CFC rules for startups and scale-ups: when are foreign profits taxed in the Netherlands?

What are the CFC rules?

The CFC rules are a provision within Dutch corporate income tax for so-called Controlled Foreign Companies. In short, the rules may apply when a Dutch taxpayer has control over an entity established in a designated low-tax or non-cooperative jurisdiction.

The core of the regulation is that certain undistributed income of such a foreign company is, under certain conditions, included in the Dutch taxable profit. This means you do not always have to wait until the foreign company distributes a dividend.

The regulation primarily targets situations where mobile assets and related income are placed in a low-tax jurisdiction. Think, for example, of intangible assets. This is particularly relevant for tech companies, as a significant portion of a company's value can be tied to intellectual property and other assets that are relatively easy to structure internationally.

Incidentally, the CFC rules do not only apply to foreign entities. Permanent establishments can also fall under a CFC regime. This blog focuses on the rules regarding interests in foreign entities.

Why do the CFC rules exist?

The Netherlands has traditionally had an internationally oriented tax system and a broad participation exemption. Conversely, there has been increasing attention over the years toward structures where profits are shifted to low-tax countries.

The Dutch CFC rules have been part of the Corporate Income Tax Act since January 1, 2019, and are linked to the European Anti-Tax Avoidance Directive, commonly referred to as ATAD 1.

This European directive requires member states to incorporate anti-tax avoidance rules into their national legislation. The directive provides a minimum level of protection, meaning member states are permitted to implement stricter rules than are strictly necessary to comply with the directive.

Regarding CFC rules, ATAD 1 offered various ways to include foreign income in the tax base. The Netherlands took the position that part of the approach required by the directive already followed from the Dutch arm's-length principle. Nevertheless, an additional CFC measure was introduced for specific situations.

The practical consequence is that an internationally operating company must not only assess where a foreign company pays taxes. The nature of its income, the ownership structure within the group, and the economic activities of that company can also be significant.

When is a foreign company a CFC?

For the application of the Dutch rules, two core questions are essential:

1. Does the Dutch taxpayer have a sufficient interest in the foreign entity?
2. Is that entity established in a designated state?

Only when the relevant conditions are met do the CFC rules come into play. Subsequently, it must be determined whether an exception applies and which income must actually be taken into account in the Netherlands.

For startups and scale-ups, this means that an analysis of only the direct shareholder relationship may not be sufficient. Indirect interests and interests held by related parties can also count.

The 50 percent threshold

A foreign company can qualify as a controlled entity when the Dutch taxpayer, alone or together with certain related entities or individuals, holds an interest of more than 50 percent.

There are several ways to meet this threshold. These include:

• more than 50 percent of the shares in the nominally paid-up capital;
• more than 50 percent of the statutory voting rights;
• a right to more than 50 percent of the profits.

These criteria are alternative. A company does not need to exceed the 50 percent threshold in all three categories.

In practice, this can have significant consequences. For example, a company may own less than half of the shares, but through an agreement on voting rights, it may still be able to exercise more than 50 percent of the votes. In that case, the interest requirement may still be met.

Profit entitlement can also be independently relevant. The legal and economic structure of financing and participations therefore deserves attention. Looking only at the percentage of ordinary shares can provide an incomplete picture.

Affiliated parties can change the outcome

The CFC rules do not look solely at the interest held by the Dutch taxpayer itself. Interests held by affiliated entities and affiliated individuals can also play a role.

A threshold of at least 25 percent applies to this affiliation. Here, too, this can involve shares, statutory voting rights, or profit entitlement.

Broadly speaking, affiliation may exist when, among other things:

• the Dutch taxpayer holds at least 25 percent in another entity;
• another entity or an individual holds at least 25 percent in the Dutch taxpayer;
• the same person or entity holds at least 25 percent in both the Dutch taxpayer and another company.

As a result, the CFC analysis can extend significantly further than a simple organizational chart with direct subsidiaries.

Why joint ventures deserve extra attention

For startups and scale-ups, this is particularly relevant in the case of joint ventures. A company may have a minority stake in a joint venture and therefore assume that it does not have control over the companies under that joint venture. For the CFC rules, the outcome may be different.

Suppose a Dutch BV holds 33.33 percent in a joint venture. The remaining shares are held by third parties. The joint venture then owns 100 percent of a foreign subsidiary.

The joint venture itself is not a CFC of the Dutch BV based on the 33.33 percent interest. However, the subsidiary beneath it may be. This is because the joint venture qualifies as an affiliated entity, and its 100 percent interest in the subsidiary can be counted toward the control question.

When ultimately allocating the relevant income, the calculation is then performed pro rata based on the Dutch taxpayer's interest. In the example, 33.33 percent of the relevant income can therefore be allocated to the Dutch BV.

That result is not immediately intuitive. An indirect investment via a joint venture can have different implications for CFC rules than a direct minority interest with the same economic percentage.

For growth companies that regularly set up new group entities, joint ventures, or foreign partnerships, it is therefore wise not to look only at the direct percentage per entity. The entire chain of participation is relevant.

In which country must the foreign company be established?

An entity can only fall under these CFC rules if it is established in a designated state.

The list of designated states is determined annually. There are two main categories: low-tax jurisdictions and jurisdictions that appear on the EU list of non-cooperative jurisdictions.

When is a country considered low-tax?

In this context, a low-tax state is a state that does not impose a tax on profits on entities, or applies a general statutory rate of less than 9 percent.

An important detail is that the assessment is based on the general statutory rate. The actual tax burden that a specific company ultimately experiences is not decisive for this test.

This distinction is important. A foreign company may pay little tax in practice due to deductions or other circumstances without its country of residence automatically being a low-tax state for CFC purposes. Conversely, the starting point is not the individual effective tax burden, but the general statutory rate of the country in question.

Furthermore, a specific measurement date applies to the assessment. The situation as of October 1 of the calendar year preceding the calendar year in which the Dutch taxpayer's tax period begins is relevant.

The European list of non-cooperative jurisdictions

In addition, jurisdictions can be designated because they appear on the European list of non-cooperative jurisdictions.

This European list relates to matters such as tax governance, taxation, and tax transparency. A country can be removed from the list when it meets the relevant standards. Conversely, countries can be added over time.

This makes the CFC analysis a recurring point of attention. A group structure that falls outside the scope of the rules at the time of incorporation does not automatically retain the same tax treatment for years to come.

For financial years beginning in 2026, the Dutch regulations include both a group of low-tax states and a group of non-cooperative jurisdictions. Designated low-tax states include Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, and the Bahamas. The list of non-cooperative jurisdictions for 2026 includes Panama, Fiji, Samoa, and the Russian Federation.

Some jurisdictions fall into both categories.

For an internationally growing company, an annual check is therefore sensible, especially when there are companies within the group in jurisdictions with a relatively low corporate income tax rate.

What if a company is established in two countries?

Under certain circumstances, a foreign company may be considered a resident according to the rules of more than one state.

This can be relevant when one of those countries is a designated state, but the entity is also established in another, non-designated state and is subject to tax on profits there.

The CFC rules include an important nuance for such situations. The mere presence of a place of business in a designated state does not automatically mean that the CFC rules will apply.

The rationale behind this is understandable. If the profit is already sufficiently subject to corporate income tax due to the other place of business, applying the additional CFC rules is less logical.

The taxpayer must be able to substantiate this position. Documents from foreign tax authorities, for example, showing that the entity is subject to corporate income tax as a resident in the other state, can be relevant in this regard.

For international groups, this means that documentation regarding tax residency is not just an administrative matter. That information can be directly relevant to the application of the CFC rules.

Which types of income can be affected by the CFC rules?

Not the entire profit of every foreign CFC is automatically taxed in the Netherlands. The rules focus on specific categories of income and on the portion that has not been distributed.

This concerns so-called tainted income. Passive income plays a primary role here. Examples include interest and other income from financial assets, royalty income, and dividend income.

For tech companies, the treatment of income related to intangible assets is a key point of attention. After all, part of the rationale behind the rules is that relatively mobile assets can be moved to a low-tax jurisdiction, with the associated revenue ending up there.

The relevant income is determined according to Dutch standards for the purpose of Dutch taxation. Associated costs are also taken into account in that calculation.

Furthermore, the rules apply to undistributed income. In doing so, the regulation aims to prevent Dutch tax liability from being easily deferred by keeping profits in the foreign company for a long period.

Moreover, the allocation is made pro rata to the interest held. A Dutch company with an indirect interest is therefore not automatically allocated 100 percent of the relevant foreign income.

Not every foreign subsidiary leads to CFC taxation

The existence of a majority interest in a company in a designated state does not automatically mean that the Dutch parent company must pay tax on the relevant foreign profit.

The regulation contains several exceptions.

For instance, an entity may fall outside the scope of the rules if its income generally consists primarily of income other than the tainted income targeted by the CFC rules.

For certain financial enterprises, there is also a separate exception if the tainted income is generally derived primarily from parties other than the Dutch taxpayer or its affiliated entities and individuals.

For the broader startup sector, the exception for substantive economic activity is particularly important.

Substantive economic activity as a key exception

When the controlled entity carries out a substantive economic activity, no CFC income is allocated to the Dutch taxpayer, despite its qualification as a controlled entity.

This makes it clear that the regulation does not simply treat every company in a low-tax country the same way. The actual economic presence and activity of the foreign entity can be decisive.

For a startup that is genuinely expanding internationally, this distinction is relevant. There is a fundamental difference between a foreign company used primarily to house certain income and an entity that actually conducts economic activities.

The mere presence of a foreign subsidiary is therefore not enough. After assessing the interest and the country of residence, one must also look at the company's function and the nature of its activities.

Watch out for potential double CFC taxation

A striking feature of the Dutch regulation is that the same foreign company can be classified as a CFC at different levels within a group structure.

Suppose a Dutch parent company holds all shares in a second Dutch BV, and that second BV, in turn, holds all shares in a foreign CFC.

The second Dutch BV then has a direct 100 percent interest in the foreign company. However, the Dutch parent company above it also indirectly holds a 100 percent interest.

As a result, the same foreign company can be treated as a CFC from both Dutch companies. The relevant income can subsequently be subject to taxation at both levels.

The legislature deliberately chose not to implement a general rule that always prevents this form of double CFC taxation. The measure is partly intended as a fiscal deterrent against certain structures and can therefore have a prohibitive effect.

In a specific Dutch group structure, a fiscal unity can prevent double taxation as in the example mentioned. This does not change the fact that double CFC taxation remains a broader point of concern, even when different countries play a role in the shareholder chain.

For scale-ups with multiple holdings and international subsidiaries, it is therefore insufficient to perform the CFC test solely at the level of the direct Dutch shareholder. Consequences can also arise higher up in the structure.

CFC rules can overlap with other tax measures

The CFC regulation does not stand entirely on its own. Overlap with other tax measures can also occur.

For instance, CFC taxation can coincide with a top-up tax under the Minimum Tax Act 2024. Overlap with Dutch withholding tax is also possible.

Specific anti-overlap provisions have not been established for every such situation. The prohibitive nature of the CFC measure plays a role in this.

This makes international tax structuring more complex, especially for more mature scale-ups. A foreign company cannot be assessed based on a single tax regulation alone. Various levies can become relevant simultaneously.

Furthermore, the introduction of the minimum tax affects the practical significance of the CFC regulation. It is expected that this new tax will, in certain situations, take over part of the function of the supplementary CFC measure.

Why the CFC regulation deserves attention, especially for tech companies

The CFC regulation is not a rule that every early-stage startup immediately faces. Once a company grows internationally, that can change quickly.

This is especially true for tech companies with foreign participations, international joint ventures, financing structures, or valuable intangible assets.

At Startup-Recht, we see that corporate structures can become increasingly layered during rapid growth. A Dutch holding company acquires foreign subsidiaries, investors come on board, a joint venture is established, and intellectual property rights are distributed within the group. From a corporate law perspective, all those steps may be logical individually. For the CFC regulation, however, one must look at the coherence of the structure as a whole.

For example, an interest of less than 50 percent does not automatically mean that the CFC rules do not apply. Interests held by affiliated parties may be included in the calculation. Consequently, an indirectly held subsidiary under a joint venture may also become relevant.

In addition, a country's tax position can change. The list of designated states is determined annually. Therefore, a structure should not only be assessed at the time of incorporation.

Practical CFC check for startups and scale-ups

A useful initial analysis starts with the complete international organizational chart. Map out not only direct foreign holdings, but also indirect interests, joint ventures, and the interests of affiliated parties.

Next, look at the following questions for each foreign entity:

• What is the size of the interest in shares, voting rights, and profits?
• Which affiliated entities or individuals also hold an interest?
• Is the company established in a state that is designated annually?
• Is there a general statutory corporate income tax rate of less than 9 percent there?
• Is the jurisdiction on the relevant European list?
• Does the company potentially have more than one tax residence?
• What types of income does the company receive?
• What portion of that income has not been distributed?
• Does the foreign entity perform a substantive economic activity?
• Can the same foreign company qualify as a CFC at different levels within the group?

This analysis may be necessary again, especially after a restructuring, a new funding round, an international acquisition, or entering into a joint venture. A change in voting rights or profit entitlement can be just as relevant as a change in the share percentage.

The CFC rules are about more than just the tax rate

The biggest pitfall is reducing the CFC rules to the question of whether a foreign subsidiary is located in a tax haven. The regulation is broader and more technically nuanced.

The country of residence is only one component. Control, affiliation, indirect interests, the nature of the income, whether or not that income is distributed, and the economic activity of the foreign entity all play a role.

For startups and scale-ups with a straightforward Dutch structure, this often remains a topic for later. But as soon as the company goes international, relatively standard growth steps can have unexpected tax consequences.

That is precisely why the CFC rules deserve a place on your tax checklist when expanding internationally. By mapping out your ownership structure, foreign operations, and income streams in advance, you gain better insight into potential Dutch tax liabilities and avoid the scenario where a foreign entity is only identified as a CFC when filing your corporate income tax return.

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