A specific entity that may be of interest within the scope of financial planning in certain situations is the Tax-exempt Investment Institution (or 'TII') (Dutch: Vrijgestelde Beleggingsinstelling (VBI)), which was introduced in 2007. The returns in the TII are exempt from dividend and corporate income tax. This makes the TII fiscally attractive compared to holding companies that are liable to corporation tax (20 to 25%), payment via box 3 (25% levy) or borrowing from the private limited company (BV).

The TII is an investment institution. This institution is only allowed to invest in financial instruments and is subject to monitoring because it is classified as an investment institution. The TII was conceived to keep assets in the Netherlands that would otherwise often be placed with foreign entities (especially the Antilles and Luxembourg). In principle, the TII must be a mutual fund or a public limited company (NV). Important conditions to consider when forming a TII are: the TII must have at least two shareholders; direct investment in real estate is not allowed; withholding tax on foreign shares may not be deducted such that such investments are in principle unattractive.

The biggest advantage of the TII is the exemption from corporate and dividend tax. The TII does not qualify for a refund of dividend tax withheld from dividends received, the participation exemption does not apply and no tax treaties can be invoked. This can be taken into account when making investments.

The shareholder of the TII is liable for (partly deferred) income tax. How much exactly depends on the size of the interest in the TII; a natural person with an interest of 5 percent or more has a substantial interest (box 2), if the natural person has a smaller interest, the interest is taxed in box 3. For the TII, a notional yield over the tax base applies. The tax base is the fair value of the shareholding.

 Our specialists:

• L. (Léon) Tweebeeke, LLM