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8.2.2. The credit method

The credit against tax method, or credit method, is usually used for foreign withholding taxes on investment income such as dividends, interest and royalties, on a per country basis (a ministerial order concerning the possibility of choosing between the credit method on a per country basis and the credit method on an overall basis is in preparation). The tax reduction amounts to the lower of the foreign withholding tax or the Dutch tax attributable to the foreign dividends, interest and royalties.
Since the foreign withholding taxes for which credit is allowed are usually levied on a gross basis, whilst Dutch income tax is levied on a net basis, it is quite possible that the Dutch tax attributable to the relevant items of income is not sufficient to provide full credit for the tax levied by the source country. In such cases the excess foreign taxes may be carried forward to subsequent years.
Since January 1, 1999 in a few conventions for the avoidance of double taxation the credit method is also applicable for income from passive investments derived through a permanent establishment (see 8.4.2).

8.2.3. Deduction as costs

In situations in which no exemption or credit is allowed then any foreign taxes paid may be deducted as costs related to the relevant income. In situations in which a tax credit would normally be used then the taxpayer may opt for non-recognition of the tax credit. This option is applicable to the year in which the income is received and to the total amount of all dividends, royalties and interest received in that year. The option will thus result in a deduction of foreign taxes as costs.

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