Capital Import Neutrality (CIN) and Capital Export Neutrality (CEN) are concepts from international tax law that help determine how investments across borders are taxed. These concepts influence the decisions of companies and investors on where to allocate their funds, and affect countries’ influence on their own economic and social policies. If countries follow capital import neutrality, they aim to attract investments by treating foreign companies the same as domestic ones. If they follow capital export neutrality, they try not to discourage their own companies from investing abroad through taxation.
Capital Import Neutrality
Capital import neutrality is about fairness between domestic and foreign investors in the country where the investment takes place. If you have a company in the Netherlands and you want to invest in Belgium, according to capital import neutrality, Belgium should not tax you differently than a Belgian company making the same investment. The idea is that it doesn’t matter where you come from; the tax you pay is based on where you invest. This principle aims to create a level playing field for everyone investing in a particular country.
It’s important to realize that capital import neutrality can undermine a country’s sovereignty to determine its own economic and social policies, including imposing higher taxes on foreign investors to stimulate domestic development and fund social programs.
Capital Export Neutrality
Capital export neutrality looks at the situation from the investor’s perspective. It states that as a Dutch investor, it should not matter whether you invest in the Netherlands or elsewhere, such as in Belgium. The tax you pay should be the same, no matter where you invest. This principle ensures that investors can make the best choices without worrying about different tax rates in different countries. If you invest abroad and pay tax there, the Netherlands will not tax you again.
The participation exemption plays a significant role in relation to capital export neutrality by preventing double taxation of international business profits. When a Dutch company receives profits from a foreign subsidiary, the participation exemption ensures that these profits are not taxed again in the Netherlands after being taxed in the country of origin. This encourages companies to invest abroad by reducing the tax burden on internationally earned profits, in line with the principle of capital export neutrality. It thus facilitates a more attractive investment climate for multinationals and supports the globalization of their activities.
However, be aware that capital export neutrality promotes global capital flows at the expense of local investments and economic independence. It can also exacerbate international inequality by directing capital to already wealthy countries with low taxes.
About the author: Farshad Bashir combines his passion for entrepreneurship with tax advice at Taksgemak to assist businesses and individuals with the complex world of tax regulations. He simplifies the complicated and ensures his clients stay on track. Before diving into the consulting world, he was a member of the Dutch Parliament. This combination of political experience and tax knowledge makes him an excellent partner for anyone.
