Recently, the Dutch Supreme Court issues its decision on an interesting case, ruling that the exemption from Dutch real estate transfer tax (“RETT”) in the event of a split-off is applicable if based on genuine business reasons. Applicability is not deferred by the fact that there was also an intention to sell the shares in the newly incorporated company - which was formed as part of the split-off.
RETT
RETT is imposed on the acquisition of immovable property, or rights thereto. Briefly put, RETT is also imposed if a qualifying interest in a legal entity is acquired, at least 50% of the (consolidated) assets of which are made up of immovable property – at least 30% of which is located in the Netherlands -, and the main purpose of the legal entity is to acquire, alienate and/or exploit the immovable property, or the rights thereto.
Exemption from RETT
The above acquisitions are exempt from RETT if the acquisitions are the result of a legal merger, an internal restructuring or a split-off, for example. The exemption from RETT does not apply, however, if the legal split is predominantly aimed at the avoidance or deferral of taxation, which is the case if the split-off is not for genuine business reasons. A split-off is deemed to be predominantly aimed at the avoidance or deferral of taxation if the shares in the split legal entity or the acquiring legal entity are sold to an unrelated third party within a three-year period. In the latter case, however, it is possible for the taxpayer to make a convincing argument that the split-off is for genuine business reasons. The case before the Dutch Supreme Court related to this possibility for the taxpayer to provide counter-evidence.
The Supreme Court case
The facts of the case were as follows:
In November 2015, an oil company had transferred a gas station to a newly incorporated company by means of a split-off. Prior to the execution of the split-off, in June 2015, the parties had already agreed that the shares in the newly incorporated company would be sold to a third party immediately after the execution of the split-off. In fact, the shares were transferred to the third party a day later.
The oil company had claimed exemption from RETT in relation to the split-off. However, given the fact that the shares were transferred to the third party a day after the execution of the split-off, the Dutch tax authorities disputed the application of the exemption.
After objection and appeal, the matter ended up before the Dutch Supreme Court. The question it was seized upon to answer was whether the intended sale adversely affected the possibility for the taxpayer to provide counter-evidence. The Supreme Court returned a negative answer, referring to a case revolving around the exemption from Dutch corporate income tax (“CIT”) in the event of a split-off. In that particular case, the Supreme Court had ruled that the possibility to state a reasonable argument that the split-off is for genuine business reasons is not limited in proportion to the time elapsed between the split-off and the sale of the shares. This decision has now been held by the Supreme Court to apply likewise to the exemption from RETT in the event of a split-off. Consequently, even if the intention to sell the shares exists prior to or at the time of the split-off, the taxpayer still has the possibility to establish a prima facie case that the split-off as such is for genuine business reasons. If so, the exemption from RETT should apply as well.
Commentary AKD
When it introduced the exemption from RETT in the event of a split-off, the Dutch government indicated that this exemption had its origins in the exemption from CIT in the event of a split-off. In practice, however, the Dutch tax authorities failed to apply the two exemptions on equal terms. In some cases, the tax authorities were willing to apply the CIT exemption, but not the exemption from RETT. The recent Supreme Court decision demonstrates that the Dutch tax authorities should apply both exemptions if the taxpayer argues a convincing case that the split-off is for genuine business reasons.
If you have questions or comments on the case, please do not hesitate to contact your trusted AKD adviser.
Recently, the Dutch Supreme Court issues its decision on an interesting case, ruling that the exemption from Dutch real estate transfer tax (“RETT”) in the event of a split-off is applicable if based on genuine business reasons. Applicability is not deferred by the fact that there was also an intention to sell the shares in the newly incorporated company - which was formed as part of the split-off.
RETT
RETT is imposed on the acquisition of immovable property, or rights thereto. Briefly put, RETT is also imposed if a qualifying interest in a legal entity is acquired, at least 50% of the (consolidated) assets of which are made up of immovable property – at least 30% of which is located in the Netherlands -, and the main purpose of the legal entity is to acquire, alienate and/or exploit the immovable property, or the rights thereto.
Exemption from RETT
The above acquisitions are exempt from RETT if the acquisitions are the result of a legal merger, an internal restructuring or a split-off, for example. The exemption from RETT does not apply, however, if the legal split is predominantly aimed at the avoidance or deferral of taxation, which is the case if the split-off is not for genuine business reasons. A split-off is deemed to be predominantly aimed at the avoidance or deferral of taxation if the shares in the split legal entity or the acquiring legal entity are sold to an unrelated third party within a three-year period. In the latter case, however, it is possible for the taxpayer to make a convincing argument that the split-off is for genuine business reasons. The case before the Dutch Supreme Court related to this possibility for the taxpayer to provide counter-evidence.
The Supreme Court case
The facts of the case were as follows:
In November 2015, an oil company had transferred a gas station to a newly incorporated company by means of a split-off. Prior to the execution of the split-off, in June 2015, the parties had already agreed that the shares in the newly incorporated company would be sold to a third party immediately after the execution of the split-off. In fact, the shares were transferred to the third party a day later.
The oil company had claimed exemption from RETT in relation to the split-off. However, given the fact that the shares were transferred to the third party a day after the execution of the split-off, the Dutch tax authorities disputed the application of the exemption.
After objection and appeal, the matter ended up before the Dutch Supreme Court. The question it was seized upon to answer was whether the intended sale adversely affected the possibility for the taxpayer to provide counter-evidence. The Supreme Court returned a negative answer, referring to a case revolving around the exemption from Dutch corporate income tax (“CIT”) in the event of a split-off. In that particular case, the Supreme Court had ruled that the possibility to state a reasonable argument that the split-off is for genuine business reasons is not limited in proportion to the time elapsed between the split-off and the sale of the shares. This decision has now been held by the Supreme Court to apply likewise to the exemption from RETT in the event of a split-off. Consequently, even if the intention to sell the shares exists prior to or at the time of the split-off, the taxpayer still has the possibility to establish a prima facie case that the split-off as such is for genuine business reasons. If so, the exemption from RETT should apply as well.
Commentary AKD
When it introduced the exemption from RETT in the event of a split-off, the Dutch government indicated that this exemption had its origins in the exemption from CIT in the event of a split-off. In practice, however, the Dutch tax authorities failed to apply the two exemptions on equal terms. In some cases, the tax authorities were willing to apply the CIT exemption, but not the exemption from RETT. The recent Supreme Court decision demonstrates that the Dutch tax authorities should apply both exemptions if the taxpayer argues a convincing case that the split-off is for genuine business reasons.
If you have questions or comments on the case, please do not hesitate to contact your trusted AKD adviser.