Participation exemption not applicable to uncovered call options
On 6 November 2020, the Dutch Supreme Court ruled that uncovered call options on shares do not qualify for the participation exemption.
The Dutch participation exemption exempts income from shares that represent 5% or more of the nominal paid-in capital in a subsidiary. In 2002, the Dutch Supreme Court ruled that a call option on shares that are part of a qualifying participation also qualifies for the participation exemption if the exercise of the options would result in a qualifying participation in the company (i.e., 5% or more).
On 6 November 2020, the Supreme Court elaborated on its 2002 ruling and ruled that a call option is only within scope of the participation exemption if the writer of the option owns the underlying shares at the time that the option is written. In other words, the participation exemption only applies to covered call options that result in a qualifying participation (5% or more) in the company upon exercise.
The burden of proof that the participation exemption applies to an option lies with the taxpayer. The Supreme Court did not elaborate on the manner in which the taxpayer could meet this burden of proof.
Theoretically, both listed call options and over-the-counter options can qualify for the participation exemption if the option writer owns the underlying shares. In case of listed call options, however, obtaining proof that the option writer owns the underlying shares will almost always be impossible. Therefore, claiming participation exemption with respect to listed call options is expected to be difficult in practice.