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06 December 2019 / article

Demerger exemption from real estate transfer tax also applies in case of a planned sale

The Supreme Court has ruled that the demerger exemption from real estate transfer tax also applies if at the time of the demerger it is already clear that the acquiring company will be sold.

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The seller of the shares in this case belongs to a group which is engaged, among other things, in the sale of fuel via its own service stations. The seller had concluded an agreement to sell shares in a company to be established at that time (hereinafter: interested party). The seller was then demerged, with the service stations being spun off to the interested party. The seller subsequently sold this company to the buyer.

Question of law

The demerger exemption is subject to the condition that the absence of real estate transfer tax may not be the decisive motive for the demerger (arm's-length test). In the case of a sale of shares within three years of the demerger, this condition is not met, unless the taxpayer can provide evidence to the contrary. The dispute is whether these rules to the contrary have been complied with.

Assessment by the Supreme Court

Earlier this year, in his opinion on this case, Advocate General Wattel posed the question whether the Court of Appeal of The Hague was using the right approach to assess whether business reasons were present. According to the Advocate General, the demerger exemption needs to be clarified in practice in order to assess whether business considerations underlie an indirect business sale to a third party within three years. The Advocate General proposed that the criterion should be whether the asset to be transferred would also have been transferred to the acquiring entity if there had not been a transfer of the asset to a third party. If this is not the case, only in one other case can the demerger exemption be applied in the event of an indirect business sale. This applies if, in the interest of the continued existence of the company (on the basis of the Bulk Gas judgment on corporate income tax), there is no reasonable way of doing so other than by means of the demerger.

Contrary to the Advocate General, the Supreme Court concurred with the judgment of the Court of Appeal of The Hague. This ruling is that the demerger was carried out on commercial and market strategic grounds, which should lead to restructuring and rationalisation of the management of the seller and the third party. The fact that the shares were sold after the demerger does not preclude the application of the exemption. The Supreme Court considered this judgment of the Court of Appeal to be in line with the Bulk Gas judgment previously given by the Supreme Court itself.

Practical implications

In the present case, the third party put forward the new market strategy of the group as a commercial reason for the demerger. The reason for the new strategy was to be able to work more efficiently, remain competitive and continue to grow. The service stations were therefore divested so that the group could focus on its core business. In addition, the interested party provided several arguments as to why the demerger was the most common way to ultimately sell the business. The Supreme Court has therefore upheld the judgment of the Court of Appeal that there is no question of largely avoiding real estate transfer tax.

The interpretation/application of the arm's length test in the case of a demerger is currently generating a great deal of discussion with the Dutch Tax Administration. In the event of a final sale of shares, the Tax Administration will often take the view that the demerger is aimed at avoiding real estate transfer tax. This judgment shows (again) that this position is not tenable in all cases and that taxpayers can successfully invoke the rebuttal scheme even in the event of a planned sale of shares.



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