Dutch Supreme Court provides guidance on the scope of non-deductible costs in relation to the acquisition or disposal of a subsidiary
Costs incurred in relation to the acquisition or disposal of a participation in a subsidiary are treated as non-deductible ‘acquisition or disposal costs’ under the Dutch participation exemption.
In a decision published on 7 December 2018, the Dutch Supreme Court has provided rules on how and when to determine which costs will qualify as acquisition or disposal costs.
These rules appear to be more stringent on certain elements but more lenient on others when compared to the approaches applied in practice by taxpayers and the Dutch tax authorities. Consequently, taxpayers should carefully review positions taken, and to be taken, by them with respect to costs related to the acquisition or disposal of participations.
In the absence of clear guidance on this matter, the question whether and which costs qualify as non-deductible acquisition or disposal costs of a participation often used to result in lengthy discussions between taxpayers and the Dutch tax authorities.
In its current decision, the Supreme Court decided that costs incurred by a taxpayer constitute non-deductible acquisition or disposal costs if there is a direct causal link (rechtstreeks oorzakelijk verband) between those costs and the acquisition or disposal of a specific participation. Put differently: acquisition or disposal costs are those costs that would not have been incurred absent the acquisition or disposal of the participation. The existence of such link has to be determined by applying objective standards.
The decision also clarifies that non-deductible acquisition or disposal costs comprise both internal and external costs of the taxpayer.
The Supreme Court furthermore clarifies that costs only qualify as non-deductible acquisition or disposal costs if they are connected to the actual acquisition or disposal of a specific participation. Consequently, costs incurred in relation to an envisaged acquisition or disposal that is ultimately not completed are deductible.
The decision specifically addresses cases where the initially intended sale of a participation to a potential buyer has failed but later on the participation is sold to a different buyer. In such case, costs incurred in relation to the first, failed disposal attempt qualify as non-deductible disposal costs if and to the extent those costs would still have been incurred had the failed disposal attempt not taken place. To that extent, those costs are considered as non-deductible disposal costs connected to the subsequent, successful sale of the participation.
Finally, the Supreme Court rules that fiscal sound business practice (goed koopmansgebruik) provides that costs incurred in relation to an envisaged acquisition or disposal of a participation must be recorded by taxpayers on their (tax) balance sheet as a transitory asset. This transitory asset has to be maintained until it is certain whether the acquisition or disposal will take place or not. At that moment, the transitory asset is written off and the part of the write-off that represents non-deductible acquisition or disposal costs has to be determined in accordance with the rules set by the Supreme Court.
This decision may significantly affect positions taken by taxpayers on the deductibility of costs related to the acquisition or disposal of participations. The precise impact has to be analyzed on a case-by-case basis. In terms of administration, this decision necessitates that taxpayers maintain a complete and clear record of costs related to the acquisition or disposal of each individual participation.
Should you have any queries, please contact your trusted adviser at Loyens & Loeff.