Dutch Supreme Court: legal presumption in demerger roll-over facility to be set aside

Background

The case concerned a Dutch Central Bank‑mandated sale of an insurance business. The transaction was structured as a legal demerger followed by the sale of the shares in the newly incorporated company to a third party shortly after the demerger. The Dutch tax authorities refused to apply the roll-over for legal demergers, relying on the legal presumption that business reasons are deemed absent if the shares are disposed to a third-party within three years. The Court of Appeal upheld this approach and placed the burden of proof on the taxpayer to demonstrate that the legal demerger did not have tax avoidance or deferral as its predominant motive. The Court of Appeal then ruled that the taxpayer did not succeed in this burden of proof and that the choice to transfer the insurance business via a legal demerger instead of an asset deal had a predominantly anti-tax motive. The case then went to the Supreme Court.

Judgment of the Supreme Court

The Supreme Court emphasises that the anti-abuse rule must be applied in conformity with the EU Merger Directive and relevant case law of the Court of Justice of the European Union, as the Dutch demerger roll-over is intended to align with the EU Merger Directive, without distinction between domestic and cross-border demergers.

Referring to settled case law of the Court of Justice of the European Union, the Supreme Court holds that:

Member States may not apply a general or automatic presumption of abuse, unless the demerger is solely aimed at obtaining a tax benefit and therefore not driven by valid business reasons;
a demerger can be driven by multiple objectives, including tax considerations, which does not exclude valid business reasons provided the relevant tax considerations are not decisive;
abuse must be assessed on the basis of a case‑by‑case analysis;
tax authorities must provide at least prima facie evidence of tax avoidance or the absence of valid business reasons.

The Supreme Court further emphasises that the mere disposal of shares to a third-party within three years after a demerger does not in itself justify the conclusion that the demerger is predominantly aimed at tax avoidance or tax deferral. The Supreme Court reiterates earlier Supreme Court case law that also if such intention to do so already existed at the time the demerger was decided upon, this does not in itself justify such conclusion.

Accordingly, the concerning legal presumption in the anti-abuse rule constitutes an impermissible general presumption contrary to the Merger Directive, and must therefore be set aside. On that basis, the Supreme Court annulled the decision of the Court of Appeal and referred the case for further factual assessment, applying a directive‑compliant allocation of the burden of proof.

Practical relevance

This judgment significantly impacts the application of the Dutch demerger roll-over in sale scenarios. The ruling is also relevant for the roll-over facility available for transfers of businesses against the issuance of shares (business merger) and the demerger facility for Dutch real estate transfer tax (the latter as in force until 1 July 2025). The Supreme Court confirms that:

a third-party share sale within three years after a demerger does not in itself constitute abuse or an absence of business reasons, even if already envisaged at the time of the demerger;
shareholder motives may qualify as valid business reasons, provided they are not predominantly tax‑driven;
the Dutch tax authorities cannot rely on a legal presumption triggered by a third-party sale within three years, but must substantiate their position with concrete evidence;
to determine whether valid business reasons are present, it should be assessed whether the ultimate purpose of the demerger, as well as the choice for the demerger as instrument to implement the transfer compared to other available alternatives, are driven by valid business reasons.

The decision marks a clear departure from the long‑standing practice of automatic burden‑shifting in cases involving a share disposal within three years after a demerger. However, it remains to be seen what the outcome will be for the relevant taxpayer and how the Court of Appeal will approach the factual assessment after referral, particularly given the concerns raised by the Court in appeal earlier as to the choice for a legal demerger instead of regular asset transfers. The referral judgment potentially provides further clarification and practical guidance regarding the factual assessment of whether valid business reasons are present.