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Netherlands: Dutch participation exemption and the write-down of receivables

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One of the key benefits of the Dutch tax system is the participation exemption regime, whereby benefits derived by Dutch corporate taxpayers from a qualifying shareholding (i.e. dividends, capital gains, and foreign exchange results) are fully exempt from Dutch corporate income tax (25%). This beneficial treatment of the participation exemption regime also applies to earn-out payments whereby the deferred instalment payments depend upon the performance of the company being sold.

In its June 29 2018 decision, the Dutch Supreme Court (Hoge Raad) ruled in favour of the Dutch tax authorities that the write-off of a receivable that is considered to be an earn-out in connection with the alienation of an interest in another entity is not tax deductible under the Dutch participation exemption. This case provides practical guidance on the interpretation of the earn-out provisions in case of a sale of a subsidiary against acknowledgement of debt.

The case

X BV held certificates of interest in A BV, and these certificates qualified for the participation exemption. As a result, all benefits, including dividends, capital gains, and foreign exchange results, derived by X BV from its interest in A BV were exempt from Dutch corporate income tax.

On May 29 2008, X BV sold some of its certificates to two buyers as part of a management buy-in. The two buyers remained indebted by the agreed purchase price of €245,102 ($282,000). In the purchase agreement, the buyers and X BV agreed that: (i) the principal amount would be subject to a 5% interest rate; and (ii) in case of a dividend distribution by A BV to the buyers, they would repay first the interest and subsequently the redemption of the principal. Furthermore, it was agreed that, on December 31 2016, the remaining amount of the principal and accrued interest would be waived by X BV and the other sellers.

After the sale of the certificates, X BV reported two receivables in its books. In 2012, X BV wrote down its receivables on the buyers in the amount of €91,600. Accordingly, X BV claimed a tax deduction for this amount in its corporate income tax return.

Court decisions

Under dispute was whether the write-down on the receivables was deductible for Dutch tax purposes. The tax inspector scrutinised the deduction of the depreciation loss as he argued that this loss fell under the scope of the participation exemption regime. As such, any losses as well as benefits derived from the shareholding were exempt from taxation.

The tax inspector's position was rejected by the Lower Court of Arnhem, while the Higher Court of Arnhem–Leeuwarden ruled in line with the authorities that the denial of the deduction was correct.

The Supreme Court confirmed the Higher Court of Arnhem–Leeuwarden's decision that the write-down of a receivable that is considered to be an earn-out instrument for the alienation of a shareholding that qualifies for participation exemption is taxed in the same manner as earn-out payments. The Supreme Court held that there was an indissoluble connection between: (i) the transfer of the certificates and the agreed payment on the one hand; and (ii) the receivable related to the indebtedness of the payment on the other. As such, the receivable was considered to have been a payment for the sale of A BV. As payment of the receivable was dependant on the dividend distributions by A BV to the buyers, there was also a clear connection between the profit-generating potential of A BV and the buyer's ability to pay off the receivable, according to the Dutch Supreme Court.

For these reasons, the receivable was considered to fall within the scope of the earn-out rules and the Dutch participation exemption regime, resulting in value adjustments on an earn-out receivable being tax exempt. Therefore, the Higher Court's decision to deny the write-off of X BV's receivables on the buyers for Dutch tax purposes (since it was considered to be a value adjustment of an earn-out receivable) was ruled to be correct.


This case makes it clear that the Dutch Supreme Court applies the earn-out concept on a very broad basis. In case of a 'regular' earn-out arrangement between seller and purchaser, deferred instalment payments received by the seller are exempt from taxation under the participation exemption regime provided that such instalment payments essentially depend upon the profit generating potential of the target. This provides welcome flexibility in M&A deals in terms of tax-neutral treatment of future instalment payments (i.e. exempt under the participation exemption). The flip side of the participation exemption is that losses are not deductible. This means that in light of this Supreme Court case, Dutch tax treatment needs to be carefully considered in M&A deals where the sales price remains indebted by the purchaser, as under certain circumstances such an arrangement may qualify as an earn-out.

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