Netherlands: Dutch participation exemption and the write-down of receivables
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

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

Sponsored by

Sponsored_Firms_piper.png
intl-updates-small.jpg

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.

Comments

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.

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article