Participation exemption denied after future sale of shares
In a recent decision, the Amsterdam tax court decided that a entering into a sale agreement regarding the shares in a subsidiary can mean that the end of being able to use the participation exemption. This can have important tax consequences if (a) the transfer of the shares is (partially) deferred or (b) if it is uncertain whether sale can be executed or (c) if the remuneration can be changed if certain circumstances occur.
The case at hand, was about a Dutch company that held a major share interest in a US company. This shareholding qualified for the Dutch participation exemption. In 1997 the Dutch company entered into a Share Repurchase Agreement (SRA) with the US company. Under this agreement the US company repurchased all shares that were held by the Dutch company.
The agreement would be effectuated in four phases. At closing of the SRA a part of the shares were transferred to the US company, for which payment would be received by the Dutch company. The remaining shares would follow in three annual instalments, provided that a repurchase of shares would (still) be possible under US law at that time. In the SRA the price was agreed for all portions whereby the original price would be increased with an ‘accretion rate’ of 5% per annum. Under certain conditions the repurchase price would be increased (e.g. if a third party would take-over the US company and thereby paid a price higher than that mentioned in the SRA).
When additional shares were transferred, the Dutch company claimed the participation exemption for the full remuneration that it received. Therefore, including the accretion rate of 5%. It argued that it still qualified for the participation exemption since it was holder of the legal title to the shares and had still some economic interest in those shares.
The Amsterdam tax court decided that the uncertainties regarding the actual transfer of the remaining portions could be disregarded. It decided that the sale of the shares in 1997, marked the end of the period during which the participation exemption applied. As from the date of the SRA the Dutch company was a mere creditor and the shares were in fact held as a security for the receivable. All results from this receivable are to be considered as normal taxable income in The Netherlands.
