Global Tax Alert | 19 June 2013
Dutch Supreme Court rules in participation exemption case
Court favors application of the participation exemption to profits originating prior to a change in the participation exemption rules even though such participation did not previously qualify
The Dutch participation exemption
Under the Dutch participation exemption rules, income derived from a qualifying participation is exempt from Dutch corporate income tax. However, in cases where the income (typically dividend or capital gain) partly originates from a period in which the participation did not qualify, the income has to be apportioned to the period during which the participation did not qualify and to the period during which the participation did qualify. Only this last part of the income is then exempt. This principle is referred to as the so-called “‘partitioning doctrine” or “compartmentalization” regime and based on previous case law applies if facts and circumstances that determine whether a participation qualifies change.
The Supreme Court ruling
On 14 June 2013, the Dutch Supreme Court ruled that the partitioning doctrine does not apply with respect to the change in the application of the Dutch participation exemption as a result of the legislative change in these rules per 1 January 2007.
In the case brought before the Dutch Supreme Court, a foreign subsidiary held by a Dutch taxpayer had distributed profits at the end of 2007 that originated from the period before the change in the rules as per 1 January 2007 when the participation exemption did not apply to that subsidiary. The change in the participation exemption rules that became effective per 2007 however caused the participation to qualify as of that same date.
Although the application of the partitioning doctrine to the 2007 change in the rules was referenced during the Dutch Parliamentary Proceedings, the Dutch Supreme Court ruled that the partitioning doctrine does not apply to the dividend received at the end of 2007 since the new rules did not specifically provide for application of this doctrine to the change in the legislation. As a consequence, the full dividend received by the Dutch taxpayer in 2007 was exempt.
To neutralize future budgetary impact of this Supreme Court case, the Dutch government immediately announced that it will propose new legislation that will provide for application of the partitioning doctrine in relation to the participation exemption in case of a change in law. This new legislation will apply retroactively as of 14 June 2013.
Although unrealized profits or gains that in part originate from the change in the participation rules per 1 January 2007 will likely not be able to benefit from this Supreme Court ruling, it could have an impact on Dutch taxpayers that realized income prior to 14 June 2013 that (partly) originates from the pre 2007 rule change period for which – under application of the partitioning doctrine – no exemption was claimed. This could involve dividends, capital gains and capital losses. This Supreme Court ruling could also be of importance for Dutch taxpayers that have realized income from a subsidiary prior to 14 June 2013 that did not qualify for the participation exemption before the further changes in the participation exemption rules that took effect as of 1 January 2010 but qualified as of that date as a result of the changes in the rules.
Dutch taxpayers that realized income from a subsidiary prior to 14 June 2013, and the income was (partially) included in the taxable income, should review the positions if:
- • The Dutch taxpayer applied the partitioning doctrine because of a change in the participation exemption rules; and
- • The tax assessment for the relevant year is not yet final.
Further guidance will be provided as soon as the legislative proposal is published.
For further information on this Supreme Court ruling, please contact any of the following:
EY Belastingadviseurs LLP, Amsterdam
- • Johan van den Bos
+31 88 407 1457
EY Belastingadviseurs LLP, Rotterdam
- • Michiel Swets
+31 88 407 8517
Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York
- • Dirk Stalenhoef
+1 212 773 3390
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago
- • Frank Schoon
+1 312 879 5508
Ernst & Young (China) Advisory Limited, Belgium-Netherlands Tax Desk, Shanghai
- • Bas Leenders
+86 137 0199 4869
Ernst & Young LLP, Dutch Tax Desk, London
- • Jelger Buitelaar
+44 20 795 15648
EYG no. CM3546