Global Tax Alert | 5 September 2013

Dutch government proposes partitioning legislation for participation exemption

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Following the 14 June 2013 Dutch Supreme Court ruling on the application of the participation exemption to profits partially originating from a non-exempt period of time, the Dutch government has proposed new legislation to neutralize the future budgetary impact of the decision.

Dutch participation exemption and the Supreme Court ruling

The Dutch participation exemption provides for an exemption from Dutch corporate income tax on income derived (e.g., dividends and capital gains) from a qualifying participation. The so-called “partitioning doctrine” or “compartmentalization regime” applies in case the application of the participation exemption to a share interest changes. However, the Supreme Court recently ruled that the partitioning doctrine does not apply in case of a change in the application of the Dutch participation exemption as a result of a legislative change to these rules, rather than a change in the relevant facts and circumstances. (Reference is made to our previous tax alert dated 19 June 2013, Dutch Supreme Court rules in favor on the 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.)

To neutralize the future budgetary impact of this Supreme Court decision, the Dutch government immediately announced that it would propose new legislation that will provide for application of the partitioning doctrine in relation to the participation exemption also in case of a legislative change.

Proposed legislation

The proposed rules apply to both a change in the application of the participation exemption as a result of a change in legislation as well as a change in the relevant facts and circumstances. Based on previous case law, the partitioning regime already applied in case of a change in facts and circumstances, but will now also be codified in Dutch tax law.

Based on the proposed rules, a Dutch taxpayer is required to create a fiscal “partitioning reserve” if it holds a (share) interest in a company to which the participation exemption no longer applies whilst the participation exemption did apply up until that moment (and vice-versa). The amount added to the partitioning reserve equals the amount of the difference between the tax book value and the fair market value of the share interest. Simultaneously, the tax book value of this interest is increased (or reduced) to match the fair market value at such moment. The partitioning reserve can be an “exempt” reserve or a “non-exempt” reserve depending on the change in applicability of the participation exemption.

The partitioning reserve is released if and to the extent one of the following events occur:

  • Income is derived from the share interest (e.g., dividends) that can (partially) be allocated to the period for which the partition reserve has been formed;
  • The share interest is no longer part of the business assets of the Dutch taxpayer, which includes the transfer of the share interest in case of a legal merger, demerger, or if the Dutch taxpayer is included in a Dutch fiscal unity. A roll-over facility is available in case of a legal merger or demerger, provided that certain conditions are met.

The release of the fiscal reserve is added to the taxable income of the Dutch taxpayer if the partitioning reserve is qualified as non-exempt (if the participation exemption previously did not apply). If the participation exemption previously applied to the share interest, the release is no included in the taxable income.

This new legislation will apply retroactively as of 14 June 2013. Should a Dutch taxpayer have a share interest to which the application of the participation exemption changed prior to this date, a partitioning reserve should be created immediately prior to one of the above mentioned events, observing specific rules.

Impact

The proposed legislation could be relevant for Dutch taxpayers that hold one or more share interests to which a change in the applicability of the participation exemption occurred. We recommend that these Dutch taxpayers review their positions.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Amsterdam
  • Johan van den Bos
    +31 88 407 1457
    johan.van.den.bos@nl.ey.com
Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Michiel Swets
    +31 88 407 8517
    michiel.swets@nl.ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, New York
  • Dirk Stalenhoef
    +1 212 773 3390
    dirk.stalenhoef@ey.com
Ernst & Young LLP, Belgium-Netherlands Tax Desk, Chicago
  • Frank Schoon
    +1 312 879 5508
    frank.schoon@ey.com
Ernst & Young (China) Advisory Limited, Belgium-Netherlands Tax Desk, Shanghai
  • Bas Leenders
    +86 137 0199 4869
    bas.leenders@cn.ey.com
Ernst & Young LLP, Dutch Tax Desk, London
  • Jelger Buitelaar
    +44 20 795 15648
    jbuitelaar@uk.ey.com

EYG no. CM3784