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Participation exemption

The Dutch participation exemption has a long tradition in Dutch corporate income tax law. The basics of the exemption as we know it today are essentially the same as those introduced in 1969. The rules have been amended several times, however, to adopt new EU-legislation and also to fix loopholes.

As per 1 January 2010, the so-called ‘motive test’ was re-introduced. Under this test a parent company can qualify for the participation exemption if holds the 5% or more participation in a subsidiary in line with its own business activities (i.e. not as a portfolio investment). This was a significant improvement and simplification compared to the ‘asset test’ that was introduced in 2007.

The Dutch Revenue was reluctant, however, to apply the new participation exemption rules on all dividends distributed in 2010 and later years. The Revenue took the position that the tax treatment of dividends, which are distributed from profits realised in earlier years, must be determined based on the Dutch tax rules applicable in the years in which the subsidiary realised those profits. If the profits now distributed originate from the period 2007 up to and including 2009, the subsidiary must have fulfilled the ‘asset test’ (i.e. not more than 50% passive assets) or the ‘effective tax rate test’ (effective tax rate of at least 10% measured on Dutch standards) in any of those past years. Especially when requesting an advance tax ruling on the applicability of the participation exemption, this appeared to be a complicating factor.

The decision of the Dutch Supreme Court in Case 11/04538 of today completely overrules this position of the Dutch Revenue. The Supreme Court stipulates that a change in tax law takes effect as from the moment this change is enacted. If the legislator would have wanted something else, explicit transitional rules should have been made to create such effect. The mere reference to the application of ‘compartmentalisation-method’ for distribution of ‘old profits’ in the explanatory notes is insufficient.

This means that the more advantageous rules of the participation exemption in force as from 1 January 2010 apply to any dividends received on or after that date. It is not relevant from which years the dividend is paid.

We are delighted that the Supreme Court now confirms the viewpoint that we have taken earlier: a dividend received in a certain tax year must be judged exclusively on basis of the tax rules applicable in that tax year.

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