Dutch Supreme Court provides further guidance on the scope of non-deductibility of costs of acquisition or disposal of a subsidiary

The participation exemption

The participation exemption implies that benefits from a subsidiary are not taken into account when determining the profit of its parent company. These benefits may include dividends, but also (positive or negative) results on the disposal of a subsidiary. Costs relating to the acquisition or disposal of a subsidiary are also excluded. In its judgment of December 7, 2018, the Dutch Supreme Court explains when costs relating to the acquisition or disposal of a subsidiary are, and when they are not taken into account:

1. Costs incurred by a taxpayer constitute non-deductible acquisition or disposal costs only if there is a direct causal link between those costs and the acquisition or disposal of a specific subsidiary;
2. The non-deductibility of acquisition or disposal costs comprise both internal and external costs of the taxpayer;
3. The non-deductibility relates solely to the acquisition and selling costs of an acquisition or disposal that actually took place;
4. If the disposal of a subsidiary fails, but continues later, it must be ascertained to what extent costs were incurred that would also have been incurred if the subsequent disposal had not taken place;
5. Costs relating to an intended acquisition or disposal of a subsidiary must be recorded on the (tax) balance sheet as a transitory asset. Only when it is established whether an acquisition or disposal of a subsidiary takes place, the transitory asset is written off. It must then be determined to what extent the write off / costs are deductible.

Insofar part of the transitory asset relating to an acquisition is deemed non-deductible, the write-off may be added to the cost price of the participation. This means that upon a possible future liquidation of the subsidiary, these costs may then become deductible as part of the liquidation loss.

What does this mean for you?

First, because of this court decision you may have to update your internal procedures and bookkeeping, as it is it is important that you keep record of all costs with a direct causal link with an (intended) purchase or disposal of a subsidiary. This not only comprises external costs but internal costs as well.

Secondly, you need to record costs relating to an intended acquisition or disposal on the tax balance sheet as a transitory asset. This may impact your cash flow model.

Finally, the Dutch Supreme Court has redirected the court case to another Court of Appeal for a factual examination of the costs in this specific case.

On 28 November 2019, the judgment of the Court of Appeal of 's-Hertogenbosch (hereinafter 'the Court') was published. The Court ruled that it must first be determined whether costs were in a direct causal relationship with the sale. If this is the case, the taxpayer must include the costs as a transitory item as at the balance sheet date. The Court also ruled that: costs that make the final sale to third parties (including the buyer) possible, are not deductible if it ultimately comes to a sale. Costs that have only been incurred for one specific party that does not ultimately buy, are deductible.

Former State Secretary for Finance Snel has decided not to appeal in cassation because he agrees with the opinion of the Court.