F/X result on participation dividend receivable taxable

10/11/23

A dividend receivable arises at the moment the company's competent body adopts the dividend resolution. At that moment, the parent company must value the dividend receivable and recognise it as an asset on its tax balance sheet. The dividend to be received by the parent company is exempt if the participation exemption applies. Any results in respect of the dividend receivable (including foreign exchange results) are not covered by the participation exemption and are subject to corporate income tax. The Supreme Court confirmed this in a judgement dated 3 November 2023.

What does this mean for your company?

An important lesson from the Supreme Court ruling is that transactions involving exempt participation income must be structured with legal precision to avoid accidents. This case concerned the distribution of a dividend to which, in itself, the participation exemption applied. However, a period elapsed between the dividend resolution and the actual payment, albeit a relatively short period of just over a month. The dividend was denominated in foreign currency. During this short period, an exchange rate difference occurred on the dividend receivable. The exchange result led to a positive taxable foreign exchange result to which the participation exemption does not apply. Unfortunately from the perspective of the group and the Dutch company, there was only a 'paper' profit given the totality of the transactions.

The case

The Dutch company/taxpayer holds all the shares of a Swiss-based subsidiary. The participation exemption applies to this interest. On 1 July 2011, the subsidiary decided to make a dividend payment of CHF 104 million to its Dutch-based shareholder.

On 4 August 2011, the Swiss subsidiary paid the dividend by transferring intercompany receivables worth CHF 104 million to the Dutch shareholder. On the same day, 4 August 2011, it was decided that the Dutch shareholder would make an interim dividend payment to the parent company of the shareholder (also) amounting to CHF 104 million. Consequently, the dividend received by the relevant Dutch party was redistributed to the parent company on the same day.

The exchange rate of the Swiss franc against the euro increased in the period from 1 July 2011 to 4 August 2011. As the Dutch company calculates its profit in euros, an exchange result of 10.6 million euros arose.

Supreme Court ruling

Benefits obtained from a participation are exempt if the participation exemption applies. Exempt benefits include dividend payments and capital gains on disposal. In the case before the Supreme Court, the issue was whether the exchange result on the dividend receivable was also covered by the participation exemption.

The first question the Supreme Court had to answer was the question at what moment a dividend receivable arises for tax purposes. This was a subject of much debate in the tax literature. In particular, this discussion focused on the question whether a dividend receivable arises at the moment the dividend is declared, i.e. the moment at which the dividend receivable arises in civil-legal terms, or at the moment it is made available for payment. The Supreme Court has now ruled that the first view is correct. A dividend receivable arises at the moment the company's competent body adopts the dividend resolution. At that moment, the parent company must value and recognise the receivable as an asset on its tax balance sheet.

The second question the Supreme Court had to answer was the question of the scope of the participation exemption. It is clear from the judgement that a benefit located in the arising of the dividend receivable belongs to the exempt participation profit. The dividend itself is therefore covered by the exemption. Next, the Supreme Court ruled that with the arising of that receivable, the exempt participation profit is left. From then on, the dividend receivable is an independent asset which, by its nature, can lead to profits and losses. As a result, changes in the value of the dividend receivable, including changes in value due to exchange rate fluctuations of foreign currencies, are in the taxable domain (profits taxed, losses deductible). It is therefore very important for what value the dividend receivable is recognised on the tax balance sheet.

Finally, the Supreme Court has therefore also indicated how the valuation of the dividend receivable on the fiscal balance sheet should take place. In order to correctly determine the taxable total profit, the dividend receivable must be recognised on the balance sheet at the moment it was arising. This is the moment a legally enforceable liability arises. Thus, there is no "economic" approach. The valuation is made at fair value at that time.

Supreme Court overturns old case law

In the ruling in question, the Supreme Court indicated that old case law (from 1977 and 1988) no longer applies. In that old case law, the Supreme Court had considered that accounting principles are leading when answering the question when and for what amount a dividend receivable arises. The 1988 ruling showed that in case there is such an impediment to payment of the dividend that it is uncertain whether such payment would ever take place, no dividend receivable needs to be recognised on the tax balance sheet as an asset on the basis of accounting principles. The judgement of 3 November 2023 now shows that this rule no longer applies and even if it is uncertain whether a dividend payment will actually take place, the dividend receivable must be valued at fair value on the tax balance sheet. The uncertainty may affect the value at which the receivable should be recognised as an asset.

In addition, the Supreme Court revises an exception. In the 1988 ruling, the Supreme Court had accepted that if, due to a cause related to the participation, the dividend cannot be remitted to the Netherlands after it has been attributed, no receivable had to be recognised. Thus, this exception too has now been abandoned.