The Supreme Court rendered two landmark decisions on whether shares can be classified as debt for Dutch tax law purposes. The Supreme Court ruled that the classification of shares under Dutch civil law - whether contributions on shares are available for recourse by creditors - is decisive. Loyens & Loeff successfully represented the taxpayers in both cases.
Banking syndicate case
In the first case ("banking syndicate case"), a Dutch banking syndicate had provided a loan to a Dutch holding company. The holding company used the proceeds of the loan to acquire shares of a Dutch listed company. The shares so acquired qualified for the participation exemption regime, which provides for a full exemption from Dutch corporate income tax for benefits derived from a qualifying shareholding. The holding company was unable to offset the deductible interest expenses under the loan against taxable profits. However, the income derived by the banking syndicate from the loan was regularly subject to Dutch corporate income tax. Therefore, effectively a mismatch existed for Dutch tax law purposes.
To neutralize this mismatch, the holding company contributed its shares in the listed company to a new Dutch company ("Newco") in exchange for, among others, shares with the characteristics of cumulative preference shares ("CPS"). The holding company subsequently sold the CPS to a banking syndicate. The holding company used the proceeds of the sale to repay the loan from the banking syndicate. The return on the CPS was pre-determined. The banking syndicate and the holding company furthermore entered into contractual arrangements, allowing the banking syndicate to request the liquidation of Newco. The banking syndicate argued that benefits derived from the CPS were exempt from Dutch corporate income tax by virtue of the participation exemption. The tax authorities challenged this position by arguing that the CPS, in conjunction with the contractual arrangements, should be regarded as debt for Dutch tax law purposes, in which case benefits derived from the CPS would be regularly subject to Dutch corporate income tax.
The Supreme Court ruled that shares for Dutch civil law purposes cannot be regarded as debt for Dutch tax law purposes. Under Dutch civil law, a holder of shares is subordinated to all creditors, and any contributions made by shareholders are therefore available for recourse by creditors of the company. This characteristic of shares is not affected if (i) the shareholder has the right to terminate its capital financing after a certain period and (ii) such capital financing has certain (economic) similarities with a loan. Therefore, if a shareholding exists for Dutch civil law purposes, such shareholding should be respected as such for purposes of the participation exemption regime. In addition, the Supreme Court rejected the tax authorities' appeal on the abuse of law doctrine (fraus legis) because taxpayers are free to finance a subsidiary with either debt or equity, taking into account the intent of the participation exemption.
Australian RPS case
In the second case ("Australian RPS case"), a Dutch company had originally provided a shareholder loan to its Australian subsidiary. In a restructuring, the Dutch company effectively exchanged its shareholder loan for redeemable preference shares ("RPS") of a newly established Australian group company. The RPS had the following characteristics:
- entitlement to annual and cumulative fixed rate dividends;
- priority over other classes of shares for the payment of dividends and repayment of capital;
- redemption after 10 years; and
- limited voting rights.
For Australian corporate income tax purposes, the issuer of the RPS was allowed to take a deduction for any dividends on the RPS. The Dutch company took the position that the RPS qualified for the Dutch participation exemption regime. However, the Dutch tax authorities argued that the RPS should be classified as debt for Dutch tax law purposes.
The Supreme Court ruled that the RPS are classified as shares qualifying for the participation exemption, with reference to the banking syndicate case discussed above. The Supreme Court held that Dutch civil law allows for the issuance of cumulative preference shares with limited voting rights that have the same characteristics as the RPS. Such cumulative preference shares under Dutch civil law also qualify for the participation exemption. Furthermore, the deduction for any dividends on the RPS for Australian tax purposes does not impact the applicability of the participation exemption regime to the RPS. In addition, the Supreme Court rejected the tax authorities' appeal on the abuse of law doctrine (fraus legis) with respect to the exchange of the shareholder loan with the RPS.
Bron: Loyens & Loeff
Informatiesoort: Nieuws
Rubriek: Vennootschapsbelasting
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