Administrative High Court: Contribution of real estate as an exchange

Overview

The ruling of the Administrative High Court of 13 December 2021, Ra 2021/15/0106, dealt with the question of whether the contribution of real estate to a corporation without the granting of share rights is to be regarded as an exchange and is therefore subject to tax.

Facts of the case

The appellant contributed several properties from his private assets to a limited liability company in which he held a 50 % share. As a result of the contribution, no new shares in the company were granted and no other consideration was received. A capital increase did not take place either. In the opinion of the appellant, there was therefore no exchange, as there was no consideration.

The tax office did not share the appellant's view. It explained that due to the standardised fiction of exchange pursuant, the contribution of assets to a corporation was considered a sale and subsequent acquisition at the limited liability company if it did not fall under the Reorganisation Tax Act. The Tax Appeals Court agreed with this legal opinion. It also stated that an exchange consists of the sale of the real estate on the one hand and the acquisition of new shares in the company on the other if a capital increase takes place. Without a capital increase, there would be an increase in the acquisition cost of the existing company shares, which was also to be understood as consideration for the exchange.

Decision of the Administrative High Court

The Administrative High Court followed the legal opinion of the Tax Appeals Court and stated that according to the income tax law, an exchange exists in the case of a contribution of assets to a corporation. This does not apply if the contribution falls under the Reorganisation Tax Act and results otherwise therefrom. In the present case, however, the Reorganisation Tax Act was not applicable.

Furthermore, the exchange transaction consists of an acquisition and a sale. In the case of a contribution of real estate, the exchange transaction usually consists of the sale of the real estate and the acquisition of shares in the company. The Administrative High Court held that an exchange also exists if no new shares are granted. In this case, however, the contribution leads to an increase in the value of the shares and thus to an increase in their acquisition cost. From an income tax perspective, this increase in value is the consideration.

In the sense of income tax law, this is therefore a transaction for consideration. The fair market value of the properties is therefore to be assessed as proceeds from the sale in the case of the appellant and as acquisition cost for the properties in the case of the limited liability company.

Conclusion

If a property is contributed to a corporation and the Reorganisation Tax Act does not apply, an exchange transaction subject to income tax is deemed to have taken place, even if there is no increase in the company shares. In this case, the contribution leads to an increase in the value of the existing company shares and an increase in the acquisition cost. According to the Administrative High Court, this is to be seen as a consideration, so that the transaction is taxable.