Anti-abuse provision does not preclude application of liquidation loss scheme
Supreme Court has ruled that the anti-abuse provision of art. 13d(4) CITA 1969 does not prevent taking a liquidation loss in this case, since the value of the participation has not dropped in the relevant period.
4 October 2018
Liquidation loss scheme
Under the participation exemption both positive and negative advantages from a participation are excluded from determining the parent company’s profit. That said, the participation exemption does not apply if a loss arises due to the dissolution of the entity in which the taxpayer participates. If so, the liquidation loss can be taken to the profit. In this respect, the liquidation loss is determined as the difference between the amount paid by the taxpayer for a participation and the total liquidation payments made.
The liquidation loss scheme does have its restrictions, though, to prevent abuse. One of them regards the situation in which an intermediate holding company is liquidated. If the equity of this intermediate holding company includes a participation whose value has dropped since the acquisition of the shareholding in the dissolved entity, a liquidation loss will only arise insofar as this loss exceeds the drop in value of the participation. The Supreme Court has provided clarity about the scope of this anti-abuse provision recently.
Write-down of participation not obligatory
The interested party was part of a group. Together with a private limited company (B.V.), the top holding company of this group held the full shareholding in the intermediate holding company. In turn, this company held all shares in an Aktiengesellschaft. Following a restructuring, the interested party acquired the full shareholding in the intermediate holding company on 24 June 2004. These companies subsequently set up a fiscal unity. The Aktiengesellschaft did not form part of this fiscal unity. The value of the shares in the Aktiengesellschaft dropped over time - a drop in value that had already occurred in the period prior to the interested party acquiring the participation in the intermediate holding company.
The intermediate holding company transferred its assets and liabilities within the fiscal unity to the interested party in March 2009, apart from the participation in the Aktiengesellschaft and a cash amount. The intermediate holding company was deconsolidated from the fiscal unity in the same month. It was subsequently liquidated in June 2009. The dispute was about whether the interested party could take a loss amounting to the difference between the liquidation payment and the amount paid.
The Den Bosch Court of Appeal ruled that sound business practice did not preclude continuing to value the participation in the Aktiengesellschaft at historical cost. The rationale was that because of the application of the participation exemption, any write-down would not affect the profit of the fiscal unity. This valuation could be maintained, even after the intermediate holding company had been deconsolidated from the fiscal unity. All this led to an amount paid of well over EUR 119 million. The Supreme Court subscribes to this outcome. Still, after the deconsolidation, it states, the intermediate holding company even had the obligation to follow the carrying amount applied by the parent company in respect of the participation in the Aktiengesellschaft.
The Court of Appeal subsequently ruled that in this case the wording of aforementioned anti-abuse provision does not preclude taking a liquidation loss, because the value of the participation in the Aktiengesellschaft had not dropped since the interested party acquired the shares in the intermediate holding company. The Court of Appeal nevertheless ruled that taking a liquidation loss would go against the aim and purpose of the liquidation loss scheme. Hence, the interested party was not permitted to do so.
The Supreme Court clearly has a different view. It considers the judgment of the Court of Appeal to be based on an incorrect interpretation of the law. When drafting the scheme, the legislature deliberately included a clear and narrowly defined anti-abuse provision. The amount of liquidation loss is only limited when the equity of the entity dissolved includes a participation whose value has dropped since the acquisition of the participation in the entity dissolved. The Supreme Court subsequently considers that the friction with the aim and purpose of the liquidation loss scheme, as identified by the Court of Appeal, is caused by the complex of legal provisions for determining the amount paid upon deconsolidation from a fiscal unity. Once again, the legislature has deliberately opted for a simple scheme to determine the amount paid. It should thus be assumed that the legislature wanted to accept the scheme’s advantageous and adverse effects for the taxpayer. The conclusion is that the interested party is right. This results in a deductible liquidation loss of well over EUR 94 million.
On a final note, the legislature did not want to wait for the outcome of these proceedings. It introduced a legislative change on 1 January 2018. The text of art. 13d(8) CITA 1969 now stipulates that when determining the equity of a deconsolidated company, a participation must be valued at its commercial value at the date of deconsolidation if this value is lower than the carrying amount.
Source: HR 28September 2018, 16/05706, ECLI:NL:HR:2018:1791