Damages for failed share transaction not covered by the participation exemption  | Deloitte Nederland


Damages for failed share transaction not covered by the participation exemption

The Supreme Court ruled that the participation exemption does not apply because the interested party had not yet acquired an unconditional de facto and de jure enforceable right to delivery of the shares.

22 July 2020


The interested party had held a shareholding in a Polish state owned company since 1999. The Share Purchase Agreement stipulated that the parties intended to have the Polish state company listed on the stock exchange by 2001 at the latest, with the interested party being granted the right to acquire a further 21% of the shares on the stock exchange. The first step towards the IPO was taken in August 2001. However, this was followed by the attacks in the United States in September 2001, which affected the international stock exchanges. On top of this, the opposition won the Polish parliamentary elections. During the election campaign the opposition had already indicated that Poland should no longer relinquish its state shareholdings. After many negotiations, it eventually became apparent that the Polish state was not going to honour the pledge made in the SPA. The interested party initiated arbitration proceedings against the Polish state and it won the case. The parties ultimately reached an agreement according to which the interested party would float its shares in the Polish state-owned company on the Polish stock exchange. In exchange it would be compensated for the increase in the value of its shareholding and the loss of dividends. This compensation ultimately amounted to well over EUR 1.16 billion. The dispute was about whether the compensation was exempted under the participation exemption.

Right to delivery

In the course of the proceedings before the Court of Appeal, the interested party raised several points. Firstly, the interested party claimed that the right to the listed block of shares was indivisibly linked to the existing shareholding in the Polish state-owned company. The Court of Appeal rejected that claim, arguing that the entitlement to the 21% package did not stem from the shareholding but from the SPA. Also, according to the Court of Appeal the 21% share package did not involve a split shareholding between the interested party and the Polish state. Finally, the Court of Appeal ruled that the SPA did not result in a right to delivery of the shares concerned. Insofar as the compensation received relates to the failed transaction, the participation exemption does not apply. It does, though, insofar as the compensation (approximately EUR 250 million) serves as a compensation for the lower price that the interested party had to settle for when the shares already held were listed on the stock exchange.

The Supreme Court has confirmed the judgment of the Court of Appeal. The Supreme Court reiterated its earlier legal rule that a participation only exists after an agreement has been entered into under which the other party has committed itself to deliver shares to an interested party and under which this interested party has committed itself to deliver the quid pro quo following the acquisition of those shares. Hence, in the pre-contractual phase no participation is involved. The Court of Appeal had already ruled that the interested party did not yet have an irrevocable right of delivery under Polish civil law. It is therefore correct in its assessment of the taxability of the compensation in question. The Court of Appeal’s judgment also stands up to the test of criticism in terms of the grounds on which it is based.

Subsequently, the Supreme Court refined its case law on shareholding ratios. Our highest court of justice states that a letter of intent is insufficient, because the agreement itself does not yet create an unconditional right to delivery of the shares. For the same reason, an agreement subject to a condition precedent is equally insufficient, at least if the fulfilment of that condition depends on a future event beyond the taxpayer’s control.  
In addition, a participation does not or no longer constitute a participation if external circumstances de facto or de jure render an unconditional right to delivery of shares unenforceable. The Supreme Court concludes with the observation that the above applies regardless of whether the taxpayer already has a participation in the company to which the shares to be acquired relate. Undoubtedly an important judgment.

Source: HR 10 July 2020, 18/03268, ECLI:NL:HR:2020:1270

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