No addition to reinvestment reserve for revaluation profit upon deconsolidation from fiscal unity
The Supreme Court rules that a revaluation profit to be taken into account under an anti-abuse provision does not classify for application of the reinvestment reserve facility.
4 April 2018
Provided certain conditions are met, the reinvestment reserve facility (RRF) allows entrepreneurs to defer taxation on book profits realized after assets have been alienated. This facility is rooted in the “replacement concept”: no profits will be realised if assets are replaced and, economically, the replacement assets have the same function in the company. Once assets are alienated, taxes imposed on its realization could endanger a company’s continuity. It could prevent replacement of assets, even if this is economically desirable. The Supreme Court has further clarified the concept of alienation for purposes of the RRF.
Transfer within a fiscal unity
Parent company X forms a fiscal unity for corporate income tax purposes with subsidiary Y. The parent company transfers immovable property to its subsidiary within the fiscal unity in 2007. As this involves a transfer within the fiscal unity, no book profit needs to be accounted for. The immovable property transferred is let to a third party. X sells the shares in Y to this third party in 2010. With the shares sold, the subsidiary no longer forms part of the fiscal unity. This deconsolidation triggers the anti-abuse provision of art. 15ai CITA 1969. Parent company X must as yet take into account the book profit realised upon transferring the immovable property (the so-called revaluation profit). The dispute is about whether a reinvestment reserve can be formed in respect of this profit. In other words, does the revaluation profit result from alienation of an asset?
Objective of anti-abuse regulation
The Supreme Court considers that the objective of art. 15ai CITA 1969 is to prevent the asset involved from being transferred to a party outside the fiscal unity without corporate income tax being paid in respect of a hidden reserve within the fiscal unity. As the Supreme Court states, the legislature specifically assumed that forming a reinvestment reserve for the amount of the revaluation profit is not possible. The parliamentary debate shows that for the purposes of the reinvestment reserve it is not possible to regard the revaluation profit as proceeds from the alienation of an asset. Hence, addition of the revaluation profit is not possible. Considering the above, for parent company X this represents a revaluation profit in respect of the transfer of the immovable property, subject to regular taxes.
Source: HR 30 March 2018, no. 17/00726, ECLI:NL:HR:2018:459