No participation exemption for uncovered call options and benefits from cum/ex transactions | Deloitte Netherlands


No participation exemption for uncovered call options and benefits from cum/ex transactions

The Dutch Supreme Court ruled that uncovered call options do not qualify as a participation and that benefits derived from cum/ex transactions cannot be exempt under the participation exemption.

18 November 2020


The technique of cum/ex transactions is based on the trading and lending of shares or derivatives around the dividend date. This allows risks to be covered by means of call options on shares (i.e. options that give the buyer the right to buy shares at a fixed price within a specific time period). The Dutch Supreme Court recently pronounced judgment on the tax treatment of both call options and the benefits derived from cum/ex transactions in the context of the participation exemption.

Cum/ex transactions and call options

The interested party is a Dutch market maker that has executed cum/ex transactions involving a super dividend from a German listed company. Pursuant to the German withholding tax provisions applicable at the time, the interested party did not have to pay dividend withholding tax to the German tax authorities. This provided the interested party with a benefit per share equal to the amount of the German dividend tax (the cum/ex benefit). In order to hedge the risks of the cum/ex transactions, the interested party bought call options on shares of the German company. The call options would entitle the holder to more than 5% of the outstanding shares in the German company, and would therefore result in a participation under Dutch tax law should they be exercised. The interested party argued that the participation exemption should apply to the result achieved with the cum/ex transactions, regardless of the fact that the underlying shares of the call options were not actually in its possession. The Court ruled that the call options that were obtained for the purpose of the cum/ex transactions cannot be regarded as a participation. The interested party appealed against this judgment.

Judgment by the Supreme Court

In cassation, it was disputed whether the call options constitute a participation and whether the cum/ex benefit is exempted under the participation exemption. Firstly, the Supreme Court ruled that the participation exemption does not apply to the income and expenses of a call option, if at the time of the conclusion of the option agreement the writer of that call option does not have the underlying shares that should be delivered upon exercise of the option. Thus, the position of the interested party that it is only relevant whether a participation would have been acquired upon exercise of the call options is incorrect.

With regard to the cum/ex benefit the Supreme Court ruled that this benefit does not originate from the value development of the shares of the German company, but exclusively from the fact that the interested party does not have to pay German dividend withholding tax. So this is not a situation in which double taxation of company profits must be avoided. Considering the purpose of the participation exemption, the cum/ex benefit can therefore not qualify as a benefit on account of a participation. In so doing, the Supreme Court confirmed the Court’s judgment that the participation exemption does not apply in this case.

Source: HR 6 November 2020, 18/04686, ECLI:NL:HR:2020:1738

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