Transfer tax structure is abandoned
The Supreme Court judges that the tenet of fraus legis applies in situations where transfer tax was avoided through an alternative way of transferring shares in a real estate company.
8 February 2017
Real estate company and transfer tax
The acquisition of real estate located in the Netherlands is subject to transfer tax. It would be fairly easy to avoid the levy of transfer tax by transferring the shares in a company owning the real estate instead of transferring the real estate itself. Because economically the subsequent result is similar, the legislature has made such structures taxable as well. Subject to certain conditions the shares in a real estate company itself are considered to be real estate, the transfer of which is subject to transfer tax. Recently the Supreme Court has pronounced judgment in a case where the interested party attempted to avoid to this levy.
Does a transfer of shares lead to taxation?
The interested party in this situation, a private limited liability company, held 50% of the shares in another private limited liability company, which qualified as a real estate company for transfer tax purposes. The interested party wished to acquire the remaining 50% of the shares. A direct transfer of the shares would have led to the levy of transfer tax. Hence, the transfer was structured through a merger and share transfer, applying the exemptions for mergers and for internal restructurings. Thus, no transfer tax could be levied under the law. Invoking fraus legis, the inspector nevertheless imposed an additional tax assessment. If this tenet is applied in the event of tax avoidance contrary to the purpose of the law, taxation is still possible.
Levy of transfer tax still possible
The Den Bosch Court of Appeal had established that it regarded a set of legal acts whose ultimate goal was to realize the transfer of the 50% interest to the interested party. The Court of Appeal went on to rule that the decisive motive for setting in motion this set of legal acts had been the avoidance of transfer tax. This is why the inspector is successful - at least in part - in invoking fraus legis. However, according to the Court of Appeal this tenet cannot be applied to the choice of the interested party to opt for a tax-saving structure to transfer shares that in itself do not classify as real estate for transfer tax purposes. This is because had these shares been independently transferred no transfer tax would have been levied either. If taxpayers wish to achieve a fair and commercial objective they are free to follow whatever structure reduces the tax burden to a minimum. As the process followed in this specific case is in line with this freedom, the Court of Appeal partially annuls the additional tax assessment.
The Supreme Court does not accept the judgment of the Den Bosch Court of Appeal though. In this case the intended the transaction is the transfer of the 50% interest. When assessing whether the taxation consequences agree to the purpose of the law, it would have to be examined what type of taxation would have been imposed on this transfer. No other legal acts are taken into account in this respect. Hence, the Supreme Court decided in the inspector’s favor and the entire construction was discarded. So, even in a case in which no transfer tax is due according to the letter of the law, taxation could be possible based on the tenet of fraus legis.
Source: Supreme Court February 3, 2017, no. 15/04988, ECLI:NL:HR:2017:126