Regarding the Dutch participation exemption the Supreme Court ruled lately about two cases regarding the fiscal qualification of a funding as debt or capital. In order that the Dutch participation exemption is applicable it is important that the fundings qualifies as capital.
With these two judgements the Supreme Court confirms its course adopted in previous case law, stating that the civil form of a funding is decisive for the fiscal qualification. In addition, it is important that making use of the freedom of choice taxpayers have when funding a company in which they participate, does not violate the aim and purpose of the law.
Two basic principles for the qualification of funding
First, the Supreme Court decided in both cases that for the determination whether a funding of a subsidiary by its parent company is to be considered a loan or a capital contribution for tax purposes the civil form is, in principle, decisive.
Second, the Supreme Court considered that it is inherent in the system of the law that taxpayers have a free choice in the way they fund a company in which they participate. Making use of this freedom of choice does not imply acting in violation of the aim and purpose of the law (fraus legis).
The first case dealt – in short – with a debt restructuring by a banking consortium, where the restructured funding was provided through a participation in the capital of the intermediate holding company. The funding bore several similarities to a loan, but was yet to be considered risk capital. The (subordinated) creditors would prevail in case of winding up of the company. The Supreme Court therefore decided that there was no room for an exception to the main rule. The funding qualified as equity.
In the second case at hand, there was a conversion of a long-term loan into Australian redeemable preference shares (RPS). The RPS were taken into account as equity for the purpose of the participation exemption. The Supreme Court decided that the features of the Australian RPS also occur with cumulative preferential shares with limited voting rights issued by Dutch companies. As these Dutch cumulative preferential shares qualify as shares for the participation exemption, this also applies to the Australian RPS.
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Source: Supreme Court 7-2-2014, nrs. 12/04640 en 12/03540