Dutch Supreme Court clarifies tax treatment of costs on acquisition or disposal of a participation

As a general rule costs incurred related to the acquisition or disposal of shares of a subsidiary that qualifies for the participation exemption, are non-deductible for Dutch tax purposes. The question to what extent costs should be earmarked and would actually be considered as related to the acquisition or disposal of a qualifying participation remained unclear. Following a recent decision by the Supreme Court on 7 December 2018 additional guidance now is available. 

The main take aways from the decision are:

• Any relevant corporate income taxpayer should at all times properly document and specify the transaction costs
• It is essential to earmark all costs in relation to the transaction in advance and to specify the reason why they have incurred. This applies both to direct attributable costs made in-house as well as external advisors. 
• If it appears that costs are not directly linked to the actual acquisition or disposal of a participation, such costs should be deductible (for example the costs in relation to an unsuccessful transaction). 
• Insofar a success fee relates to an acquisition or disposal of a participation it is not tax deductible 
• A corporate income taxpayer must record a transitory asset on its (tax) balance sheet with respect to transaction costs at the moment the acquisition or disposal of the participation is envisaged. This transitory asset will be written off as soon as the final decision with respect to the transaction has been made. 
• All initial costs in relation to a transaction are deductible insofar the costs would also have been incurred if the initial stage of the disposal had not taken place. 
• The burden of proof on the earmarked costs rests with the corporate income tax payer, but on the tax inspector insofar it relates to its deductibility

Although the decision provides useful clarifications, it leaves several questions unanswered. In any event the Dutch tax aspects of transactional costs incurred by a Dutch resident corporate income taxpayer always justifies a closer look.