On November 3, 2023 the Dutch Supreme Court ruled in a case regarding dividends denominated in a foreign currency that are received by a Dutch resident entity (ECLI:NL:HR:2023:1504). More in particular the judgment concerns the moment of occurrence, or at least the mandatory capitalization of a dividend receivable for Dutch corporate income tax purposes. The Dutch participation exemption applies to such dividends up to the moment such dividend receivable is to be capitalized as a separate asset on the balance sheet for tax purposes. As of that moment currency exchange results realized/incurred with respect to the dividend receivable are taxable/deductible for Dutch corporate income tax purposes. Considering the fact that Dutch entities very often have a pivotal role in international holding structures and the fact that the judgment of the Dutch Supreme Court deviates from what seems to have been the predominate opinion in literature makes this judgment of the Dutch Supreme Court a definite must read for any tax specialist who is involved in international holding structures that involve Dutch (sub-)holdings.
Facts of the case
2.1 X BV (hereinafter: the taxpayer) is part of an international group (hereinafter: the group). The only shareholder of the taxpayer is a resident of the United States (hereinafter: the parent company). The taxpayer owns all shares in a company that was incorporated under Swiss law and that is a resident of Switzerland (hereinafter: the subsidiary).
2.2 The parent company has drawn up a so-called “Debt Payoff Plan” which aims at eliminating group loans from the group's books.
2.3 In that respect, on July 1, 2011 (the declaration date) the Board of Directors and the shareholders' meeting of the subsidiary decided to distribute a dividend of CHF 104,000,000 (hereinafter: the Swiss dividend).
2.4 On August 4, 2011, the subsidiary paid the Swiss dividend by transferring loan notes receivable of CHF 104,000,000 it had outstanding on a group company to the taxpayer.
2.5 Also on August 4, 2011 (the declaration date) the Board of Directors and the shareholders' meeting of the taxpayer decided to pay an interim dividend of CHF 104,000,000 to the parent company under the Debt Payoff Plan. On that same date the taxpayer transferred the receivables it had received under 2.4 above to the Parent Company as a dividend.
2.6 The taxpayer calculates its taxable amount for Dutch corporate income tax purposes in euros.
2.7 In the period from July 1, 2011 through August 4, 2011 the CHF/EUR exchange rate went up.
2.8 The taxpayer takes the position that the exempt Swiss dividend it received on August 4, 2011 should be accounted for on August 4, 2011 at the euro value of that date. Accordingly, in its Dutch corporate income tax return for the year 2011, the taxpayer accounted for the Swiss dividend as exempt income in the amount of CHF 104,000,000, which was converted to euros against the CHF/EUR exchange rate of August 4, 2011, (i.e. € 95,439,112).
2.9 The Dutch tax authorities took the position that the Swiss dividend should be accounted for on the date of declaration by the subsidiary (i.e. July 1, 2011) at the value in euros of that date, and that from that date on the taxpayer had a claim for payment of this dividend against the subsidiary, which belonged to the profit sphere. When issuing the additional Dutch corporate income tax assessment, the tax authorities therefore valued the Swiss dividend against the CHF/EUR exchange rate of July 1, 2011. This resulted in an amount of € 84,780,305 that was exempt for Dutch corporate income tax purposes because the participation exemption applied to this amount. Consequently, the Dutch tax authorities considered an amount of € 10,658,807 to constitute a taxable currency exchange gain that the taxpayer had realized over its claim for payment of the Swiss dividend.
In its judgements the District Court of Noord-Holland and the Court of Appeal of Amsterdam ruled in favor of the Dutch tax authorities.
Pleas in law
The taxpayer has brought forward one plea in law that can be divided in 2 sub-pleas:
(i) According to the taxpayer, the Court of Appeal violated the law by failing to examine whether or not the dividend that was declared by its subsidiary on July 1, 2011 was also made payable on that date. According to the taxpayer, it is only the becoming payable of the dividend that necessitates a capitalization of a dividend receivable; the taxpayer is of the opinion that it follows from HR BNB 1988/232 that sound business practice allows a dividend receivable to be only capitalized at the moment that it became payable.
(ii) In the alternative, the taxpayer argues that if already on July 1, 2011 a dividend receivable should have been capitalized on that same date an equally large debt to the taxpayer’s parent company regarding its redistribution obligation should have been capitalized. That obligation had not yet legally arisen. But the taxpayer does not consider that decisive because in its opinion economic reality must be leading when determining taxable profits. The taxpayer argues that all parties involved intended to have the receiving and redistribution to take place on one and the same day, precisely in order to prevent exchange results. It is furthermore of the opinion that this intention was indeed relevant, since in an economic sense the taxpayer therefore never disposed of the dividend receivable. The taxpayer considers the Court of Appeal's ruling on this point insufficiently reasoned, because it is of the opinion that it is incomprehensible that the Court of Appeal awarded no or insufficient significance to the intention of the parties as evidenced by contemporaneous e-mails and a later notarial deed.
The Secretary of State endorses the Court of Appeal's judgment, as it is established that on July 1, 2011 the taxpayer acquired an unconditional right to the dividend. He considers the taxpayer's apparent assertion that the two dividend declarations were related in such a way that they should also be considered related for tax purposes to be incorrect, since the relevant resolutions do not contain such a correlation. Furthermore the Secretary of State is of the opinion that there is no reason to deviate from that legal reality, since the taxpayer has not submitted any facts and circumstances based on which the civil law reality should be ignored for tax purposes.
From the legal assessment of the Dutch Supreme Court
4.1 First of all the plea is directed against the Court of Appeal's judgments, mentioned above in that a dividend receivable had already become part of the taxpayer's assets on July 1, 2011, and that as a result thereof the Dutch participation exemption does not apply to subsequent changes in the value of that receivable. The plea argues that the date of payment (according to it, August 4, 2011) is the appropriate time at which a dividend receivable should be capitalized, or at least that in any case sound business practice allows this.
4.2 In assessing this complaint, the Dutch Supreme Court puts the following first.
4.2.1 If the body of an entity, that under applicable corporate law is authorized to do so, has resolved that the company will proceed to pay a dividend, a claim against the entity for payment of that dividend (hereinafter: the dividend receivable) shall thereby arise for the relevant shareholder(s).
If the shareholder has a participation in the distributing entity as referred to in Article 13 of the Dutch corporate income tax Act, the dividend will in principle be exempt as a benefit stemming from a participation as referred to in paragraph 1 of that Article when determining the taxable profit for Dutch corporate income tax purposes. The benefit that lies in the arising of the dividend receivable is then part of the exempt income stemming from a participation at the time that said receivable arises. With the arising of that receivable, it leaves the sphere of the participation exemption. From that moment on, the dividend receivable is an independent asset that, by its nature, can lead to profits and losses. The participation exemption does not apply to those profits and losses. This also applies if that receivable is not immediately due and payable. For the purpose of a correct determination of the taxable total profit, that receivable must be capitalized at the time it was created at its fair value at that time (expressed in euros or another functional currency). Therefore, any results subsequently realized or incurred with respect to this receivable, such as exchange results, are not part of the benefits stemming from the participation and are therefore to be taken into account in determining the taxable profit.
4.2.2 In all that has been considered in 4.2.1 above, contrary to what the plea argues, it is irrelevant when the dividend is made payable and sound business practice does not play a role.
4.2.3 In view of what has been considered above in 4.2.1, the Dutch Supreme Court no longer sees room for the exception to the obligation to capitalize a dividend receiveable that it accepted in paragraph 4.2 of its judgment of April 20, 1988, ECLI:NL:HR:1988:ZC3804, in the case where there are such impediments to the payment of the dividend that at the time of its declaration it was uncertain whether such payment would ever take place. Nor does the Supreme Court any longer see room for the exception that it accepted in its judgment of April 20, 1977, ECLI:NL:HR:1977:AX3560 with respect to changes in the value of the dividend receivable in the event that after it has been declared the dividend cannot be remitted to the Netherlands due to a cause related to the subsidiary. If one of these circumstances occurs at the time the dividend is declared, it should be taken into account when determining the fair value of the dividend receivable. Therefore, any benefit arising thereafter in respect of that receivable cannot be considered a benefit stemming form the participation that granted the dividend, even if that benefit is causally related to that participation.
4.3.1 The Court of Appeal's findings and judgments imply that on July 1, 2011, the corporate bodies of the subsidiary - which under Swiss company law - which applies here - are authorized to do so - decided that the subsidiary would make dividend distribution to the taxpayer worth CHF 104,000,000. The parts of the plea directed against these findings and judgments fail. In so far as the Court of Appeal relied on Swiss law in this respect, it is true that cassation for infringement of the law of foreign States is not possible under Article 79, Paragraph 1 opening words and under b of the Judicial Organization Act. For the rest, these findings and judgments are of a factual nature and are adequately substantiated.
4.3.2 In view of what has been considered above under 4.2 and in 4.3.1, the Court was able to come to the conclusions (i) that the taxpayer acquired a right to dividends worth CHF 104,000,000 as an - exempt - benefit stemming from its participation in the subsidiary, (ii) that this right became part of the taxpayer’s assets on July 1, 2011, and (iii) that changes in the value of that right arising after that date can no longer be considered a benefit stemming from the participation in the subsidiary.
4.3.3 The fact that, as the plea argues, the taxpayer neither intended nor desired to realize a currency exchange result, nor did the other group companies involved, cannot alter what has been considered above in 4.3.1 and 4.3.2.
4.3.4 The plea in law as set forth above under 4.1 fails.
4.4 The plea in law also fails insofar as it is directed against the judgments of the Court of Appeal insofar as it concerns the application of the exceptions to the moment of capitalization of a dividend receivable and to the rule that changes in the value of that receivable occurring after that moment are taxed as adopted by the Court of Appeal. In view of what was considered above in 4.2.3 there is no room for these exceptions.
4.5 The plea also fails insofar as it is directed against the Court of Appeal's judgment that the dividend receivable the taxpayer has on its subsidiary must be valued at its face value. This judgment is factual and not incomprehensible.
4.6.1 The plea further complains about the Court of Appeal's judgement on the taxpayer’s alternative position. The plea argues that as of July 1, 2011 - the date the Swiss dividend was declared - an equal obligation to redistribute that dividend to the parent company should be taken into account. According to the plea, economic reality should be leading when determining the taxable profit, and therefore according to the taxpayer it is not decisive whether or not on July 1, 2011 the obligation to (re-)distribute the dividend to the parent company already legally existed for the taxpayer.
4.6.2 The plea also fails to this extent. The Court of Appeal correctly assumed that an obligation to pay a dividend can only be taken into account after a legally enforceable obligation to pay that dividend has arisen. The Court of Appeal did not err in law by judging that for the taxpayer an obligation to pay a dividend only arose on August 4, 2011, after - in accordance with the requirements of Article 2:216 of the Dutch Civil Code and the taxpayer’s Articles of Association - the shareholder of the taxpayer had decided to do so and the Board of Directors of the taxpayer had given its approval. That opinion, as intertwined with valuations of a factual nature, cannot otherwise be examined for correctness by the Supreme Court in the cassation proceedings. It is adequately reasoned. Nor can it detract from that judgment that, as the plea argues, the taxpayer and the other group companies involved intended that the taxpayer would not obtain an exchange result on the Swiss dividend.
4.7 In view of the foregoing, the plea fails in all its aspects.
The Dutch Supreme Court declared the appeal in cassation unfounded and therewith confirmed the previous judgment of the Court of Appeal of Amsterdam.
Remarks by International Tax Plaza
Although the Advocate General already came to the same conclusion in January 2022 the judgment of the Dutch Supreme Court still came as a surprise to us. The reason here for is that in our opinion in the underlying judgment the Dutch Supreme Court seems to break with its own established case law.
With respect to dividend distributions three moments in time can be distinguished. The first is the date on which the decision to distribute a dividend is taken by the authorized corporate body (or bodies) of an entity. For example when a shareholders’ resolution to distribute the dividends is adopted. The second date is the date as of which the dividend is payable. Finally the third date is the date on which the dividend is actually being paid to a shareholder.
It must be noted that the following only applies to situations in which the Dutch participation exemption applies to a shareholding in a subsidiary. In that case the general consensus in literature seems to have been that the participation exemption applies to dividend distributions until the date on which the dividends become payable or are being paid. Consequently, under that reasoning a dividend receivable would only have to be capitalized on the date that the dividend becomes payable/is actually being paid. Therefore, the Dutch participation exemption would also apply to currency exchange results that arise over the dividend between the date that the authorized corporate body or bodies have decided that a dividend will be distributed (e.g. adopted a shareholders’ resolution in that respect) and the date on which the dividend becomes payable/is received. These currency exchange results would therefore be not taxable/non-deductible for Dutch corporate income tax purposes. As a result, only (currency exchange) results that arise between the date on which the dividend becomes payable and the date on which it is actual paid/received would be taxable/deductible.
But that was what seems to have been the general consensus in literature that we can now set aside since in its underlying judgment the Dutch Supreme Court has ruled that the Dutch participation exemption does not apply to any result that is realized or incurred on a dividend after the moment on which the authorized corporate body or bodies of the subsidiary have decided that a dividend will be distributed (e.g. the moment on which a shareholders’ resolution in such respect is adopted). Since in its judgment the Dutch Supreme Court has ruled that taxable results with respect dividends to be received by a Dutch entity can also occur between the moment on which the decision to make a dividend distribution was made and the moment on which said dividend becomes payable, the period in which taxable results can occur is longer than it was generally assumed in literature. This is therefore something that should be considered when intra-group dividends are being distributed.
In the underlying judgment the Dutch Supreme Court does not make any remarks regarding the situation in which a Dutch entity is not the receiver, but the distributor of the dividends. It however seems logical that analog reasoning is to be applied. Therefore in such case the distributing entity has to include a separate dividend debt in its tax books on the moment a shareholders’ resolution has been adopted and approved by the Board of Directors of the distributing entity. Any changes in value of the dividend that occur after that date are taxable or deductible at the level of the Dutch distributing entity. By taking such an analog approach no mismatch would occur if both the distributing entity and the shareholder would be Dutch entities that are liable for Dutch corporate income tax. A taxable gain of X euros at the level of the shareholder at the same moment leads to a deductible loss at the level of the subsidiary and vice versa.
The full text of the judgment of the Dutch Supreme Court of November 3, 2023 as published on the website of the Dutch courts can be found here.
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