A recent judgment of the Court of Amsterdam (Gerechtshof Amsterdam), case number: 20/00352, ECLI:NL:GHAMS:2021:1765, shows the importance of good timing and the use of precise wording during (financial) restructurings. In the underlying case the question arose whether a Dutch taxpayer should take into account a taxable profit with respect to a dividend it received from its Swiss subsidiary.
Relevant facts
A Dutch B.V. (the taxpayer) is part of an international group that is financially being restructured in 2011. A is the sole shareholder of the taxpayer. The activities of the taxpayer mainly consist out of holding activities. C Sárl (C) is one of the subsidiaries of the taxpayer. The taxpayer is the sole shareholder of C. The Dutch participation exemption applies to taxpayer’s shareholding in C.
The purpose of the financial restructuring that took place in 2011 was to eliminate an amount of US-dollar 1.4 billion of intra-group receivables from the books.
Steps
C Sárl
· On July 1, 2011, a management meeting and a shareholders’ meeting were held during which meetings it was decided that C would make a dividend distribution to the taxpayer;
· The shareholders’ resolution (of C) to distribute CHF 104 million was taken on July 1, 2011;
· According to the Dutch Court for as-far-as relevant the management resolution reads as follows: “The managers unanimously resolve to propose to the quotaholder that CHF 104,754,917 (accumulated deficit at the beginning of the year of CHF 291,131,269 plus the net income for the year of CHF 395,886,186) shall be distributed as dividend for CHF 104,000,000 and carried forward on new account for CHF 754,917.”;
· The shareholders' resolution adopted this decision in almost identical terms. Neither resolution specifies when the dividend will be paid;
· On July 1, 2011, the currency exchange rate for the CHF was: CHF 1 = EUR 0.81519524;
· On August 4, 2011, the currency exchange rate for the CHF was: CHF 1 = EUR 0.91768377;
· On August 4, 2011, C made its dividend distribution to the taxpayer by transferring an IC USD-receivable receivable to the taxpayer.
The taxpayer
· On August 4, 2011, the management of the taxpayer adopted a management resolution. For as-far-as relevant the management resolution reads as follows: “It is hereby confirmed: that taxpayer has sufficient freely distributable reserves in accordance with article 216 paragraph 2 Book 2 Dutch Civil Code and is permitted to make the proposed interim distributions to its sole shareholder [A] by means of the distribution of receivables owing from [E] in the amount of CHF 104,000,000 in the form of a dividend; […]”
· Also on August 4, 2011, the shareholders of the taxpayer adopted a shareholders’ resolution to make a dividend distribution to A. For as-far-as relevant this shareholders’ resolution reads as follows: “[A] […] hereby resolves, in accordance with the articles of association of the taxpayer:
- to declare an interim distribution in the amount of CHF 104,000,000 to the undersigned by means of the distribution of receivables owing from [E]. in the form of a dividend; […]”
· Immediately after receiving the dividend distribution from C, on August 4, 2011, the taxpayer on its turn made its dividend distribution by transferring this same IC USD-receivable to its shareholder A.
Discussion
In its 2011 Dutch corporate income tax return the taxpayer did not take into account a taxable income with respect to the dividend it received from C. The Dutch tax inspector is of the opinion that the taxpayer should take into account a taxable currency exchange result that was realized over the dividend income between July 1, 2011, and August 4, 2011.
The pleas of the taxpayer
The taxpayer has the folowing 2 pleas:
· It is of the opinion that the dividends distributions made by C and the taxpayer are 2 related dividend distributions in kind. Namely the distribution of an IC USD-receivable (by C) which was immediately followed by another distribution of that same IC USD-Receivable (by the shareholder). Therefor the taxpayer is of the opinion that both dividend distributions were actually made in USD and not in CHF. And since the distribution made by the taxpayer was done immediately after it received the dividend of C according to the taxpayer no result was realized over the related dividend distributions.
· A second plea of the taxpayer is that the principles of sound business practices (goed koopmansgebruik) do not come into play since according to the taxpayer in the underlying case the question is whether taxable income is realized and not to which financial/fiscal year such taxable income must be allocated.
The Court’s decision
First plea
The taxpayer’s plea that the dividend distributions are related dividend distributions in kind and that therefore they were actually dividend distributions in USD and not in CHF over which in total no currency exchange result was realized is put aside by the Court of Amsterdam. For the Court the text of the adopted shareholders’ resolutions is leading. The shareholders’ resolution by which it was decided that C would make a dividend distribution contains no reference to the IC USD-receivable. The adopted resolution only states that a dividend resolution amounting to CHF 104 million is to be made.
Second plea
In it’s second plea the taxpayer argues that the principles of sound business practices do not apply to the dividend it receives from C. The taxpayer is of the opinion that it therefore only must book the dividend on the date the actual payment is made. And this booking is then obviously made against the currency exchange rate of the date of payment. Therefore, the taxpayer is of the opinion that it does not realize a currency exchange result with respect to the dividend it received from C.
The Dutch tax authorities do not agree with the taxpayer. The inspector is of the opinion that the principles of sound business practice also apply to the dividend the taxpayer received from C. Consequently, the inspector is of the opinion that on July 1, 2011, the taxpayer must include an IC-receivable in its books. This IC-receivable amounts to EUR 84 million (CHF 104 million converted against the CHF/EUR exchange rate of July 1, 2011). At the same time the taxpayer realized an exempt dividend income of EUR 84 million. Subsequently when on August 4, 2011, the IC US-dollar receivable is distributed to the taxpayer, the taxpayer realizes a taxable currency exchange result.
In its judgment the Court rules in favor of the Dutch tax inspector. The Court rules that the principles of sound business practice indeed apply to a dividend distribution that is received from a subsidiary to which the Dutch participation exemption applies. According to the Court a Dutch taxpayer must include an IC-receivable in its books at the moment the shareholders’ resolution by which the dividends are declared is adopted. In principle the receivable to be booked against face value, unless there are circumstances based on which the principles of sound business practice demand that the IC-receivable should be booked at lower than face value. The amount that is booked as IC-receivable is also the amount to which the participation exemption applies.
According to the Court at the date of payment (the date of distribution) the taxpayer must take the exchange result that was realized over the outstanding IC-receivable (relating to the dividend distribution) into account as taxable income. This taxable exchange result is calculated by using the different CHF/EUR exchange rates of July 1, 2011, and August 4, 2011. In this respect the Court solely looks at the wording of the shareholders’ resolution. The shareholders’ resolution by which the dividend to be distributed by C was declared only mentions a dividend of CHF 104 million and nowhere refers to the IC USD-receivable. Thus the Court denies the taxpayer’s plea that the Debt Payoff Plan and the e-mail correspondence between several group employees clearly show that from the beginning it was the intention that the dividend distribution would take place by means of distributing the IC USD-receivable.
The Court adds that no currency exchange loss was incurred with respect to the dividend payment the taxpayer made to its shareholder. The reason here for is that to the Courts opinion a debt can only be included in the books at the moment that a legally enforceable obligation comes into existence with respect to this debt. According to the Court this was the case on August 4, 2011, since at this date the taxpayer’s shareholders adopted the shareholders’ resolution. Thus the Court denies the plea of the taxpayer that a debt should have been included in its books as per July 1, 2011, since based on the Debt Payoff Plan and internal e-mail correspondence from the beginning it was clear that the intention of the taxpayer were to redistribute the IC USD-receivable immediately after it received the distribution from C.
The underlying court case shows the importance of a careful planning of the dates on which formal decisions are being made (in this case the adoption of the shareholders’ resolutions declaring the dividends). The case also shows the importance of carefully considering the wording used in official decisions is carefully chosen. The taxpayer in the underlying case might have avoided a lot of Dutch tax problems if both shareholders’ resolutions declaring the dividends were adopted on the same date and if the wording regarding the dividends to be distributed would have been identical.
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