The Dutch corporate taxpayer (X) is part of an international group. X’s only shareholder is tax resident in the USA. X holds 100% of the shares in a subsidiary incorporated under Swiss law that is a tax resident in Switzerland.
In 2011, the US parent company adopted a "Debt Payoff Plan" aimed at eliminating group loans. As part of this plan, the board of directors and the shareholder meeting of the Swiss subsidiary declared on 1 July 2011 that it would pay X a dividend of CHF 104,000,000. The dividend receivable was paid in kind on 4 August 2011 by transferring an outstanding group receivable to X. That same day, as part of the Debt Payoff Plan, X’s board and shareholder meeting announced and paid in kind, by transferring the outstanding group receivable, an interim dividend in the same amount (i.e. CHF 104,000,000) to its US parent company with the intention to set off any foreign exchange risk.
X’s functional currency was the euro. Between 1 July 2011 and 4 August 2011, the Swiss franc rose against the euro (resulting in a positive exchange result in regard of the dividend receivable of approximately EUR 10.6 million for X). X took the position that the Swiss francs denominated dividend should be capitalised on 4 August 2011 (payment date) and should be converted to euros on that date. As a result, the full amount should be exempt from tax under the Dutch participation exemption. The Dutch Tax Administration (DTA), however, took the position that the dividend receivable should be capitalised on 1 July 2011 (declaration date). In this case, the Dutch taxpayer should record a foreign exchange profit at the payment date. According to the DTA, only the fair market value of the dividend receivable at the declaration date is exempt under the Dutch participation exemption and any foreign exchange result later realised is not exempt.
Dutch Supreme Court judgment
In line with the Court of Appeal, the Dutch Supreme Court rules that if a subsidiary’s competent body announces a dividend payment, the Dutch recipient should capitalise a dividend receivable at that declaration date. The benefit should for purposes of the so-called total profit concept (totaalwinst) be taken into account against its fair market value (in the taxpayer’s applicable functional currency) at that moment in time. Assuming that the requirements for the Dutch participation exemption are met, the gain realised should be exempt from Dutch corporate income tax. Any subsequent results related to this receivable, such as foreign exchange results, are not considered benefits derived from a participation, and are therefore not exempt under the Dutch participation exemption. According to the Dutch Supreme Court, this outcome does not change if the receivable is not immediately legally enforceable.
It was clear from the underlying case that X did not intend or desire to realise foreign exchange results on the receivable. However, the Dutch Supreme Court dismissed this argument, stating that intention does not alter facts. The Dutch taxpayer also argued that economic reality should be considered when determining taxable profit, as well as a possible obligation for the Dutch taxpayer to redistribute the dividend to its parent company on 1 July 2011. The Dutch Supreme Court rejected these arguments on the grounds that X was under no legal enforceable obligation on 1 July 2011 to redistribute the dividend to the US parent company.
Although it was not directly relevant in the case at hand, the Dutch Supreme Court explicitly revisits its earlier rulings where it in certain circumstances allowed taxpayers to not (yet) capitalise a dividend receivable, i.e. where formalities may hinder payments, where it is uncertain if payments will ever be made, and where it may be practically difficult to actually make payments to the Netherlands. In such cases, the Dutch Supreme Court now provides that such factors should be taken into account when valuing dividend receivables against fair market value. It notes in this regard that any subsequent benefits are not covered by the Dutch participation exemption.
This judgment may significantly impact Dutch holding structures, as the Dutch Supreme Court rules that the declaration date is leading and explicitly revisits its view on case law from the seventies and eighties concerning capitalising of dividend receivables. The latter not because those ruling were incorrect, but because the Dutch Supreme Court no longer sees room for such exceptions. As noted above, adverse conditions in respect of the dividend distribution should be taken into account when valuing a dividend receivable.
Dutch holding companies that are part of an international group where multiple foreign currencies are involved should examine and determine the possible impact of this decision for the group in order to mitigate potential taxation of foreign exchange results in respect of dividend distributions. The decision of the Dutch Supreme Court is especially also relevant for cases in which a minority interest is held or in case of listed shares in which situations the shareholder may have less control on the timing of the dividend (i.e. declaration and payment thereof potentially resulting in taxable foreign exchange results).
HR 20 April 1977, 18065, BNB 1977/162 and 20 April 1988, 24533, BNB 1988/232.