Corporation tax liability for reinvestment reserve release

The Collector of Taxes in a classic case involving the sale of a virtually empty private limited-liability company with a reinvestment reserve which was subsequently siphoned off by the new owner held the previous parent company and the latter’s shareholder liable for the out­standing corporation tax charge for the year in which the company changed hands, allow­ances having been made in the tax assessment in question for the release of the reinvest­ment reserve.

In order to stop the reinvestment reserve being released, the company as a matter of form had concluded a contract of sale involving a replacement immoveable property situated abroad, which contract had been drawn up by (or on behalf of) the party which had pur­chased the shares in the company’s capital. This party, however, was not the owner of the property and was therefore not in a position to provide the company with – at least – full benefi­cial title in respect of the property, in addition to which both the vendor and the pur­chaser had the option for a further three-month term to reverse the transaction. The Amster­dam Court of Appeal considered it implausible that the private limited-liability company had secured beneficial control when it collected title to the foreign properties in question. There was no scope for capitalisation as an operating asset or amortisa­tion of the reinvestment reserve.

The Court went on to conclude that the corporation tax assess­ment had rightly been raised with the company. It did, however, quash the Collector of Taxes’ decision to hold the (previous) parent company liable as the statutory provision on which the Collector had based his decision exclusively applied to natural persons (as opposed to legal entities) while the Court was of the opinion that the position which the State Secretary for Finance had adopted in the matter – and which had been included in the Tax Collection Guidelines – lacked viable legal foundation, but did concur with the (previous) par­ent company’s shareholder having been held liable.