Holding exemption does not cater for damages

The holding exemption regime forming part of the Dutch corporation tax system serves the purpose of warding off double taxation of earnings. It applies to the gains and losses associated with equity interests. Any such equity interest should amount to 5% or more in order for it to be permissible for the shareholder in question to make use of the holding exemption. The holding exemption regime is not available for equity interests held by fellow shareholders even where a particular shareholder has secured a right of pre-emption on the shares in question. As the damages paid by the fellow shareholder for flouting the right of pre-emption are not associated with the shareholder’s own equity interest, they do not come under the holding exemption regime.

The North Holland District Court tried a case involving the classification of a payment made by a shareholder for having acted in breach of the shareholders’ agreement, in which it was stipulated that allowances had to be made for a right of pre-emption (right of first refusal) in the event of it being a shareholder’s intention directly or indirectly to sell his stake in the company’s capital (change of control scenario). One of the shareholders had divested himself of his shareholding without first having invited the other shareholder to buy his shares, and ended up having to pay 438 million US dollars in damages to his fellow shareholder. The latter shareholder, quoting the Supreme Court’s 2002 Falcons Ruling – which had dealt with call options on shares and similar financial instruments –, insisted that the 438 million dollars should qualify for holding exemption as he had not personally been the holder of the shares which had indirectly been disposed of.

The North Holland District Court ruled that the right of pre-emption as per the shareholders’ agreement failed to compare with a call option, as the latter was not personally assigned, was independently transferable and comprised an (unconditional) right to be exercised at a pre-set price. The holder of a call option had a vested interest in the appreciation in the value of the underlying share, which interest was diametrically opposed to that of the holder of the share. The right of pre-emption by contrast was a personal right which was not independently transferable and which lacked a pre-set exercise price, it not being until such time as the prerequisite of the proposed transfer of the equity interest had been satisfied that the price to be paid and the additional conditions governing the exercise of the right of pre-emption were fixed. The other shareholder had made the payment by way of damages rather than by virtue of an equity interest.