Reinvestment reserve using newly acquired funds

If you have earmarked (some of) your book profit towards a reinvestment reserve, please bear in mind that you actually need to reinvest the funds in question rather than spending the money on something else and delaying the reinvestment – using newly acquired funds – until a later stage. This was the upshot of a recent judgment by the District Court for Zeeland and Western Brabant. 

A private limited-liability company had acquired an estate and realised a book profit, and went on to use the surplus funds in question to create a reinvestment reserve. The company in 2008 went on to present each of its two then directors cum controlling shareholders with a sizeable amount in dividends. All of this considerably drained the corporate coffers. The directors cum controlling shareholders in the course of 2008 sold their shares to another business, in the context of which transfer they reported an unrealised reinvestment reserve and corresponding tax receivable as part of their company’s balance sheet. However, the company in its corporation tax return refrained from mentioning the reinvestment reserve. This prompted the Inspector of Taxes to adjust the corporation tax assessment by crediting the reinvestment reserve to the company’s taxable profit, which in turn inspired the company to take the matter to court.

Newly acquired funds

According to the company, the reinvestment intention had most certainly been there, to the point where the actual reinvestment had in fact been realised, as reflected by the company’s acquisition in 2008 of two commercial properties, albeit that the latter acquisition had been funded using a mortgage loan furnished by the two former directors cum controlling shareholders. 

The District Court saw things differently, in that according to it there had been no question of the reinvestment reserve having been realised, as the book profit to all intents and purposes had been distributed at the time the shares in the company’s capital were sold and this had left the company without any financial resources, thus rendering it unable to proceed with reinvestment. It was irrelevant in this respect that the subsequent property acquisition had been funded using resources made available by the two former directors cum controlling shareholders; what mattered was that newly acquired funds had been used for the property transaction and it had been the new management which had secured the relevant funding. 

All in all the company had failed to render it plausible that the sale of the estate had represented a reinvestment intention, and the taxman’s additional tax assessment was upheld.