Timing of change in stake

The Supreme Court in a series of rulings has addressed the application of the reinvestment reserve and the stipulation forming part of the Netherlands Corporation Tax Act 1969 aimed at preventing the trade in private limited-liability companies boasting reinvestment reserves. The essence of the stipulation in question is that an existing reinvestment reserve is credited to the profit whenever the stake in the company in question changes. Where a reinvestment occurs around the time the stake in the company changes, it is crucial that the exact timing of the reinvestment and that of the change in stake should be pinpointed.

One of the Supreme Court rulings dealt with the timing of the stake in a private limited-liability company changing. 18 December 2008 was the date on which the shares in the capital of the company in question were sold. The company immediately went on to acquire an 89% participating interest in a German property fund from the party that had bought its shares. Title to the shares in the capital of the company transferred as at 30 December 2008. The Arnhem Court of Appeal ruled that the reinvestment had been made in anticipation of the take in the company changing, so that the reinvestment reserve could not be credited to the profit. The Supreme Court in turn professed itself underwhelmed by the Court of Appeal’s substantiation of the above ruling, pointing out that it had been agreed in the context of the contract of sale that title in respect of the shares was to transfer on 19 December 2008, in addition to which the price to be paid for the shares had been fixed on the basis of the company’s balance sheet as at 30 September 2008 and had not subsequently been adjusted because of the delayed closing. The Supreme Court considered it insufficiently clear on what the Court of Appeal had based itself when it ruled that the stake in the private limited-liability company had not changed until as late as 30 December 2008.

According to the Supreme Court, the Court of Appeal had moreover erroneously ruled out the application of the fraus legis (“abuse of law”) doctrine in the matter at hand. A fraus legis scenario can be said to occur whenever:

• the stake in a private limited-liability company boasting a reinvestment reserve has changed, with the new stakeholder having previously made substantive use of the reinvestment reserve,
• there is a concurrence of juristic acts involving the reinvestment having occurred in immediate anticipation of the change in stake, and
• the object of all of this has been to dodge the applicable statutory regime.

Both the object and the purport of prevailing legislation would be infringed upon if the reinvestment reserve were stopped from being released in the above setting.