The finance ministry has issued a decree summarising recent Supreme Tax Court cases on questions arising in connection with short-term capital gains from the sale of securities held as private assets.

Natural persons who sell shares and other securities held in their private estates are subject to income tax on the gain if less than twelve months elapsed between purchase and sale. Longer term capital gains are tax free, provided the seller held less than 1% of the capital of the company throughout the previous five years. There have been a number of recent Supreme Tax Court cases on short-term capital gains by natural persons and the finance ministry has now seen fit to summarise this case law in an itemised decree on "questions of doubt", adding its own views where relevant. In brief:

  • Securities are purchased on conclusion of a binding contract. For stock exchange purchases this is the date the broker completes the transaction.
  • New issues are purchased on offer acceptance by the issuer. If the issue is over-subscribed, unsuccessful bidders will not be able to deduct any costs as business expenses.
  • The conversion of convertible bonds to shares is a share purchase on the day the option is exercised. The original cost of the bond becomes the base cost of the shares.
  • Option bonds giving the holder the right to acquire shares in the issuing company lead to share purchases on the day the option is exercised. The base cost is the amount paid on exercise together with the cost of the option. If this latter is inseparable from the cost of the bond, it will have to be estimated, e.g. on the basis of the yield.
  • Exchange bonds allowing the holder to claim redemption in the form of a set number of shares rather than cash are exercised at the stock exchange value of the shares on the day of exercise (redemption). The difference to the original cost of the bond is investment income in the year of exercise.
  • Share bonds allow the issuer to redeem a bond with shares rather than in cash. His exercise of this option is a share purchase by the holder at the stock exchange value of the shares when acquired. The difference between this value and the original cost of the bond is a factor in determining the yield of the bond taxable as investment income.
  • Employee stock options lead to share acquisitions on the date of exercise, or on fulfilment of any further condition of exercise if later (e.g. a minimum period of service requirement). The base cost for any later capital gain is the amount paid for the shares together with the benefit in kind taxed as employment income. The dates of share acquisition and realisation of the employment income may be different.
  • Share splits are not taxable events. The new shares are deemed to have been acquired on the same date and for the same total amount as the old.
  • Bonus shares are acquired on the date of the resolution or on the later fulfilment of a qualifying condition. The acquisition cost is the amount deemed as investment income.
  • Rights issues lead to a split of the original purchase cost over the old and new shares. The new shares are deemed acquired as of the original acquisition date. Shares acquired with purchased rights are a new transaction. The sale of rights is equated to a proportionate sale of shares.
  • Share exchanges are treated as a sale and purchase of old and new shares. Both transactions are valued at the stock market value of the new shares on issue.
  • If a company is merged under the Reconstructions Tax Act, its shareholder is treated as having sold and acquired shares at the original cost of investment. Any taxable gain is therefore zero. The one-year holding period runs anew, from the entry of the merger in the trade register.
  • If the company is split, the original investment is apportioned over the old and new shares in the ratio of the two balance sheets. The amount split off is a sale and purchase as of the date of entry in the trade register. If the shareholder had held his investment for more than a year before the split, the new shares are deemed to have been acquired at the current market value of the old ones surrendered.
  • If a company distributes shares held in another company to its own shareholders, these receive a dividend in kind.
  • Liquidations and reductions of capital are distributions rather than sales of shares. The proceeds are therefore dividends or capital repayments for the shareholders, depending upon the quality of the distribution as shown by the accounts of the company.
  • Reclassifications of shares, e.g. the conversion of preference to ordinary shares, is a mere adjustment of shareholders' rights and is not a taxable event for the shareholders. The new shares are deemed to have been acquired on the date and at the cost of the old. Any premium paid by shareholders is a subsequent increase in base cost.
  • Minority compensation on take-over is a sale by the minority shareholder of his investment. This is independent of the degree of coercion or pressure to which he became subject.
  • Foreign currency cash deposits lead to taxable gains or losses if they are converted to Euro or another currency within a year. If spent, the "sales proceeds" are deemed to be the € value of the item purchased.
  • The creation and collection of foreign currency receivables are not taxable events, unless the balance is converted to €. The repayment of a foreign currency liability is similarly not taxable.
  • Shares sold as part of a progressively acquired holding are deemed to be sourced from acquisitions outside the one-year holding period as far as possible. If the cover is inadequate, the remaining balance is deemed to come from the other acquisitions in equal proportions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.