Recently, on 25 October 2024, the Supreme Court ruled that the rules for expiring participations extend to options on qualifying participations. This Supreme Court judgment provides a favorable outcome for taxpayers, based on the intent of the participation exemption rules.
The judgment was rendered following (direct) cassation against the judgment of the Gelderland District Court dated 6 May 2022. The outcome of the judgment is in line with Advocate General Wattel's (A-G) opinion dated 22 December 2022.
Facts and circumstances
In 2014, the applicant acquired a shareholding of 8.5% in a Japanese company. The Japanese company also granted call options to the applicant that entitled it to 5% of the shares in the Japanese company. A year later, the options were partly waived by the applicant after which the remaining options entitled the applicant to 2.34% of the shares. Following the IPO of the Japanese company in 2017, the applicant's shareholding had diluted to 2.28% whilst the options entitled the applicant to a shareholding of 1.58%. The remaining options were subsequently exercised by the applicant and the result realised was brought under the scope of the participation exemption. For purposes of the participation exemption, the applicant relied on the scheme for expiring participations as laid down in article 13(16) Corporate Income Tax Act, along with the 'Falcons doctrine' as developed in a judgment of the Supreme Court dated 22 November 2002 (the 'Falcons judgment'). In this judgment, the Supreme Court ruled that the participation exemption can be applied to call and put options if the shares acquired upon exercise would form part of a qualifying participation of the option holder.
Legal question
According to the tax inspector, the Gelderland District Court and the State Secretary, the participation exemption did not apply to the benefits derived by the applicant from the options. In brief, the Gelderland District Court ruled that the options did not constitute an expiring participation as referred to in article 13(16) Corporate Income Tax Act because the options did not qualify as a participation (deelneming) within the meaning of article 13(2) Corporate Income Tax Act. The applicant appealed for (direct) cassation.
Assessment Supreme Court
The parliamentary history of the rules for expiring participations, introduced as of 1 January 2007, shows that the legislator considered it reasonable to allow continued application of the participation exemption under conditions to shareholdings that previously qualified as participations for up to three more years after no longer meeting the 5% ownership requirement, for example as a result of a dilution or a phased disposal of shares.
The intent of the participation exemption, the prevention of double taxation, led to the conclusion in the Falcons judgment that the participation exemption under certain conditions applies to both parties that have a split interest in a shareholding (e.g. in the case of an option).
In line with the intent of the participation exemption and the rationale of the exemption scheme for expiring participations, the Supreme Court rules that the rules for expiring participations extend to the split interest in such expiring participation (e.g. options). The Supreme Court considered that the rationale of the exemption scheme for expiring participations applies to the entire position covered by the participation exemption, including a split interest in a participation.
Impact
The Supreme Court's judgment is favorable to taxpayers who realise a gain on the exercise, settlement or disposal of an option that entitles such taxpayer, as holder of the option, to shares that would form part of a qualifying participation upon exercise.
While the judgment provides clarity in this specific case, the Supreme Court provides no further guidance on the interpretation and scope of the case law on options and split interest. As such, the interpretation and scope of the 5% ownership requirement remains unclear.
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.