In practice, internal restructurings and plans to sell often go hand in hand. Under current legislation, there is a legal presumption that a merger or demerger is not based on business considerations if a sale to an independent third party takes place within three years thereafter. The 2027 Tax Plan puts an end to this. The government proposes to eliminate this presumption of lack of commercial rationale, shifting the burden of proof to the Tax Authority in certain situations. This change may be particularly relevant for business owners who wish to optimize their corporate structure in anticipation of a future transfer or sale.
Background and necessity of the amendment
The corporate merger and demerger provisions make it possible to restructure companies without immediately incurring corporate income tax on any hidden reserves and goodwill. An important condition is that the reorganization must not be primarily aimed at avoiding or deferring taxation. If there are no business-related reasons for a business merger or division, the restructuring is presumed, unless proven otherwise, to be aimed at avoiding or deferring taxation.
Within this business rationale test, a statutory presumption of evidence applies. Based on this presumption, business considerations are deemed not to exist if shares in the entity in question are sold within three years of the reorganization.
The Supreme Court has previously ruled that this presumption of evidence within the spin-off facility is not in accordance with European law.
Proposed amendment and tax implications
To bring the legislation in line with the Supreme Court’s ruling, the government proposes to remove the presumption of evidence in both the spin-off facility and the business merger facility.
As a result, a sale of shares within three years of the reorganization no longer automatically leads to the assumption that business considerations are lacking. If the Tax Authority believes that the reorganization is primarily aimed at evading or deferring taxation, it will have to provide sufficient evidence of this itself.
That does not mean, however, that every reorganization prior to a sale automatically qualifies for the tax relief. Even under the proposed rules, the Tax Authority may still deny the relief if it believes that the reorganization is primarily aimed at obtaining a tax benefit.
As a result of the elimination of the presumption of evidence, the option to obtain a ruling in advance regarding a proposed disposal within three years of the reorganization has also been eliminated. This may be a point of concern for taxpayers who wish to have clarity in advance regarding the tax consequences of a proposed sale.
Relevance to Your Business
This measure may be particularly relevant for companies and shareholders considering a restructuring prior to a planned sale. Examples include situations in which business activities are spun off, real estate is separated from operational activities, or a group structure is simplified with a view to a future transfer of shares.
Are you planning to revise your corporate structure, or are you considering a future business or share transfer? If so, it may be wise to assess the tax implications well in advance.
Do you have any questions as a result of this article? Then please contact your Govers contact person, using our contact form on the website, or call our general phone number 040 - 2 504 504.