BOR: feasibility and justice in balance?
The Dutch business succession scheme in the Gift and Inheritance Tax Act and the income tax deferral scheme (together abbreviated in Dutch as BOR) was created so that the continuity of businesses is not endangered by the payment of tax due after a transfer.
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In doing so, the legislator has coloured the 'business succession' on the basis of objective standards. However, this can result in 'overkill': cases in which the BOR does not apply despite the fact that the business succession is not fiscally driven. The question then arises as to whether the intention of the taxpayer is still meaningful. As far as the application of the ownership requirement (article 35d SW 1956) is concerned, this question is currently before the Dutch Supreme Court.
What is it all about?
In essence the case is about the following. A company runs a business. All the conditions for the BOR of the Gift and Inheritance Act have been met. Within the period of ownership, however, the company has taken over a business. The question is whether the ownership requirement also applies to this extension. If the answer is in the affirmative, this means that in the event of a donation within five years or death within one year, the BOR of the Gift and Inheritance Act does not apply, at least insofar as the value of the shares is attributable to the extension.
Ratio of ownership requirement: prevention of abuse
With the possession requirement, the legislator wanted to prevent abuse of the BOR of the Gift and Inheritance Act . In doing so, the legislator had in mind the situation where shortly before donating (taxed) investment capital is 'converted' into (exempt) business capital with the main purpose of making use of the exemption.
From an anti-abuse point of view, there is no reason to apply the ownership requirement to the expansion of the business, if this is based purely on commercial (i.e. non-tax) motives. Incidentally, when a company expands (whether or not through a takeover), there will often also be no question of inflating the BOR basis. Think for example of the entrepreneur who finances the expansion from a 'takeover fund', which can be regarded as business assets according to labelling standards. In that case, the takeover fund already qualifies for facilitation.
This anti-abuse objective is at odds with the legal text. After all, the ownership requirement has a 'hard' period of one year. Whether there is actually abuse is irrelevant on the basis of the legal text.
Opinion Advocate General
Advocate General (AG) IJzerman submitted an Opinion (Conclusion 21 August 2019, No 19/00189) to the Dutch Supreme Court on this case. In short, the AG is of the opinion that the possession requirement also applies to expansions of the company, even if there is no abuse. In his opinion, the current possession requirement does not allow for a separate abuse test.
If the Supreme Court were to follow this opinion of the A G, the consequence would be that a business-economically desirable expansion could have a considerable fiscal price tag. This consequence is quite remarkable, now that the legislator wanted to introduce the BOR precisely because the continuity of the company is impeded by tax law.
Feasibility versus fairness
This topical issue exposes a deeper problem of the current business succession arrangements. With a generous facility such as the BOR of the Gift and Inheritance Act, improper use is lurking. It is understandable that the legislator is putting a dam on this. However, because of the strict periods of ownership for inheritance or gift of 1 and 5 years respectively, non-abuse cases can also be affected ('overkill'). The enforceability of the regulation prevails here over individual justice. A separate motive test could offer solace here. We are not unfamiliar with this in the tax field. Restructuring facilities such as the Dutch merger and demerger facility, for example, also have a tailor-made anti-abuse provision (merger/division will not be granted if the company merger is 'predominantly aimed at avoiding or deferring taxation'). This allows the BOR to be brought more into line with what it is intended for: facilitating real business successions.