On March 17, 2025, the Dutch tax authorities (DTA) issued a knowledge group (KG) position clarifying the application of the participation exemption in contexts affected by transfer pricing mismatch rules. This position establishes that the participation exemption applies to the total capital gain on the disposal of a participation, regardless of whether the tax base of said participation was affected by the application of the transfer pricing mismatch rules. This clarification is beneficial for taxpayers, as KG positions constitute binding policies for tax inspectors and can be invoked by taxpayers from the date of publication.
Background to the Legislation against Transfer Pricing Mismatches
From January 1, 2022, the Netherlands implemented anti-abuse legislation to avoid double non-taxation arising from transfer pricing mismatches. According to Article 8bd of the Corporate Income Tax Act (CITA), in transfers of assets and liabilities through contributions, distributions, mergers and demergers, the tax base for the recipient is set, at most for assets or at least for liabilities, at the value included in the tax base of the transferor. This provision generated uncertainty about its scope in relation to the transfer of shares that qualify for the participation exemption and the application of that exemption.
Details of the KG Position and its Impact on Taxpayers
The KG position analyzes the application of the participation exemption in a situation where a Dutch parent company acquires a foreign subsidiary through a profit distribution, and subsequently sells its participation obtaining a capital gain. The clarification establishes that the participation exemption applies to the totality of the gain, even if the tax base of the participation was affected by transfer pricing mismatch rules. This position offers taxpayers certainty about the interaction between transfer pricing mismatch legislation and the participation exemption, and may have broad application in conceptually similar situations. For advance certainty, especially in situations that differ from the analyzed case or where there is uncertainty about the application of the participation exemption to a specific subsidiary, taxpayers may consider requesting a tax ruling.
Conclusion and Recommendations for Companies
This clarification by the Dutch tax authorities provides valuable guidance on the application of the participation exemption in contexts affected by transfer pricing mismatches. Companies should review their structures and transactions to ensure that they comply with current regulations and consider obtaining advance tax rulings to ensure certainty in their tax obligations. It is advisable for companies to consult with international tax experts to assess the impact of this clarification on their operations and tax strategies.
Source: Lexology