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 the Transfer Pricing mismatch rules. This position states that the participation exemption applies to the entire capital gain on participation disposal, regardless of whether the tax base of such participation was affected by the application of the Transfer Pricing mismatch rules. This clarification benefits taxpayers, as the KG positions constitute binding policies for tax auditors, and taxpayers can appeal them from the date of their issue.
Background
As of 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 spin-offs, the tax base for the recipient is set at the value included in the tax base of the transferor as a maximum for assets or a minimum for liabilities. This provision generated uncertainty as to its scope regarding the transfer of shares qualifying for the participation exemption and the application of such exemption.
Details of the KG Position and Its Effects 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 share for a capital gain. The clarification states that the participation exemption applies to the entire gain, even if the tax base of the share was affected by the Transfer Pricing mismatch rules. This position ensures taxpayers the interaction between the Transfer Pricing mismatch legislation and the participation exemption and may broadly apply in conceptually similar situations. In order to obtain advance certainty, particularly in situations differing from the case discussed or where there is uncertainty about applying the participation exemption to a specific subsidiary, taxpayers may consider requesting an advance tax agreement.
Conclusion and Recommendations for Companies
This clarification by the Dutch tax authorities provides valuable guidance on applying the participation exemption in contexts affected by Transfer Pricing mismatches. Companies should review their structures and transactions to ensure compliance with current regulations and consider obtaining advance tax agreements to ensure certainty in their tax obligations. Companies should consult with international tax experts to assess the effects of this clarification on their transactions and tax strategies.
Source: Lexology