Supreme Court allows utilization of international mismatches

Every country has its own laws and legislations. On the basis of these national rules, it must be determined how a particular international transaction between parties (for example, a transaction between companies from different countries) must be qualified. Since the rules are not the same in all countries, it is possible for mismatches/disparities to occur. The utilization of these mismatches could result in tax advantages.

For example, if a payment qualifies as share capital under Dutch law, the tax authorities consider the compensation which a company receives for the payment in the Netherlands as a dividend which is not taxed with corporation tax under conditions on the grounds of the participation exemption. The same payment, under Australian law for example, could be considered as a loan, with the consequence that the payment of the compensation is considered as interest, which may be allowed as a deduction in Australia. In the case of this payment, it therefore concerns a tax deductible item in Australia, while in the Netherlands there is no tax advantage. You could refer to this as an international ‘mismatch’.

For some time, it has been uncertain whether the utilization of international mismatches is fiscally permissible. The tax authorities generally took the viewpoint that utilizing mismatches is in conflict with the objective and scope of the Dutch Corporation Tax Act 1969 (fraus legis).On the basis of this viewpoint, in relevant cases, the tax authorities rejected the application of the participation exemption, due to the fact that the payment is otherwise qualified in a different country. As a result of this, the ‘dividend’ received was still taxed with corporation tax.

On 7 February 2014, in two rulings the Supreme Court made a judgement regarding this problem – it ruled that it is fiscally permissible to utilize international mismatches. The application of the participation exemption may therefore not be refused in the Netherlands because of the fact that the payment is otherwise qualified in a different country. In practice, this offers possibilities of utilizing mismatches within international relations and therefore obtaining tax advantages.

If you have any questions regarding the above-mentioned, please do not hesitate to contact your tax advisor at Baker Tilly.