The Dutch Supreme Court provided further guidance on the deductibility of transaction costs under the Dutch corporate income tax act. Taxpayers should keep track of costs along the way until successful acquisition or sale.
Deductibility of transaction costs
Costs related to the sale or acquisition of participations that fall under the scope of the participation exemption regime are generally not tax deductible. The deductibility of transaction costs is a grey area and may lead to discussions between taxpayers and the Dutch Tax Authorities.
In its ruling, the Supreme Court provided further guidance on the deductibility of transaction costs in relation to the sale of a participation. The Supreme Court ruled that transaction costs are non-deductible if there is a direct causal link (in Dutch: “rechtstreeks oorzakelijk verband”) between the costs and the sale of a participation. Hence, transaction costs are considered non-deductible to the extent that the costs are incurred as a direct result of the sale of the participation. The direct link must be assessed based on objective criteria. Both external and internal costs that are directly linked to the sale of the participation fall within the scope of this doctrine.
A direct link can only be established in case of a successful sale of a participation. Aborted deals are therefore not affected and costs made in that respect should – in principle – be fully deductible. However, costs incurred in relation to an aborted deal that also have a direct causal link with a subsequent successful deal should be taken into account as non-deductible transaction costs of the successful deal.
Keeping track of transaction costs
The Supreme Court stipulates that under the principles of sound business practice (in Dutch: “goedkoopmansgebruik”) taxpayers should record the accrued transactions costs as a transitory asset on the balance sheet up until the sale is effectuated. At that moment, the deductibility of the transaction costs should be assessed and the transitory asset on the balance sheet is written off. Taxpayers should therefore have a complete overview of all costs incurred in relation to the (contemplated) sale of a participation.
Acquisition costs
A similar approach applies to costs that are incurred in relation to the acquisition of a participation.