Netherlands: Exemption scheme for participations falling below 5% threshold applies to covered call options
Supreme Court decision
The Dutch Supreme Court held on October 25, 2024, that the exemption scheme for participations falling below the 5% threshold also applies to covered call options.
Summary
A taxpayer held shares and covered call options in a Japanese company. The shares represented a shareholding of 8.5%, and the covered call options gave a right to acquire a shareholding of 5%. The taxpayer subsequently waived some of the options, and the remaining options only gave a right to acquire a shareholding of 2.34%. The Japanese company then became listed on the Tokyo Stock Exchange, diluting the taxpayer’s shareholding to 2.28% and the taxpayer’s option to a right to acquire a shareholding of 1.58%. After the IPO, the taxpayer exercised the call options, realizing a profit on them. The taxpayer applied the participation exemption to this profit pursuant to the scheme for participations falling below the 5% threshold as contained in Section 13(16) Corporate Income Tax Act 1969.
The Supreme Court reiterated that the aim of the participation exemption is to prevent the same profit being taxed twice in participation relationships, which also applies in the context of options. Thus, if both the option writer and the option holder are eligible for the participation exemption, both parties may apply the scheme for participations falling below the 5% threshold (provided that the other conditions of the scheme are also met).
KPMG observation
The court did not answer the question of whether a shareholding and an option, or other kinds of interest in shares, must be added together for purposes of determining whether the 5% threshold under the participation exemption is met.
Read an October 2024 report prepared by the KPMG member firm in the Netherlands