On February 15 2002 the Ministry of Finance published a resolution that will remove the 'overkill' included in the 16th Standard Condition for corporate groups. This standard condition relates to the break-up of a group caused by the sale of shares in a subsidiary. The condition is triggered if assets and/or liabilities with hidden reserves are transferred from one group member to a subsidiary, the shares of which are subsequently sold (a so-called 'tainted transaction'). No corporate income tax can be levied in such a case.

However, under certain circumstances the combination of transferring hidden reserves to a subsidiary followed by the sale of shares in that subsidiary is considered an abuse of the corporate group regime. This abuse is contested by the 16th Standard Condition. When this condition applies, all assets and liabilities of the sold subsidiary are revalued at their market value. Further, all fiscal reserves of the subsidiary are added to the taxable profits. The revaluation and release of reserves takes place on the day before the group ends. As a result, the profit arising from the revaluation and release of reserves will be included in the group's taxable profit for that year.

The 16th Standard Condition is excessive because all assets and liabilities of the subsidiary will be revalued, rather than only the assets and liabilities that were acquired by the subsidiary as a result of the tainted transactions within the group. As a result, the revaluation profit on the basis of the 16th Standard Condition may be much higher than the transferred hidden reserves. The new resolution intends to remove this imbalance. At the taxpayer's request, the existing sanction on the 16th Standard Condition will be replaced by a revaluation of just those assets and liabilities that have been transferred within the group.

A similar rule is included in a proposed bill on changes to the group income tax regime. However, the Ministry of Finance's resolution anticipates the proposed bill. If application of the resolution is triggered, all transferred assets and liabilities must be revalued (ie, not only the assets and liabilities transferred to the sold subsidiary, but also those transferred by the sold subsidiary to the other group companies).

The present resolution is of short duration. It applies only if the group ends on or after January 1 2002, and to revaluations that occur before the day immediately preceding the financial year in which the new bill will apply to the corporate group.

For further information on this topic please contact Guido Derckx or Elisabeth Hendrix at Loyens & Loeff by telephone (+31 20 578 5629) or by fax (+31 20 578 5854) or by email ([email protected] or [email protected]). The Loyens & Loeff website can be accessed at www.loyensloeff.com.