If real estate is transferred as part of a statutory merger in the Netherlands, the real estate transfer tax exemption may be claimed – but only if certain conditions are met. One of these conditions is that the statutory merger must be undertaken primarily for commercial reasons. The Hague District Court recently issued an opinion containing an interpretation of the term “commercial reasons”.

More detailed interpretation of ‘commercial reasons’

Parliamentary history indicates that the term ‘commercial reasons’ must be assigned a separate interpretation when it comes to real estate transfer tax [overdrachtsbelasting] in the context of a statutory merger. Specifically, the term ‘commercial reasons’ is used more often in tax law (such as in the corporation tax-related merger/demerger facility [fusie- en splitsingsfaciliteit] and the real estate transfer tax-related division facility [splitsingsfaciliteit]). In the context of the merger facility, the legislature has indicated that commercial reasons may be considered to underlie a restructuring or rationalisation of the legal entities involved in the merger if the purpose of the merger is to increase productivity and improve the economic or social performance of the legal entities involved in the merger. This would be the case, for example, if a statutory merger were to result in optimum operating possibilities, lower financing costs, and benefits of scale.

The parliamentary history also states that the merger must result in a whole that is greater than the sum of its parts.

Finally, the activity must be continued by the acquiring company for a period of at least three years. This is designed to ensure that the statutory merger is not implemented solely as a way to surreptitiously transfer real estate.

Case

In the case on which the District Court recently rendered its opinion, two private limited companies (‘BVs’) were operating a shop specialising in women’s and infants’ clothing via a general partnership (‘VOF’). The acquired company [verdwijnende vennootschap] also owned a shop that was being let to a third party.

Prior to the statutory merger, the acquired company transferred its share in the general partnership to the acquiring company [verkrijgende vennootschap]. That means that the only asset transferred by operation of law [onder algemene titel] as a result of the merger was title to the shop being let to a third party. The dispute in the case centred on whether the exemption from real estate transfer tax could be successfully claimed in the context of a statutory merger.

The Hague District Court held that the acquiring company could not claim the merger exemption, because the acquiring company failed to make a prima facie case that the statutory merger was undertaken primarily for commercial reasons. Since the only asset transferred as part of the statutory merger was title to the shop that was being let, the merger could not be said to have been implemented primarily for commercial reasons. Although the statutory merger also resulted in a cost saving and a simplification of the structure, The Hague District Court held that the merger exemption was not intended to apply to transfers such as the one in question.

In practice

As indicated above, the merger exemption requires a strict interpretation of the term ‘commercial reasons’. Therefore, if there is an intention to combine the assets of two companies, applying another facility might be more likely to be successful. We would be pleased to advise you on which facility has the best chance of success.

Should you still wish to claim the merger exemption, we advise you to obtain an advance ruling from the Dutch Tax and Customs Administration [Belastingdienst] to determine whether you will be entitled to claim the exemption. That way, you will know where you stand.