The Gelderland District Court recently ruled that income tax is payable in connection with a charge attached to a gift of shares representing a substantial interest.
Significant interest
You have a substantial interest (AB) if you hold 5% or more of the shares in a public limited company (NV) or private limited company (BV). If the share capital of the NV or BV consists of different classes of shares, you are deemed to have a substantial interest if you hold 5% or more of the shares of the same class. The shares held by your tax partner are taken into account when assessing whether you have a substantial interest. The concept of a substantial interest may, in addition to shares, also include profit-sharing certificates and membership of a co-operative, amongst other things.
Income from a substantial interest
Income from a substantial interest is subject to income tax under Box 2. This covers regular benefits, such as dividends paid out by a private limited company (BV) or public limited company (NV). However, capital gains are also taxed under Box 2.
The sale and transfer of shares is the most obvious example of a disposal that gives rise to a substantial interest tax. In such cases, tax is levied on the difference between the sale price and the (tax) acquisition cost of the shares. Disposal gains subject to the AB tax may also arise in the context of mergers and demergers.
Donation
Another common situation involving the disposal of shares is a gift. In such cases, the purchase price is usually €0, or at any rate less than the actual value of the shares. However, the law stipulates that, for the purposes of calculating income from a substantial interest, the purchase price is set at the market value of the shares.
Income tax on benefits arising from a substantial interest is levied at a proportional rate of 25%. If the plans If the Rutte III government’s plans go ahead, this rate will be increased in 2020 to 27,3% and in 2021, even to 28,5%. At the same time, the rates of corporation tax payable by private limited companies (BV) and public limited companies (NV) will be reduced from 20%/25% to 16%/21%.
Business succession
In the context of business succession, AB shares are, of course, often gifted. The capital gain is then not subject to income tax if:
- and insofar as the private limited company operates, either directly or indirectly, a material business;
- the transferee is liable for domestic tax and;
- has been employed by the company to which the gifted shares relate for at least 36 months immediately prior to the gift.
This scheme is also referred to as a ‘pass-through’ scheme. This is because the (tax) acquisition cost of the shares is passed on by the transferor to the transferee.
Gift subject to conditions
The carry-forward scheme applies to the extent that no payment is made for the shares. Suppose the shares are worth €2,000,000 and the father transfers them to his son for €500,000. If the acquisition cost is €18,000, the capital gain is taxed as follows: €500,000 – €18,000 = €482,000. The amount carried forward is: €2,000,000 – €500,000 = €1,500,000. The acquisition cost of the son’s substantial interest is €500,000.
The case before the Gelderland District Court involves larger sums. The father, by means of a notarial deed, gifted AB shares worth almost €35 million to one of his sons. In doing so, he imposes on the son the obligation to pay his brother 10 annual instalments of €480,000, plus 5% interest. This obligation is valued at (approximately) €5 million. The sons have accepted the gift and the obligation respectively.
The question is whether the obligation to pay between the brothers should be regarded as consideration for the AB shares transferred by their father. The Court concludes that this is the case, with the result that the father is liable for AB tax on €5 million minus his tax-related acquisition cost. The difference between €35 million and €5 million is passed on.
Gift tax
Naturally, gift tax also applies when AB shares are gifted. This tax is payable by the recipient. Provided the conditions are met, the business succession scheme may be applied. This entails a conditional exemption of 100% of the value of the business assets up to just over €1 million and of 83% of the value of the business assets above that amount. The gift tax that has been conditionally waived will nevertheless be recovered if and to the extent that the business is not continued during the five years following the gift.