On 3 September 2013, the Dutch government released a bill that will allow for the partitioning doctrine for splitting benefits under the participation exemption to be applied in case of a legislative change.

The government originally released its proposal in June after the Dutch Supreme Court ruled that the doctrine does not apply when there is a change in the law unless the law provided transitional rules.

Under the participation exemption, corporate taxpayers are exempt from Dutch corporate income tax on benefits derived from qualifying shareholdings.  Several conditions must be met for income from shares to fall within the scope of the exemption. If the conditions are not met without interruption, a benefit must be split into a taxable and nontaxable periods.

The bill applies to both a change in the application of the participation exemption as a result of a change in legislation as well as a change in the relevant facts and circumstances.

Therefore, when there is a change in the eligibility of certain shares for the participation exemption, those shares would be revalued at the fair market value at the time of the change. The amount would be frozen and booked into a separate reserve that would be released upon disposal of the participation or in the case of a transfer as a result of a merger or demerger. If the partitioning reserved is non-exempt, the release of the reserve is added to the Dutch taxpayer’s taxable income. If the participation exemption previously applied to the share interest, the release is not included in the taxpayer’s taxable income.

The legislation will apply retroactively as of 14 June 2013. It will also apply if the change in the law occurred before this date but the taxpayer still owns the participation. If this is the case, the Dutch taxpayer should create a partitioning reserve. The reserve will be calculated at the difference between the book value and the fair market value at the date of the applicable change in the law.