Partitioning doctrine inapplicable in case of law change, Dutch Supreme Court rules

The Netherlands Supreme Court held on 14 June (Case 11/04538) that the partitioning doctrine for splitting benefits under the participation exemption into taxable and non-taxable periods doesn’t apply if the conditions for the participation exemption weren’t met because of a change in law.

Under the Dutch participation exemption, corporate taxpayers are exempted from Dutch corporate income tax on benefits (such as dividends, capital gains and liquidation profits) derived from qualifying shareholdings. Capital losses are non-deductible unless they result from a subsidiary’s liquidation, and even then, strict conditions must be met.

Several conditions must also be met for shares to fall within the scope of the participation exemption. That raises the question of how benefits are to be taxed if they can be allocated to periods during which the conditions were met as well as periods during which the conditions weren’t met…

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