Time test for exemption in case of shares exchanged for new shares with a different nominal value suspended
15 August 2022
In its recent judgment, the Supreme Administrative Court (SAC) insisted that the three-year time test necessary for the exemption of income of individuals from the transfer of shares is not suspended only in the case of an exchange of shares with an identical nominal value. If shares are exchanged for new shares of a higher nominal value, a new time limit for assessing the exemption starts to run. In the present case, the court dealt with a situation where the complainant was the owner of shares in a company whose general meeting decided to increase the share capital and exchange the existing shares for shares of a higher nominal value. In that case, the shareholder had held the shares continuously, during which time the share capital had been increased and the proportion of the individual shareholders had not changed. The taxpayer then held that even the time test could not be interrupted. The SAC strictly insisted on the linguistic interpretation of Section 4(1)(w) of the Income Tax Act (ITA), where the time test is suspended in case of exchange of shares for shares of higher nominal value. The Supreme Administrative Court also disagreed with the conclusions of the Coordination Committee, where the representatives of the state administration and the Chamber of Tax Advisors concluded that the time test is not suspended in the case of an increase in the nominal value of shares by so-called bypassing. The SJC also did not fail to add that the quoted part of the minutes cannot be regarded as a description of settled administrative practice that could be followed.
The strict conclusions of that decision have been the subject of much heated debate in the professional community and will no doubt continue to be. The question is whether the same conclusion would be reached in other similar cases that come before the SAC and are not dealt with by the Enlarged Chamber. In any event, caution should be exercised in comparable situations and each case should be evaluated individually.