On 22 March 2013, the Netherlands Supreme Court (Hoge Raad der Nederlanden) gave its decision in X BV v. Tax Administration (No. 11/0599; BX6710), on whether or not the Netherlands may tax a reinvestment reserve (herinvesteringsreserve) resulting from the sale of immovable property located in the Netherlands by a company whose place of effective management at that time was located in Luxembourg and thereafter in the Netherlands. Details of the case are summarized below.

a) Facts. X BV (the Taxpayer), was established under Dutch law and in 1995 it transferred its place of effective management to Luxembourg. In 1998 and 1999, the Taxpayer sold two buildings located in the Netherlands. The profits from the sale were placed in a reinvestment reserve. In 2001, the replacement reserve was converted into an agioreserve. Thereafter, the tax inspector imposed a supplementary assessment based on the fact that the company no longer had the intention to replace the building. The Taxpayer appealed the assessment.

(b) Legal background. Article 3.54 of the Dutch Income Tax Act (ITA) provides that, in situations where the sale price of the asset exceeds the book value of that asset, the difference may be allocated to a reserve (reinvestment reserve). This reserve may only continue to exist as long as the intention to replace the disposed asset exists, subject to conditions.

(c) Decision. The Court of Appeal held that the amounts placed in the reserve were taxable in 2001, because from the tax return it followed that the replacement intention no longer existed. In addition, the Court held that it is not incompatible with the Treaty on the Functioning of the EU (TFEU) that sale profits are taxed in a later year than that in which those were realized.

Furthermore, the Court held that as long as the replacement reserve was kept, the Taxpayer was still deriving profits from business activities in the Netherlands.

Finally, due the fact that under the Luxembourg - Netherlands Income and Capital Tax Treaty (1968) (as amended through 1990) the taxing rights with respect to immovable property are allocated to the situs state (Netherlands), the Court decided that the Netherlands is authorized to tax the replacement reserve after the company no longer intended to replace the buildings.