On 30 November 2012, the Dutch Supreme Court (Hoge Raad der Nederlanden) gave its decision in X Management BV v. the Tax Administration (Case No. 11/00167; LJN: BV 7390) on the application of the business merger facility to a contribution to a newly established subsidiary followed by subsequent contribution to a newly established daughter company of all of the assets except a business building. Details of the case are summarized below.

(a) Facts. In 2003, the taxpayer established a holding company (D BV) and contributed all business assets including a business building to that company. Subsequently, in 2003, the holding company established a real estate agency to which the business exclusive the business building was contributed. The business building was rented by the holding to the real estate agency.

The taxpayer claimed that the contribution of the business building to the holding company should be tax exempt based on the business merger facility. The tax inspector took the view that the business merger facility was not applicable in the case in question.

(b) Legal background. Article 14(1) of the Corporate Income Law defines an enterprise merger as the transfer of the enterprise of one company to another company in exchange for shares newly issued by the acquiring company in order to conclude a merger of the two enterprises. The enterprise of a company comprises, in general, all assets and liabilities. If a part of the assets and liabilities is considered to be an economically independent branch or activity, however, such a part can be deemed to be an enterprise.

(c) Decision. The Lower of Leeuwarden had decided that the facility does not apply if one business asset with a hidden reserve, which is transferred in the context of a business merger, is separated from a branch of activity, which is also transferred in the context of a business merger. Furthermore, the court held that a business building which is rented out to the real estate agency cannot be regarded as a branch of activity.

The Supreme Court, first referred to article 2((i)c) of the Merger Directive (90/434), in which term "branch of activity" is defined as "all the assets and liabilities of a division of a company which from an organizational point of view constitute an independent business, that is to say, an entity capable of functioning by its own means". Thereafter, the Court referred to the decision of the European court of Justice (ECJ) in Andersen og Jensen ApS v. Skatteministeriet (C-43/00), in which it was held that the asset transferred constitute a separate exploitation if those assets are capable of functioning as an independent operation.

The Supreme Court confirmed the decision of the Lower Court to the effect that it was decisive that at the time of contribution of all assets to the holding company it was already intended to contribute those assets subsequently to a newly established real estate agency, except for a business building. According to the Court, this means that the assets contributed to the real estate agency from an organizational point of view could not constitute the exploitation of an independent business by the holding company. Finally, the Court held that the business building in the case in question could not constitute a branch of activity or a separate part of a business.

Consequently, the Supreme Court held that the business merger facility was not applicable in the case in question.