Three‑year rule held incompatible with the EU Merger Directive
For years, Dutch legislation relied on a statutory mechanism under which a share transfer within three years of a legal demerger created a presumption that the demerger lacked sound business motives. This presumption as reflected in article 14a sub 6 CITA shifted the burden of proof to the taxpayer, who then had to demonstrate that the demerger was primarily based on sound business motives.

The Supreme Court has now ruled that this automatic consequence no longer stands and considers that under the EU Merger Directive, national rules may not rely on general presumptions of tax fraud or tax avoidance. Whether a transaction pursues such a purpose must be assessed case‑by‑case, based on an overall examination of the transaction rather than predefined general criteria. Provisions that grant the Directive’s benefits only if the taxpayer proves sound business reasons, without requiring the tax authorities to provide any initial indication of non‑business motives or of tax fraud or avoidance, effectively establish a general presumption of abuse and can therefore be considered incompatible with the EU Merger Directive.

Consequently, the Supreme Court decided that a subsequent share transfer, even when anticipated at the moment the demerger was planned, does not in itself establish the intention for tax‑avoidance. A presumption triggered solely by a general presumption such as the timing of a sale exceeds what the EU Merger Directive permits. As a result, the statutory presumption in article 14a sub 6 CITA cannot be applied.

Revised burden of proof framework
With the automatic presumption invalidated, the burden of proof no longer shifts to the taxpayer simply because a sale occurs within three years. Instead, the tax inspector must first present initial evidence suggesting that the demerger was driven by sound business motives or was primarily tax‑motivated. Only after this threshold is met then the taxpayer may be required to substantiate its business rationale. The Court clarified that contesting the taxpayer’s explanation is insufficient, the inspector must provide affirmative indications of abuse.

Practical implications for restructuring
This decision has immediate consequences for transactions involving carve‑outs that foresee a subsequent sale of the separated business. A transfer of shares within three years after the demerger can no longer be a standalone reason to deny tax‑neutral treatment, even if a sale was planned in advance. The Dutch tax authorities must now substantiate any allegation of abuse with concrete, transaction‑specific indications. This decision brings Dutch tax practice in line with the EU Merger Directive. The above should equally apply to the business merger of article 14 CITA and the 3 years abuse presumption therein.