Farewell bonus does not qualify as cost of sales participation

After the sale of a company, bonuses are paid by the parent company to the employees of the participations that have been sold. The Dutch Supreme Court ruled in December 2023 (HR 22-12-2023, no 22/02219) that the bonuses are deductible for tax purposes. As such, the bonuses do not qualify as cost of sales in relation to the participations.

What are costs of sales?
Based on the so-called Dutch participation exemption regime, costs directly related to the sale of a participation are not deductible for Dutch corporate income tax purposes at the level of the selling company. But when are costs directly related to the sale? Based on a 2018 Dutch Supreme Court ruling, there must be a direct causal link between the sale and the costs.

Case of the 2023 Supreme Court ruling
The case concerned the deductibility of a farewell bonus granted by the parent company to the staff of a number of participations it had sold. The parent company had decided to grant the bonus after the sale and the amount depended on the length of contract, salary and performance of the employee concerned. The bonus had been subject to payroll tax at the level of the parent company and has also been included as costs at this level.

The Dutch Court (Gelderland 13 May 2022, no. 21/1402) did not qualify the bonuses as deductible costs for tax purposes. According to the Dutch Court, the criterion of the direct causal link of the Supreme Court ruling of 7 December 2018 had been formulated broadly and therefore also costs that result from the sale of a participation qualify as cost of sales in relation to the participation, because without the sale of the participation those costs would not have been incurred. According to the Dutch Court, without the sale, the farewell bonuses would not have been paid, and therefore qualify as cost of sales.

The Supreme Court rejected this decision. According to the Supreme Court, the required direct causal link includes the condition that the costs have such a causal connection to the disposal, that they have been incurred because they were - objectively seen - helpfull or required to achieve that disposal. According to the Supreme Court, this connection is lacking in the case of expenses which - admittedly - would not have been incurred if the disposal had not taken place, but which otherwise cannot contribute in any way to the realization of that disposal. Such expenses do not form a direct causal link with the disposal, because they are not helpfull nor required to achieve that disposal, according to the Supreme Court. The Dutch Court had determined that the farewell bonuses were not paid with the intention to achieve the disposal of the participations. These costs were not 'evoked' by the disposal, but were a consequence of it, as the bonuses were paid using the sale proceeds. The Supreme Court therefore ruled that there was no direct causal link and decided that the farewell bonuses qualify as deductible costs for Dutch tax purposes.

Note!
This case concerned bonuses granted by the parent company. Depending on the facts, bonuses may also be attributable to the participations themselves, for example if the bonus results from the employment contract. In other cases, the costs may belong at shareholder level and it should then be assessed whether they are participation costs. Structuring a farewell bonus to employees that is deductible for tax purposes therefore listens closely.

In case you are planning to grant a farewell bonus to your staff, please contact us for personal advice.