SAC: exchange of shares upon capital increase from own sources interrupts time test

In the case in question, a taxpayer owned shares in a company whose general meeting decided to increase the registered capital from its own resources, and to exchange the existing shares for new ones. Two years after the transaction was carried out, the taxpayer sold the shares. The taxpayer first taxed the proceeds from the sale of the shares in the regular tax return, but then reconsidered this approach and filed an additional tax return. In it, the proceeds from the sale were treated as tax exempt: in the taxpayer’s opinion, the ‘time test’ had been met and had not been interrupted by the exchange of shares.

The case then went before the SAC. The SAC confirmed the tax administrator's view that the time test had been interrupted and that the proceeds from the sale of the shares had to be taxed. In the SAC’s opinion, the linguistic interpretation of the relevant provision does not allow for exempting the income. The SAC stated that the law expressly provides for an exception where the time test is not interrupted, i.e. an exchange of shares by the issuer for other shares of the same total nominal value. It can thus be deduced that since the law explicitly links the non-interruption of the time test solely and exclusively to a specific situation (i.e. an exchange of shares of the same total nominal value), the legislators' intentions clearly were that the for all other share exchanges, the time test should be interrupted. Otherwise, according to the SAS, it would not make sense to stipulate a special exception.

The SAC further stated that for the purposes of the interruption of the time test, there is no reason to distinguish between economically essentially identical procedures for increasing the nominal value of shares; therefore ‘stamping,’ whereby the value of the shares changes although shareholders do not formally acquire new shares, should be treated the same. As both of the above also involve an increase in the registered capital, according to the SAC, the condition that shares shall be exchanged by the issuer for shares of the same total nominal value is not met, therefore the time test is interrupted.

The SAC dis not accept the arguments referring to the 2008 conclusion of the Coordination Committee and to tax authorities’ practice. As to the minutes of the Coordination Committee, the SAC emphasised that they can only establish taxpayers’ legitimate expectations if they are sufficiently reasoned, not self-contradictory or against the wording and meaning of the law. 

To conclude: in practice, the time test is not interrupted by an exchange of shares solely if the total value of the newly issued shares is the same as the total nominal value of the original shares (i.e. regardless of whether the number of the newly issued shares is the same or different from the number of the original shares). An example of such a situation can be a demerger or merger of shares. In contrast, where the exchange of shares relates to a change in the amount of the registered capital or, more precisely, the total nominal value of the shares, the non-interruption of the time test for tax exemption cannot be applied.