Tax-deductibility of acquisition and selling costs

Where a company is acquired or sold in a share deal by a Dutch company, the participation exemption generally applies on both sides of the transaction. If the participation exemption applies, on the seller’s side, capital gains should be exempt from Dutch corporate income tax.

However, the Dutch participation has a significantly wider scope of application than just capital gains on the sale of participations. Also acquisition costs incurred by the purchaser or selling costs incurred by the seller fall within the scope of the Dutch participation exemption. This means that such costs are non-deductible for Dutch corporate income tax purposes.

In transactions, costs incurred are often incorrectly allocated or mischaracterised. Both the misallocation and mischaracterisation of costs can result in disputes with the Dutch tax authorities that generally only occur after the acquisition of a company.

Usually, the share purchase agreement contains an indemnity which allows the purchaser to claim the amount of indemnified tax incurred by the target from the seller. However, due to the complexity and multidimensionality of these conflicts, these conflicts generally result in commercial litigation between the purchaser and the seller. This contribution aims to give in-house lawyers an insight into how these disputes may arise and thus, how these disputes can be prevented.

Dutch participation exemption

Under the Dutch participation exemption, both income1 and losses2 derived from a shareholding that qualifies as a participation are tax-exempt. For the Dutch participation exemption to apply, the taxpayer should firstly hold a shareholding representing at least 5% of the nominal paid-up share capital3 of the company. There is no minimum holding period under Dutch domestic law

If a taxpayer holds a shareholding that meets the shareholding threshold, one additional test out of three tests in total should also be met. Firstly, the Dutch participation exemption applies if the so-called ‘motive test’ is passed. This is the case if the participation is not deemed to be held with a portfolio investment motive, but rather for business-drive motives.

If the shareholding is held with a (deemed) portfolio investment motive, the shareholding can still qualify if the either ‘subject-to-tax test’ or the ‘asset test’ are met. Both these tests test the level of taxation. Under the subject-to-tax test, an assessment is made as to whether the direct subsidiary to which the Dutch participation exemption should apply is sufficiently subject to tax. Under the asset test, an assessment is made as to whether the assets of the direct subsidiary and, up to a certain degree, the indirect subsidiaries are sufficiently subject to tax.4

Acquisition costs and selling costs

Allocation versus qualification as acquisition costs and selling costs

There are two dimensions in assessing the tax treatment of acquisition costs and selling costs. The first dimension, which is the cause of most disputes between seller and purchaser, is the allocation of costs between the seller and the target company. If costs can be allocated or pushed down to the target, this precludes any debate on whether these costs qualify as selling costs at the level of seller. In practice, however, costs are often incorrectly pushed down, resulting in disputes between the newly acquired target and the Dutch tax authorities. An example of costs that often result in disputes is costs incurred in relation to a vendor due diligence. Often sellers argue that these costs are (also) relevant for the target, as the target can use the vendor due diligence to address any existing legal or tax risks.

The second dimension is the qualification as acquisition costs and selling costs, which are non-deductible, versus qualification as other types of costs, which are generally tax-deductible. This qualification generally causes disputes only between the purchaser and/or the seller on the one hand and the Dutch tax authorities on the other hand.


Prior to a 2019 ruling by the Dutch Supreme Court (see below), the tax treatment of acquisition costs and selling costs of participations was fragmented, with different positions being taken in practice as to which costs qualify as such and as of what point in time costs start qualifying as acquisition costs or selling costs. This often resulted in question letters from the Dutch tax authorities after the acquisition of the target company, leading to disputes which had to be settled.


In late 2018, the Dutch Supreme Court clarified the tax and tax accounting treatment of acquisition costs and selling costs.5 In order for costs to qualify as acquisition costs or selling costs, these costs must have a direct causal relationship with the acquisition or sale of the participation, in the sense that absent the acquisition or sale, these costs would not have been incurred.

Further the Dutch Supreme Court ruled that these costs should be reported on the balance sheet as a transitory asset.

Key takeaways

Acquisitions may result in litigation between purchaser and seller due to tax costs potentially incurred by the misallocation of costs by the seller to the target, where these costs should have been incurred by the seller, as opposed to the target. These tax costs may not only include corporate income tax, but could also include, for example, value added tax.

Both on the side of purchaser and seller, it is important to correctly qualify the costs for Dutch tax purposes, in order to prevent disputes with the Dutch tax authorities on the qualification of costs as acquisition costs or selling costs.


  1. Such as dividends or capital gains.
  2. Such as losses incurred upon sale of the participation.
  3. There are several other variations, depending on the legal form of the subsidiary. Except for the membership interest in a Dutch cooperative, these generally require 5% of the shares or similar instruments to be held.
  4. This is the case if the subsidiary (subject-to-tax test) or the assets (asset test) are subject to a corporate income tax that results in an effective tax rate of at least 10% on a taxable basis that is substantially similar to the Dutch taxable base.
  5. Dutch Supreme Court 07-12-2018, no. 17/01211, ECLI:NL:HR:2018:2264,BNB 2019/26.