In principle, you must pay tax on business book profit immediately. However, you are permitted to avoid this tax by creating a reinvestment reserve (RIR). How does that work? What did the court say?
You make a book profit on a business asset when the sales price exceeds the asset's book value. In principle, you must pay tax on this book profit immediately. However, you are permitted to avoid this tax by creating a reinvestment reserve (HIR).
Reinvestment intention
One of the conditions for establishing a reinvestment reserve is that there must be a reinvestment intention. The Supreme Court recently ruled that a reinvestment intention is not required to be feasible in the year of disposal of the asset (ECLI:NL:HR:2022:1507). .
What had happened?
A private limited company sold properties in 2010 and 2011. The private limited company formed a real estate investment trust (HIR) for the book profits. According to the Court of Appeal,
Arnhem-Leeuwarden (ECLI:NL:GHARL:2020:7160) this was not possible because the BV had not demonstrated a feasible intention to reinvest on the balance sheet dates. After all, there were high losses and the BV had negative working capital. Furthermore, documents demonstrating a reinvestment intention for 2010 were missing. The fact that the BV requested sales information for a leased property in 2011 was also not considered by the court to constitute a feasible intention to reinvest. The BV was dependent on external financing for the purchase price of €2 million.
Feasibility not required.
However, the court's ruling is not upheld on appeal. The Supreme Court ruled that it is not required that a reinvestment intention
must be realizable in the year of alienation of the property.
So intention is not important?
However, the ruling does not mean that the feasibility of the reinvestment intention is irrelevant. A HIR cannot be formed or maintained if it cannot reasonably be expected that the reinvestment intention will be realized within the statutory three-year period (Section 3.54 of the Income Tax Act 2001), for example, because it is financially impossible. The burden of proof and substantiation for this lies with the tax inspector. The court of appeal misunderstood this.
Plan does not have to be concrete.
Unlike the exchange rulings, establishing a reinvestment reserve does not require a taxpayer to have a specific plan for a replacement investment. Nor is it required that a taxpayer already have a specific plan for financing this investment.
Other evidence must be submitted first.
The fact that the BV had no documents demonstrating a reinvestment intention for 2010 does not mean that a reinvestment intention cannot be proven. The BV can also provide this proof in other ways. For example, documents and other evidence relating to the period after the balance sheet date can also be relevant. After all, events occurring after the balance sheet date can also provide indications about the presence or absence of a reinvestment intention on the balance sheet date.
For the HIR, you must have a reinvestment intention to reserve profit for this purpose. However, according to the court, this intention doesn't have to be feasible and financially viable in advance. It's the intention itself that counts, and you must substantiate it.
