Participation exemption: advisory costs linked to price adjustment clauses not tax deductible

The Dutch Tax Administration has withdrawn its earlier position that advisory costs relating to a price adjustment clause on the sale of a participation should be treated as non-deductible disposal costs. The withdrawal aligns with recent Dutch Supreme Court case law on the required direct causal link.

Source and background

The withdrawn position is Knowledge Group item KG:023:2022:7, “Deductibility of advisory costs in connection with a price adjustment clause”, originally effective from 27 March 2023 and published, among other places, in V-N 2023/26.4.15. The withdrawal was published on 19 May 2026.

The case concerns advisory costs incurred by a seller in a dispute over historic tax liabilities of the sold subsidiary where the share purchase agreement included a balance-sheet warranty functioning as a price adjustment mechanism.

Facts

A taxpayer sold a participation under an agreement containing a balance-sheet warranty. Under that clause, the seller could remain exposed to tax liabilities discovered after closing but relating to periods in which it still owned the participation.

The issue was whether advisory costs connected with a dispute with a foreign tax authority over those historic liabilities should qualify as non-deductible disposal costs for Dutch corporate income tax purposes.

Judgment

The Dutch Tax Administration has now abandoned its earlier view that these costs fall within the scope of article 13(1) of the Dutch Corporate Income Tax Act 1969. The change reflects the Dutch Supreme Court’s clarification that a mere “but-for” connection with a disposal is not enough.

For costs to qualify as non-deductible acquisition or disposal costs, they must also be objectively useful or necessary to bring about the transaction. Post-closing advisory costs incurred to reduce a potential price adjustment or warranty claim generally do not meet that test.

As a result, such costs may in principle remain tax deductible, subject to proper cost allocation and the usual tax rules.

Legal basis

Article 13(1) of the Dutch Corporate Income Tax Act 1969 excludes benefits derived from a participation, as well as costs related to the acquisition or disposal of that participation. Article 13(6), second sentence, treats price adjustments in connection with an acquisition or disposal as participation results.

The withdrawal should be read in light of Dutch Supreme Court case law, in particular HR 7 December 2018, ECLI:NL:HR:2018:2264, and HR 22 December 2023, ECLI:NL:HR:2023:1793, which further refined the direct causal link test.

Practical relevance

This is a relevant development for M&A and international tax practice. It confirms that not every post-closing expense connected with a disposal automatically falls within the participation exemption cost disallowance.

Taxpayers should carefully distinguish between costs incurred to execute a transaction and costs arising only after closing under warranties, indemnities or price adjustment mechanisms. That distinction may be critical for deductibility, SPA drafting and post-deal tax documentation.

Takeaway:

post-closing advisory costs should be documented separately and supported with a clear explanation of why they were not incurred to bring about the transaction itself.