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14-11-2024

Agricultural exemption when transferring cultivated land to partnership

Agricultural exemption when transferring cultivated land to partnership

This case concerns the application of the agricultural exemption to cultivated land, initially leased and later contributed to a partnership. At the time the land was leased, it was considered part of the owner’s asset under the “availability regime” since the land was leased to a partnership in which her husband was one of the partners. The legal question is whether the increase in value realized by the arable farmer upon the subsequent transfer of a parcel of agricultural land to her husband is taxable or if part of that increase is exempt from taxation under the agricultural exemption.

Facts

In 1977, an arable farmer acquired over 50 hectares of agricultural land from her parents. This land was initially leased to third parties. In 2001, the land was leased to the partnership run by her husband and his brother. From that moment, the agricultural land qualified as “assets available for business use” (tbs-assets) under the Dutch Income Tax Act of 2001. However, the agricultural land was never declared as such in income tax returns.

In 2011, the brother left the partnership, and the arable farmer formed a partnership with her husband. She contributed the economic ownership of the agricultural land to the partnership, reserving part of the hidden reserves for herself. Due to a change in the profit-sharing arrangement, the arable farmer transferred 40% of her share in the economic ownership of one parcel of agricultural land to her husband as of May 1, 2018. This parcel was part of the agricultural land she had initially contributed to the partnership. At the time of the transfer, the arable farmer did not reserve the hidden reserves for the parcel. The leased state value of the land at the beginning of the availability regime was €12,500 per hectare. At the time of the contribution, the leased state value was €17,500 per hectare, and the free market value was €35,000. By the time of the 2018 transfer, the free market value of the land had increased to €65,000 per hectare.

Arable Farmer’s Position

The arable farmer argued that the land was contributed to the partnership at the leased state value, as the lease relationship had not yet been terminated at that time. She contended that the value increase of the parcel during the partnership period should be split into two parts. The first part concerned the autonomous increase in free market value from €35,000 to €65,000 per hectare, which she claimed should be exempt under the agricultural exemption. The second part concerned the value increase due to the release of the leasehold, which she argued should be entirely attributable to her husband, as he had contributed the leasehold to the partnership when it was formed. Only the value increase that occurred during the availability regime period would be taxable for the arable farmer, as the agricultural exemption does not apply to tbs-assets.

Tax Inspector’s Position

The tax inspector argued that the land was contributed to the partnership at its free market value, as the lease relationship had been terminated prior to the contribution. Consequently, the entire value increase from the moment of contribution would be taxable, except for the portion covered by the agricultural exemption. The inspector stated that the book profit realized by the arable farmer upon the subsequent sale of a portion of the land was understated in her tax return and adjusted it to a higher amount.

Court’s Ruling

The court ruled that the agricultural land had been contributed to the partnership at its leased state value. This meant that the value increase during the availability regime period, when the land was leased, was taxable. This increase was calculated as the difference between the leased state value at the time of contribution and the leased state value at the start of the availability regime period.

The court divided the value increase during the partnership period into two parts. The autonomous value increase, which occurred after the land was contributed to the partnership, was covered by the agricultural exemption and remained untaxed. However, the portion of the value increase attributable to the termination of the leasehold was taxable, insofar as it could be allocated to the arable farmer. The court concluded that this calculation resulted in a higher taxable book profit on the land than the tax inspector had initially calculated.

Recommendation

For entrepreneurs contributing real estate, such as agricultural land, to a partnership or other collaborative entity, it is crucial to determine whether the assets qualify as part of the availability regime at the time of contribution. Do you have questions about the agricultural exemption or the tax implications of contributing assets? Please contact us for further advice.

Source: District Court of Northern Netherlands | Case Law | ECLI:NL:RBNNE:2024741, LEE 23/1913, and 23/1914 | March 6, 2024