Husband and wife were married in community of property. By prenuptial agreement standing marriage, the business assets of the sole proprietorship were allocated to the husband against a debt owed to the wife for over-dealing of about €955,000. Seven years later, they divorced. In doing so, the wife waived her claim plus interest.
The man filed a gift tax return for his acquisition and received an assessment. On reflection, he considered that for tax purposes there was no donation, but that his ex-wife had fulfilled a natural obligation so that a gift tax exemption applied. Therefore, the man objected to the gift tax assessment, which was rejected. The man appealed to the court.
Donation
Gift tax is levied on the value of anything acquired by virtue of a gift from someone who was resident in the Netherlands at the time of the gift. Donation is understood to include the gift. The criteria for this are: an enrichment of the recipient, an impoverishment of the donor and generosity. With regard to the latter requirement, awareness of the favouring and the will to favour must be present in the donor. From a tax point of view, if generosity is absent because a natural obligation is fulfilled, there is an (exempt) donation.
Enrichment and impoverishment?
It is undisputed that the husband was enriched by the cancellation of the debt and the ex-wife was impoverished.
Generosity?
The burden of proof that the debt was discharged out of generosity rests on the Inland Revenue. The Inland Revenue argued that the ex-wife was both aware of the favouring and also wanted the favouring of the husband. The Inland Revenue points to the factual record, which would show that the ex-wife would discharge the debt only to the husband, and not to anyone else. The reason apparently was that she did not want to jeopardise the husband's business. The ex-wife would not do that for every other person.
The man disputes that his ex-wife wanted to benefit him. According to him, his ex-wife's will was not aimed at enriching him, but at preventing him from financially jeopardising the continuity of his business. Thus, there was no favouritism intention towards him.
The court found in favour of the Tax Office. The court deduces from the wording of the divorce covenant that the ex-wife was aware that by waiving her claim, she enriched the husband. Furthermore, the court considers it plausible that the ex-wife also wanted this enrichment of the husband, given their relationship and the reason why she proceeded with the waiver. Ensuring the continuity of the business is also in the husband's interest as the owner of the business. The court does not believe that the ex-wife would also make such a waiver of around €1 million to any third party with a company.
This means that all requirements are met and the waiver counts as a donation from a tax point of view.
Satisfying a natural commitment?
The husband argues that his ex-wife felt morally obliged to waive the claim, and thus there was the satisfaction of a natural obligation. The Tax Court disputes that conclusion. The court held that the ex-wife's will to favour was not removed by the mere assertion that the ex-wife waived the claim against the husband in connection with his business. The husband has not put forward any facts and circumstances showing that the husband's situation and his business were such that there was a need to proceed with remission and the ex-wife would feel morally obliged to do so. Nor does anything show that less far-reaching options were considered and considered.
Conclusion
The court finds that the cancellation of the debt qualifies as a taxable gift. The gift tax assessment was rightly imposed and not to an excessive amount.
Note: The Tax Administration can easily prove that generosity must have been involved, and the man cannot substantiate fulfilment of a natural obligation - a moral obligation to remit. With that, the remission remains a gift.
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