“Supermarket BV” is a company in the Netherlands. It conducts some of its business through a permanent establishment (PE) in Belgium. In 1999, the company formed a reinvestment reserve from the proceeds of selling a leasehold interest in a Dutch supermarket. In 2003, the company used this reserve to acquire the right to use a dwelling located in Belgium, which was included in the assets of its Belgian PE.
From 2004 to 2013, “Supermarket BV” incorrectly calculated depreciation relating to the Belgian asset by using a lower initial book value due to the inappropriate deduction of the reinvestment reserve. Consequently, the exempt profits attributable to the Belgian PE were overstated, resulting in excessive exemption from Dutch taxation.
In 2013, the tax authorities detected the error and corrected it by adjusting the taxable profit for that year, applying the ‘error correction doctrine’ and making a one-time adjustment to correct the accumulated errors from 2004 to 2012.
“Supermarket BV” filed an appeal, arguing that the error correction doctrine could not apply because the error did not affect the final balance sheet for determining overall taxable profits in the Netherlands; it only concerned the calculation of exempt profit attributable to the Belgian PE. The appeal was dismissed by the lower court, after which an appeal was filed with the Supreme Court.
Judgment
The Supreme Court upheld the tax assessment and rejected “Supermarket BV”’s arguments. It held that the error correction doctrine also applies to errors in determining exempt profits attributable to a foreign PE, provided the error impacted the PE’s closing balance sheet. The Court emphasised that determining exempt profits attributable to a permanent establishment involves a separate calculation based on Dutch tax rules, including continuity of balance sheets. Therefore, the depreciation error affected the PE’s closing balance and the error correction doctrine was applicable.
Additionally, the Supreme Court confirmed that the tax authorities was justified in making a one-time correction in the 2013 assessment, rather than imposing retrospective additional assessments for each individual year (2004-2012), because the extended reassessment period for foreign-sourced income did not apply—since the reinvestment reserve originated from a domestic asset and was incorrectly used in the PE calculation.
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