The question as to what extent assets, liabilities and derivatives should be jointly valued was answered by a court for the first time with due observance of the Cocoa Bean judgment (Supreme Court April 10, 2009, No. 42.916). On August 18, 2010 the District Court of Haarlem passed judgment on proceedings involving a valuation issue relating to a market maker (a professional market player engaged in option trading) for whom KPMG Meijburg & Co acted as counsel.
Separate valuation is more favourable for tax purposes
For each balance sheet item, the unrealized profit on balance sheet items that have been valued separately can be carried forward for tax purposes while an unrealized loss can be taken. In the case of balance sheet items that are to be valued jointly, the unrealized results should be netted out in those balance sheet items prior to proceeding with deferral or recognizing a loss. The loss balance can then be taken and the profit balance can be deferred. The more balance sheet items that are permitted to be valued separately, the more advantageous this is for tax purposes.
The case heard
The market maker concluded an agreement with the Dutch Revenue in 1993. The agreement laid down the assets, liabilities and derivatives that should be valued separately and those that should be valued jointly. This compromise stipulated that all shares and options from one and the same fund should be valued together. In addition, under the agreement it was possible to distinguish between different ‘basket units’ within separate funds, such as shares and short-term options, options with a remaining period to maturity of 12 months, and long-term options. Effective 2001 the Dutch Revenue ruled against extending the agreement with the interested party and stipulated that the interested party should carry all their financial assets, liabilities and derivates in that year at market value.
District Court sets out the practical aspects of the Cocoa Bean judgment
However, the District Court believes there is insufficient reason for terminating the contract with the interested party. According to the District Court, the only provision in the agreement that conflicts with the existing case law on sound business practice and joint valuation is the provision under which different ‘sub-basket units’ may be formed within one and the same fund based on the different remaining periods to maturity. The District Court believed that the movement in value of the assets, liabilities and derivatives in these sub-basket units showed a connection that fell within the 80-125% margin as stipulated by the Supreme Court of the Netherlands in the Cocoa Bean judgment. In the District Court’s judgement, eliminating the part of the agreement that distinguishes between the remaining periods to expiry was not sufficiently significant in terms of its effect on the amount of the market maker’s taxable profit to justify terminating the contract.