Dutch Government To Change The Rules Governing Corporate Losses

; posted on
April 23rd, 2019

The Dutch government has launched a draft bill on corporate loss. The draft bill is aimed at preventing misuse of the liquidation and cessation loss rules and at expanding the tax base.

Current Liquidation and Cessation Loss Rules

Benefits from a “participation” (an interest of at least 5%) foreign activities, such as dividend and capital gain are in principle exempt from tax. As a result, during the existence of the relevant activities corporate income tax is levied once, either in the Netherlands or abroad.

However, there is an exception to these provisions in case foreign activities are discontinued, since if the ceasing of activities gives rise to a loss, such a loss cannot be taken into account abroad. Therefore, under the current Dutch provisions this loss may still be deductible in the Netherlands.

The current rules used by Shell and other multinationals to write off losses incurred when liquidating a foreign subsidiary from their Dutch profits. As a result, the non double taxation may arise since the Netherlands and the other jurisdictions have no profit base to levy the tax due to the loss situation.

Draft Bill

Under the draft bill to prevent the misuse of liquidation loss on a participation, the loss would only be deductible if the following conditions are satisfied:

  1. The participation is established in the Netherlands or in another EU/EEA state (territorial limitation); and
  2. The Dutch taxpayer holds a qualifying interest in the subsidiary. A qualifying interest is satisfied when the taxpayer holds at least 25% of interest (currently, 5%) or interests giving rise to decisive influence on the participation’s activities.

The conditions have been proposed in order to limit the liquidation loss rules to situations covered by the EU/EEA freedom of establishment. To the extent the conditions are fulfilled, the losses should be deducted within three years from the discontinuance of the relevant activities or the decision for the discontinuance.

The draft bill also contains threshold for the loss deduction. Losses up to the amount of EUR 1 million remain deductible (this also applies to interests of 5% but less than 25% and also to non-EU/EER situations).

Proposed Effective Date

The proposed entry into force of the new rules is set on 1 January 2021 with a three-year transitional period concerning deferred liquidation losses incurred before 1 January 2021.

Source: Dutch Government

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