Dutch Supreme Court Rules Non-Continuation Requirement in Liquidation Loss Scheme

; posted on
June 11th, 2019

The Dutch Supreme Court ruled on the assessment procedure on non-continuation in liquidation loss schemes. The judge was of the opinion that the affiliation of the continuing company should be assessed when the liquidation is completed.  

Background

Under Dutch tax regulation, a taxpayer may deduct a loss from its taxable profit in connection with the liquidation of a subsidiary. To utilize a liquidation loss, the company should satisfy the requirement of non-continuation losses where the company of the dissolved subsidiary should be completely discontinued or should only be continued by persons other than those associated with the taxpayer. In other words, continuation by third parties is allowed to enjoy the loss deduction.

The Dutch supreme court ruled on the timing of assessment whether there is a affiliated relationship between the subsidiary and the continuing company. In detail, the case is about the taxpayer who had a subsidiary and transferred its activities to a group company in 2002. In 2003, the shares in that group company were sold to a third party. The liquidation of the subsidiary started in 2004 and the liquidation of the subsidiary was finally completed in 2010.

In response to this arrangement, tax authorities argued that the affiliation between the subsidiary and the continuing company had to be assessed at the time of continuation (ie in 2002). The reason underlies the position of the State Secretary for Finance of his Decree no. 2019-0000012049. However, the taxpayer was of the opinion that the affiliation of the continuing company should be assessed when the liquidation of the subsidiary was completed (ie in 2010). After all, that is the moment at which the liquidation loss can be taken at the earliest.

Decision

The Supreme Court opined that the moment of the assessment is when the liquidation of the subsidiary is completed. This decision was taken by considering the objective of the provision, as the text of the non-continuation requirement gives no definitive answer about the moment of testing.  According to the judge, the purpose of the non-continuation requirement is to postpone loss-taking until the activities are discontinued or continue outside the group. This objective is best achieved if the requirement is tested at the earliest moment at which the liquidation loss can be taken into account.

With this judgment, the Supreme Court ruled in favor of the taxpayer.

Sources: Taxlive, Dutch Supreme Court

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