In October 2019 the Dutch government decided to amend the liquidation loss regime for corporate income tax (CIT) purposes as of 1 January 2021. The reason for this is that politicians believe that multinationals should pay more CIT on their profits in the Netherlands. According to various media, for example Shell would have used this scheme as a favorite construction to pay less or even no CIT.
Normally, a company established in the Netherlands is required to pay CIT on Dutch profits. Profits made from foreign activities are taxed abroad. By applying the participation exemption, which is applicable if more than 5% of the shares are held in a subsidiary, the profit of the foreign company can under conditions be distributed without taxation to the Dutch BV. In short, profits are taxed only once; in the Netherlands or abroad. Capital gains and losses are also exempted if the participation exemption applies.
However, in the event of termination of activities abroad from which a loss arises, the participation exemption does not apply. This means that the loss, based on the invested equity in the subsidiary, can be offset against the profits in the Netherlands. The existing Dutch liquidation losses scheme allows a deduction of losses in a subsidiary that is liquidated, provided certain stringent conditions are met. One of these conditions is that the loss will be deductible in the Netherlands at the moment of liquidation of the foreign company.
In addition for the deduction of losses on the termination of foreign permanent establishments the loss will be taken into account if the activities of the permanent establishment are discontinued, this is called the cessation loss scheme.
In the final draft bill of 2 October 2019 the liquidation loss scheme is limited.
Territorial and quantitative limitation
The bill includes a territorial limitation and a quantitative limitation if the deductible liquidation loss exceeds 5 million euro, namely:
Territorial limitation: the participation/subsidiary must be located in an EU/EEA-member state; and
Quantitative: the company in the Netherlands holds a qualifying interest in the subsidiary. This is the case with interest of more than 50 percent or interest giving rise to decisive influence on the activities of the subsidiary.
Losses less than 5 million euros do not have to meet the territorial and quantitative requirement as mentioned above.
Temporal limitation
The final draft bill also includes temporal limitation. Purpose of this limitation is to prevent the
opportunity for long-term deferment of the date of deduction of liquidation loss. The liquidation loss can only be taken into account if the liquidation is completed within three years of the cessation or completion of the decision to do so. For the scheme for discontinuation losses of foreign fixed establishments, similar limitations will apply.
The government announced it will adopt the final draft bill and the proposed entry into force is 1 January 2021. For potential liquidation losses arising before that date there is a three-year transitional period.
The limitations regarding to deductible liquidation and cessation losses could have a large impact. Would you like to receive more information about the possible changes and their effect on the taking of a foreign liquidation loss? Do not hesitate to contact us.
