Current rules for liquidation losses
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.