Dutch parliament suggests limitations to liquidation loss provision

17/04/19

Dutch parliament suggests limitations to liquidation loss provision

On 16 April 2019, an internet consultation concerning limitations to the provisions of the Dutch Corporate Income Tax Act (CITA) on liquidation losses (in the case of foreign participations) and cessation losses (in the case of foreign branches) became available. More specifically, the consultation concerns a legislative proposal on the initiative of the members of Dutch parliament Snels (GroenLinks), Leijten (SP) and Nijboer (PvdA). The legislative proposal aims at the broadening of Dutch tax base and the prevention of improper use of foreign losses.

The initiators are of the opinion that Dutch multinational companies do not pay sufficient corporate income tax over their profits. In their view, one of the reasons for this is that ceasing foreign activities may give rise to foreign losses that, under the current Dutch rules, may be deductible in the Netherlands. Opposition parties GroenLinks, SP and PvdA feel that this is no longer desirable, which is why they submitted this legislative proposal introducing limitations to the deductibility of these losses.

 

Current Dutch legislative framework

A Dutch resident company is, in principle, liable to corporate income tax on the profits derived in the Netherlands. Results derived from foreign activities are taken into account abroad. These results are exempt in the Netherlands under two provisions of the Dutch CITA: the participation exemption provision (concerning foreign participations) and the object exemption provision (concerning foreign branches). As a result, during the existence of the relevant activities corporate income tax is levied once, either in the Netherlands or abroad.

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. More specifically, if the relevant foreign activities are carried out by means of a foreign participation, a loss can be deducted upon the liquidation of the foreign participation (the so-called “liquidatieverliesregeling”). In the same vein, if the foreign activities are exercised by means of a foreign branches, the losses can deductible in the Netherland at time these activities are discontinued (the so-called “stakingsverliesregeling”).

The legislative proposal

GroenLinks, SP and PvdA suggest limitations to the deductibility of losses upon the cessation of foreign activities. However, the proposed limitations should be in line with EU/EEA law. The most important points of the legislative proposal are the following:

  • The liquidation loss provision would be applicable only:

a) in EU/EEA situations, and

b) with regard to interests of at least 25% (currently, 5%) or interests giving rise to decisive influence on the participation’s activities;

  • Cessation losses of foreign branches (which normally fall within the scope of the above-mentioned object exemption provision) also are deductible only in EU/EER situations;

  • 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);

  • Liquidation losses shall be deductible within three years from the discontinuance of the relevant activities or the decision for such discontinuance;

  • 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.

Internet consultation

The internet consultation consists of the legislative proposall, the proposed explanatory memorandum and several questions to the public. The deadline for responses to the legislative proposal and the questions is 16 May 2019. It is expected that PwC will provide its response to the legislative proposal (either through the Dutch Association of Tax Advisors (NOB) or separately).

What does this mean for you?

The suggested abolition of the liquidation loss provision for non-EU/EER interests may have a large impact. The proposed entry into force of the legislative proposal in combination with the proposed transitional period provide you, in many situations, with a timeframe to prepare for the new rules. Please contact your PwC advisor to discuss the implications of the proposed rules to your company.

 

Contact us

Roland Brandsma

Roland Brandsma

Partner, PwC Netherlands

Tel: +31 (0)65 321 80 09

Michel van Dun

Michel van Dun

Senior Manager, PwC Netherlands

Tel: +31 (0)61 042 11 99

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