Group relief does not hinder Dutch liquidation loss

26/03/25

On Friday 21 March 2025, the Dutch Supreme Court issued a ruling on the application of the liquidation loss scheme. More specifically, this concerned the requirement that there is no compensation elsewhere in the group for the losses of the dissolved entity, and the timing of determining whether this requirement has been met. The ruling concerns a Dutch NV that claimed a liquidation loss for two liquidated Irish subsidiaries and whether the use of the Irish "group relief" scheme thwarts this claim (either partially or entirely). According to the Supreme Court, the "no-compensation requirement" is characterised as an anti-abuse provision. The legislator intended to prevent several specific abuse situations with this, but these do not include the Irish losses to which the group relief regime was applied, as these losses could no longer be offset in any other way at the time of liquidation of the Irish companies. The fact that under certain circumstances losses can be offset twice is, according to the Supreme Court, inherent to the liquidation loss scheme and therefore does not preclude its application. As such, the Supreme Court goes against the conclusion of the Advocate General.

What does this mean for your organisation?

If your organisation wants to use the Dutch liquidation loss, then this means that the loss will not be reduced if the dissolved entity has previously transferred losses under a group relief scheme.

Note that following this ruling, the State Secretary will have to adjust a decree which contains a different interpretation, and it cannot be ruled out that a legislative change will be announced simultaneously.

Background

A Dutch NV holds shares in two Irish subsidiaries. These Irish entities are liquidated, and the NV claimed a liquidation loss of over €202 million in its corporate income tax return.

One of the subsidiaries had transferred approximately €116 million in losses to Irish group companies based on the Irish group relief scheme a few years before the liquidation. These losses were offset by group companies. At its dissolution, there were still approximately €110 million of non-transferred losses. The group relief scheme was not optimally utilised: a part of the non-transferred loss could have been transferred, but was not.

This procedure concerned the question whether, as a result of the group relief scheme, the conditions for applying the liquidation loss scheme were not met. To get a good understanding of the issue, we will first discuss the liquidation loss scheme and then the group relief scheme.

The liquidation loss scheme

In general, due to the participation exemption in the Netherlands, it is not possible to take into account losses on participations. There is only one exception to this, namely when the participation is liquidated. Then, based on the so-called liquidation loss scheme, a loss can sometimes be claimed.

The amount of the liquidation loss is set at the difference between the 'sacrificed amount' for the participation and the received liquidation distributions. The acquisition price of the shares is generally used as the sacrificed amount. When introducing the scheme, to avoid practical objections, it was chosen not to 'transfer' uncompensated loss of the subsidiary as a liquidation loss to the parent company, but to align with the loss that the parent company (taxable in the Netherlands) suffers on its investment (sacrificed amount).

An important condition of the liquidation loss scheme is that there is no right to any compensation in the taxation of losses that have remained uncompensated at the dissolved entity (no-compensation requirement).

Therefore, in determining the sacrificed amount, the investment of the parent is considered, while for the aforementioned 'no-compensation requirement', it must be examined whether there is compensation possible for the uncompensated losses of the dissolved entity.

Group relief scheme

Under Irish tax law, it is possible to offset a loss incurred by a group company in a particular year against a profit of another group company in the same year. 'Group relief' means that losses within a group can be offset against profits elsewhere in the group. Several countries, such as the UK and Germany, have such schemes that are all slightly different in terms of scope and requirements. In a sense, the fiscal unity scheme for corporate income tax in the Netherlands could also be considered 'group relief', as far as it concerns the offsetting of all fiscal results of fiscal unity companies.

Dispute

The question is whether the application of the Irish group relief scheme means that the entire loss or the portion of the loss that has been transferred under the group relief scheme cannot be deducted in the Netherlands.

It comes down to the interpretation of the no-compensation requirement and at what moment the no-compensation requirement must be tested. In a policy decree, the State Secretary had indicated that the group relief scheme prevented the recognition of a liquidation loss.

The question of whether the State Secretary’s position is correct has long occupied tax practice. The court had decided that the group relief scheme did not prevent taking a liquidation loss. However, A-G Wattel concluded that due to the application of the group relief scheme, no liquidation loss could be considered at all, not even for the uncompensated loss.

Supreme Court

The Supreme Court has now decided that the no-compensation requirement must be executed at the time when the liquidation of the dissolved entity is completed. In the present case, there were still €110 million tax losses available at the time of dissolution which are definitively no longer offsetable after the dissolution. According to the Supreme Court, the aforementioned requirement is therefore met. The fact that the remaining losses of over €116 million were previously transferred to group companies that were able to offset them does not affect this. The fact that part of the definitively non-offsetable losses could have been offset earlier seems to be considered irrelevant by the Supreme Court.

A broad interpretation of the no-compensation requirement, in accordance with the inspector's position and as included in the decree, does not, according to the Supreme Court, align with the purpose and intent of the liquidation loss scheme as a facility for losses that remain definitively uncompensated because of the liquidation of the subsidiary.

The Supreme Court acknowledges, however, that this results in a way, in 'double loss recognition'. Yet, according to the Supreme Court such a result is inherent in the design of the Dutch liquidation loss scheme. When introducing the scheme, for feasibility reasons, the choice was made not to 'transfer' the uncompensated loss of the subsidiary as a liquidation loss to the parent company, but to align with the loss that the parent company (taxable in the Netherlands), suffers on its investment (sacrificed amount) and thus determine the loss on the subsidiary rather roughly and at a fixed rate. The amount of uncompensated losses at the level of the subsidiary at the time of liquidation is therefore, according to legislative history, not related to the liquidation loss to be considered by the parent company.

With such a design, the legislator has consciously accepted that, on balance, losses can in a sense be deducted twice. Incidentally, we note that the opposite also occurs regularly, namely that losses, despite the application of the liquidation loss scheme, cannot be utilised anywhere or can only be utilised partially.

For completeness’ sake, we note that this ruling related to the liquidation loss scheme as it read in 2013. However, the outcome is still relevant for the scheme as it currently applies, as the issue surrounding the no-compensation requirement has remained unchanged. Under the current scheme, there are some additional requirements and limitations (such as the requirement that liquidation losses on non-EU entities are capped at 5 million euros). You can read more about this in the earlier Tax News article "Bill to limit liquidation loss scheme". Note that this bill was passed and has been part of the Dutch legislation.