Supreme Court grants liquidation losses, non-continuation requirement fulfilled

12/06/19

In general losses in respect of a subsidiary cannot be taken into account in the Netherlands, due to the participation exemption. One exception to this rule is the so-called liquidation loss scheme (“liquidatieverliesregeling”). However, in order to be able to claim such liquidation losses, one condition is that the activities of the liquidated subsidiary are not continued by another company within the group.

On Friday, 7 June 2019, the Supreme Court ruled on the application of the Dutch liquidation loss scheme. Amongst other requirements, it is not possible to claim a liquidation loss, if the activities of the liquidated company have been carried on by another company within the group.

The question in this case was, at what point in time it must be assessed whether (a part of) the activities of a company have been carried on within the group: at the time of the (internal) transfer of the activities, or at the time of the dissolution of the participation. This question was relevant in the situation at hand, because at the time of the dissolution of the participation, the group had already sold and transferred the company, which had continued (a part of) the activities, to a third party.

The Supreme Court now has decided that it is in line with the rationale of the non-continuation requirement to make the assessment based on the situation at the time of dissolution and liquidation of the participation. If, at that moment in time, the continuing company does not longer belong to the group, the activities of the liquidated company are not continued within the group, as meant for the purposes of the non-continuation requirement of the liquidation loss scheme. Therefore, the liquidation loss can be claimed.

What does this mean for you?

If an internal transfer of activities has taken place within your group (e.g. because of an internal reorganisation), based on this Supreme Court ruling, it may be wise to keep the transferring subsidiary in place, for the time being. This applies in particular if the continuing entity will possibly be sold on to a third party in the future. Possibly the dissolution and liquidation of the transferring company may be realised after that sale.

Possible developments in Dutch legislation

Earlier we have commented on an internet consultation concerning limitations to the provisions of the Dutch Corporate Income Tax Act (CITA) on, amongst others, liquidation losses. One of the elements of the proposed legislation is to restrict the possibility of postponing the dissolution and liquidation in the context of taking the liquidation loss. Should this bill pass the Dutch parliament, a similar situation may lead to a different outcome.