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16 April 2019 / news

Dutch minority left wing proposal to restrict deduction of liquidation losses on participations

Today, three left wing political parties submitted a preliminary draft bill (the proposal) for public consultation.

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This proposal would limit the deduction of liquidation losses on subsidiaries in the following ways:

  1. a minimum shareholding of more than 25% in the equity of the subsidiary would be required;
  2. liquidation losses would only be deductible with respect to subsidiaries that are resident in the EU/EEA; and
  3. a liquidation loss would only be deductible if the dissolution of the subsidiary is completed ultimately in the third calendar year following the year in which the subsidiary’s activities were terminated (subject to a rebuttal rule).

Similar amendments are proposed to the rules for deduction of losses upon termination of a foreign permanent establishment. The changes should become effective per 1 January 2021 with some transitional rules for pending losses.

The Dutch government recently expressed that it had no intentions to change the existing rules. The three left wing parties do not have a majority in the Dutch parliament. Some other parties seem to have responded positively to the proposals. Anyway, it is currently uncertain whether the proposal, if actually submitted after consultation, would be adopted by parliament. The public consultation is open until 16 May 2019 and comments can be submitted online. We are happy to assist you in case you wish to submit comments to the proposal.

The existing rules for liquidation losses on participations allow deduction of losses on any shareholding of 5% or more in a subsidiary that is liquidated, provided certain stringent conditions are met. Provided these conditions are met such losses may be deducted regardless of the subsidiary’s country of residence.

The proposal would restrict the deduction of liquidation losses to ‘controlled’ shareholdings, which are defined as shareholdings of more than 25% in the capital of the subsidiary (or such other shareholding that gives the influence to decide the activities of the subsidiary). Secondly, deduction of liquidation losses would be restricted to participations in subsidiaries that are resident in the Netherlands or the EU/EEA. The proposal, therefore, disallows deduction of liquidation losses on shareholdings between 5% and 25% and in relation to subsidiaries in countries outside the EU/EEA. This disallowance only applies to the extent the liquidation loss exceeds EUR 1 million. The threshold of more than 25% has been chosen to avoid the applicability of the EU freedom of capital rules under which third country investments would need to get the same treatment as EU/EEA investments.

The proposal also disallows deduction of indirect losses on non-EU/EEA subsidiaries (held through an EU/EEA holding), indirect losses on non-EU/EEA permanent establishments and indirect losses on EU/EEA subsidiaries held through a non-EU/EEA holding. The same applies to indirect losses on non-controlled participations. Finally, the Dutch shareholder must have held a qualifying participation up to the moment of dissolution of the subsidiary. Losses allocable to a period in which the participation did not qualify under the proposed rules are excluded from deduction.

Finally, the proposal would only allow the deduction of a liquidation loss if the dissolution of the liquidated subsidiary is completed and settled ultimately in the third calendar year following the calendar year in which the activities of the subsidiary were terminated or the decision to terminate was taken. This aims to avoid planning through which a Dutch taxpayer can decide in which year a liquidation loss is taken into account, for example by simply postponing the completion of the dissolution of a subsidiary. Such planning could help avoiding the evaporation of tax losses, particularly in view of the recent restriction of the loss carry forward term from nine to six years. The period of three calendar years does not apply if the taxpayer is able to demonstrate sound business reasons for the delayed dissolution of the subsidiary.

The proposal includes similar amendments to the rules that govern the deduction of losses upon the termination of foreign permanent establishments of Dutch taxpayers. The current rules also apply to foreign real estate and portfolio investments in the equity of foreign enterprises. Based on the proposal, termination losses on a foreign permanent establishment would only be deductible if the permanent establishment is located in an EU/EEA state. Portfolio investments in foreign real estate or in the equity of foreign enterprises outside of the EU/EEA are carved out of the proposal to limit deductibility of losses in order to comply with the EU freedom of capital. This exception, however, is subject to the condition that there is an arrangement for exchange of information between the Netherlands and such third state. The proposed restriction with respect to permanent establishments is subject to the same de-minimis exception as liquidation losses, which means that only termination losses in excess of € 1 million are not deductible. The proposal also includes a similar limitation in time. Termination losses would only be deductible in case the taxpayer ceases to realize profits from the relevant state within three calendar years after the calendar year in which the foreign activities were terminated. This three-year term can be extended if the taxpayer is able to demonstrate sound business reasons for the delay.

The changes should become effective as per 1 January 2021. With respect to the limitation in time, the proposal includes transitional rules for pending losses. If a termination of activities of the subsidiary or the foreign permanent establishment has occurred or was decided prior to 1 January 2021, the resulting loss can in principle be deducted until 31 December 2023 This three-year term does not apply if the taxpayer is able to demonstrate sound business reasons for the delay. No transitional rules are proposed with respect to the restrictions relating to non-controlled and non-EU/EEA participations and non-EU/EEA permanent establishments.


We will keep you informed on any further developments. Please contact your trusted adviser at Loyens & Loeff in case you have any queries.


This article was sent as a Tax Flash newsletter on 16 April 2019. Subscribe here to regular news updates.


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