Impact of post-closing actions on access to tax attributes - New York office Snippet

The Netherlands operates anti-loss trafficking rules to curtail the trading in companies with carry-forward tax losses. The Supreme Court recently ruled that unrealised losses may also be captured. Similar rules apply to carry-forward interest and tax credits.

The anti-loss trafficking rules are largely a mathematical exercise. Loss access may be restricted in case of a ≥ 30% change in NL Target’s ultimate ownership compared to the oldest tax loss year.

An exception frequently relied upon is the “activity reduction and portfolio investment” test. The portfolio investment test requires that NL Target’s assets did not consist for ≥ 70% of portfolio investment assets in the loss year, nor in the year in which it is offset. This is generally not an issue if an operational business is acquired.

The activity reduction test requires NL Target’s activities at the time of the takeover to be at least 30% of their size as at the start of the tested year (generally the oldest loss year). In addition, it must not be intended at the time of the takeover to reduce the activities below this threshold within three years (intention test).

Activities are assessed on a per-entity basis (i.e., without regard to a fiscal unity if the Dutch loss-making entity is included therein) and measured by reference to personnel, assets and revenues. The weighting depends on the facts and the business sector. For a holding company, most weight is typically attached to its assets.

Since the purchaser’s intentions are also taken into account in the intention test, a post-closing reduction of NL Target’s activities may jeopardise loss access if already intended at closing. This is often overlooked when pricing tax attributes in the takeover bid. This is particularly important where IP is transferred out of NL Target or subsidiaries are transferred out from under NL Target post-closing.

Key takeaways

When pricing tax attributes in an acquisition, US MNEs should consider its profit forecast, anti-loss trafficking rules and assess whether NL Target’s carry-forward losses, interest and tax credits remain available following the transaction.
The analysis should not be limited to the acquisition itself. Pre-closing restructurings, planned integrations and follow-up divestments can also affect access to tax attributes.
Where activity reductions were only contemplated after closing, the timing of the decision-making process should be carefully documented to mitigate discussions regarding the intention test.