The Netherlands – Developments of the corporate tax loss relief rules
A recently published Royal Decree formalised the entry into force date of the revised Dutch corporate income tax loss relief rules at 1 January 2022. Following these rules, tax loss can be carried back one year and carried forward indefinitely subject to a quantitative restriction. It is recommended to analyse the impact of these changes for your business, both from a taxation and accounting perspective.
Amendments to the corporate tax loss relief rules
As of 1 January 2022, the Dutch loss relief rules in the corporate income tax act will be amended. Current loss relief rules allow Dutch taxpayers to offset loss against profits of the previous year (i.e. carry back) and the six following years (i.e. carry forward). No quantitative restriction applies. As of 1 January 2022, loss can still be carried back one year but carried forward indefinitely. However, a quantitative restriction will be introduced, as a consequence of which the annual loss compensation will be limited to EUR 1 million, increased with 50% of the taxpayer’s annual taxable profit exceeding EUR 1 million. The new loss relief rules will apply to both loss incurred after 1 January 2022 as well as existing loss that are available to be offset against profits of book years starting on or after 1 January 2022.
Utilisation of carry forward loss
Since a quantitative restriction will be introduced, we recommend assessing whether it is useful and possible to utilise available carry forward loss prior to 2022. This is specifically relevant with respect to tax loss which will be no longer available for offset as of the year 2022 (e.g. loss from 2012). In any case it is recommended to analyse the impact of the changed loss relief rules for your business.
Increased relevance of sound business practice
In view of the quantitative restriction, also the timing of the realisation of profits or loss becomes more important. This entails the application of the Dutch sound business practice doctrine (goed koopmansgebruik).
Effective as of 1 January 2022
The envisaged date of entry into force of the Dutch loss relief rules was set at 1 January 2022, subject to an implementation test, determining whether implementation per 1 January 2022 is feasible for the Dutch tax administration. By letter of 28 May 2021, a positive implementation test was sent to Dutch Parliament. The required Royal Decree to confirm 1 January 2022 as the effective date, has been published on 4 June 2021. Hence, the enacted loss compensation rules will change effectively for financial years starting on or after 1 January 2022.
Impact on financial statements
We understand that under IFRS, the amendments to the loss relief rules do not impact the deferred tax asset position of financial statements with a closing balance sheet date before 28 May 2021. The changes were in our view not (substantially) enacted until the letter of the Dutch State Secretary for Finance was published. In case such financial statements need to be approved after 28 May 2021, it is recommended to include the impact of the changed legislation in the explanatory notes. Financial statements under IFRS having a closing balance sheet date on or after 28 May 2021, should take the new rules into account as part of the valuation of the related deferred tax asset.
As a final note we want to mention that in May 2021 the European Commission published a recommendation to Member States on the domestic treatment of loss. The goal of the recommendation is to help ensure fair competition between companies and to better support businesses during the financial recovery of the Covid-19 pandemic, especially SME’s. The Commission recommends that Member States should allow companies to carry back loss incurred in 2020 and 2021 to at least the previous year or even to extend the carry back period up to three years. In order to minimise the impact on national budgets, Member States should however limit the amount for the loss carry back to EUR 3 million on annual basis.
In response, the Dutch government communicated that it does not find it necessary to change the Dutch loss carry back rules.
We will keep you informed about further developments in this regard. Should you have any question, please contact one of us or your trusted Loyens & Loeff adviser.
Michiel SchulPartner Tax adviser
Michiel Schul is a partner in Loyens & Loeff’s International Tax Services practice group and a member of the Energy Team and the US Region Team. From 2011 to 2013 he worked in Loyens & Loeff’s New York office.T: +31 20 578 53 38 M: +31 6 51 88 64 01 E: [email protected]