Restriction on the deduction of liquidation and termination losses from 2021

Deduction of liquidation and termination losses

The existing Dutch corporate income tax 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. Such losses may be deducted regardless of the subsidiary’s country of residence. Similar rules are applicable to the deduction of losses on the termination of foreign permanent establishments (PEs) of Dutch corporate income taxpayers.

Initiative legislative proposal

On 2 October 2019, three left-wing political parties submitted an initiative legislative proposal that would limit the deduction of liquidation losses on subsidiaries in the following three ways:

A minimum shareholding of more than 50% in the equity of the subsidiary would be required;
Liquidation losses would only be deductible with respect to subsidiaries that are resident in the EU/EEA; and
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).

Therefore, the proposal disallows the deduction of liquidation losses on shareholdings between 5% and 50% and in relation to subsidiaries in countries outside the EU/EEA. This disallowance only applies to the extent the liquidation loss exceeds EUR 5 million. Liquidation losses up to and including an amount of EUR 5 million will in principle still be deductible (also for shareholdings between 5% and 50% and in relation to subsidiaries resident of countries outside the EU/EEA). The proposal includes similar amendments to the rules that govern the deduction of losses on the termination of foreign PEs of Dutch corporate taxpayers. The changes should become effective from 1 January 2021, with some transitional rules for pending losses.

Final legislative proposal of Dutch Ministry of Finance expected July 2020

On Budget Day 2019, the Dutch Government announced that it intends to embrace the initiative legislative proposal. The Government will use this proposal as much as possible as a starting point when drafting its own. The 2020 legislative agenda of the Ministry of Finance shows that the Government’s legislative proposal should be expected in July 2020 and should become effective from 1 January 2021.

What are the consequences for your company?

The above-mentioned restrictions can have a major impact on the deduction of liquidation losses in relation to subsidiaries resident in countries outside the EU/EEA. The expected date of entry into force and the transitional rules allow you to prepare and plan ahead this year. Contact your BDO advisor to discuss the situation of your company. We will keep you informed on any further developments.

Hans Noordermeer
hans.noordermeer@bdo.nl

Niek de Haan
niek.de.haan@bdo.nl