Loss relief becomes limited to 50% of the annual profit

07/10/20

From 2022, the loss relief in corporate income tax will be capped at 50% of the taxable profit, with an amount of up to EUR 1 million being still deductible. On the other hand, losses will be deductible indefinitely in time.

To this end, the Dutch government has submitted a Memorandum of Amendment to the 2021 Tax Plan bill in which the new rule is further elaborated. This measure had already been announced in a letter to the Dutch parliament.

The proposed scheme means that, if the total amount of losses from previous years exceeds the amount of EUR 1 million, the set-off of those losses in a certain year will only take place up to an amount of EUR 1 million plus an amount of 50% of the taxable profit or the Dutch income of that year after that profit or income has been reduced by EUR 1 million. The above applies only to the corporate income tax sphere. In relation to losses incurred by an entrepreneur for personal income tax purposes the current loss relief rules continue to apply. The proposed limitation will also apply to the carry-back loss relief rules in corporate income tax.

This means that a BV or other company subject to corporate income tax that makes a profit can benefit from loss relief for losses from other years indefinitely up to a maximum of EUR 1 million. Subsequently, only 50% of the taxable profit in a year (in excess of EUR 1 million) can then be offset against losses from other years.

For your better understanding, an example of the proposed rules

A taxpayer attains the following results:

Year 1: profit of EUR 1 million
Year 2: loss of EUR 4 million
Year 3: profit of EUR 4 million

The loss relief works out as follows. First, EUR 1 million losses from Year 2 can be set off backwards against the profit from Year 1. This is because it has been determined that at least EUR 1 million in taxable profit may be deducted in a profit year. Subsequently, 2.5 million EUR loss of Year 2 can be offset against the profit of Year 3 (i.e. 1 million EUR plus 50% of the remaining profit above EUR 1 million, i.e. 50% of EUR 3 million). This means that corporate income tax will be due on EUR 1.5 million in Year 3. A loss relief of 0.5 million EUR (of Year 2) remains to be deducted in future years without time limitation (instead of full loss relief in Year 3 as it would be possible under the current rules).

Objective of the proposed measure

The proposed measure aims at preventing profit-making companies from avoiding paying corporate income tax for years due to a large amount of deductible losses incurred in previous years. In order to achieve a minimum amount of corporate income tax for companies with profitable activities, the Dutch government, therefore, proposes to limit the amount of losses to be deducted in a year.

No loss relief expiration

The proposal also includes an extension measure: the loss carry-forward will become unlimited in time. At present, losses expire after six years. Existing losses on 1 January 2022 can be set off indefinitely in time, but from that date they will be subject to the above mentioned limitations. Losses incurred from 2013 onwards can thus in fact be deducted indefinitely in time (for companies with a financial year equal to a calendar year or with a split financial year). As of 1 January 2022, the above-mentioned restrictions will apply (i.e. maximum EUR 1 million loss relief plus 50% of the excess taxable profit in a year).

Transitional law

There are two transitional law provisions:

Losses from years starting before 1 January 2013 can be set off for a maximum of nine years (the loss relief period of nine years applicable up to that time will thus be maintained).
If a taxpayer has incurred both deductible losses from holding or financing activities prior to 2019 as well as other losses, the deduction of each of these types of losses will be allowed up to an amount of EUR 1 million EUR, for each of them. Above this amount only a deduction up to an amount of 50% of the remaining taxable profits from holding or financing activities or other profits (respectively) will be allowed.

Impact on the annual accounts

If the proposed new rules enter into force, they should be considered in 2020 for the analysis of whether a deferred tax asset can be formed regarding the existing losses at the end of 2021. This may have an impact on the effective tax rate. For more detail on the impact of the new scheme on the annual accounts, see ‘Tax accounting impact proposed measure loss compensation’.

What does this mean for you?

The limitation of the loss relief in corporate income tax has the following concrete consequences for you:

Taxable profit of up to EUR 1 million in a year can still be fully offset against available deductible losses as of 1 January 2022.
Insofar as your company has made more than EUR 1 million taxable profit in a year, only a maximum of 50% of that excess can be offset against available deductible losses as of 1 January 2022.
In most cases, losses incurred in financial years commencing on or after 1 January 2013 can be deducted indefinitely, with the above restrictions applying as of 1 January 2022 (i.e. maximum EUR 1 million or 50% of the excess taxable profit in a year). This may be different if there are one or more “short” financial years in this period.
A separate scheme applies to existing losses incurred from holding and financing activities (from before 2019). These losses must therefore be administered separately after the proposed measure is introduced.
These changes may affect the size of a deferred tax asset in the annual accounts in connection with the deductible losses. Discuss this issue with your tax accountant. For more information, please refer to our Tax news article ‘Tax accounting impact proposed measure loss compensation’.