Tax accounting impact proposed measure loss compensation

07/10/20

On 5 October 2020, the Dutch government published an Amendment Note (the note) to the proposed Bill on the 2021 Tax Plan. In this note, the details of the loss relief limitation in corporate income tax are further elaborated.

Objective of the proposed measure

The proposed measure aims at preventing profit-making companies from avoiding paying corporate 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 as of 1 January 2022. This proposal is also accompanied by an “extension measure”: the loss carry-forward will become unlimited in time (currently, six years).

Outline of the proposed measure

The proposed scheme means in short 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 of the Dutch income of that year after that profit or income has been reduced by the EUR 1 million. The proposed limitation will also apply to the carry-back loss relief rules in corporate income tax. 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, so for each category separately. 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.

The proposed amendments to the loss carry-forward rules will be applicable to all loss carry-forwards that have been incurred (in financial years beginning) on or after 1 January 2022 or that are still available for carry forward at the end of 2021. The Dutch government considers this justifiable because the proposed amendments are both beneficial and restrictive for taxpayers and existing losses will not be lost. Finally, it is noted that losses from years commencing before 1 January 2013 will remain deductible for a maximum of nine years, i.e. the carry forward period until that date. For more detail on the proposed measure, please refer to "Loss relief becomes limited to 50% of the annual profit".

What does this mean for you?

The loss relief limitation in corporate income tax to 50% of taxable profit will have consequences for companies subject to corporate income tax, that currently have incurred losses but expect to be able to set them off in future years. The proposed scheme will apply to all deductible losses that incur from (financial years starting on or after) 1 January 2022 or losses that could still be carried forward at the end of 2021.

Tax accounting impact

The envisaged new loss set-off rules - when substantially enacted (or finally enacted for US GAAP purposes) - should be considered in the deferred tax asset (DTA) recognition analysis for existing losses per year end 2021.

Depending on the profit forecast of the company, an indefinite loss carry-forward rule could potentially increase the ‘headroom’ for the recognition of a DTA for unused tax losses and could therefore impact the effective tax rate (ETR) when it is ‘probable’ (or more likely than not) that more losses can be recognised (i.e. decrease the ETR). However, due to the introduction of a ’cap’ on the loss set-off rules the amount of required taxable profits to utilise all available tax losses will increase, which might trigger an (partial) impairment of the DTA (and thus increase the ETR).

Although an indefinite loss carry-forward in principle will have a positive effect on the DTA recognition, the forecasting period and the ability of companies to provide a reliable estimate will be even more relevant. The further the company needs to look into the future to forecast their taxable profits the harder it will be to provide (convincing) evidence of the projected future taxable profits.

Lastly, with the announced introduction of a ‘cap’ on the future loss compensation the ‘cash ETR’ or cash tax impact should also be considered by companies in close consultation with their treasury departments.