Impact Tax Plan 2021 - Tax loss changes substantively enacted

04/06/21

On 15 December 2020 the Dutch Senate has accepted the Dutch Tax Plan 2021. This means that some of the measures as included in the Dutch Tax Plan 2021 are considered to be substantively enacted under IFRS and Dutch GAAP. As such, the tax accounting impact of these measures should be considered and taken into account for annual accounts ending on/after 15 December 2020. We have updated this article with news on the loss compensation rules.

Key takeaways of the Tax Plan 2021 (under IFRS and Dutch GAAP) are outlined below per measure.

Rate change CIT

The CIT rate will remain 25 percent. The corporate income tax rate applicable to the first bracket is decreased from 16.5 to 15 per cent. This low rate will apply in 2021 for profits up to EUR 245,000 and in 2022 this threshold will be increased to EUR 395,000.

Tax accounting impact

Remeasurement of existing deferred taxes could impact the effective tax rate (ETR) as follows:

Remeasurement of existing deferred tax assets (DTAs) when applying a higher tax rate would lead to higher DTAs, which could lead to a decrease of the ETR.
The remeasurement of existing deferred tax liabilities (DTLs) would lead to higher DTLs which could lead to an increase of the ETR.

Note that an assessment needs to be made of how the impact of the tax rate change on deferred taxes should be reported in the financial statements, either in P&L, equity or other comprehensive income (i.e. backwards tracing).

Innovation box rate change

Profits from research and development are taxed at a favourable rate in the Netherlands under the innovation box regime. The effective tax rate of the innovation box has been increased from 7 per cent to 9 per cent.

Tax accounting impact

Depending on the applied methodology to determine the tax base, this proposed change in tax rate could lead the re-measurement of the deferred taxes relating to the Innovation Box activities as follows:

Re-measurement of existing DTAs when applying a higher tax rate could lead to higher DTAs which would lead to a decrease of the ETR.
Whereas the re-measurement of existing DTLs could lead to higher DTLs which would lead to an increase of the ETR.

Corona reserve

If 2020 is expected to become a tax loss year for your company, while 2019 was a profitable year, an early reduction of your 2019 tax liability is available by forming a corona reserve in your financial year (FY) 2019 tax return, which subsequently reverses in FY 2020. This reserve can be formed up to the amount of the lowest of the FY 2020 (expected) loss or FY 2019 taxable profits. Any remaining losses that exceed the profits of the previous financial year, can still be set off against the profits of the six subsequent financial years. Thereby in effect having roughly the same outcome as a carry back.

This 'carry back of tax losses' is effectuated when filing the corporate income tax return for 2020. Because the tax returns for 2020 will only be submitted in 2021 or later and as the government considers it undesirable for companies to have to wait so long to collect a refund for a regular carry back, a formation of this 'tax corona reserve' for 2019 is allowed.

The most important requirements are as follows:

A ‘corona-related loss’ for book year 2020 should be expected.
The ‘corona-related loss’ shall not exceed the total losses for 2020.
The company’s loss that you are expecting to suffer in 2020 as a result of the corona crisis can be brought to a corona tax reserve against your profits for 2019. The corona tax reserve should not exceed the total amount of profits for 2019. The tax result for 2019 therefore cannot become negative as a result of this reserve.
The corona tax reserve should be released within book year 2020 and hence, reduces the 2020 losses of your company.
The addition to the corona tax reserve will be included in the 2019 tax return under the section “other tax reserves”. The release of the corona tax reserve in the book year 2020 is included as a withdrawal under the same heading of the 2020 tax return.

Tax accounting impact

Notwithstanding the retroactive force of the corona reserve to 2019, the impact of the corona reserve should be considered (substantively) enacted in the FY2020 financial statements. The corona reserve effectively means that the expected 2020 loss can be used to offset the 2019 taxable amount, resulting in a current tax benefit i.e. reduction of the 2019 current tax liability.

We note that in case the corona reserve is to be used, an assessment should be made if any remaining carryforward losses (if any) can be recognised. If not, this could affect the ETR (i.e. increase of the ETR).

For (open) financial statements 2019, an assessment should be made if the impact of the corona reserve should be stated in the disclosures of the financial statements in line with IAS 10.

Amendments to loss set-off regime

The new loss compensation rules were accepted by the Dutch Senate at the end of 2020. However, the bill included a provision that the new compensation rules would be effective by a separate Governmental Decree, pending an implementation test. On 28 May 2021 the Dutch Treasury Secretary announced that the implementation test has been finalised and the Governmental Decree will be published. Hence, as of this date the new loss compensation rules are considered to be (substantively) enacted under Dutch GAAP and IFRS (for US GAAP purposes it is considered enacted when published in the official Gazette, being 4 June 2021).

The 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 per cent 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 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 per cent of the remaining taxable profits from holding or financing activities or other profits (respectively) will be allowed.

The 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 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.

Tax accounting impact

The new loss set-off rules should be considered in the deferred tax asset (DTA) recognition analysis for existing losses per year end 2021 as it can be argued that the new loss compensation rules are considered to be substantively enacted under Dutch GAAP and IFRS (for US GAAP purposes it is considered to be enacted when published in the official Gazette, being 4 June 2021). These new measures should thus be considered for (e.g.) the Q2 2021 closing (for calendar years) for Dutch GAAP and IFRS.

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

Changes to anti-abuse rules on interest (Article 10a CITA)

Under certain circumstances, the anti-abuse rules on interest and related costs could in effect result in a tax exception instead of a tax deduction limitation. (e.g. if foreign exchange gains exceed the interest costs on certain internal group debts). The rule is adjusted so that the exemption cannot be higher than the deduction limitation. The assessment will take place on a loan-by-loan basis.

Tax accounting impact

With the adjustment that the exemption cannot be higher than the deduction limitation, a potential permanent difference for interest and FX for such loans could be different as of 2021. This could affect the ETR as of 2021.

Amendments to liquidation loss rule

Insofar as the liquidation loss exceeds EUR 5 million, it can only be considered if the taxpayer has significant authority in the dissolved entity and the dissolved entity is located in the Netherlands, another EU/EEA Member State, or a state with which the EU has concluded a specific association agreement. The liquidation must have been completed within three years after it started, or within three years after the decision to liquidate. This time-related condition applies to all liquidation losses, irrespective of their size. A grandfathering rule applies to liquidations which have been decided on before 1 January 2021.

Tax accounting impact

The (potential) liquidation loss could be recognized as a DTA i.e. future deductible temporary difference. When assessing the recognition of the DTA, these amendments to the liquidation loss rule should be considered.

Conditional withholding tax on interest and royalties

Tax Plan 2020 – applicable as of 1 January 2021

A conditional source tax has been introduced for outbound interest and royalty payments to related parties that:

are resident in countries without tax on profits or countries that levy such tax at a nominal rate of lower than 9 per cent,
are resident in countries included in the EU list of non-cooperative jurisdictions, and/or
in tax abusive situations.

The tax rate for the source tax will be equal to the highest rate of the corporate income tax, i.e. 25% (2021). The bill entered into force on 1 January 2021

Tax accounting impact

With the introduction of the withholding tax on interest and royalty payments, consideration should be given on how the proposed (new) withholding tax is presented in the financial statements of the recipient, as a non-income or income tax (i.e. above the line or below the line). Both approaches impact the ETR in a different way. If the withholding tax is considered an income tax, deferred taxes should potentially be recognised.