Legislative proposal on the limitation of liquidation loss filed

On Budget Day 2020 the Bill limitation liquidation and cessation loss was filed with the House of Representatives. This bill is a response to the own-initiative bill several left-wing parties (Groenlinks, SP and PvdA) offered with the goal of limiting the deductibility of liquidation losses. The government had already stated it wanted to adopt this bill, be it with some changes. Consequently, the legislative proposal submitted is broadly in line with the own-initiative bill previously published. The introduction of restrictive conditions further limits the deductibility of liquidation and cessation losses for financial years starting on or after 1 January 2021.

The legislative proposal

The legislative proposal limits the scope of the liquidation and cessation loss regime. The liquidation loss scheme relates to the liquidation of participations, the cessation loss scheme to the cessation of the activities of a foreign permanent establishment.

By setting a temporal condition and a maximum amount of loss to be taken into account, the application of the liquidation and cessation loss regime will initially be limited to amounts of EUR 5 million and for situations where the liquidation of the participation is completed within three years after the start of the liquidation or the decision to that effect. If quantitative and territorial conditions are met, a liquidation or cessation loss of more than EUR 5 million may be taken into account.

The legislative proposal imposes three conditions:

• Temporal condition

The first is the temporal condition. The purpose of this condition is to limit the possibility of planning in which year the loss will be included in the Dutch taxable profit.

Where the liquidation of a participation does not take place within a certain period of time or the taxpayer continues to enjoy profits derived from the state of the permanent establishment within a certain period of time, the liquidation or cessation loss may no longer be taken into account. That period is three calendar years.

A provision to the contrary may allow the loss to be charged to profits even after that period, i.e. if the taxpayer demonstrates that exceeding the three years is not intended to avoid or defer corporation tax.
 

• Quantitative condition

In order for more than EUR 5 million of liquidation losses to be taken into account, both the quantitative and territorial conditions must be met.

The quantitative condition entails that the taxpayer had, during a certain period prior to the liquidation, an interest in the participation which enabled it to influence the decisions of that participation in such a way that the activities of that holding could be determined (qualifying interest). Generally this means an ownership of more than 50% of the voting rights.

• Territorial condition

The territorial condition entails that the participation was established in the Netherlands, in another Member State of the European Union (EU), in the European Economic Area (EEA) or in a state with which the EU has a specific association agreement. This condition also applies to cessation losses of permanent establishments (under the so-called object exemption).

For the application of the last two conditions, the quantitative and territorial condition should also be met during the five years immediately preceding the completion of the liquidation of the assets of the dissolved entity (time of review). There is a relaxation if the participation only became a participation during that period (e.g. because it was created or acquired during that period).