The Dutch government recently announced that in September 2020 a legislative proposal will be published that introduces additional restrictions for the deductibility of a loss incurred when liquidating a subsidiary on which the Dutch participation exemption applies. The aim of the Dutch government is that the new restrictions apply per 1 January 2021. Considering a liquidation of a foreign subsidiary can take quite some time, we recommend that contemplated liquidations of EU/EER subsidiaries of 50% (or less) and non-EU/EER subsidiaries are initiated shortly. Our Corporate Structures and Tax lawyers are happy to assist.
What changes are proposed?
Based on the current draft proposal published, the following restrictions will become applicable per 1 January 2021 on the part of a liquidation loss that exceeds EUR 5 million:
- Shareholding requirement: The Dutch parent entity needs to own more than 50% of the shares in the subsidiary or have a decisive influence on the subsidiary (e.g. the parent entity owns more than 50% of the voting rights).
- Geographic requirement: The subsidiary needs to be a tax resident of the EU/EER. Hence, the liquidation loss rule no longer applies with regard to subsidiaries that are a tax resident outside the EU/EER.
- Temporal requirement: The subsidiary needs to be dissolved (vereffend) ultimately three years after the end of the calendar year in which the activities of the subsidiary are discontinued or the decision to discontinue the activities is taken. The term of three years can be extended if the liquidation is delayed due to non-tax reasons. The burden of proof for these non-tax reasons lies with the Dutch taxpayer.
If an entity that satisfies these additional restrictions is interposed between a Dutch parent entity and a subsidiary that does not satisfy the additional restrictions, the Dutch parent entity cannot indirectly claim the liquidation loss that relates to this non-qualifying subsidiary.
In summary the following applies:
- EU/EER subsidiary (more than 50%): If such subsidiary enters into liquidation before 1 January 2021, the liquidation loss can be taken into account provided that the subsidiary is dissolved before 1 January 2024. This term can be extended if the liquidation is finalized at a later moment due to non-tax reasons.
- EU/EER subsidiary (50% or less) and non-EU/EER subsidiary: The liquidation loss can only be taken into account provided that the subsidiary is dissolved before 1 January 2021.
In the expected legislative proposal, the geographic and temporal condition will also apply to losses incurred when discontinuing a permanent establishment with its head office in the Netherlands. The threshold of EUR 5 million also applies with regard to discontinuation losses of permanent establishments. Non-EU/EER permanent establishments should be fully discontinued before 1 January 2021 in order to take into account a discontinuation loss.
Please contact us in case you need our assistance in the process of liquidating subsidiaries or discontinuing permanent establishments in the Netherlands or abroad.