Netherlands: Developments in corporate tax loss relief rules
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A recently published Royal Decree formalized the date of entry into force of the revised Dutch corporate tax loss relief rules on January 1, 2022. Under these rules, tax losses can be carried back one year and postponed indefinitely subject to a quantitative restriction. It is recommended that you analyze the impact of these changes on your business, both from a tax and accounting perspective.
Changes to corporate tax loss relief rules
As of January 1, 2022, the Dutch loss relief rules in the corporation tax law will be changed. Current loss relief rules allow Dutch taxpayers to offset losses against profits from the previous year (i.e. carry-back) and the following six years (i.e. carry forward). No quantitative restriction applies. As of January 1, 2022, the loss can still be carried back one year but carried forward indefinitely. However, a quantitative restriction will be introduced, as a consequence of which the annual compensation for losses will be limited to 1 million euros, increased by 50% of the annual taxable profit of the taxpayer exceeding 1 million euros. The new loss relief rules will apply both to losses incurred after January 1, 2022 as well as to existing losses that can be offset against profits for accounting years beginning on or after January 1, 2022.
Use of losses carried forward
As a quantitative restriction will be introduced, we recommend to assess whether it is useful and possible to use the losses carried forward available before 2022. This is particularly relevant with regard to tax losses which will no longer be available for compensation. from the year 2022 (e.g. loss from 2012). In any case, it is recommended to analyze the impact of the new loss compensation rules on your business.
Increased relevance of good business practices
In view of the quantitative restriction, the timing of the realization of profit or loss also becomes more important. This implies the application of the Dutch doctrine of good commercial practices (goed koopmansgebruik).
In force on January 1, 2022
The planned date of entry into force of the Dutch loss relief rules has been set for January 1, 2022, subject to an implementation test, determining whether implementation on January 1, 2022 is achievable for the Dutch tax administration. By letter of May 28, 2021, a positive implementation test was sent to the Dutch Parliament. The royal decree required to confirm January 1, 2022 as the effective date was published on June 4, 2021. Consequently, the loss compensation rules adopted will effectively change for financial years beginning on or after January 1, 2022.
Impact on financial statements
We understand that under IFRS, the changes to the loss exemption rules have no impact on the deferred tax asset position of financial statements with a closing date prior to May 28, 2021. The changes were, in our opinion, only (essentially) promulgated on the date the letter from the Dutch Secretary of State for Finance was published. If these financial statements need to be approved after May 28, 2021, it is recommended to include the impact of the amended legislation in the explanatory notes. Financial statements under IFRS with a closing date of May 28, 2021 or after that date should take into account the new rules as part of the measurement of the corresponding deferred tax asset.
Finally, we would like to mention that in May 2021, the European Commission issued a recommendation to Member States on the national treatment of losses. The aim of the recommendation is to help ensure fair competition between businesses and to better support businesses during the financial recovery from the Covid-19 pandemic, in particular SMEs. The Commission recommends that Member States allow companies to carry forward losses incurred in 2020 and 2021 to at least the previous year, or even extend the carry forward period up to three years. In order to minimize the impact on national budgets, however, Member States should limit the amount of loss carryforwards to € 3 million on an annual basis.
In response, the Dutch government has indicated that it does not consider it necessary to change the Dutch loss carryback rules.
We will keep you informed of further developments in this regard. If you have any questions, please contact one of us or your trusted Loyens & Loeff advisor.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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