Developments in corporate tax loss relief schemes
July 13, 2021
Loyens & Loeff
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A recently published Royal Decree formalized the entry into force of the revised Dutch corporate tax withholding rules on January 1, 2022. Under these rules, tax losses can be carried forward one year back and, subject to a quantitative limit, carried forward indefinitely. It is recommended that you analyze the impact of these changes on your company from both a tax and an accounting perspective.
Changes to corporate income tax loss compensation rules
On January 1, 2022, the Dutch regulations on loss compensation in the corporate income tax law will be changed. The current rules on loss compensation allow Dutch taxpayers to set off losses against profits from the previous year (ie the carryforward) and the six following years (ie the carryforward). There are no quantitative restrictions. From 01/01/2022, the loss can be carried forward for another year, but for an indefinite period. However, a quantitative limit will be introduced which will limit the annual loss compensation to EUR 1 million, increased by 50% of the taxpayer’s annual taxable profit exceeding EUR 1 million. The new loss compensation regulations apply to losses that arose after January 1, 2022 as well as to existing losses that can be offset against profits from accounting years beginning on or after January 1, 2022.
Use of the loss carryforward
Since a quantitative restriction will be introduced, we recommend checking whether it is sensible and possible to use existing loss carryforwards before 2022. This applies in particular to tax losses that will no longer be offset from 2022 (e.g. loss from 2012). In any case, it is advisable to analyze the effects of the changed loss offsetting rules on your company.
Increased relevance of sound business practices
In view of the quantitative restriction, the point in time at which the profit or loss is realized is also gaining in importance. This includes the application of the Dutch doctrine of sound business practice (goed koopmansgebruik).
Valid from January 1, 2022
The planned entry into force of the Dutch regulations on loss compensation has been set for January 1, 2022, subject to an implementation test to determine whether implementation by January 1, 2022 is feasible for the Dutch tax administration. A positive implementation test was sent to the Dutch parliament by letter dated May 28, 2021. The Royal Decree required to confirm January 1, 2022 as the Effective Date was published on June 4, 2021. Therefore, the issued loss offsetting rules will change effectively for fiscal years beginning on or after January 1, 2022.
Effects on the annual financial statements
We are aware that the changes to the loss compensation regulations according to IFRS have no impact on the deferred tax assets of financial statements with a reporting date before May 28, 2021. In our opinion, the changes were (essentially) only published with a letter from the Dutch State Secretary for Finance. In the event that such a financial statement has to be approved after May 28, 2021, it is recommended that the effects of the amended legislation be included in the notes. Financial statements according to IFRS with a reporting date on or after May 28, 2021 should take the new regulations into account when assessing the corresponding deferred tax asset.
Finally, it should be mentioned that the European Commission published a recommendation to the member states on the domestic treatment of losses in May 2021. The aim of the recommendation is to ensure fair competition between companies and to better support companies, especially SMEs, in their financial recovery from the Covid-19 pandemic. The Commission recommends that Member States allow companies to write back losses incurred in 2020 and 2021 at least to the previous year or even to extend the carry-back period to three years. However, in order to minimize the impact on national budgets, Member States should limit the amount for loss carry-back to EUR 3 million per year.
In response, the Dutch government announced that it did not consider it necessary to change the Dutch rules on loss carry-back.
We will keep you informed about 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 general guidance on the subject. You should seek expert advice regarding your specific circumstances.
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