A look at the proposed loss relief rules in the Netherlands
Jian-Cheng Ku and Ilse Lagerweij of DLA Piper Netherlands assess the changes to the 2021 tax budget rules concerning the deductibility of losses.
On October 5 2020, the Dutch Ministry of Finance published an important clarification to its proposed 2021 tax budget rules for the deductibility of losses. In this article, we will provide further details on the proposed rules and highlight what the impact of these rules can be for businesses and taxpayers.
After a recommendation of the Committee Taxation of Multinationals in their report of April 2020, a new regime for loss relief in the corporate income tax act was presented in the 2021 Dutch tax budget. The proposed regime should enter into force as of January 1 2022.
Under the proposed rules, losses can be carried forward indefinitely, but the deduction of losses is subject to a threshold. The aim of the proposal is a more gradual set-off of losses.
What has changed?
The current loss relief regime permits losses to be carried back one year and carried forward six years. After six years, the losses, if they have not yet been utilised, will expire and no longer be deductible.
As mentioned previously, under the newly proposed rules, losses can be carried forward indefinitely. For the carry back of losses, the limitation of one year stays in place.
Compared to the current regime, this is more in line with the so-called ’overall profit principle’ (totaalwinst) in the Netherlands. The overall profit principle must ensure, to the extent possible, that entities are taxed over the total amount of profit or loss during their entire lifetime. Since under the proposed regime losses do not expire, there is no longer a breach of the overall profit principle.
However, the proposed measures do limit the deductibility of losses in terms of the amount per year. Losses can be offset against taxable profits up to a threshold of €1 million ($1.18 million) plus 50% of the taxable profit exceeding €1 million. Therefore, most small businesses will not be limited in their loss deductibility potential.
The rules will enter into force on January 1 2022. The clarification of the Ministry of Finance confirmed that the new rules apply to all losses that occur after January 1 2022 and all losses that are still in place at year-end 2021. The new rules therefore also apply to losses occurred in 2013 that has not yet been deducted, as previous transitional law allowed losses from 2013 to be carried forward for nine years. After January 1 2022, these losses will become deductible indefinitely.
Although the legislative proposal has not yet been passed into law, the introduction of the indefinite carry forward of losses can be commended, as it aligns with the overall profit principle.
In addition, the proposed loss relief regime is more in line with that of surrounding countries such as Germany, Belgium and the UK. These countries also apply rules that limit loss relief per year instead of by an expiration date.
Lastly, perhaps the most important for now, the transitional law is very favourable, as losses from 2013 and after are deductible indefinitely as from January 1 2022.
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