Legislative proposal to limit the liquidation and discontinuation loss scheme

Legislative proposal to limit the liquidation and discontinuation loss scheme

Legislative proposal to limit the liquidation and discontinuation loss scheme

24 March, 2020

The Dutch government already announced on Budget Day in 2019 that it intended to limit the liquidation and discontinuation loss scheme on the basis of the (draft) private member’s bill from House of Representative members Snels (GroenLinks), Leijten (SP) and Nijboer (PvdA). The legislative proposal for the Liquidation and Discontinuation Loss Scheme (Restrictions) Act has now been submitted to the House of Representatives on Budget Day 2020 along with the tax package. Under the proposal, the scope of the liquidation and discontinuation loss scheme for corporation tax will be limited with the aim of preventing improper use of these schemes. The substance of the proposal is explained below.

The legislative proposal

The legislative proposal now submitted corresponds generally with the previously presented private member’s bill and concerns a further restriction of the liquidation and discontinuation loss scheme for financial years commencing on or after 1 January 2021.

The liquidation loss scheme will be restricted as a result of the addition of three new conditions: a quantitative condition, a territorial condition and a temporal condition.

The quantitative condition

Under the quantitative condition, a liquidation loss, insofar as this exceeds the threshold amount (see below), will only be deductible if the parent company has decisive influence over the decision-making of its subsidiary. According to the proposal, this will normally be the case if the parent company has more than 50% of the voting rights in the subsidiary.

The threshold amount is € 5 million. The quantitative condition will not apply to liquidation losses of € 5 million or less. The deductibility of liquidation losses of € 5 million or less will therefore not be restricted as a result of the quantitative condition.

The territorial condition

Under the territorial  condition, a liquidation loss, insofar as this exceeds the threshold amount (see below), will only be deductible if the losses originate in the Netherlands, the EU/EEA or a country with which the EU has concluded a specific association agreement.

The threshold amount for the territorial condition is also € 5 million. The territorial condition will therefore not apply to liquidation losses of € 5 million or less.

The temporal condition

Lastly, under the temporal condition, a liquidation loss will only be deductible if the liquidation is completed within three calendar years after the end of the calendar year in which the business operations of the subsidiary are fully or almost fully discontinued, or the decision to that effect was taken. The temporal condition also features a rebuttal scheme on the basis of which the taxpayer can demonstrate that the completion of the liquidation at a later date was not due to an intention to avoid or defer taxation.

No threshold amount applies for this condition, so the temporal condition applies for all liquidation losses regardless of the amount involved.

Look-through provision

The legislative proposal includes a look-through provision to prevent circumvention of the quantitative and territorial conditions by using an intermediate or overall holding company. Under this provision, it will be considered whether the liquidation loss could also have been deducted if the intermediate or overall holding company were to be ignored and the taxpayer would have held a direct interest in the subsidiary that is to be liquidated.

A look-through provision also applies for the application of the temporal condition that should prevent easy circumvention of the operation of this provision. Under this provision, the liquidation of an intermediate or overall holding company has to be completed within three calendar years after the calendar year in which the discontinuation of the business of the previously terminated participating interest, or the decision to that effect, occurred. If this condition is not met (and an appeal under the rebuttal scheme is not successful), the liquidation loss in relation to the previously terminated entity will not be deductible.

Transitional law

A transitional provision applies with respect to the temporal condition concerning decisions to liquidate taken prior to 1 January 2021. In these situations, the transitional provision states that a liquidation loss may only be deducted if the liquidation is completed not later than 31 December 2023.

Also for discontinuation losses

Similar territorial and temporal conditions are proposed for the discontinuation loss scheme that applies to foreign permanent establishments of Dutch-based entities. The nature of the discontinuation scheme means that introduction of a quantitative condition would not be appropriate. A discontinuation loss may occur in the event of discontinuation of a foreign business that is not incorporated in a legal entity (a permanent establishment).

More information

If you have any questions, please do not hesitate to contact your regular contact person at Joanknecht or one of our specialists .



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