Proposed draft bill to restrict liquidation loss deduction published

On 16 April 2019, GroenLinks, SP, and PvdA submitted a draft bill to restrict the possibilities to deduct liquidation losses. The liquidation loss rules enable a taxpayer to deduct a loss as a result of the liquidation of a subsidiary in which a taxpayer holds a share interest of 5% or more (hereinafter: subsidiary).

How does the current liquidation loss deduction work?

Subject to stringent conditions, taxpayers with a subsidiary may deduct losses upon liquidation of this subsidiary. The deductible loss amounts to the amount invested in the subsidiary by the taxpayer, minus the equity distributed by the subsidiary upon liquidation.

What does the bill consist of?

The bill aims to limit the deductibility of liquidation losses in three ways. The liquidation loss can only be deducted from the tax base if:

  1. the share interest in the subsidiary amounts to at least 25% (currently 5%);
  2. the subsidiary is located in the EU/EEA (under the current legislation, the country in which the subsidiary is established is not relevant); and
  3. the dissolution of the subsidiary must be completed ultimately in the third calendar year following the year in which the subsidiary ceases its activities (the current legislation does not impose a period).

The liquidation loss can only be deducted from the tax base to the extent that this liquidation loss is attributable to a loss of the subsidiary during the period in which conditions 1 and 2 are met without any interruptions. If the subsidiary to be liquidated has, in its turn, a subsidiary or a permanent establishment in a country outside of the EU/EEA, the liquidation loss will not be eligible for deduction to the extent that this liquidation loss is attributable to that subsidiary or permanent establishment outside of the EU/EEA.

The limitation to the liquidation loss only applies to the extent that the liquidation loss exceeds an amount of € 1 million. The current legislation will continue to apply to liquidation losses up to € 1 million.

The draft bill contains similar rules to limit the option of deducting losses when discontinuing permanent establishments of Dutch taxpayers in other countries.

Entry into effect and consultation

The intended effective date of the proposed amendments is 1 January 2021. Transitional rules have been proposed for deferred liquidation losses.

The parties that have published the draft bill for consultation do not have a majority in the Dutch House of Representatives. As a result, it is uncertain whether the bill will actually be adopted if the initiators submit it to the Dutch House of Representatives after the consultation.

The bill is open to public response until 16 May 2019.

This news release, published on 14 May 2019, contains general information. You cannot derive any rights from it.