On 21 March 2025, the Dutch Supreme Court ruled that a taxpayer is allowed to deduct a liquidation loss on its participation in a liquidated subsidiary that transferred losses to group companies under the Irish group relief regime in the years prior to the liquidation. This Supreme Court judgment provides a favorable outcome for taxpayers.
Background
Pursuant to the participation exemption regime, benefits derived
by Dutch corporate taxpayers from qualifying participations are
exempt and losses incurred with respect to such participations are
non-deductible for Dutch corporate income tax (CIT) purposes. As an
exception to this rule, the loss suffered upon the liquidation of a
qualifying participation is deductible as 'liquidation
loss' if certain conditions are met. The rationale of the
liquidation loss exception is that losses should be deductible at
least once, by allowing the taxpayer to recognize a loss where the
subsidiary can definitively no longer set off its losses against
its own profits. The amount of the liquidation loss is not linked
to the amount of losses of the subsidiary but equals the excess of
the invested amount over the liquidation proceeds, subject to
certain adjustments.
One of the conditions for recognizing a liquidation loss is that no
group company may have a right to claim any compensation for tax
purposes in respect of losses of the liquidated subsidiary that
remained uncompensated (the 'no-loss-relief
condition').
Facts and circumstances
The taxpayer in the case at hand owned a qualifying participation in an Irish subsidiary that made use of the 'group relief' regime in Ireland. Under this regime, losses incurred in a certain year by an Irish company can be transferred to a profitable Irish group company in the same year. It is not possible to offset the losses against profits of group companies in different years or after the subsidiary's liquidation. The subsidiary's losses that remained available at the time of its liquidation are permanently lost.
In the years prior to its liquidation, the Irish subsidiary transferred losses to Irish group companies under the group relief regime.
The taxpayer incurred a liquidation loss upon the liquidation of the Irish subsidiary in 2013. The Dutch tax authorities disallowed the liquidation loss based on their position that the no-loss relief-condition was not met by reason of the use of the Irish group relief regime.
Legal question
The dispute concerns the question whether the use of, or the possibility to use, the Irish group relief regime in the years prior to the liquidation constitutes a right to loss compensation within the meaning of the no-loss-relief condition. If so, no liquidation loss is allowed under the liquidation loss rules.
Both the District Court and the Court of Appeal ruled in favor of the taxpayer in the sense that using the Irish group relief regime does not cause the no-loss-relief condition to be failed. Contrary to both courts, the Advocate General concluded that the no-loss-relief condition was not met in his opinion of 29 April 2022.
Supreme Court judgment
The Supreme Court follows the Court of Appeal by ruling that the no-loss-relief condition is satisfied. The Supreme Court considers that the no-loss-relief condition, based on its intent and purpose and place within the liquidation loss rules, should be assessed as per the moment that the liquidation of the subsidiary is completed (i.e., on an as-is basis). The condition is meant to ensure that the possibility for the group to use the subsidiary's own losses remaining at the time of its liquidation is definitively lost. Therefore, the (possibility to make) use of the Irish group relief regime prior to the liquidation does not prohibit satisfying this condition. Although this interpretation of the no-loss-relief condition may result in double loss relief, the Supreme Court considers this to be the result of a deliberate choice of the Dutch legislator in designing the liquidation loss rules.
Impact
The Supreme Court judgment clarifies the application of the no-loss-relief condition. The judgment is favorable for taxpayers that wish to deduct a liquidation loss on a participation in a foreign subsidiary that used a group relief regime (or had the possibility to do so) if any remaining losses are permanently lost after the subsidiary's liquidation.
Furthermore, the Supreme Court reconfirms its view that the interpretation of anti-abuse measures, such as the no-loss-relief condition, should be tailored as much as possible to the improper use that the legislator aimed to target and the manner that the legislator intended in doing so. This consideration should be helpful for taxpayers in the application of other anti-abuse measures in the Dutch tax codes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
