Dutch Supreme Court: Loss utilisation restriction also applies to latent losses

Background

• In this case, the shares in a real estate company were transferred to a new shareholder in 2015. At the time of the transfer, the economic value of the real estate portfolio was significantly lower than its tax book value, resulting in substantial latent losses. These losses were only realised in 2017 when part of the real estate portfolio was sold.
• The key question before the Court was whether the loss utilisation restriction that applies following a substantial change in shareholding also covers latent losses that already existed at the time of the shareholder change but were realised only afterwards.

Supreme Court Judgment

• The Supreme Court held that the loss utilisation restriction applies not only to realised and formally recognised tax losses, but also to latent losses that already existed at the time of a relevant change in shareholding.
• According to the Court, the purpose of the legislation is to prevent losses from being utilised after the connection with the shareholders from the loss-making period, and with the activities that generated those losses, has largely been severed. This rationale applies not only to formally established losses, but also to losses that were economically present at the time of the shareholder change and merely realised at a later date.

Why Is This Judgment Important?

• The judgment makes clear that, when assessing the impact of a contemplated change in shareholding, taxpayers should not focus solely on existing tax loss carry-forwards. Consideration must also be given to latent losses embedded within the company's assets.
• In practice, this means that:
  • careful consideration should be given to whether assets have an economic value below their tax book value at the time of the transaction;
  • commercial valuations and the assumptions underlying such valuations should be properly documented; and
  • the potential application of the loss utilisation restriction should be taken into account at an early stage when structuring a transaction.
• An important aspect is that latent losses are not formally determined by the Dutch tax authorities. If a dispute arises years later, the taxpayer's position will therefore largely depend on the documentation, valuations and supporting evidence available at the time of the shareholder change.

Practical Implications

• The judgment may result in latent losses existing at the time of a change in shareholding becoming permanently unavailable for tax purposes. Although the legislation contains certain exceptions that may allow loss utilisation in specific circumstances, the Supreme Court has confirmed that the scope of the loss utilisation restriction should be interpreted broadly.
• For buyers, sellers, investors and real estate businesses, it is therefore important to identify any latent loss positions at an early stage and assess the impact such losses may have on the tax value of the business and the overall transaction economics.

If you have any questions regarding the implications of this judgment for a contemplated transaction or an existing loss position, please do not hesitate to contact us. We would be pleased to discuss the impact on your specific circumstances.