Supreme Court rules that Article 20a of the Corporate Income Tax Act 1969 also applies to deferred losses

Case

The interested party held a property portfolio consisting of thirteen let office buildings and an industrial building. Following the bankruptcy of its shareholder, it came under the management of a bank in mid 2012 and an insolvency practitioner carried out the supervision. Due to the market circumstances at the time, a sale of the property was postponed. Pending identification of a suitable buyer, the portfolio remained in operation.

On 23 December 2015, the shares in the interested party were sold to third parties. A transaction price of EUR 72.5 million was asked for the property. The tax base at that time amounted to EUR 89.8 million. Following a commercial revaluation of the portfolio, a negative equity of approximately EUR 4.5 million remained. As to the building itself, the transaction value differed compared with the tax base.

At the end of 2017, the interested party transferred three buildings to three subsidiaries, recognising a book loss of approximately EUR 4.3 million. From 1 January 2018, these companies and the interested party formed part of a fiscal unity. The Tax Inspector did not accept the book loss in the 2017 assessment, because Article 20a of the Dutch Corporate Income Tax Act 1969 (hereinafter: the CITA 1969) was considered to preclude its deduction. Article 20a of the CITA 1969 precludes loss carry forward if the ultimate beneficial interest has changed, either immediately or gradually, by 30% or more since the start of the earliest loss year.

The Court of Appeal’s ruling

The dispute before the Court of Appeal was whether a deferred loss existing at the time of the share transfer could fall within the scope of Article 20a of the CITA 1969 when that loss was not realised until a later date.

The wording of the provision did not provide the Court of Appeal with a clear answer. In particular, it was not immediately clear whether the term ‘loss incurred’ used therein exclusively concerns losses that have already been realised and formally established.

In interpreting the provision, the Court then examined the legislative history. The Court argued that Article 20a of the CITA 1969 builds on the former limitation of loss set-off under Article 20(5 (as previously in force)) of the CITA 1969 and its scope has been expanded further. Under that former scheme the Supreme Court ruled, on 9 April 2004, that losses that have not become visible for tax purposes until after a change in ownership may also fall within the scope of the limitation of loss set-off when they originated in the period prior to that change. As the legislature continued this system with Article 20a of the CITA 1969, the Court of Appeal considered the judgment of 9 April 2004 to be relevant to the interpretation of the current scheme as well. On that basis, the Court of Appeal concluded that Article 20a of the CITA 1969 is not limited to losses that had already been realised prior to the change in ownership.

Judgment of the Supreme Court

On appeal, the interested party argued that this interpretation is at odds with legal certainty. After all, the decision determining a loss is intended to provide clarity regarding the extent of available tax losses. The interested party argued that when unrecognised deferred losses are taken into account as well, this may give rise to discussion for some considerable time after the change in ownership. They further opined that the 2004 judgment could not be used as a criterion for interpreting provisions introduced later on.

The Supreme Court rejected this argument. It deduced from the legislative history that Article 20a of the CITA 1969 constitutes a continuation and tightening of the limitation of loss set-off previously included in Article 20(5) of the CITA 1969. The provision aims to limit loss set-off when the affiliation with both the original shareholders and the activities from the loss-making period have largely ceased to exist. The implementation of Article 20a of the CITA 1969 has reduced the possibilities for avoidance in respect of the former cessation criterion. In 2011, the provision was expanded to also prevent loss set-off within the year in which the change in interest took place.

The Supreme Court argues that due to the continuation of the former limitation of loss set-off, the judgment of 9 April 2004 continues to be relevant. A loss not being realised until after the change in interest does not preclude the application of Article 20a of the CITA 1969. If the loss arises from facts and circumstances prior to that change, it cannot be set off against profits in subsequent years that do not accrue to the former shareholders.

Article 20b of the CITA 1969 does not necessitate a more restrictive interpretation either. It does not follow from this provision and the relevant legislative history that Article 20a of the CITA 1969 relates only to losses that were established by decision prior to the change in interest.

The Supreme Court does, however, endorse a comment made by the Advocate General. Separate statutory provisions for determining and treating unrealised losses would have been more in line with the legal certainty intended by the decision determining a loss. However, the absence of such provisions does not alter how Article 20a of the CITA 1969 must be interpreted. The ground for appeal in cassation fails.

The judgment clarifies the scope of Article 20a of the CITA 1969 with regard to unrealised losses, but its application in specific situations may still raise questions. Hence, further practical details would be desirable.

Source:

• Supreme Court, 11 September, 23/02715, ECLI:NL:HR:2026:1431