Supreme Court does justice to loss carry forward rules
The tax rules regarding the possibility to carry forward tax losses have been tightened during the last few years. These rules aim to combat, amongst others, the trade in companies with tax losses. In September the Dutch Supreme Court issued an interesting judgement concerning the application of these rules after the dissolution of a joint venture.
In the case concerned a Dutch BV terminated its activities after disappointing results. Subsequently one of the existing shareholders acquired all of the remaining shares in this BV. This shareholder was also a company and owned already about 40% of the shares in the loss making BV. This interest was therefore increased to 100%. The holding company was owned by to two persons (in the judgment referred to as C and D) who held 43% and 57% respectively of the shares in the holding company.
The dispute in this case was about the question whether the tax losses of BV could be still compensated with the profits which of later years. According to the taxpayer this was possible because the tax law allows a shareholder who has already an interest in the loss company of more than one third, enlarges such interest without negative consequences for the tax losses.
The inspector denied the application of this rule because he took the position that the size of the initial interest (which should be more than 33.3%) must be measured at the level of C and D and not on the level of the intermediate holding company. C and D held an indirect interest of less than 33.3% in the loss-BV (17% respectively 23%). The inspector was supported by policy publications of the ministry of finance in which it was emphasised that this was an implicit consequence of the text of the tax law. The fact that a different interpretation was taken in the explanatory notes to the specific tax rules, was brushed aside with the remark that the text of the bill had been adapted at a later stage of the legislative process. Thereby the original explanation would have lost its relevance.
Also the Lower Tax Court came to the conclusion that BV lost its right to use the old tax losses. The law contains the phrase ‘ultimate beneficiary’ and – so this court decided – this means, in principle, that only people of flesh and blood could be a measurement for this test. A BV cannot be considered as ultimate beneficiary holding more than one third of the shares in the loss-BV. In the eyes of the tax court it was not relevant that the holding company already held 40% of the shares: one should ‘look through’ the structure till the highest level (the level of C and D). This was reason for the court to judge that there was no party that increased an existing interest of more than one third.
Probably the taxpayer will have lost almost all its hope on a favourable outcome of this case. Also the Advocate General to the Supreme Court came to a rigid conclusion. He advised the Supreme Court to apply the law strictly: the losses were foregone.
The Supreme Court, however, reaches the final conclusion that loss compensation is still possible. This because the original explanatory notes to the law stipulate that the exception (which was called in by the BV) is also meant to facilitate the transfer of shares in a so-called joint venture company upon dissolution of such venture. The Supreme Court attaches significant value to the intention of the law. The court makes clear that the intention can sometimes overrule the literal text of the law.
It is of great interest to observe that the Supreme Court attaches great value to what the State Secretary said at the time that the law is produces. The way how a bill is ‘sold’ to the parliament appears to be of permanent value. This importance even remains after the ministry of finance explicitly takes a much more unfavourable point of view in later policy publications.back to overview