(July 21, 2015)

On July 10, 2015 the Dutch Supreme Court ruled with respect to tax loss carry-back in a case where there were subsequent fiscal unities formed for Dutch corporate income tax purposes (ECLI:NL:HR:2015:1779). Under current regulations Net Operating Losses (NOLs) can be carried back to the previous year and carried forward to the following nine financial years. During the years 2009 and 2010 taxpayers were given the opportunity to opt for a system in which NOLs could be carried back to the previous three financial years and carried forward to the six following financial years. The underlying case regards the regulations as applied in 2009 and 2010. Although it therefore seems only interesting for a limited number of similar cases, in our view the case is still interesting because it gives an example of some of the (un-)wanted effects that joining a fiscal unity during a financial year might have.

 

The case at hand regards the so-called ‘vertical’ settlement of losses (settlement of a loss from a financial year with the taxable profits from (an) other financial year(s)) and not the so-called ‘horizontal’ settlement of losses (settlement of the loss from an entity of a fiscal unity with the taxable profits realized by an other entity from that same fiscal unity during the same financial year).

 

The facts

 

At the beginning of the year 2009 a fiscal unity (FU1) existed. FU1 was headed by BV A (the interested party/taxpayer). Other members of FU1 were (some) of BV A’s Dutch subsidiaries. As per April 22, 2009 this FU1 was included in a newly formed fiscal unity (FU2), which was headed by BV D. As per December 22, 2009 FU2 was subsequently included in an other newly formed fiscal unity (FU3), which on its turn was headed by BV X.

 

In graphics the above looks as follows:

 

 

And on a timeline it looks like this:

 

 

In the financial years 2006 and 2007 FU1 had realized taxable profits. During the year 2009 the subsequent fiscal unities incurred losses for tax purposes. In total euro 2.762.694 of these losses was allocated to the entities that formed the former FU1. With the tax inspector it was agreed that the loss of Euro 2.762.694 would be allocated proportionally to the different periods of the financial year 2009. In practice this means:

 

Period of FU1 (Jan 1 – Apr 21)	A loss of Euro 847.731
Period of FU2 (Apr 21 – Dec 21)	A loss of Euro 1.839.273
Period of FU3 (Dec 22 – Dec 31)	A loss of Euro 75.690

 

The dispute between the taxpayer and the tax inspector is about how these tax losses can be carried back and settled with taxable incomes from previous years.

 

Regulations

 

Article 20, Paragraph 2 DCITA 

 

Article 20, Paragraph 2 of the Dutch corporate income tax Act (DCITA) as applicable for the year 2009 reads as follows:

“A loss is settled with the taxable profits, respectively the Dutch incomes, of the previous year and the following nine years, provided that the loss has been determined by the inspector via a ‘voor bezwaar vatbare beschikking’ (a decree against which the taxpayer can file a letter of contest).”

 

Article 20, Paragraph 10 DCITA

 

Because of the crisis for the years 2009 and 2010 an additional paragraph 10 was added to Article 20 DCITA. This paragraph 10 provides taxpayers with an option to choose for a longer carry-back period, while at the same time shortening the period for which a carry-forward of the losses is possible.

 

Article 20, Paragraph 10 DCITA as applicable for the year 2009 reads as follows:

“In case in its tax return the taxpayer chooses so, the term for the carry-back and settlement of losses as mentioned in paragraph 2 is replaced by three years, and term for the carry-forward and settlement of losses is replaced by six years.”

 

Article 7, Paragraph 4 DCITA

 

Article 7, Paragraph 4 DCITA as applicable for the year 2009 reads as follows: 

“By a year is meant a financial year, or, if the taxpayer does not keep a regular bookkeeping with regular yearly closures, a calendar year. If during the financial year the taxpayer as a subsidiary becomes part of a fiscal unity, or stops to be a member of a fiscal unity, as meant in article 15, paragraph 1, the part of the financial year in which the taxpayer is not part of that fiscal unity will be considered to be a separate year.”

 

The dispute

 

The tax inspector has settled the tax loss that FU1 incurred in the year 2009 (Jan 1 – Apr 21, 2009) with the taxable profits that FU1 realized in 2006.

 

With respect to the losses of FU2 (Apr 22 – Dec 21, 2009) and FU3 (Dec 22 – Dec 31, 2009) that were allocated to FU1, the tax inspector deviated from the request done in the tax return filed. Instead of settling these losses with the profits FU1 realized in 2006, the tax inspector settled these latter losses with the taxable profits FU1 realized in the year 2007.

 

A Dutch court of justice has ruled that it is not clear what intentions the legislator had regarding the coherence between Article 7, Paragraph 4 DCITA and Article 20, Paragraphs 2 and 10 (DCITA as applying for the year 2009). According to the court of justice therefore preference should be granted to a grammatical explanation and an explanation based on the system of the law in such a way that the second sentence of Article 7, Paragraph 4 DCTA effects Article 20, Paragraphs 2 and 10 of the DCITA. In this respect the court found it relevant that the text of the law defines the ‘voorvoegingsperiode’ (pre-fiscal unity period) as a ‘separate year’ and that this same term ‘year’ is included in the loss-settlement rules as included in Article 20 DCITA. According to the court of justice it is to be assumed that, taking into account that in the text of the DCITA after Article 7 the word ‘year’ is used, the legislator has intended that the term ‘year’ is to be interpreted in the same way as it is defined in Article 7, Paragraph 4 DCITA. According to the court  the system of the law does not conflict with this grammatical interpretation. Therefore the court of justice ruled that the Inspector was right.

 

BV A went into appeal against the ruling of the court of justice. Where BV A argued that the second sentence of Article 7, Paragraph 4 DCITA does not create a separate financial year for tax purposes. According to BV A for the application of Article 20 of the DCITA the calendar year 2009 should therefore be taken into account as 1 year.

 

Ruling of the Dutch Supreme Court

 

In the underlying case the Dutch Supreme Court ruled as follows:

 

Based on Article 7, Paragraph 2, DCITA the taxable amount consists out of the taxable profits of a year less the losses that are being settled based on Chapter IV of the DCITA. Based on Article 7, Paragraph 4 DCITA the term ‘year’ means financial year. The second sentence of Article 7, Paragraph 4 DCITA contains the exception that in case during a financial year the taxpayer either is included as subsidiary in a fiscal unity or stops being a member of a fiscal unity as meant in Article 15, Paragraph 1 DCITA, the part of that financial year during which the taxpayer was not included in that fiscal unity is considered to be a separate year.

 

In the opinion that the Advocate General provided with respect to this case, he states a.o. the following:

“The second sentence of Article 7, Paragraph 4 DCITA was added as per January 1, 2003 by the ‘Wet herziening regime fiscale eenheid’, which made it possible to include entities in a fiscal unity during the course of a financial year. With respect to this second sentence, the ‘MvT’ accompanying the law proposal states that this is of practical importance for a.o. the carry-back of losses.

 

“The (…) change of Article 7, Paragraph 4 is associated with the possibility that taxpayers are included in a fiscal unity during the course of a year. This causes that two different periods come into existence. Namely a period in during which the taxpayer is included in the fiscal unity and the period during which the taxpayer is not included in the fiscal unity. Since corporate income tax is raised based on a financial year of a taxpayer, it could be indistinct whether both periods are part of that financial year. Therefore it is arranged that both years will constitute separate financial years. This is of practical importance for a.o. the carry-back of losses. If during the course of a financial year the taxpayer is included in a fiscal unity and incurs losses during that year, the losses can in principle be settled with the profits realized during the previous three years. For this it is however necessary that these losses have been determined by decree. This change means that in such a situation the loss incurred during the part of the financial year in which the taxpayer was not yet, or no longer, included in a fiscal unity, will be considered to constitute the loss of a ‘year’ and will be determined and available for settlement as such.””

 

From the history of the drafting of Article 7, Paragraph 4 DCITA (as provided by the Advocate General (see above)) it is to be concluded, that the second sentence was included in said Paragraph in order to effectuate that the loss that is incurred in the period of the financial year during which the taxpayer was not yet, or no longer, included in a fiscal unity, is considered to constitute the loss of a ‘year’ and is established and can be settled as such.

 

According to the Dutch Supreme Court the interpretation as argued by the taxpayer is not in keeping with the second sentence of the text of Article 7, Paragraph 4 DCITA. According to the Supreme Court from the parliamentary history it is to be concluded that it was the intention of the legislator that the second sentence of Article 7, Paragraph 4 is also applied in case of a vertical settlement of losses. Therefore the Dutch Supreme Court ruled that the plea of the taxpayer fails and that the ruling of the court of justice was correct an by doing so confirming that the loss settlement as applied by the tax inspector was correct.

 

For further information click here to be forwarded to the text of the ruling of the Dutch Supreme Court, which unfortunately is only available in the Dutch language.

 

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