Amount of liquidation loss on purchase of participation before tax liability arises has been saved
Amount of liquidation loss on purchase of participation before tax liability arises
The Supreme Court ruled on the sum of the amount paid in the situation in which a company became liable for tax during the holding period of the liquidated participations.
16 November 2022
Facts and background
The interested party is a public limited company (N.V.) that became subject to corporate income tax due to the entry into force of the Modernisation of Corporate Income Tax Liability (for Public Enterprises) Act (the Wet modernisering vennootschapsbelastingplicht overheidsondernemingen, or ‘WmVpbO’) with effect from 1 January 2016. On that date, the interested party held shares in two private limited companies. These shareholdings qualified as participations. However, both private limited companies were liquidated and wound up in 2016. The historical cost of these shareholdings amounted to EUR 5,469,888. As no liquidation payments were made, the interested party charged the cost price of the shares to the profit in its 2016 corporate income tax return, by applying the liquidation loss scheme (article 13d Corporate Income Tax Act 1969).
The Tax Inspector refused the deduction of the liquidation loss, arguing that the market value of the participations on the date when the liability for corporate income tax arose, i.e. the of value the opening balance sheet, should be taken into account when determining the deduction. In this case, the amount was nil. The Tax Inspector went on to argue that the loss was substantially incurred before 2016. Under those circumstances, taking a liquidation loss would be contrary to the purpose and purport of the Corporate Income Tax Act 1969. Applying the compartmentalisation doctrine, it is only permitted to deduct the loss that arose in the period when the interested party was liable for tax.
However, the Noord-Nederland Court did not follow the Tax Inspector’s reasoning and ruled that a grammatical interpretation of the legal text (article 13d Corporate Income Tax Act 1969) must be followed. The WmVpbO does not include transitional law on the liquidation loss scheme. Neither did the Court identify any indication in the legislative history for an interpretation that deviates from the legal text. The Court found in favour of the interested party and upheld the appeal. On behalf of the State Secretary, a leap-frogging appeal to the Supreme Court was lodged against this decision.
Judgment of the Supreme Court
The Supreme Court followed the Court’s ruling and ruled that neither the text nor the purport of the liquidation loss scheme (article 13d Corporate Income Tax Act 1969) gives reason to assume that a liquidation loss is excluded from deduction to the extent that this loss is attributable to a period in which the taxpayer was not yet liable for corporate income tax. The Court saw no ground to limit, through a reasonable application of the law, the liquidation loss to the part attributable to the period in which the interested party was liable for tax. After all, the size of the amount paid does not tie in with a balance sheet item, but is an extra-accountable quantity. Hence, how the taxpayer valued the participation on its balance sheet is irrelevant for the determination of a liquidation loss. The liquidation loss scheme does not seek a reconciliation with the total profit, but aims to provide an entity with relief for losses of participations if these losses are available for offset but can never be recovered.
Considering the above, the Supreme Court declares the appeal in cassation to be unfounded. In determining the sum of the amount paid in this situation - where the participation was acquired before the tax liability arose - the historical cost of the liquidated participations must be considered.
Source: HR 4 November 2022, 21/02980, ECLI:NL:HR:2022:1578