The 2011 Tax Plan proposed a further restriction to the rules on loss set-off after a shareholder change of 30% or more, as prescribed by Section 20a Corporate Income Tax Act (“CITA”). The first Memorandum of Amendment to the 2011 Tax Plan proposes that, in the year of the shareholder change the results for that year be split at the moment the shareholder change takes place. Profits are taxed in the current year. Losses are allocated to previous or future years, depending on the moment that the loss occurs, that is either before or after the shareholder change. This change is intended to make a loss set-off in the year in which a shareholder change takes place, impossible. However, the way in which the change is proposed can, in certain cases, lead to inadequate legal protection.
Example
In the year of a shareholder change (year t), a loss is suffered before the shareholder change. Pursuant to the proposed text of Section 20a CITA, that loss is allocated to the previous year (year t-1). The bill does not further specify how this allocation will be worked out. This means that the tax assessment or the loss determination decision for year t-1 will be determined at a lower or higher amount than the profit or loss that was originally reported for year t-1.
This is not a problem as long as the tax assessment or the loss determination decision for the previous year has not become final. The loss to be allocated can be included in the determination of the assessment or the loss determination decision. The taxpayer can, if necessary, file an objection, and at a later stage, file an appeal.
No objection or appeal
The lack of legal protection occurs if year t-1 has already been dealt with and the assessment or the loss determination decision for that year has become final. As described above, the tax inspector can only take that amount into account by way of an ex-officio reduction in the tax assessment or an ex-officio adjustment of the loss distribution decision. An ex-officio reduction in corporate income tax cannot be objected to or appealed.
If the tax inspector and the taxpayer do not agree on the amount of the loss suffered in the year prior to the shareholder change, then the taxpayer cannot file an objection to the amount the tax inspector will ultimately take into account for year t-1.
Conclusion
Introducing the proposed amendment to Section 20a(1) CITA without further adjustments or additions will result in inadequate legal protection for the taxpayer. The taxpayer will not be able to legally challenge an adjustment to their calculation of loss suffered before the shareholder change and that is allocated to year t-1, if year t-1 has already been dealt with and completed. Recent case law from the Supreme Court concerning the ‘Fierensmarge’ shows that such a lack of legal protection conflicts with Article 1 of the First Protocol of the European Convention of Human Rights. KPMG Meijburg & Co is trying, via different channels, to bring attention to this matter, to ensure that the 2011 Tax Plan is adjusted and this undesirable effect is removed.