On April 8, 2011, Deputy Minister of Finance Mr. Weekers announced he would present a legislative proposal to the Lower House of Dutch Parliament, offering the possibility of taxing exchange gains on participations if the taxpayer previously deducted exchange losses on participations. On June 1, 2011, the Council of State presented its advice regarding the legislative proposal, and the amended proposal was presented to the Lower House on June 20, 2011.
Current rules for exchange gains and losses
Based on prevailing legislation and case law, the participation exemption applies to exchange gains and losses on participations in the Netherlands: exchange gains are exempt from the profit for tax purposes, while exchange losses may not be deducted from the profit for tax purposes.
Deutsche Shell judgment – deductibility of exchange losses?
On February 28, 2008 the European Court of Justice (“ECJ”) handed down judgment in Deutsche Shell, based on which taxpayers might argue that exchange losses on participations may nevertheless be charged to their profits for tax purposes.
Deutsche Shell concerned the treatment of exchange losses on the capital invested by a Germany-based entity – Deutsche Shell – in an Italian permanent establishment (“endowment capital”). The Italian permanent establishment was transformed into an Italian subsidiary of Deutsche Shell in 1992, after which that participation was sold. In Germany, the proceeds from that sale were treated as a repayment of the endowment capital contributed to the permanent establishment. Deutsche Shell realized an exchange loss on that repayment. That exchange loss could be declared neither for purposes of calculating the German profit (the permanent establishment’s results were exempt) nor for purposes of determining the results in Italy (the profit was calculated in the local currency, meaning that no exchange loss was reported).
In its judgment, the ECJ held it to be contrary to the principles of European law – freedom of establishment – that the exchange loss could not be taken into account in Germany.
In the April 8, 2011 press release, the Deputy Minister of Finance notes that it has become apparent that various taxpayers have adopted the position that, based on Deutsche Shell, exchange losses on participations are deductible also.
Since the Deputy Minister feels that the participation exemption applies in full to exchange gains and losses, and that therefore exchange losses are non-deductible, proceedings will need to be conducted to decide cases in which taxpayers adopt this position. If those proceedings lead to the conclusion that exchange losses are in fact deductible in certain situations, this would create an imbalance in that exchange losses are deductible whereas exchange gains are exempt.
Against the backdrop of these developments, the Deputy Minister has decided to introduce a plan that, essentially, offers the possibility to tax exchange gains on participations if the taxpayer previously deducted exchange losses.
Proposed treatment of exchange gains and losses
The Deputy Minister has decided to introduce an interim plan. This decision stems from the existing uncertainty about the deductibility: it will only be clear once the proceedings are over whether exchange losses are in fact deductible.
The legislative proposal on an Interim Plan for Exchange Gains and Losses on Participations currently states that exchange gains on participations are subject to tax if:
1. an exchange loss on a participation has actually been deducted from the taxpayer’s profit for tax purposes, and
2. based on case law handed down by the ECJ this exchange loss may in fact be deducted from the taxpayer’s profit for tax purposes.
Based on the proposed legislative text, the participation exemption will cease to apply to exchange gains from all participations from the start of the financial year in which those losses were deducted. This means that the legislative amendment does not apply only to the participation for which the exchange losses were previously deducted. Similarly, whether the participations are domiciled in the EU or elsewhere is irrelevant also.
If, based on case law of the ECJ, exchange losses may not be deducted, the interim plan will not have any implications for taxpayers who deducted their losses: in that situation, exchange losses will remain non-deductible and exchange gains will not be subject to tax.
Restructuring?
Taxation of exchange gains might be prevented by, for example, relocating the participations that might generate exchange gains within the group to a Dutch taxpayer that has not deducted any exchange losses from its profit for tax purposes.
To prevent such scenarios, the legislative proposal states that the acquiring taxpayer may not claim the participation exemption for exchange gains stemming from relocated participation previously held by a taxpayer that successfully claimed deduction of an exchange loss on a participation. Essentially, the tax claim follows the participation, even if the participation is transferred first to a non-Dutch group company and then to a Dutch taxpayer.
Liquidation loss
The legislative proposal also states that any exchange loss on a participation that is in fact deductible may not be declared again if the participation is liquidated at any time. Liquidation losses may only be deducted insofar as they exceed the balance of the exchange gains and losses charged to the profits in connection with that participation.
Retroactive effect
To prevent taxpayers from trying to avoid tax on realized or deferred exchange gains by relocating their participations before the moment that the interim plan enters into force,the legislative proposal will have retroactive effect to 5 p.m. on April 8, 2011 (the moment that the legislative proposal was announced in the press release).