Compensation of losses vs. tax entities

A loss in the corporation tax sphere is offset against the profits for the previous year and the nine consecutive years. A choice used to be available upon request in favour of set-off against three previous and six subsequent years. When a “besloten vennootschap” or B.V. (private limited-liability company) joins a tax entity, its financial year is split up where the profit calculation is concerned, with the portion of the year in which the company had stand-alone liability for taxes being earmarked as a separate year, thus enabling the calculation of the profit for the relevant period with a view to the corporation tax assessment. When a subsidi­ary company comes to form part of a tax entity, this does not alter its constitutionally defined financial year. The Supreme Court in a 2010 ruling stated that “financial year” was to be interpreted as the period in respect of which a business venture rendered account finan­cially, and although the ruling in question was handed down in connection with turnover tax, the interpretation of “financial year” applies likewise to other types of tax as it is a company’s articles of association in which the financial year is defined.

The Tax and Customs Administration adhered to the statutory provision of mandatory profit split in the event of integration into a tax entity including where compensation of losses was concerned. The group of companies in question owing to two consecutive restructuring exer­cises, in the context of each of which the old tax entity had been given a new parent com­pany and both of which had been carried out in 2009, had operated three different tax enti­ties – the first of these having lasted up to 21 April 2009 inclusive, with the second one prevail­ing from 22 April to 21 December 2009 inclusive and the third, from 22 December 2009 onwards – where its liability for corporation tax was concerned. The loss which the group had posted in respect of the year 2009 had been allocated commensurately to the three tax entities.

The Tax and Customs Administration had based itself on two separate years where the compensation of the loss incurred by the first parent company was con­cerned. The first year covered the portion of 2009 during which corporation tax liability had rested with the first parent company itself and the second year, the period during which the parent had formed part of a tax entity involving the second and third parent companies, respec­tively. All of this had prompted the Tax and Customs Administration to argue that this precluded the set-off of the loss for the second period in 2009 against the profit generated by the tax entity in 2006 as this would cause the period covered to exceed the maximum three-year term. The District Court for Guelderland dismissed this view, stating that it was the con­cept of financial years in which the compensation of losses had to be anchored. As the sec­ond parent company’s financial year had undergone no change as a result of the tax entity being created, the year 2009 covered just the one financial year rather than two, the upshot of this being that it had indeed been permissible to offset the loss for 2009 against the profit for 2006.