Netherlands: participation exemption, foreign exchange losses tax deductible!
State Secretary of Finance Frans Weekers announced to amend the Dutch participation exemption
In the Netherlands under current law and jurisprudence the participation exemption is applicable to foreign exchange losses on participations. Foreign exchange gains and losses are therefore tax exempt respectively not tax deductible.
Based on the decision of the European Court of Justice on the Deutsche Shell a number of international companies is of the opinion that foreign exchange losses are tax deductible. If they are right, this has a significant impact on the budget.
To prevent this negative fiscal impact, the State Secretary proposed by press release on Friday, April 8, 2011 at 17:00 hours to amend the participation exemption so that companies, who tax deduct foreign exchange losses on their participations, have to add their foreign exchange gains to the taxable profit. With this measure the balance is restored.
For current cases the amendment would be very easy to avoid by transferring the participation to another group company. Therefore State Secretary proposes that the amendment enters into force retroactively at the time the press release was published.
Furthermore foreign exchange gains that are realized after this press release and which are attributable to the period before the press release, will also be taxed. It is also proposed to prevent that foreign exchange losses could be taken twice: once as a foreign exchange loss and once as part of a liquidation loss.
To be clear, the amendment will only affect taxpayers who tax deduct foreign exchange losses on their participations. Nothing changes for taxpayers who do not use this option.
After the Cabinet has approved the bill, the Council of State will be asked for advice. The bill with the advice will be published upon submission to the House.
Importance to practice?
In the Netherlands companies can opt for the participation exemption to tax deduct their foreign exchange losses and - depending on the text - perhaps opt to add foreign exchange gains to their taxable profit. For the exact details we will have to wait for the text of the bill.