Dutch Supreme Court confirms loss compensation limitation extends to latent losses

X BV, a real estate company in the Eurocommerce group, held 13 office buildings and a warehouse. At the end of 2015, Y BV, the group’s holding company, then in bankruptcy, sold all shares in X BV to Q BV. The transaction valued the portfolio at EUR 72.5 million against a fiscal book value of EUR 89.8 million, implying a latent loss of approximately EUR 17.3 million.

In 2017, X BV transferred three buildings to subsidiaries, realising a book loss of EUR 4.3 million. X BV claimed the loss as a deduction. The inspector denied it, arguing that Article 20a applied because the loss was already latent when the shares changed hands in 2015.

Article 20a is an anti-abuse provision designed to prevent the trading of loss-making companies. It restricts loss compensation where a company’s ownership changes significantly and its activities or financing have largely ceased. The central question in this case was whether Article 20a applies only to losses formally established before a shareholder change, or also to latent losses that existed at that time but were realised afterwards. Under the former Article 20(5), the predecessor provision, the Supreme Court had held that latent losses fell within scope. The question was whether this case-law remained valid.

The District Court of North-Holland ruled for the taxpayer in 2022, holding that the statutory reference to ‘losses incurred’ covers only realised losses. It considered the revaluation option in Article 20a(12) an indication that the legislature focused on formally established losses.

The Court of Appeal Amsterdam reversed that judgment in 2023, ruling that the wording was inconclusive but that legislative history showed Article 20a continued the anti-abuse purpose of former Article 20(5). The earlier case-law remained relevant. The court added that the 2011 amendment introducing the reference to losses incurred was a technical change related to intra-year loss compensation, not a narrowing of scope.

In February 2024, Advocate General Peter Wattel advised the Supreme Court to dismiss the appeal. His key arguments included the following:

• The Supreme Court’s 1995 and 2004 case-law under former Article 20(5) remains valid.
• The 1995 loss assessment decree did not alter this position.
• Statutory references to ‘losses incurred, losses available for carry-forward and outstanding losses’ do not limit Article 20a to realised losses.
• Nothing in the legislative history suggests the legislature intended to exclude latent losses.
• Legal certainty is protected: the inspector bears the burden of proving that a post-change loss is attributable to the pre-change period.

The Supreme Court dismissed the appeal, following the Advocate General’s opinion. It confirmed that Article 20a extends to latent losses, which means a loss realised after a change of interest but deriving from pre-change facts and circumstances falls within scope and cannot be used for loss compensation if the statutory conditions are met.

As a result, the EUR 4.3 million book loss on the three buildings transferred in 2017 is restricted under Article 20a because it reflects value deterioration already present when the shares changed hands in 2015.

The ruling is directly relevant for share acquisitions involving targets whose assets may be worth less than their fiscal book value. The following implications should be carefully considered:

• Due diligence: Look beyond formally established carry-forward losses. Identify and quantify latent losses in real estate, participations, inventory and other assets.
• Step-up option: The Article 20a(12) revaluation to fair market value at the time of the shareholder change becomes a more important planning tool. This option, however, only permits an increase of book values. It does not cover latent losses (negative hidden reserves). This asymmetry limits its usefulness in scenarios where the target holds depreciated assets.
• Transaction documentation: Address the risk of restricted latent losses in transaction pricing and through appropriate representations, warranties and indemnities in the SPA.
• Burden of proof: The inspector must establish that a post-change loss is attributable to the pre-change period. Practical questions remain, however, about how to deal with post-change value fluctuations. Academic commentary has discussed a compartmentalisation approach, fixing the latent loss at the moment of ownership change. Contemporaneous documentation of asset values strengthens the taxpayer’s position.
• Pre-closing write-downs: Consider whether assets can be written down to market value before a shareholder change. A write-down to lower going-concern value, however, requires a permanent decline, which may be difficult to demonstrate shortly before a transaction.

• Article 20a restricts losses realised after a change of ownership if they arise from pre-change facts and circumstances.
• A clean tax balance sheet does not eliminate Article 20a risk. Latent losses must be identified and documented as part of tax due diligence.

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