Doing Business in the Netherlands 2012 - American Chamber of ...

Doing Business in the Netherlands 2012
participating interests with loans denominated in currencies other than
the Euro, it is particularly important to check whether it is possible to
avoid exposure to currency exchange risks by a functional currency
ruling.
18.4.3 Capital Losses Under the Participation Exemption
As a general rule, capital losses and a decline in value of the shares in
a qualifying participating interest are not deductible. However, losses
incurred on a completed liquidation of a subsidiary are deductible.
Please note that this exception is subject to complex anti-abuse rules
which will be discussed here to a limited extent. In general, the
deductible amount is equal to the difference between the funds
invested and the liquidation proceeds. This amount will be reduced by
dividend payments made in the previous five (or sometimes 10) years.
Liquidation losses may not be deducted if the activities of the
liquidated subsidiary are continued elsewhere within the same group.
Deduction of losses incurred during the liquidation of an intermediate
holding company may be denied in certain situations. If a foreign
branch is converted into a subsidiary, the participation exemption will,
under certain circumstances, apply only once previous losses incurred
by the branch are recovered.
18.4.4 Conversion of Loans
In the past, a conversion into equity of a loan that had been (partially)
written off could lead to a direct realization of taxable profit for the
debtor, which might have reduced the losses that were eligible for
setoff. The difference between the book value of the loan and its fair
market value would constitute taxable income for the debtor.
However, since this provision was met with considerable resistance in
the corporate market (especially due to its adverse consequences for
internal reorganizations and acquisition structures), a different way of
taxing “conversion profits” was introduced.
In this system, which became effective early 2006, under certain
circumstances, the Dutch creditor realizes a gain upon conversion of a
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