Key tax considerations

Short description

The war in Ukraine and the related sanctions and uncertainties raise significant challenges for businesses. It is key to map out potential tax consequences and related actions. Examples are assessing if and when tax deductions can be claimed, the potential effect of inflation on taxable profits, and, for immediately affected business, possibilities for deferral of tax payments. When terminating commercial or JV agreements the VAT treatment of outstanding invoices or potential termination payments should be taken into account. If one or more short or longer-term scenarios may bring corporate or financial transactions or restructurings to the table, tax related value items to be considered often include preserving and optimising the use of tax attributes (e.g. tax loss carry forwards) and the prevention of taxable profits as a result of debt restructurings. Finally, the possible impact on tax policy developments is an important topic.

For instance, a frequent question is whether current initiatives within the EU to further harmonise taxation may be delayed in view of other priorities, but potentially receive more support in the longer term in case of accelerated further EU integration. In addition, we could see the EU consider further border adjustment mechanisms to protect EU businesses from certain competitive disadvantages caused by the current crisis.

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Klaas Versteeg

Senior Associate

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Broader considerations on tax

We have highlighted below certain short, medium and long-term material tax considerations.​

Short term:​

Potential short-term measures are assessing if and when tax deductions can be claimed in the form of impairments in respect of affected assets or liquidation losses on liquidated or expropriated subsidiaries and, for immediately affected business, possibilities for deferral of tax payments: ​

  • From a Dutch tax perspective, assets, including intra-group receivables, may often be written down for tax purposes to the extent it can be demonstrated that the value of the asset has significantly decreased in value. The corresponding loss should be reported in the taxable year in which the decrease in value occurred. ​
  • A different treatment applies to shares in operating subsidiaries because profits are exempt and losses are in principle non-deductible based on the Dutch participation exemption. By way of exception, liquidation losses (including losses from expropriation) may under strict conditions be tax deductible. However, as from January 2021 liquidation losses from non-EU/EEA subsidiaries or activities are only deductible up to EUR 5 million.
  • ​It could also be explored whether F/X losses could be claimed on debts or receivables for instance USD denominated debt.
  • Companies that consider the need for impairments in their annual or quarterly financial statements should also consider whether the impairment amounts may be effectively reduced by corresponding tax benefits.​
  • The current risk of high inflation may potentially also result in inflated profits of a company, effectively increasing its taxable income. This effect could potentially be mitigated (i) by using a last-in-first-out (LIFO) valuation system for inventories, (ii) by forming a provision for increased costs in case of long term fixed price contracts which become loss-making as a result of inflation, or (iii) by offsetting tax loss carry forwards as soon as possible, which would otherwise decrease in value as a result of inflation.
  • Another short-term tax consideration regards tax aspects relating to termination of commercial or intra-group agreements, such as the VAT treatment of termination payments or outstanding invoices.

Medium term:​

If one or more short or longer-term scenarios may bring corporate or financial transactions or restructurings to the table, tax related value items often include:​

  • preserving and optimising the use of tax attributes (e.g. NOL's), taking into account change of control rules that could result in forfeiture of such attributes;​
  • the prevention of cancellation of debt income as a result of debt restructurings; and​
  • considering whether it would be possible to defer immediate taxation when transferring assets within the group.​

Long term:​

Given the current geopolitical environment, there may be less resources available at the level of the relevant EU bodies to push the EU tax harmonization agenda forward. This may result in current initiatives to further harmonize taxation in the EU to temporarily stall. However, if the current geopolitical environment would result in an accelerated EU integration in other areas, this may as a spill-over effect potentially result in tax harmonization initiatives receiving more support in the long term. In addition, we could see the EU consider further border adjustment mechanisms to protect EU businesses from certain competitive disadvantages caused by the current crisis.

Team

Klaas Versteeg

Senior Associate

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