From Uncertainty to Tax Certainty: Protecting Losses for a Sustainable Data Centre
The client’s problem
One of our clients is developing a sustainable data centre in Amsterdam. Developing a data centre is a capital-intensive undertaking. During development, the client incurs significant costs, resulting in start-up losses.
The client’s shares have been acquired by a new owner. Dutch corporate income tax law includes an anti-abuse provision stipulating that companies forfeit their losses in the event of a significant change in ownership. Dutch tax law provides for certain exceptions to this main rule.
Loss offset against future profits remains possible in the case at hand, if at least half of the company’s balance sheet assets has - during a certain period - consisted of business assets (and therefore not investments).
Immovable property made available to third parties, however, is by legal fiction considered a deemed investment. If client’s balance sheet would consist for over 50% of (deemed) investments, it would loose its compensable tax losses.
The client wanted to know if it can still make use of its losses after the change of ownership.
Our solution
We analysed client’s business activities. We learned that the exploitation of the data centre should be seen as providing (colocation) services. These services are an inseparable set of physical security, continuous power, cooling, network connectivity and monitoring, delivering value through functionality and not square footage.
We came to the conclusion that the exploitation of this data centre differs from the typical exploitation of real estate whereby the price per square meter is relevant. On that basis, the data centre should not be considered as ‘immovable property made available to third parties’ and therefore not as a deemed investment.
To obtain 100% certainty we suggested to ask the tax inspector for confirmation.
What did we do?
We submitted a well motivated request to the Dutch tax inspector. In this request, we asked the tax inspector to confirm with a notification that client’s balance sheet consisted for at least half of its total assets as business assets rather than (deemed) investments. In other words we asked for confirmation that clients losses could still be compensated with future profits after the significant change of ownership.
Current situation
The Dutch tax inspector first denied our request for confirmation without any argument. Subsequently, we filed an objection, which was eventually honoured. This means that the client can keep its compensable tax losses after the change of ownership. Not only the client but also the new owner were very satisfied with the official confirmation for the tax authorities that the losses can still be used for compensation with future profits.