SME profit exemption and operating loss

The operating profit in an income tax sphere is reduced by the entrepreneur’s allowance and the SME profit exemption. The latter amounts to 14 percent of what is left of the operating profit once the entrepreneur’s allowance has been deducted. It was made clear at the time the SME profit exemption was introduced that the interpretation of “profit” should be an algebraic one in that rather than being taken to be confined to positive results (gains), it should allow for negative results (losses) to be taken into consideration as well. The SME profit exemption therefore still applies even in a loss-making scenario, except that it will then result in the profit increasing. The legislator has decided that this should be so because of the systematics of the law, as non-application of the SME profit exemption in loss-making scenarios would result in losses being set off materially at higher rates than those at which profits are taxed.

The District Court in a case brought by a loss-making business owner dismissed the latter’s reliance on the principle of equality. According to the Court, the legislator had in effect come up with a reasonable justification of the restriction on offsettable losses by arguing that all business owners should be equally taxed irrespective of operating result trends. The Amsterdam Court of Appeal subsequently sided with the District Court.

Dutch version: Mkb-winstvrijstelling en verlies uit onderneming