Elastic NV

13. Income Taxes

The Company is incorporated in the Netherlands but operates in various countries with differing tax laws and rates. The geographical breakdown of loss before (benefit from) provision for income taxes is summarized as follows (in thousands):

The components of the (benefit from) provision for income taxes were as follows (in thousands):

The Company’s effective tax rate substantially differed from the Dutch statutory tax rate of 25.8% primarily due to the release of the valuation allowance for most of the United States deferred tax assets and waiver of certain deductions subject to the Base Erosion Anti-Abuse Tax (“BEAT”). A reconciliation of income taxes at the statutory income tax rate to the (benefit from) provision for income taxes included in the consolidated statements of operations is as follows (in thousands, except for rates):

Deferred Income Taxes

Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Management assesses whether it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets are reduced by a valuation allowance where management has concluded it is more likely than not that the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. Management makes estimates and judgments about future taxable income based on assumptions that are consistent with the Company’s plans and estimates.

Significant components of the Company’s deferred tax assets and liabilities are summarized as follows (in thousands):

The valuation allowance for deferred tax assets as of April 30, 2024 and 2023 was $386.9 million and $575.6 million, respectively. As the Company has generated losses since inception in the Netherlands and is anticipated to have cumulative losses for the foreseeable future, management maintains a full valuation allowance against the net deferred tax assets in this jurisdiction. In addition, the United Kingdom jurisdiction is also anticipated to have cumulative losses for the foreseeable future and, as such, a valuation allowance has been established for this jurisdiction. The valuation allowance in the Netherlands and United Kingdom increased by $61.2 million and decreased by $0.2 million, respectively, for the year ended April 30, 2024 and increased by $80.1 million and less than $0.1 million, respectively, for the year ended April 30, 2023.

The income tax benefit was primarily due to the release of the valuation allowance for U.S. federal and certain state deferred tax assets of $250.7 million. The Company regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, positive and negative evidence related to the likelihood of realization of the deferred tax assets is considered to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. As of January 31, 2024, based on all available positive and negative evidence, having demonstrated sustained profitability which is objective and verifiable, and taking into account anticipated future earnings, the Company has concluded that it is more likely than not that the majority of its U.S. federal and certain states’ deferred tax assets will be realizable. The Company continues to maintain a valuation allowance against its California and certain other states’ deferred tax assets due to the uncertainty regarding realizability of these deferred tax assets as they have not yet met the “more likely than not” realization criteria. The valuation allowance in the United States decreased by $250.7 million for the year ended April 30, 2024 due to the valuation allowance release and decreased by $3.6 million for the year ended April 30, 2023.

The valuation allowance for the Netherlands deferred tax assets as of April 30, 2024 and 2023 was $344.5 million and $283.3 million, respectively, the valuation allowance for the United States deferred tax assets as of April 30, 2024 and 2023 was $23.0 million and $272.7 million, respectively, and the valuation allowance for the United Kingdom deferred tax assets as of April 30, 2024 and 2023 was $19.4 million and $19.5 million, respectively. To the extent sufficient positive evidence becomes available, the Company may release all or a portion of the valuation allowance in one or more future periods. A release of the valuation allowance, if any, would result in the recognition of certain deferred tax assets and a material income tax benefit for the period in which such release is recorded.

As of April 30, 2024, the Company had net operating loss (“NOL”) carryforwards for Netherlands, United States (federal and state, respectively) and United Kingdom income tax purposes of $1.237 billion, $806.9 million, $641.7 million and $78.2 million, respectively, which begin to expire in the years ending April 30, 2037 and April 30, 2025 for the United States (federal and state, respectively), with Netherlands and United Kingdom losses being carried forward indefinitely. The Company also has research and development tax credit carryforwards for United States (federal and state, respectively), Canada, Spain, and France for income tax purposes of $31.7 million, $9.3 million, $1.9 million, $0.8 million, and $0.2 million, respectively, which begin to expire on April 30, 2038, April 30, 2025, April 30, 2042, April 30, 2041, and April 30, 2025, respectively. The deferred tax assets associated with the NOL carryforwards and other tax attributes in the Netherlands and the United Kingdom are subject to a full valuation allowance.

Uncertain Tax Positions

The calculation of the Company’s tax obligations involves dealing with uncertainties in the application of complex tax laws and regulations. ASC 740, Income Taxes, provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company has assessed its income tax positions and recorded tax benefits for all years subject to examination, based upon the Company’s evaluation of the facts, circumstances and information available at each period end.

Although the Company believes that it has adequately reserved for its uncertain tax positions, the Company can provide no assurance that the final tax outcome of these matters will not be materially different. As the Company continues to grow in size, it will face increased complexity, and the Company’s unrecognized tax benefits may increase in the future. The Company adjusts its reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made.

The Company had unrecognized tax benefits of $22.7 million as of April 30, 2024, of which none would impact the effective tax rate before consideration of any valuation allowance. The activity within the Company’s unrecognized tax benefits is summarized as follows (in thousands):

Approximately $1.2 million of the increase for the year ended April 30, 2024 for tax positions taken in prior periods is due to the filing of tax returns during the fiscal year. Approximately $3.3 million of the increase in tax positions related to the current period is primarily from the research and development tax credits generated for the year ended April 30, 2024.

The Company’s policy is to recognize penalties and interest accrued on any unrecognized tax benefits as a component of income tax expense. The Company recognized interest and penalties of $0.2 million for both of the years ended April 30, 2024 and 2023, and $0.3 million for the year ended April 30, 2022. The amount of accrued interest and penalties recorded on the consolidated balance sheet as of April 30, 2024 and 2023 was $0.4 million and $0.2 million, respectively.

The Company is subject to periodic examination of income tax returns by various domestic and international tax authorities. During the year ended April 30, 2024, the Company was subject to new audits by various tax authorities.

The Company does not anticipate any significant increases or decreases in its uncertain tax positions within the next twelve months. The Company files tax returns in multiple jurisdictions, including the Netherlands and United States. The Company’s tax filings for fiscal years starting with the year ended April 30, 2018 remain open in various tax jurisdictions.

Dutch income taxes and non-Dutch withholding taxes associated with the repatriation of earnings or for temporary differences related to investments in non-Dutch subsidiaries, excluding the U.S subsidiaries, have not been provided for, as the Company intends to reinvest the earnings of such subsidiaries indefinitely or the Company has concluded that an immaterial additional tax liability would arise on the distribution of such earnings. Earnings from the Company’s U.S. subsidiaries are treated as being currently repatriated back to the Netherlands, even though no Dutch income taxes or U.S. withholding taxes regarding to such repatriations are recorded due to the Netherlands participation exemption provisions and exemption from withholding taxes under the income tax treaty between the Netherlands and the United States. As of April 30, 2024, there were cumulative earnings of $212.2 million from the non-U.S. subsidiaries. If such earnings were to be repatriated, they would be exempt from taxation in the Netherlands and the amount of dividend withholding taxes from such foreign jurisdictions would be $4.4 million, due to the various income tax treaties between the Netherlands and the respective foreign jurisdictions.