On September 2, 2015 the Court of Justice of the European Union ruled in the Groupe Steria case that a particular element of the French consolidation regime which is only provided to French group companies, must also be granted with respect to a subsidiary in another EU member state. The case will likely have an impact on the Dutch fiscal unity regime as well.
1. The Groupe Steria case (facts and judgment)
On September 2, 2015 the Court of Justice of the European Union ("CJEU") ruled on the Groupe Steria case (C 386/14), which concerned the question whether or not a particular benefit of the French tax grouping regime ('intégration fiscale’) must be granted in a situation where a French company (i.e. Groupe Steria) owns subsidiaries in other EU member states which -except for their place of establishment- meet all other criteria to be part of the French tax group.
In this case, the benefit of the tax grouping regime claimed by Groupe Steria concerned the fact that, under French tax law, dividends received from a company included in the same tax group are 100% exempt from Corporate Income Tax ("CIT"), whereas without a tax group dividends received from domestic or foreign subsidiaries are only exempt for 95% (under the assumption that the taxable 5% dividend income relates to deemed costs attributable to the subsidiary). Groupe Steria, however, claimed a full exemption of dividends received from its EU subsidiaries because -had these EU subsidiaries been established in France- it would have been able to obtain such full exemption by forming a tax group.
After considering and rejecting a number of possible justifications, the CJEU decided that the French rule restricts the freedom of establishment since it obstructs French parent companies to exercise their freedom of establishment, as they would be deterred from setting up subsidiaries in other Member States. The case therefore adds an interesting nuance to the earlier X-Holding case (C-337/08), where the CJEU ruled that tax grouping regimes do not need to be allowed in cross-border situations, because of the risk of double use of losses (in multiple jurisdictions). In the Groupe Steria case the CJEU now adds that, although EU law does not require Member States to allow an actual cross border tax group. some benefits of such regimes must still be applied in a cross border context within the EU.
2. Dutch fiscal unity regime possibly affected
As a result of the Groupe Steria case, France will now have to amend its group taxation regime and/or participation exemption regime. The case was however also closely monitored in the Netherlands since the outcome of the Groupe Steria case is very relevant for the Dutch fiscal unity regime, which provides many tax benefits which are currently limited to Dutch group companies included in a fiscal unity (requiring a 95% or more ownership). Some provisions in the Dutch Corporate Income Tax Act ("CITA") which could potentially be affected in an intra-EU context include:
- Several interest deduction limitations (e.g. articles 10a and 13l CITA) since these rules only apply if the interest relates to certain transactions or participations whereas such transactions or participations would be eliminated in the tax consolidation.
- Certain loss ring fencing rules (article 20, paragraph 4 CITA), since such rules only apply in case a company is mostly engaged in holding activities and/or intra-group financing activities, whereas shareholdings and loans would be made "invisible" if the fiscal unity regime applies and operational activities within a fiscal unity would be taken into account in a positive way.
- The liquidation loss rules (article 13d CITA), since these rules allow for deduction of losses upon liquidation of a participation at a different amount if the participation is not part of the same fiscal unity.
- The taxation of capital gains on transactions with affiliated companies (e.g. sales of assets ), since such capital gains can be deferred if they relate to transactions within a fiscal unity.
It is however noted that before successfully claiming application of these benefits in a cross border situation, the grounds for justification must be considered for each rule separately in accordance with the case law developed by the CJEU.
3. Practical consequences
It is at this stage uncertain how the Dutch government will respond to the Groupe Steria judgment. The case will likely trigger many taxpayers (and their advisers) to take the position that certain tax rules that are disadvantageous to them, infringe the freedom of establishment if such rules would not have applied had a company in another EU/EEA-member state been included in their tax group. In these cases, taxpayers are encouraged to file objections in time to preserve their rights. It is however noted that in order to enforce these rights under EU law, taxpayers may be required to litigate, potentially all the way to the CJEU.