On 16 October 2015, Dutch Government released a Tax Bill to extend the fiscal unity regime in accordance with EU law, following judgments handed down by the Court of Justice of the European Union (ECJ) on 12 June 2014 (see our Tax Flash). The fiscal unity regime is a consolidation regime for corporate income tax purposes that provides for offset of losses and profits between members as well as non-recognition of gains and losses on transactions between members.
The Tax Bill extends the fiscal unity regime to allow for (i) the formation of a fiscal unity between a Dutch parent company and a Dutch second-tier subsidiary held via one or more EU/EEA intermediate subsidiaries (Intermediate Fiscal Unity) and (ii) the formation of a fiscal unity between Dutch subsidiaries held, directly or indirectly via EU/EEA intermediate subsidiaries, by an EU/EEA parent company (Sister Fiscal Unity). The Tax Bill codifies, to a large extent, a decree of the Dutch State Secretary of Finance of 16 December 2014 (Stcrt. 2014, 38029), that was issued to extend the fiscal unity regime in anticipation of the Tax Bill. The Tax Bill also introduces rules to counter unintended effects of the fiscal unity regime extension. Finally, the Tax Bill tightens the ownership condition for the formation of a fiscal unity, such that full legal and beneficial ownership, including legal title, of at least 95% of the shares in the subsidiary must be held.
Intermediate Fiscal Unity
The EU/EEA intermediate subsidiary needs to satisfy certain requirements that correspond with the existing requirements for fiscal unity subsidiaries, including legal form (e.g., comparable to Dutch limited liability companies), tax residency (outside the Netherlands, within the EU/EEA), liability to a tax on profits in the EU/EEA country of residence and absence of a permanent establishment (PE) in the Netherlands.
The EU/EEA intermediate subsidiary cannot be included in the Intermediate Fiscal Unity; only the Dutch parent company and the Dutch second‑tier subsidiary held by such intermediate subsidiary. As a general rule, the EU/EEA intermediate subsidiary is treated as a regular participation of the Intermediate Fiscal Unity.
Sister Fiscal Unity
The EU/EEA parent company needs to satisfy certain requirements that correspond with the existing requirements for fiscal unity parent companies, including requirements to the legal form (e.g., comparable to Dutch limited liability companies, cooperative associations or mutual insurance companies), tax residency (outside the Netherlands, within the EU/EEA), liability to a tax on profits in the EU/EEA country of residence and absence of a PE in the Netherlands.
The EU/EEA parent company cannot be included in the Sister Fiscal Unity; only the Dutch subsidiaries held by such parent company (directly or indirectly via EU/EEA intermediate subsidiaries). In principle, one of the Dutch subsidiaries needs to be designated by the taxpayer as parent company of a Sister Fiscal Unity. Various aspects need to be considered in determining which subsidiary to designate as parent company. The designated parent company needs to meet the requirements for fiscal unity subsidiaries (e.g., strict requirement on legal form). The tax book year of the designated parent company ends at the time the Sister Fiscal Unity is formed.
Fiscal unity including EU/EEA company with a PE in the Netherlands
Under current law, a non-Dutch resident company with a PE in the Netherlands can be included in a fiscal unity as parent company, regarding its PE, if its shareholding in a qualifying Dutch subsidiary is attributable to such PE (PE Fiscal Unity). For non-Dutch resident companies that reside in the EU/EEA, the Tax Bill abolishes the attribution requirement. These companies can, furthermore, form a PE Fiscal Unity, regarding their PE in the Netherlands, with a Dutch subsidiary held via an EU/EEA intermediate subsidiary.
If an EU/EEA parent company owns multiple PEs in the Netherlands via (separate) EU/EEA intermediate subsidiaries, such PEs can be included in a Sister Fiscal Unity. Moreover, Dutch subsidiaries owned by that EU/EEA parent company can also be included in such Sister Fiscal Unity.
Rules to counter unintended effects of the fiscal unity regime extension
The Tax Bill introduces rules to counter unintended effects of the fiscal unity regime extension, including amendments to the liquidation loss rules and the interest deduction limitation rules for loans taken up for investment in participations qualifying for the participation exemption. The majority of these rules aims to avoid double deductions for losses incurred on receivables from, and shareholdings in, EU/EEA parent companies and EU/EEA intermediate subsidiaries.
Tightening of ownership condition
Under current law, the ownership condition for the formation of fiscal unity, that at least 95% of the legal and beneficial ownership of the shares of the subsidiary must be held, can under circumstances be satisfied if the legal title to the shares are held by an entity outside the fiscal unity (e.g., if the fiscal unity parent company owns depository receipts over shares of a subsidiary and (de facto) exercises the voting rights attached to such shares at its sole discretion). The Tax Bill tightens the ownership condition such that full legal and beneficial ownership, including legal title, of at least 95% of the shares in the subsidiary must be held.
Entry into force
The Tax Bill may be amended during the course of the legislative process, and will take effect after publication in the official Dutch Government Gazette (Staatsblad). The Tax Bill includes a two-year grandfathering rule for existing fiscal unities, with respect to the amendment to the ownership condition.
How to proceed?
The Tax Bill provides an incentive for international groups with operations in the Netherlands to investigate whether a(n) (extended) fiscal unity is available and beneficial. The Tax Bill is restricted to EU/EEA situations. Cases are however pending before Dutch tax courts, in which a fiscal unity is requested in group structures where parent companies and intermediate subsidiaries are established outside the EU/EEA. In these cases the position that a fiscal unity can be formed is based on a non-discrimination clause in a bilateral tax treaty. In addition, the Tax Bill does not include amendments based on the decision of the ECJ in the case Groupe Steria (C-386/14; see our Tax Flash of
2 September 2015). This case may, under circumstances, extend specific benefits of a domestic fiscal unity to a cross-border situation and may result in further amendments to the fiscal unity regime. In either situation, it should be considered to request a fiscal unity or file an objection, in order to preserve the taxpayer’s rights.