On 15 December 2017 a ruling of the Dutch Supreme Court was published in which it is essentially ruled that the Dutch fiscal unity regime, by disallowing a fiscal unity between Dutch sister subsidiaries of a joint Israeli parent company, is not in breach of the non-discrimination clause as included in article 27(4) of the Dutch-Israel tax treaty (the "Treaty").

Background

Based on the Dutch fiscal unity regime, a Dutch parent company that owns at least 95% of the shares in a Dutch subsidiary, upon a joint request, can form a fiscal unity for corporate income tax purposes. If included in a fiscal unity regime, profits and losses can be settled between the entities included in the fiscal unity and transactions between these entities are ignored for corporate income tax purposes (subject to certain anti-abuse provisions and pending EU case law regarding the 'per element' approach). Only the parent company has to file a corporate tax return that includes the consolidated income of the entities included in the fiscal unity.

Traditionally, the fiscal unity regime requires the parent of the fiscal unity to be a Dutch resident corporate income taxpayer. Subject to certain conditions, a Dutch permanent establishment of a non-resident corporate income taxpayer can also head a fiscal unity. However, the European Court of Justice in its ruling on the joint cases C‑39/13 to C‑41/13, in short, decided that the Dutch fiscal unity rules infringe the freedom of establishment as a Dutch parent company, under Dutch tax law, was allowed to form a fiscal unity with its Dutch based subsidiaries, whilst a parent of another EU/EEA member state was not allowed to form a fiscal unity with its Dutch based subsidiaries. Subsequently, the fiscal unity regime has been amended whereby a fiscal unity became possible between Dutch subsidiaries that are held by a parent company of another EU/EEA member state. We note that such fiscal unity is - according to the Dutch tax authorities - not possible with a parent of a third state (i.e. not an EU/EEA member state) which led to the ruling at hand.

 

The case of 15 December 2017

The key facts on which the Supreme Court ruling of 15 December 2017 is based, are as follows. An Israeli resident top company holds 99.9% of the shares in two Israeli subsidiaries that each hold 50% of the shares of three Dutch resident subsidiaries. Two of these Dutch resident subsidiaries each hold 50% of the shares in another Dutch resident subsidiary. None of the Israeli companies has a permanent establishment in the Netherlands. The Supreme Court had to decide whether the Dutch fiscal unity regime was in breach of the non-discrimination clause included in article 27(4) of the Treaty, as the regime disallowed a fiscal unity between the Dutch subsidiaries that were held by an Israeli top company. Art. 27(4) states: "Enterprises of one of the States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected."

The High Court ruled that the fiscal unity regime was in breach of the non-discrimination clause based on the different tax treatment of Dutch sister subsidiaries with an Israeli parent company wanting to form a fiscal unity (which is not allowed) and - the hypothetical situation that – Dutch sister subsidiaries with a Dutch parent company want to form a fiscal unity (which is allowed). However, the Supreme Court ruled that this comparison was incorrect. Instead, the Dutch sister subsidiaries of the Israeli based parent company wanting to form a fiscal unity should be compared to the hypothetical situation of the Dutch sister subsidiaries wanting to form a fiscal unity (i.e. without a parent company). Dutch subsidiaries cannot form a fiscal unity without a Dutch top company. Thus, the Supreme Court ruled that since there is no difference in tax treatment, the Dutch fiscal unity regime is not in conflict with article 27(4) of the Treaty.