On June 12, 2014, the EU Court of Justice ("ECJ") ruled in two joint cases that the Dutch fiscal unity regime infringes on the EU freedom of establishment, because it does not allow a fiscal unity between (i) a Dutch resident parent company and its second-tier Dutch resident subsidiary held through an EU resident intermediate company, or (ii) two Dutch resident sister companies held by the same EU shareholder. The ECJ further ruled that there is no justification available for this infringement. The Netherlands will have to eliminate this infringement from its tax law. In the meantime, the Dutch tax authorities will have to approve pending fiscal unity requests for these type of structures. 

As a starting point, each Dutch resident entity has to file a corporate tax return and is liable to corporate tax on a stand-alone basis. The Dutch fiscal unity regime allows two Dutch corporate taxpayers to form a consolidated group, a "fiscal unity," for corporate tax purposes. The member companies of a fiscal unity may file a single, consolidated corporate tax return and pool their profits and losses. Transactions between fiscal unity member companies are ignored for Dutch corporate tax purposes. The minimum threshold currently requires a parent company to hold at least 95 percent of the shares, which should give right to at least 95 percent of the votes and profits, in a subsidiary to be able to form a fiscal unity. 

Initially, a fiscal unity was possible only between Dutch incorporated entities. The regime was broadened to include certain types of foreign incorporated companies, provided they were resident in the Netherlands, and, in accordance with the EU freedoms and international nondiscrimination principles, over time extended to include the Dutch permanent establishments ("PEs") of foreign resident entities. However, prior to the ECJ rulings, in order to be part of a fiscal unity, the regime required each company in the ownership chain—both the parent and the direct and lower-tier subsidiaries—to be resident (or have a PE) in the Netherlands. 

In the 2008 Papillon case, the ECJ ruled that a French parent and its second-tier subsidiary should be able to apply the French tax consolidation regime, as long as the intermediate holding company is a resident of an EU member state. This ultimately led to the EU Commission formally requesting the Netherlands to amend its fiscal unity regime on June 16, 2011. So far, this has not happened. In the June 2014 cases, however, the ECJ did not find any justification for the limitations in the Dutch regime. It found that the rules cannot be justified by the need to prevent double loss deduction, nor are the rules sufficiently specific to be justified by the need to prevent tax evasion or tax avoidance. Many argue that these two ECJ cases may open the door to tax planning regarding double loss deduction. 

A bill to amend the fiscal unity regime has not been presented yet and consequently, the measures that will be taken are not yet clear. However, based on the two ECJ cases, the Dutch tax authorities should technically have no choice but to approve pending fiscal unity requests between a Dutch resident parent company and its second-tier Dutch resident subsidiary held through an EU resident intermediate company or between two Dutch resident sister companies held by the same EU shareholder. Moreover, the ECJ rulings may have consequences for other tax consolidation regimes in the EU. These may be favorable developments for international groups structured through various EU member states.