On 12 June 2014, the Court of Justice of the European Union (Court) delivered its ruling in the SCA Group Holding BV and joint cases. In these cases the Dutch fiscal unity regime was challenged where it contains specific ownership requirements. The Dutch fiscal unity regime currently allows two or more Dutch tax resident companies within a group to elect to be treated as a single taxpayer for Dutch corporate income tax purposes, provided that these entities are part of an uninterrupted chain of Dutch tax resident companies. The Court of has now ruled that this requirement violates (higher ranking) EU Law, particularly the freedom of establishment. As a result, Dutch tax resident companies should be able to form a fiscal unity together, even if their joint parent or if the intermediate holding company is a resident of another EU Member State, as further explained below.
The current regime
The Dutch fiscal unity regime offers various tax benefits such as the compensation of profits and losses within the fiscal unity. Also, sales and services within the fiscal unity are disregarded for Dutch corporate income tax purposes.
One of the most important conditions for forming a fiscal unity currently requires that the Dutch resident parent company must own at least 95 percent of the shares in the issued and paid up share capital of the Dutch subsidiary and each intermediate subsidiary must also be included in that same fiscal unity. Because only Dutch tax resident companies can be part of a fiscal unity, this implies that the fiscal unity cannot be formed if the Dutch parent holds the shares of a Dutch company through a non-Dutch subsidiary. In other words, a purely domestic Dutch fiscal unity cannot be formed, unless there is an uninterrupted chain of Dutch tax resident companies*. Furthermore, two Dutch tax resident sister companies can only form a fiscal unity together if they have a joint Dutch tax resident parent company which should also be part of that same fiscal unity.
Click here to view diagram.
Combining the Netherlands companies in the diagrams reflected above in one fiscal unity is in principle not allowed under the current rules, unless the non-Dutch EU resident companies in the structure have a permanent establishment in the Netherlands to which the Dutch shares can be allocated.
The Court's ruling
After years of discussion and various lower court cases, the Court has now ruled that the Dutch fiscal unity regime violates EU law, rejecting several EU member states' justifications for the restrictions in relation to the ownership chain, such as maintaining a coherent tax system related to the prevention of the double use of losses. The Court addressed these arguments raised by the Netherlands (and other) authorities and determined, in short, that the risk of double loss relief is not relevant where a participation exemption regime excludes losses from the taxable base anyway (as is the case in the Netherlands).
Now that the Court issued its ruling, the Netherlands (and potentially other EU member states) may have to amend its (their) fiscal unity regime to allow a fiscal unity in situations that are similar to situations as reflected in the diagrams above. Although the ruling covers EU situations, we believe similar arguments can be made successfully in non-EU structures (i.e. with a joint non-EU parent or intermediate non-EU parent company) on the basis of the non-discrimination provision in most of the bilateral tax treaties that the Netherlands has concluded.
In the joined case C-40/13, the Court ruled that the exclusion from the fiscal unity regime of two Dutch resident sister companies held by a common non-Dutch EU resident parent that does not have a permanent establishment in the Netherlands constitutes a restriction on the freedom of establishment. The Court thus extends to sister companies the rationale it upheld in the Papillon case law (Case. C-418/07 of November 27, 2008), namely that a tax consolidation regime could not be dependent upon an ownership chain within a single EU Member State.
Since the possibility of integrating French sister companies held through a common EU parent company has been validated by the Court, this decision should allow some groups to elect retroactively for French group relief if such an election is in their best interests (e.g., for the off-set of profits against losses, neutralization of intragroup transactions, etc.) and file tax claims accordingly, (much like the opportunities opened in the aftermath of the Papillon decision), and within the time-limit provided for in Article L. 190 of the Book of Tax Procedures.