On 25 February 2010, the European Court of Justice (ECJ) came to its judgment in the X Holding case, answering the question of whether or not the Dutch fiscal unity regime is compatible with EU Law.
Under Dutch tax laws, Dutch resident group companies may file their corporate income tax return on a consolidated basis (i.e., the fiscal unity regime of article 15 of the Dutch corporate income tax act (CITA)). A foreign resident company cannot be included in a fiscal unity. The companies included in a fiscal unity can be seen — for Dutch corporate income tax (CIT) purposes — as one single taxpayer, giving them the opportunity for tax-neutral reorganizations, transfer of assets, and internal transactions within the fiscal unity. The Dutch fiscal unity regime is therefore more profound than a group relief regime that facilitates solely the offset of losses of a group company against profits of another group company.
In 2003, X Holding BV, a Dutch resident company, filed a request with the Dutch tax authorities to form a fiscal unity with its subsidiary, a Belgium resident company. The Dutch tax inspector denied this request because the Belgian resident subsidiary did not meet the applicable requirement that it is either (i) a tax resident company in the Netherlands, or (ii) that it has a permanent establishment in the Netherlands. In the view of X Holding BV, the refusal to allow a (cross-border) fiscal unity is incompatible with EC law, especially in conflict with the freedom of establishment. The ECJ ruled that the fact that the Dutch tax system makes it possible for a Dutch resident parent company to form a fiscal unity for CIT purposes with its Dutch resident subsidiary, but does not allow the formation of such a fiscal unity with a non-resident subsidiary, is in principle in conflict with EU law (Article 43 in conjunction with Article 48 of the EC Treaty). Objectively, a Dutch resident subsidiary and a non-resident subsidiary in this case are found to be in the same situation by the ECJ, however, they are treated differently. According to the ECJ, this conflict can be justified by the need to safeguard the allocation of the power to impose taxes.
Unlike Advocate General (AG) Kokott in her opinion of 19 November 2009, the ECJ did not specifically address the additional tax-neutral opportunities offered by the Dutch fiscal unity regime. Focus of the ECJ seemed to be whether or not cross-border relief should be allowed. In principle, should a cross-border fiscal unity be allowed, it would offer the Dutch parent company the opportunity to choose freely in which EU Member State the subsidiary’s losses would be taken into account (i.e., by including or excluding a foreign company in the fiscal unity). For Dutch permanent establishments of foreign companies (that can be included in a Dutch fiscal unity as well), a claw back regulation has been implemented in Dutch domestic tax law in order to avoid double taxation (or double deduction). The ECJ, however, ruled that EU Member States cannot be obliged to provide the same kind of regulations to foreign subsidiaries of a Dutch resident parent company. Therefore, the justification to safeguard the allocation of the power to impose taxes was found proportional.