On 8 July 2016, the Dutch Supreme Court referred preliminary questions to the Court of Justice of the European Union (CJ) about the consequences of the Groupe Steria case for the Dutch tax consolidation regime (fiscal unity) in cases concerning (i) the Dutch interest deduction limitation rule to prevent base erosion and (ii) the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary (under the Dutch participation exemption). In essence, the Dutch Supreme Court is requesting the CJ to clarify whether the ‘per-element approach’ adopted by the CJ in the Groupe Steria case is also applicable for the Dutch tax consolidation regime. The final judgments of the CJ, which are expected in 1-2 years, could have major impact on tax regimes in the EU.
Interest deduction limitation to prevent base erosion
The Dutch interest deduction limitation rule to prevent base erosion (art. 10a of the Dutch Corporate Tax Act) disallows deduction of interest paid by a Dutch corporate taxpayer to a related party where the relevant debt is connected with, inter alia, a capital contribution in a subsidiary. If the taxpayer would have formed a prior fiscal unity (tax consolidation) with the subsidiary, the capital contribution would not have been recognized for tax purposes as a result of the consolidation. Therefore, the interest deduction limitation rule would not have applied. Since the fiscal unity regime is generally restricted to Dutch resident subsidiaries, the effect of the interest deduction limitation rule at issue can only be avoided in domestic situations. The Supreme Court requests the CJ to clarify whether the application of the interest deduction limitation, in light of the beneficial effect of a fiscal unity in purely domestic situations, infringes the EU freedom of establishment.
Currency losses on participations in EU subsidiary
The second case deals with a currency loss suffered on a Dutch resident corporate taxpayer’s participation in a subsidiary residing in another EU member state. Such a loss is not deductible (whereas a profit is exempt) at the level of a Dutch parent company under the Dutch participation exemption, which exempts all profits and losses with regard to a participation in a qualifying subsidiary. Had the taxpayer and the subsidiary been included in a fiscal unity, a currency loss related to the assets of the consolidated subsidiary would have been deductible. However, since the fiscal unity regime generally only extends to Dutch resident subsidiaries, the non-deductible currency loss in this case could not be avoided by including the subsidiary in a fiscal unity. The Supreme Court asks the CJ to clarify whether the non-deductibility of a currency loss in relation to a shareholding in an EU subsidiary, in view of the deductibility of currency losses within a fiscal unity, is contrary to the EU freedom of establishment.
These cases are expected to provide more clarity on the question of which specific elements of domestic consolidation regimes also have to be available in cross-border situations. This is the so-called ‘per-element approach’ that was adopted by the CJ in the Groupe Steria case.
The CJ will rule on the questions referred by means of a judgment in about 1-2 years, and these judgments could have major impact on tax regimes in the EU. The Dutch Supreme Court will take the final decisions in these cases after the CJ has delivered its judgments. Loyens & Loeff will plead before the CJ in both cases and will keep you updated on further developments.
These cases emphasize that taxpayers should examine whether any tax advantage has been unavailable to them because they cannot form a cross-border fiscal unity and, where necessary, file an objection to preserve rights.