In his letter (the “Letter”) of 20 April 2018 the Dutch Under-Minister of Finance has answered questions raised by a member of the Second Chamber of Parliament regarding the Dutch corporate income tax (“CIT”) fiscal unity regime. As already reported in the Stibbe Tax Alert of 22 February 2018, following two recent rulings from the European Court of Justice which – in short - obliged the Netherlands to let taxpayers cherry pick benefits from the fiscal unity regime, the Under-Minister of Finance confirmed that the regime will be amended with retroactive effect to 25 October 2017 at 11.00 hours and that a legislative proposal (the “Urgent Legislative Proposal”) will be published in the second quarter of 2018.
In the Letter the Under-Minister of Finance acknowledged that introducing the amended regime with retroactive effect may indeed have certain undesirable consequences. Therefore, the Under-Minister has now announced a temporary transitional rule (the “Transitional Rule”). According to the Transitional Rule, under certain conditions the Urgent Legislative Proposal will not apply to interest - including costs and currency exchange results – in relation to the anti-base erosion rules of article 10a of the Dutch CIT Act limiting interest deductions on related party debt for the period until and including 31 December 2018. The most important conditions are that both the debt which is legally or de facto - directly or indirectly - due to a related entity or individual and the tainted transaction to which the debt related already existed on 25 October 2017 at 11.00 hours. In addition, the amount of the interest on the total debt may not exceed during a twelve month period an amount of Euro 100,000. If this cap would be exceeded, the full amount of interest would be non-deductible. Furthermore, if the tax inspector could demonstrate that the debt or the tainted transaction is not primarily based on business motives, the Transitional Rule will not apply.
The Urgent Legislative Proposal will in time be replaced with a new group relief arrangement which should be future proof both from a practical and legal perspective. Also in view of an attractive fiscal business climate, the Dutch Under-Minister of Finance will consult with businesses, relevant parties and scholars about such draft arrangement. It seems likely that the draft arrangement will be based on existing group relief arrangements in other countries. The consolidation approach as embedded in the current CIT fiscal unity regime will disappear. However, the most important element of the regime – to wit setting-off profits and losses between the entities included in the fiscal unity - will likely continue to apply.