Under Dutch tax legislation, Dutch tax resident sister companies can not form a fiscal unity if their parent company is a resident of a non-European Economic Area (EEA) country, such as Brazil or Mexico. In a court proceeding conducted by Baker & McKenzie, the Dutch Court of Appeal has ruled that this is in violation of the non-discrimination article as laid down in the tax treaty between Israel and the Netherlands. This important ruling expands the fiscal unity possibilities to structures in which the parent company or intermediate holding company is a non-EEA tax resident, provided that the applicable tax treaty contains a non-discrimination article. Since there is a non-discrimination article in the tax treaties concluded between the Netherlands and Brazil and the Netherlands and Mexico there could be possibilities for Brazilian and Mexican structures to also make use of the Dutch fiscal unity regime.
Fiscal unity advantages
The Dutch fiscal unity regime offers various tax benefits such as the compensation of profits and losses of fiscal unity members. Further, due to the fiscal consolidation, intercompany transactions between fiscal unity members are eliminated and therefore the realisation of income and capital gains can be avoided or deferred.
New possibilities: rely on the non-discrimination article to make use of the Dutch fiscal unity regime
Companies that want to form a fiscal unity must file a request to that effect. Under the current legislation, one of the requirements to form a fiscal unity is that the fiscal unity parent company must own at least 95% of the shares in the subsidiary. Further, all fiscal unity members must either be a Dutch tax resident or a Dutch permanent establishment of a non-resident company. Following recent EU Court of Justice case law, Dutch legislation has been amended such that Dutch tax resident companies may also form a fiscal unity, if their joint parent company or intermediate holding company is a resident of a EEA country (which includes EU member states). However, Dutch legislation still does not allow Dutch tax resident companies to form a fiscal unity, if their joint parent or intermediate company is a non-EEA tax resident.
The tax treaties concluded between the Netherlands and Brazil and the Netherlands and Mexico contain a non-discrimination article (NDA). On the basis thereof, a Dutch tax resident subsidiary with a shareholder in Brazil or Mexico, may not be subject to taxation which is other or more burdensome than in case its shareholder had been a Dutch tax resident. As such, there could be possibilities for Brazilian and Mexican structures to also make use of the Dutch fiscal unity regime if they rely on the NDA.
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Summary of the case - Israeli tax resident parent company
In the case at hand, Dutch tax resident sister companies were (directly and indirectly) owned by Israeli tax resident parent companies. The Dutch sister companies wanted to form a fiscal unity and filed a request. However, since their joint parent companies were all non-Dutch tax residents, this request was denied by the tax inspector and this decision was upheld by the Lower Court. Yet, according to the Court of Appeal, the fact that Dutch companies were not allowed to form a fiscal unity solely because of the tax residency of their joint shareholders, has caused taxation that is more burdensome than it would have been, had their shareholders been Dutch tax residents. Thus, in view of the Court of Appeal, denying the fiscal unity is in violation of the NDA as laid down in the tax treaty between Israel and the Netherlands, and the Dutch companies should be allowed to form a fiscal unity.
On the basis of this ruling, Dutch sister companies should now be allowed to form a fiscal unity, if their joint parent company is a resident of a country that has concluded a tax treaty with the Netherlands, as long as that treaty includes a NDA. In our view, on the basis of this ruling, the same should apply to structures in which a Dutch subsidiary is owned by a Dutch parent company through an intermediate holding resident in a non-EEA country.
What is next and how Baker & McKenzie can assist?
The Dutch State Secretary of Finance must now decide whether an appeal will be lodged with the Dutch Supreme Court. Yet, because a fiscal unity is only applicable upon request, we recommend companies who have a similar case as discussed above to file a fiscal unity request as soon as possible.