The ECJ rules on the compatibility of the fiscal unity regime with the freedom of establishment.
On 22 February 2018, The European Court of Justice (ECJ) issued its decision in the joined Cases C‑398/16 and C-399/16. The decision regards the compatibility of the Dutch fiscal unity regime in the Dutch Corporate Income Tax Act with the freedom of establishment in the Treaty on the Functioning of the European Union (TFEU). The ECJ confirmed that the 'per element' approach which the ECJ introduced in the Groupe Steria case is also applicable to the Dutch fiscal unity regime. The ruling of the ECJ is in line with the conclusion issued by Advocate General Campos Sánchez-Bordona of 25 October 2017. The decision has a significant impact on the current fiscal unity regime. Therefore, on the same day emergency repair legislation was announced by the Dutch State Secretary of Finance.
Pursuant to article 15 of the Corporate Income Tax Act, the fiscal unity regime allows Dutch parent companies to file a consolidated tax return with their Dutch subsidiaries. The fiscal unity regime contains a number of advantages:
- Profits and losses of the companies within the fiscal unity are offset against each other.
- Assets can be transferred within the fiscal unity without triggering taxation.
- Loans between members of the fiscal unity are invisible for tax purposes.
- Payments (e.g. interest payments) can be made within the fiscal unity without recognizing any taxable income due to the consolidation.
Due to the mechanics of the fiscal unity certain anti-abuse provisions do not have any effect. Amongst others, this applies to limitations regarding the deductibility of interest. However, the fiscal unity regime is only available to companies that are established in the Netherlands. The above-mentioned advantages are not available to Dutch parent companies with subsidiaries in other EU-member states.
Case C-398/16 concerns a Dutch company which received a loan from its Swedish group company which was used to make a capital contribution in an Italian subsidiary. Pursuant to article 10a of the Corporate Income Tax Act, interest on loans received from group companies that are used to make a capital contribution in a subsidiary is non-deductible. Should the Italian group company have been a Dutch resident company, it would have had the right to form a fiscal unity with its Dutch parent company. Due to the consolidation, the capital contribution would then not be visible within the fiscal unity and the interest deduction restriction would not have any effect. The ECJ confirmed that the fiscal unity regime is in breach of the freedom of establishment, as it only allows Dutch resident entities to form a fiscal unity.
Case C-399/16 concerns a Dutch group company which suffered a currency loss on the value of the shares in its UK subsidiary. Pursuant to article 13 of the Corporate Income Tax Act, such currency losses are not deductible on basis of the participation exemption. According to the Taxpayer, had the UK subsidiary been a Dutch resident company, it would have had the possibility to offset the currency losses against the profits of its parent company in a fiscal unity. The ECJ ruled that the current situation was not comparable with the domestic situation, since the participation exemption exempts all profits and losses of subsidiaries and therefore does not allow Dutch companies to suffer currency losses. Moreover, the ECJ ruled that, given that the fiscal unity regime is only available to Dutch resident companies the freedom of establishment is not restricted, because currency losses related to participations in Dutch subsidiaries are very unlikely.
Emergency repair legislation
In order to counter negative budgetary effects, the State Secretary of Finance announced emergency repair legislation with retroactive effect as from 25 October 2017, 11:00 am. This legislation basically results in the application of Dutch tax law to a fiscal unity as if the fiscal unity does not exist and regards a number of specific regulations. As a result, the existing favourable treatment for domestic situations has been eliminated with immediate effect. This new legislation is expected to be officially proposed in the second quarter of 2018 and will have the retroactive effect as mentioned above.
The Dutch Government has announced that they will work on a group relief regime that should replace the fiscal unity regime. It is yet unclear when this new regime may be proposed. In all likelihood this will take about two years.We will keep you informed of future developments.