Recently, the European Court of Justice held that the Dutch tax consolidation regime is partially in conflict with EU law. Dutch companies affiliated through a non-resident company should, in principle, be able to successfully request the application of Dutch tax consolidation provisions, as long as these companies are residents of the EU or EER. The options to form a Dutch single tax entity have thus been extended, although future legislative changes might curb the consequences of the judgments.
The Dutch corporate income tax act grants resident parent companies and their resident affiliates the possibility of being taxed as if they formed a single taxable entity, provided that the intermediate subsidiaries are either a Dutch resident or have a permanent establishment in the Netherlands. In addition, resident sister companies can only form a single tax entity for Dutch corporate income tax purposes if the parent company has its place of effective management or permanent establishment in the Netherlands.
In three jointly examined cases, the European Court of Justice ruled that the effect of these requirements is that Dutch parent companies holding Dutch subsidiaries through subsidiaries in other member states are treated differently (and less favourably). The same applies to Dutch sister companies whose parent company is established in another member state. The Dutch tax consolidation regime thus constitutes a restriction on the freedom of establishment.
The ECJ held that these restrictions cannot be justified for reasons of overriding public interest, such as the need to ensure the coherence of the tax system or the prevention of offsetting losses twice.
The findings of the ECJ are in line with earlier case law. In the Papillon case, the ECJ reviewed the compatibility of the French group taxation regime with the freedom of establishment. The French group taxation regime reduced the tax liability of a resident parent company by allowing it to offset the profits and losses of all companies in a fiscally integrated group, but not in cases where the shares of an entity were held by a non-resident intermediate holding company. As in the case of the Dutch group taxation rules, the ECJ ruled that the French provisions restricted the freedom of establishment.
The ECJ judgments mean that there are more possibilities of qualifying for the Dutch tax consolidation regime. Dutch companies affiliated through a non-resident company should, in principle, be able to apply Dutch tax consolidation provisions as long as these companies are residents of the EU or EER.
The ECJ judgments clearly mean that Dutch law will soon change. But as the Dutch Ministry of Finance has not yet responded to the judgments, it is uncertain what these legislative changes will look like: a wider group of companies qualifying for the consolidation regime or another way of making the regime compatible with EU law to curb the effects of the judgments? In the future, the legislature might try to curb the consequences of these judgments.