Corporate tax

Dutch group taxation in breach with EU freedoms

Niels van den Akker Niels van den Akker

On 22 February 2018 the EU Court of Justice decided that the Dutch fiscal unity regime is in breach with the freedom of establishment. The EU Court of Justice followed the opinion as made by the Advocate General Campos Sanchez-Bordona in the Case X BV and X NV versus the State secretary of Finance after the request for a preliminary ruling from the Supreme Court of the Netherlands. In Case of X BV the question was is deduction allowed by a resident parent company of interest on a loan for the purchase of shares in a non-resident subsidiary as this is the case when the parent company could join a fiscal unity with the subsidiary, which is only possible in case both companies are a resident in the Netherlands. In case of X NV the question was is deduction allowed by a resident company of the reduction in the value of shares in a non-resident subsidiary due to fluctuations in the exchange rate as this is the case when the parent could join a fiscal unity with the subsidiary, which is only possible in case both companies are a resident in the Netherlands.

Reply to the Supreme Court of Justice 

On 25 October 2017 the Advocate General proposed to the EC Court of Justice to reply to the Supreme Court of Justice as follows:

Article 49 of TFEU (freedom of establishment) precludes national legislation on the basis of which a parent company established in a Member State cannot deduct interest in respect of a loan associated with a capital contribution made to a subsidiary established in another Member State, whereas that deduction could have been availed if that subsidiary had been resident in the same State as the parent company.

Article 49 of TFEU (freedom of establishment) does not preclude national legislation on the basis of which a parent company established in a Member State cannot deduct from its profit losses (capital losses) derived from fluctuations in the exchange rate, in connection with the value of its shares in a subsidiary established in another Member State, where the same legislation does not provide, symmetrically, for tax to be levied on gains (capital gains) derived from those fluctuations.

On 25 October 2017 after the release of the opinion of the Advocate General the Minister of Finance published a press release whereby the statement was made that in case the EU Court of Justice will follow the opinion of the Advocate General en thereby the so called "per element" principle of the fiscal unity accept, this will led to a structural loss of the treasure chest (hundreds of Millions per year). Therefore the state secretary of Finance announced that with retrospective effect to 25 October 2017 the fiscal unity regime shall be changed in the matter that the fiscal unity regime shall not longer lead to a more favorable treatment in national situations relative to international situations.

The following emergency measures were announced:

  • Limitation of interest deduction to prevent profit drainage.
  • Limitation of the participation exemption.
  • Limitation of participation interest.
  • Limitation of loss carry forward by change of ownership.
  • Limitation of remittance reduction for dividend distributions.

This new fiscal unity regime have as a consequence that the fiscal unity regime will become more stringent for domestic relations and will lead to an increase of corporate income tax costs for enterprises. On the other hand for international companies, which claimed the interest deduction in previous years will have a benefit based on the judgment of the EU Court of Justice.

We expect that the Dutch Ministry the above mentioned measures in the foreseeable future will adapt en announce new legislation with retrospective effect to 25 October 2017.

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