Important changes for Dutch fiscal unity regime after ECJ decision
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Current fiscal unity regime
The existing fiscal unity regime allows two or more companies to be treated as a single taxpayer for corporate income tax (CIT) purposes in almost all respects, if they meet the applicable requirements. This means that if companies A and B enter into a fiscal unity, they can file a single CIT return and A's losses can be deducted from B's profits and vice versa. In addition, any transactions between A and B, such as capital contributions, loans and interest payments, are in principle disregarded for CIT purposes.
Background and ECJ decision in a nutshell
The EU Court of Justice (ECJ) ruled that the Dutch fiscal unity regime in its current form violates EU freedom of establishment rules. This because Dutch law only allows a fiscal unity to be established by two or more group companies that are either resident in the Netherlands or have a Dutch permanent establishment (PE). A fiscal unity between one or more Dutch companies and one or more foreign group companies without a Dutch PE (a 'cross-border' fiscal unity) cannot be established.
The ECJ ruled in an earlier decision (2010) that this was detrimental to foreign companies compared to Dutch companies and therefore constituted a restriction of the freedom of establishment. However, in the same decision the ECJ ruled that this restriction was justified because cross-border fiscal unities could lead to problems relating to taxation within the Member States, particularly because expenses might become deductible in two states instead of just one. Therefore, the existing fiscal unity regime remained unchanged.
The 2010 case dealt mainly with the fact that one company's expenses can be deducted from the other's profits and vice versa. The ECJ decision issued yesterday was about the other consequences of the fiscal unity regime, i.e. the fact that transactions between companies within the fiscal unity are disregarded for CIT purposes. This can affect numerous specific rules and provisions within the body of the Dutch Corporate Income Tax Act (CITA), such as interest deduction limitation rules, the participation exemption and loss carry-forward rules, because these rules and provisions are dependent on intragroup transactions. Consequently, they cannot be triggered by intragroup transactions that are disregarded because they have taken place between companies that form a fiscal unity. In this regard, the ECJ ruled that the restriction of the freedom of establishment could not be justified by the reasons put forward in 2010.
De ECJ decision means that all situations in which a (Dutch) company that is part of a fiscal unity might enjoy beneficial CIT treatment compared to a foreign company that cannot enter into a fiscal unity, must be tested separately and on their own merits to determine whether it is justifiable under EU law. This has been dubbed the 'per element approach'. If the situation is not justifiable under EU law, then the company must be awarded the same beneficial treatment.
Remedial legislation
The ECJ decision is in line with the advice from the advocate-general (A-G) in this matter, as provided on October 25, 2017. Following the advice from the A-G, the Dutch State Secretary of Finance already published plans to introduce emergency measures in the form of remedial legislation in case the ECJ were to decide against the State. In order to prevent structural damage to the state budget, the fiscal unity regime will be limited in its application so that certain transactions between the companies in a fiscal unity will no longer be disregarded. Broadly speaking, the following rules will likely be changed to no longer disregard transactions within the fiscal unity:
- The interest deduction limitation provision of article 10a of the Dutch CITA, aimed against base-erosion;
- The interest deduction limitation provision of article 13l of the Dutch CITA, aimed against excessive participation interest;
- Certain aspects of the eligibility test for the participation exemption;
- The loss carry-forward limitation provision of article 20a of the Dutch CITA; and
- The remittance reduction provision of article 11, paragraph 4 of the Dutch Dividend Withholding Tax Act.
If adopted by the Dutch Parliament, the remedial legislation will enter into effect retroactively as from October 25, 2017, 11:00 AM CET. This means companies may be affected with regard to any fiscal years ending on or after that date. The draft legislation itself is expected to be published in the second quarter of 2018.