Dutch fiscal unity regime amended: decision of ECJ has a large impact on the fiscal unity regime

The Dutch fiscal unity regime leads to an infringement of the freedom of establishment, as ruled by the Court of Justice of the European Union (hereafter: the ECJ) on 22 February 2018. The Ministry of Finance has announced legislation to remedy the possible loss of tax income with retroactive effect to 25 October 2017.

The case (Case C-398/16) concerned a Dutch company (X BV), which had paid up capital in an Italian wholly-owned subsidiary. X BV financed this capital contribution with a loan from its Swedish parent company. The interest paid by X BV to its parent company did not lead to taxation in Sweden because the parent company could offset this profit against losses from previous years. In such a case, Art. 10a of the Dutch Corporate Income Tax Act (CITA) is applicable. This leads to the refusal of the interest deduction for X BV.

X BV objected to this refusal of interest deduction using the following argument. If the Italian subsidiary had been established in the Netherlands, that subsidiary could have been part of a fiscal unity with X BV. In that case, the capital contribution would not have been visible taxwise. As a consequence of this, Art. 10a of the Dutch CITA would not have been applicable, so that the interest deduction could not have been refused. Dutch law prohibits a fiscal unity with a (wholly-owned) subsidiary established in Italy. According to the ECJ, this leads to an unacceptable limitation in the exercise of the EU freedom of establishment.

The Dutch Government will have to find a solution to grant the equal treatment of European subsidiaries and Dutch subsidiaries. This can be achieved in two ways. On the one hand, the Netherlands could decide that the refusal of interest deduction (Art. 10a of the Dutch CITA) can no longer be applied to European subsidiaries. On the other hand, the Netherlands may also decide that the refusal of interest deduction will also be applicable to Dutch subsidiaries, which are part of the fiscal unity. The Dutch government has opted for the latter as the other choice would lead to an unacceptable reduction of Dutch tax income.

The announced legislation, of which the precise content is not known yet, will mean that the fiscal unity is deemed not to exist for the application of Art. 10a and a few other provisions in the Dutch CITA, such as Art. 13l (refusal of deduction of excessive participation interest) and Art. 20a (limitation on loss settlement after the change of a shareholder). The fiscal unity regime more or less disintegrates, which will have significant consequences for taxpayers and their existing fiscal unities. Moreover, the fiscal unity regime becomes much more complicated. That is why the State Secretary (also) announced that the repair legislation should be followed by a new, simpler integrated group system within the foreseeable future.
The State Secretary will submit the announced legislation to the House of Parliament in the second quarter of 2018. We will inform you in more detail on the significant consequences this has for taxpayers and their existing fiscal unities shortly after submission to the House of Parliament.