The Dutch Government has launched a consultation on how to redesign the country's fiscal unity regime to bring it into line with EU law.
The fiscal unity regime allows Dutch parent companies and Dutch-resident subsidiaries and, subject to conditions, Dutch permanent establishments of foreign entities to file a single tax return. This enables a group to calculate its Dutch tax liability on a consolidated basis. This can significantly reduce the administrative burden for companies and may result in tax advantages.
The review of the regime responds to a European Court of Justice (ECJ) ruling in 2018 that elements of the regime are unlawful.
Following that ruling, earlier this year, the Government made limited changes to the regime, in the Emergency Repair of Fiscal Unity Act.
The new consultation is intended to ensure that the country establishes a new, robust, and future-proof group tax arrangement that is positive for businesses.
Specifically, the Dutch Government is considering whether to repeal the regime entirely or replace it with a different group tax arrangement, more commonly adopted in the EU.
The ECJ's Ruling In X BV
EU law issues arise where a corporate tax regime results in a parent company not being able to deduct costs or expenses or losses relating to a foreign subsidiary or a foreign branch where such items would have been deductible in the case of a domestic subsidiary or branch.
The ECJ ruled on 22 February 2018, that a Dutch-registered company's right to freedom of establishment under EU law was denied when the Netherlands denied a deduction for interest paid on a loan provided by its Swedish parent, in X BV v. Staatssecretaris van Financien (Case C-398/16).
In this case, X BV, a Dutch company which was part of a Swedish group, had purchased shares in an Italian subsidiary of the group from a third party through a capital contribution in a newly formed Italian company using funds borrowed from the Swedish parent company. The case revolved around the disallowance by the Dutch tax authority of an interest deduction claimed by X BV on its tax return for 2004 in respect of interest paid on the loan from the Swedish parent.
X BV argued that the deduction would have been treated differently had the transaction in question taken place between Dutch-resident entities with a Dutch parent under the country's fiscal unity regime.
X BV argued therefore that this difference in tax treatment constituted an infringement of freedom of establishment under EU law, and the European Court of Justice agreed.
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Options For Reform
The new Dutch consultation, which will run until July 29, 2019, looks at four potential options to ensure an EU law-compliant regime.
The consultation notes that although the emergency repair measures have remedied the most vulnerable elements of the regime, the risk of the regime being further challenged before the ECJ have not completely disappeared.
The Government is asking for feedback on whether the fiscal unity arrangement is useful and necessary and if, the Government should consider proposing the next step forward.
The consultation puts forward the following four options:
a) Continue the current fiscal unity regime, with the existing repair measures, and make further changes. This would involve excluding certain other arrangements from its scope and would potentially leave the regime open to further law challenges.
b) Completely abolish the fiscal unity regime.
c) Introduce a loss or profit transfer scheme, wherein every company in the tax group would be required to determine its own tax result. This would be in line with regimes in place in Belgium, Cyprus, Finland, Ireland, Lithuania, Malta, the United Kingdom, and Sweden.
d) Introduce a novel regime with cross-border application, to create fiscal neutrality between purely domestic situations and cross-border situations. The Dutch Government considers this final option to be problematic, since it may lead to base erosion and profit shifting and in particular a loss of tax revenues for the Netherlands. It also said this would still carry EU law risks, and it would significantly increase the administrative and compliance burden on businesses.
Once the consultation is over, the Government intends to send a letter containing proposals to the House of Representatives in autumn 2019. The draft legislation would be tabled for a technical consultation in mid-2020.