Additional explanations regarding the legislative proposal changing the Dutch tax consolidation regime
On 2 November 2018, the Dutch government published additional explanatory notes regarding the pending legislative proposal to change the Dutch corporate income tax consolidation (fiscal unity) regime, the so-called ‘emergency repair measures’. Based on these measures, several provisions in the Dutch corporate income tax act (“CITA”) and the Dutch dividend withholding tax act must be applied as if the Dutch fiscal unity does not exist (see our Tax Flash of 6 June 2018). The measures will have retroactive effect to 1 January 2018 (see our Tax Flash of 16 October 2018). This could have a severe impact on the tax position of taxpayers that currently apply the Dutch fiscal unity regime.
The additional explanatory notes give new insights on how the emergency repair measures should be applied and are therefore of great importance to determine the impact of these measures for a Dutch fiscal unity.
The most important new insights
The main new insights given in the additional explanatory notes regarding the application of the emergency repair measures can be summarized as follows:
- Dutch government underlines that, despite various suggestions made in professional literature, the emergency repair measures will not be maintained as a permanent solution. Dutch government is set to introduce a new group regime, more similar to group regimes operated by other EU member states. Dutch government also rejects the suggestion to maintain a separate group regime (for example the current fiscal unity regime) for SMEs.
- Interest payments on loans between entities that are part of the same fiscal unity (Internal Loans) are normally completely disregarded (no deduction, no inclusion). Under the proposed measures, interest deduction limitations (anti-base erosion rule of art. 10a CITA and participation debt rule of art. 13l CITA) will apply also to interest on such Internal Loans. If an interest deduction limitation would apply to an Internal Loan, the taxable profit of the fiscal unity will be increased with the amount of the non-deductible interest. No exception clause will be introduced.
- Dutch government confirms that interest rates on Internal Loans will have to be at arm’s length (i.e. a transfer pricing correction may have to be made) prior to testing whether an interest deduction limitation applies. This means that the profit of a fiscal unity may be increased with an amount of interest which is higher than the actual interest on the loans concerned.
- Counterproof for application of the interest deduction limitation of art. 10a CITA (business reasons test for loan and related transaction and/or reasonable taxation test of corresponding interest income) will also be possible for Internal Loans. When conditions for such counterproof are met, the interest deduction limitation does not apply.
- Due to the fact that internal interest payments were disregarded when concluding the loan, it could be argued that base erosion was not the goal of such transaction and that the business reasons test should therefore be met by definition. This line of reasoning was however rejected meaning that real business reasons will have to be present to make use of this exception.
- The mere fact that interest income on Internal Loans is effectively not included in the taxable profit of the fiscal unity will not block counterproof through the reasonable taxation test.
- The Dutch tax authorities (“DTA”) will not adopt a strict approach with respect to requesting information from existing fiscal unities, if there is no specific indication that art. 10a CITA could apply under the emergency repair measures.
- For application of the participation exemption of art. 13 CITA, the Dutch government indicated that in domestic situations between entities that are part of the same fiscal unity, the effective tax rate test will in most domestic cases be met, also in case the Dutch tonnage tax regime applies.
- Dutch government rejects the suggestion to leave art. 13l CITA outside of the scope of the emergency repair measures for 2018, considering the fact that art. 13l CITA will be abolished as per 1 January 2019.
- For application of the interest deduction limitation of art. 13l CITA, the acquisition price of participations held by a tax payer is relevant. Such acquisition price of a participation that forms part of the fiscal unity was not relevant for tax purposes. It may therefore be difficult to assess the acquisition price. Nevertheless, no approval is given to ease such assessment of the acquisition price of participations that are included in a Dutch fiscal unity. The acquisition price needs to be established as if the Dutch fiscal unity never existed.
- Until the emergency repair measures have been adopted by Dutch Parliament it will not be possible for taxpayers to discuss the impact of the emergency repair measures with the DTA prior to filing a tax return. It will in any case not be possible to enter into pre-filing discussions with the DTA regarding the consequences of the emergency repair measure for the application of art. 13l CITA.
- Based on the emergency repair measures art. 20a CITA (the provision regarding potential forfeiture of carry-forward losses in case of a change in ultimate ownership ), could also apply in case of changes in the ultimate ownership in a taxpayer prior to 25 October 2017, 11:00 AM. This was caused by the fact that the measures have to be applied without temporal limitation i.e. as if the measures always applied to the taxpayer. Dutch government confirms that only changes in the ultimate ownership of a taxpayer which occurred after 25 October 2017, 11:00 AM can be impacted by the emergency repair measure in respect of art. 20a CITA. Furthermore, the rule only applies if the fiscal unity itself has carry-forward losses.
- In certain cases, the emergency repair measures have inadvertent effect on Dutch fiscal investment institutions. Additional measures will be taken for certain situations in due course.
A review of the tax position of taxpayers that currently apply the Dutch fiscal unity regime is required to determine the impact of the emergency repair measures. Actions, such as a reorganization, before the end of the year could in certain situations mitigate the potential adverse tax consequences of the emergency repair measures. We highly recommend to assess this as soon as possible. Please contact your trusted adviser at Loyens & Loeff in case you have any queries.
We expect the parliamentary process regarding the legislative proposal to be finalized in the first quarter of 2019. We will keep you informed of any further developments.