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22 February 2018 / news

CJEU confirms application of the “per-element approach” and rules that Dutch tax consolidation infringes the freedom of establishment


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On 22 February 2018, the Court of Justice of the European Union (CJEU) issued its judgment in the joined Dutch cases X NV and N BV. These cases deal with the application of the “per-element approach" in the context of the Dutch tax consolidation regime (fiscal unity) in situations concerning:

  • The Dutch interest deduction limitation rule to prevent base erosion and;
  • The non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary.

Loyens & Loeff represented the taxpayers in both cases.

In general, the CJEU confirmed that the so-called ‘per-element approach’ adopted by the CJEU in the Groupe Steria judgment is also applicable for the Dutch fiscal unity. Insofar interest deduction limitations do apply to corporate tax payers with stand-alone foreign EU subsidiaries, while the same limitations do not apply in situations where the subsidiaries are included in a fiscal unity with the corporate tax payer, the freedom of establishment is infringed. In turn, as regards, the impossibility to deduct currency losses outside the fiscal unity, does not constitute an infringement to the freedom of establishment, according to the CJEU decision.

The decision will probably lead to many corporate tax payers with foreign EU subsidiaries claiming higher amounts of deductible interest in their tax returns. According to the Secretary of State for Finance this may have a negative impact on the Dutch budget. This is why he announced that the decision means the end of the current Dutch tax consolidation regime. Provisional legal counter measures were already announced on 25 October 2017 and will now be put into force.

Case on interest deduction limitation to prevent base erosion

The first case before the CJEU concerned the Dutch interest deduction limitation rule to prevent base erosion (art. 10a of the Dutch Corporate Tax Act). This anti-abuse provision disallows deduction of interest paid by a Dutch corporate taxpayer to a related party where the relevant debt is connected with, inter alia, a capital contribution in a subsidiary. If the taxpayer had formed a prior fiscal unity (tax consolidation) with the subsidiary, the capital contribution would not have been recognized for tax purposes as a result of the tax consolidation. Therefore, the interest deduction limitation rule would not have applied. Since the fiscal unity regime is generally restricted to Dutch resident subsidiaries, the effect of the interest deduction limitation rule at issue can only be avoided in domestic situations. The CJEU concluded the application of the interest deduction limitation, in light of the beneficial effect of a fiscal unity in purely domestic situations, infringes the freedom of establishment and cannot be justified either by the need to safeguard a balanced allocation of the powers to tax, the coherence of the tax system or to prevent tax avoidance.

Case on currency losses on participations in EU subsidiary

The second case dealt with a currency loss suffered on a Dutch resident corporate taxpayer’s participation in a subsidiary residing in another EU member state. Such a loss is not deductible (whereas profits are exempt) at the level of a Dutch parent company under the Dutch participation exemption, which exempts all profits and losses with regard to a participation in a qualifying subsidiary. Had the taxpayer and the subsidiary been included in a fiscal unity, a currency loss related to the assets of the consolidated subsidiary would have been deductible. However, since the fiscal unity regime generally only extends to Dutch resident subsidiaries, the non-deductible currency loss in this case could not be avoided by including the subsidiary in a fiscal unity. In this specific case the CJEU ruled that there is no infringement of the freedom of establishment based on a symmetry argument: under Dutch law both currency losses and currency profits are not taken into account.

Response of the Dutch State Secretary of Finance

In response to the CJEU’s judgement, the Dutch State Secretary of Finance stated that the provisional measures announced on 25 October 2017 will become new legislation. Based on the announced legislation, several provisions in the Dutch corporate income tax act and the Dutch dividend withholding tax act need to be applied as if the Dutch tax consolidation regime does not exist. As a result, several benefits of the current Dutch tax consolidation regime will no longer be available in domestic situations. The legislative proposal is expected to be published in the second quarter of 2018 and will enter into force retroactively as from 25 October 2017, 11:00 am.

The Dutch State Secretary of Finance furthermore stated that the decision of the CJEU means the end of the current Dutch fiscal unity regime. The announced legislation will be replaced by a new future-proof group regime within a foreseeable period. It is not yet clear how this new regime will be shaped.


We will keep you informed of any further developments. Please contact your trusted adviser at Loyens & Loeff in case you have any queries.

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