Dutch Supreme Court confirms application of the EU law based “per-element approach” to the Dutch tax consolidation regime
The Supreme Court rendered its judgement in two cases regarding the “per-element approach" to the Dutch tax consolidation regime (fiscal unity).
The cases concern:
- a Dutch interest deduction limitation rule, and;
- the (non-)deductibility of currency losses on certain participations.
On 8 July 2016, the Supreme Court raised preliminary questions to the Court of Justice of the European Union (CJEU) in these cases, which led to the judgement of the CJEU of 22 February 2018 concluding that the “per-element approach” applies to the Dutch fiscal unity. Today, the Supreme Court confirmed the judgement of the CJEU, see our tax flash on this.
Based on the CJEU ruling, the Supreme Court confirmed that the Dutch fiscal unity infringes EU law insofar this interest deduction applies to a Dutch taxpayer in relation with a EU subsidiary, while the application of this measure can be avoided in a domestic situation by including that respective subsidiary in a fiscal unity. This discriminatory treatment by the Netherlands cannot be justified. In line with the CJEU ruling, the impossibility to deduct currency losses outside the fiscal unity does not constitute an infringement to the freedom of establishment according to the Supreme Court.
Case on interest deduction limitation to prevent base erosion
The first case before the Supreme Court concerned the Dutch interest deduction limitation rule to prevent base erosion (art. 10a of the Dutch Corporate Income Tax Act (“CITA”)). 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 apply. Since the fiscal unity regime is restricted to Dutch resident subsidiaries, the effect of the interest deduction limitation rule at issue can only be avoided in domestic situations. The Supreme Court concluded that 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. The Supreme Court expressly rules that the per element approach does indeed apply per element; taxpayers can choose what elements of the consolidation regime they want to invoke, without having to accept other (negative) consequences of the regime.
Case on currency losses on participations in EU subsidiary
The second case concerned the impossibility to deduct a currency loss suffered by a Dutch parent company on a subsidiary residing in the EU under the Dutch participation exemption. If the taxpayer and the subsidiary would have 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 only applies to Dutch resident subsidiaries, the non-deductible currency loss could not be avoided in this case by including the subsidiary in a fiscal unity. The Supreme Court refers to the ECJ, that no infringement of the freedom of establishment is present 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
After the CJEU rendered its decision on 22 February 2018, the Dutch State Secretary of Finance stated that the announced provisional measures will become new legislation with retroactive effect as from 25 October 2017, 11:00 am. Based on these provisional measures, several provisions in the CITA and the Dutch dividend withholding tax act needs to be applied as if the Dutch consolidation regime does not apply. These measures aim to mitigate the impact of the “per-element approach” on the Dutch budget.
The draft legislative proposal regarding the implementation of the provisional measures in Dutch law was published on 6 June 2018. Given the judgement of the Supreme Court of today, we expect the additional explanatory notes to this draft legislative proposal to be published soon. In its letter of 15 October 2018, the State Secretary of Finance already confirmed to shorten the retroactive effect of the provisional measures from 25 October 2017 to 1 January 2018, as part of a package to improve the Dutch investment climate.
We will keep you updated on further developments. Should you have queries, please contact your trusted adviser at Loyens & Loeff.