Advocate General Court of Justice of EU: Dutch tax consolidation regime could infringe right of establishment
On 25 October 2017 an Advocate General (AG) of the Court of Justice of the European Union (CJEU) delivered his opinion in two Dutch cases about the consequences of the CJEU judgment in the French Groupe Steria case for the Dutch tax consolidation regime (fiscal unity) in situations concerning (i) the Dutch interest deduction limitation rule to prevent base erosion and (ii) the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary. Loyens & Loeff is representing the taxpayers in both cases.
In general the AG is of the opinion that the ‘per-element approach’ adopted by the CJEU in the Groupe Steria judgment is also applicable for the Dutch tax consolidation regime. If this approach is followed in the final judgment of the CJEU, this could have a major impact on the Dutch tax consolidation regime. The Dutch Government immediately announced legislation with retroactive effect (from Wednesday, October 25, 2017, 11:00 am) and a new company tax group regime in the near future if the CJEU is to follow the negative conclusion of the AG.
Case on interest deduction limitation to prevent base erosion
The first case before the CJEU concerns 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 would have 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 AG is of the opinion that the application of the interest deduction limitation, in light of the beneficial effect of a fiscal unity in purely domestic situations, infringes the EU freedom of establishment and cannot be justified by the prevention of tax avoidance.
Case on currency losses on participations in EU subsidiary
The second case deals 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. The AG is in this specific case of the opinion that there is no infringement of the free movement of establishment as under Dutch law both currency losses and currency profits are not taken into account.
Dutch Government announced legislation with retroactive effect
One hour after the opinion of the AG was published the Dutch government announced in a press release new legislation in case the CJEU is to follow the negative conclusion of the AG in the case on interest deduction limitations to prevent base erosion. If that happens, new legislation will come into force retroactively by 25 October 2017, 11:00 am. The new legislation means that some advantages of the fiscal unity would no longer be available in domestic situations by treating a fiscal unity in domestic situations in the same way as in a comparable EU situation (in which the advantages are also not available). The infringement with the right of establishment caused by the Dutch fiscal unity regime would in such manner be eliminated for the future. In addition, the Dutch government announced that the Dutch fiscal unity regime will, within a foreseeable period, be replaced by a company tax group regime that is future-proof if the negative conclusion of the AG is followed by the CJEU. That could entail a major overhaul of the Dutch tax consolidation regime.
We will keep you informed of any further developments. Please contact your trusted adviser at Loyens & Loeff in case you have any queries.