The legislative proposal
In certain situations, the legislative proposal leads to the fiscal entity being disregarded. This means, among other things, that some regulations following from the Corporate Income Tax Act (“CITA”) and Dividend Withholding Tax Act (“DWTA”) must be applied as if the companies were taxed on a stand-alone basis.
The articles in this regard are, in short, the interest deduction limitation for the prevention of base erosion (article 10a CITA), certain parts of the group participation exemption (article 13 par. 9 to 15 CITA), the interest deduction limit for excessive participation interest (article 13l CITA), the loss utilization in case of change of ownership (article 20a CITA) and article 11 par. 4 of the DWTA.
Interest on related party debt
Article 10a, paragraph 1 CITA excludes the deduction of interest on debts to related parties, insofar as these debts relate to certain tainted transactions.
Due to the fact that article 10a CITA should be applied as if there were no fiscal unity, transactions that were previously ignored within the fiscal unity would become visible and could therefore fall within the scope of this article. This applies to current as well as past transactions. This could include, for example, profit distributions and/or capital (re)payments.
This may create a situation where interest is taxable at the level of one company, while that interest is not deductible at the level of the other company. There are exceptions, however, these must be further assessed on a case-by-case basis.
Excessive participation interest
Article 13l CITA contains an interest deduction limitation for interest on debts, insofar as these debts are related to the excessive financing of participations that fall under the scope of the participation exemption.
As a result of the legislative proposal, every company within the fiscal unity must now apply article 13l CITA as if the fiscal unity does no longer exist. The threshold of EUR 750.000 per company must be applied and only interest above this threshold can be deducted.
The interest is still deductible insofar as this interest is attributable to the period before 25 October 2017, 11 AM and the deductibility is not otherwise limited.
Application of participation exemption
On the basis of the legislative proposal, from 25 October 2017, for certain provisions of the participation exemption, article 13, paragraph 9 to 15 and article 17 CITA, it must be determined for each individual participation whether the participation exemption applies.
For example, the participation exemption only applies to an investment company if it is a “qualifying participation”. A participation may qualify as a qualifying participation if (i) it is subject to an effective tax rate according to Dutch standards or (ii) the assets of the participation for less than 50% consist of low-taxed portfolio investments.
We hereby note that in principle all Dutch companies will comply with the effective tax test and will therefore qualify for the participation exemption on an individual basis.
Utilization of losses
Article 20a CITA is aimed at combating the trading in loss making companies. The main rule is that if the interest in a company with a loss available for compensation, changes significantly (more than 30%), the loss can no longer be utilized unless the company remains active.
Now that the legislative proposal stipulates that article 20a CITA must also be applied as if there were no fiscal unity, the “activity test” must be determined for each individual company.
Article 11 par. 4 of the DWTA applies in case where a company receives (foreign) dividend income, which is then immediately distributed to the shareholder of the company receiving the dividends. In case of a Dutch fiscal unity, the specific provision of article 11 par. 4 DWTA applies but will be abolished under the legislative proposal.
Entry legislative proposal
If the legislative proposal is adopted, the changes will apply retroactively from 25 October 2017, 11 AM, unless stated otherwise. This is the moment when the emergency repair measurements have been announced.
Please note that other elements of the Dutch fiscal unity regime, which are not currently being amended in the legislative proposal, may also be in conflict with EU law and may therefore also have to be amended.
The legislative proposal can have significant consequences for your tax return from 25 October 2017. For example, several corporate tax rules apply to your fiscal unity as if there were no fiscal unity.
We are of course able to identify all the consequences of this legislative proposal for your fiscal unity and to advice on possible adjustments to the fiscal unity to mitigate the impact of this legislative proposal.