On 22 February 2018, the European Court of Justice (ECJ) made a ruling which has major consequences for the Dutch fiscal unity regime (ECJ C-398/16 and C-399/16). The ECJ decided that in certain circumstances the regime conflicts with EU law. According to the ECJ, the Netherlands must apply the per-element approach to fiscal unities. This means that each benefit offered by a fiscal unity must be assessed separately to discover whether refusing to grant it in a cross-border situation is permissible.
The government anticipated this judgment by announcing retroactive remedial measures on 25 October 2017. These measures will now be incorporated in a Bill that is expected to be presented to the Dutch House of Representatives in the second quarter of 2018. If passed, the measures will come into force with retroactive effect to 11 am on 25 October 2017.
Content of the remedial legislation
The emergency remedial measures mean that companies in a fiscal unity will be treated as autonomous taxpayers for the application of certain tax regulations. This will apply to the interest deduction limitation rule to prevent base erosion (Section 10a of the Corporate Income Tax Act 1969 (CITA 1969)), the participation exemption rules (Section 13(9 to 15) and (17) CITA 1969), the excessive participation debt rules (Section 13l CITA 1969), the loss relief rules on a change in ownership (Section 20a CITA 1969) and the reduction of remittances for redistributions (Section 11 of the Dividend Taxes Act 1965).
Adverse consequences in practice
In practice, the measures mean an increase in the administrative burden for entities within a fiscal unity for corporate income tax purposes since, for example, the interest deduction on all loans within a fiscal unity will have to be assessed. The measures may mean that more corporate income tax is payable and so we recommend re-examining internal financing.
Opportunities in practice
Of course, the ruling by the ECJ also offers opportunities for taxpayers who are now faced with a limitation of interest deduction since a non-resident company cannot be a member of a Dutch fiscal unity. Under this judgment, it can be argued that this limitation of interest deduction is not allowed. We would be pleased to look at the possibilities.
We will keep you up to date on the draft legislation. Please contact us if you have any questions.