You will have noticed that the fiscal unity legislation for corporate income tax purposes will be ‘remedied’ retroactively as a consequence of two rulings by the Court of Justice of the European Union (CJEU) dated 22 February 2018.
This remedy also impacts existing Dutch fiscal unities. If and to what extent your business will be affected, is still uncertain. What is this all about?
The fiscal unity
For the purposes of levying corporate income tax, Dutch companies that have formed a fiscal unity are treated as one company. Considering the entire group as one taxpayer holds many advantages. Companies do not have to file separate tax returns, losses can be settled between them and transactions and loans between them will not in principle be taken into account. This is beneficial for, amongst others, interest deduction restrictions.
‘Per element’ approach
Based on domestic legal provisions, only companies that are actually established in the Netherlands can be included in the fiscal unity. A cross-border fiscal unity, between a company established in the Netherlands and a company established abroad, is not provided for.
In previous European rulings, it has already been determined that this prohibition is not contrary to European law. This means that the Netherlands is not obliged to allow fiscal unities in cross-border situations. However, in the two rulings dated 22 February 2018, the CJEU has determined that the so-called ‘per element approach’ applies.
This ‘per element approach’ means that certain benefits that become available to Dutch companies through the formation of a fiscal unity must also be available for similar European Union (EU)/European Economic Area (EEA) situations that do not allow for the formation of a fiscal unity because one of the companies is not established in the Netherlands.
The State Secretary of Finance has indicated that he is not willing to accept this ‘extension’ of the fiscal unity. As a consequence of the two CJEU rulings, the fiscal unity legislation will therefore be remedied. In a letter dated 22 February 2018, the State Secretary for Finance has indicated that he wishes to offer the emergency remedial measures announced earlier as a legislative proposal to the House of Representatives in the second quarter of 2018.
The State Secretary has decided, however, not to remove the inequality between domestic and EU/EEA situations by extending the beneficial elements of the fiscal unity regime to EU/EEA situations. On the contrary, he has chosen to remove the ‘beneficial’ elements of the fiscal unity in domestic situations. This leads to a containment of the fiscal unity.
The remedial legislation will have retroactive effect to 11:00 a.m. on 25 October 2017, when the emergency remedial measures were announced.
As a consequence, the following corporate income tax and dividend tax regulations must be applied from the aforementioned time as if there were no fiscal unity:
- anti-base erosion interest deduction limitation rules;
- investment participations in the participation exemption;
- excessive participation interest deduction limitation;
- loss compensation restrictions in the event of a change in beneficial ownership;
- for dividend withholding tax purposes; remittance reduction.
The details of the legislative proposal have not yet been communicated.
Future of the fiscal unity
The remedial measures that are implemented with retroactive effect will probably constitute a temporary solution. Expectations are that the Dutch fiscal unity will be revised drastically. The State Secretary previously announced that he is considering the introduction of a ‘future-proof group policy’. It is as yet unclear what this policy will entail. However, in response to the ruling by the CJEU, the State Secretary of Finance has indicated that the consolidation idea underlying the fiscal unity is not likely to be included in the new regulation.
Consequences and solution
The consequences of the remedial measures for your company depend very much on the actual situation. As the remedial legislation has retroactive effect, a higher company tax liability will in some cases be inevitable.
If possible, it may be favourable to defer filing the corporate income tax return for the year 2017 of the fiscal unity until more is known about the contents of the legislative proposal. In all cases, made-to-measure solutions are required.
In certain EU/EEA situations it may be beneficial to invoke the ruling of the CJEU for the period preceding the remedial legislation, in order to avail oneself of the benefits of the ‘per element approach’ for this period. For this to be successful, there must be a disadvantage that would not have occurred in a similar domestic situation. Whether this requirement is met must be assessed for each situation individually. Any such invocation of the ruling by the CJEU is only possible for the financial years for which no final corporate income tax assessment had been imposed prior to 11 a.m. on 25 October 2017. As of 11 a.m. on 25 October 2017, the remedial legislation excludes the possibility of invoking the ‘per element approach’.
It goes without saying that we will follow developments for you closely.