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Dutch Fiscal Unity Regime Updated
On 16 June 2011, the European Commission formally requested the Netherlands to amend its fiscal unity regime. According to the Commission, the fact that two sister companies cannot form a fiscal unity because both are held by a foreign EU parent company contravenes the freedom of establishment in the EU. The Netherlands were given two months to amend their regime. In the absence of a satisfactory response, the Commission may take the Netherlands to the European Court of Justice ('ECJ'). It remains to be seen whether the Commission will be successful in its claim if it reaches the ECJ.
In addition to the Commission's request, another EU-related development in respect of the Dutch fiscal unity regime is worth mentioning. Recently, a court in Haarlem ruled that Dutch Papillon-type legislative restrictions on fiscal unity are contrary to the freedom of establishment: the court held that a Dutch entity indirectly holding an interest of at least 95% in a lower-tier subsidiary can enter into a fiscal unity with such subsidiary, even though there is an interposed foreign EU-resident company.
Taxand Netherlands identifies the changes to the Dutch fiscal unity regime, what this means for Dutch companies, and how taxpayers can benefit from EU developments concerning the fiscal unity regime.
The Dutch fiscal unity regime allows companies to file a single tax return for a group of companies, thus facilitating tax compliance and allowing an offset for profits and losses and the elimination of intra-group transactions within the fiscal unity. According to the fiscal unity regime, only companies that are tax resident in the Netherlands can apply for inclusion in a fiscal unity. Furthermore, based on the law, only Dutch-resident entities at least 95% owned by another Dutch entity qualify.
On 9 June 2011 however, the Haarlem court ruled that the Dutch legislation on fiscal unity, which does not allow for the formation of a fiscal unity between a Dutch parent company and its Dutch lower-tier subsidiary if the latter is held by a company resident in another EU Member State (in the case at hand it was Germany), infringes the freedom of establishment provided for in Article 49 TFEU. This outcome is in line with the ECJ ruling in Papillon, in which the ECJ considered if it was possible for a French parent company to be taxed on a consolidated basis with its French lower-tier subsidiary, which was in turn held by a company resident in another EU Member State, and concluded that the bar on doing so was discriminatory and prohibited by EU law.
A further instance of discrimination may arguably be found in the fact that, based upon the wording of the law, Dutch sister companies owned by a parent company resident in another EU Member State cannot benefit from the fiscal unity regime. The question is whether, based on the outcome of the above cases, two Dutch subsidiary companies held by a common parent company resident in another EU jurisdiction should, under EU law, be allowed to form a fiscal unity with each other? On 25 January 2011 the Haarlem court ruled that Dutch law does not allow such fiscal unity. The court ruled that the formation of a fiscal unity between two subsidiaries was a matter of Dutch law and, as a result, none of the EU principles came into play.
The Commission, however, believes that in this respect the current Dutch fiscal unity regime contravenes the freedom of establishment without any justification for the applicable restrictions. This is why the Commission has formally requested the Netherlands to amend the regime.
Although Dutch law does not currently allow a Dutch parent entity holding (through a foreign resident company) an interest of at least 95% in a lower-tier Dutch subsidiary to enter into a fiscal unity, based on the outcome of the Papillon case and the decision of the Haarlem court on, such fiscal unity nevertheless should be possible.
Similarly, based on current case law, it is not possible for two Dutch subsidiaries directly or indirectly held by an EU-resident parent company to form a fiscal unity. The Commission's request could ultimately result in the amendment, and broader application, of the Dutch fiscal unity regime. However, even before such amendment is made, taxpayers may already take the view that a fiscal unity is possible under EU law.
The applicability of EU law and a broader application of the Dutch fiscal unity regime in the wake of the Commission's request may offer significant advantages to clients. After all, profits and losses may be freely offset among the members of the fiscal unity. Another advantage is that fiscal unity members can make tax neutral transfers of assets between each other, facilitating business restructuring processes.
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