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Netherlands: Dutch Cabinet responds to CJEU “per element” approach

Cases from Netherlands on fiscal unity

The Court of Justice of the European Union (CJEU) this week issued a judgment with respect to two corporate income tax cases for which the Dutch Supreme Court had requested preliminary rulings. In the joined cases before the CJEU, there was a common key issue—whether taxpayers, despite being unable to enter into a fiscal unity with subsidiaries established elsewhere in the EU, were nevertheless eligible for benefits from separate elements of the fiscal unity regime as if a fiscal unity with foreign subsidiaries can be entered into (the “per element” approach).

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Interest deduction limitation issue

One of the cases concerned an interest deduction limitation (profit shifting), specifically a Dutch company that borrowed from the Swedish top holding company of a group of which it was a member and then used the borrowed funds to make a share contribution in an Italian subsidiary that, in turn, used these funds to de-list another Italian group company. In this case, the CJEU followed the opinion of the Advocate General and found the deduction limitation was contrary to the freedom of establishment. 

Cabinet responds

The Dutch Cabinet had already announced emergency remedial measures that would have to be implemented with retroactive effect to 25 October 2017, if the CJEU were to follow the Advocate General's opinion. The measures mean that some corporate income tax and dividend withholding tax rules—even in domestic relationships—will have to be applied as if there is no fiscal unity. From a letter by the Deputy Minister of Finance (published 22 February 2018), it appears that the aim is to present the bill to the Lower House in the second quarter of 2018.

Foreign exchange losses

The other case concerned a Dutch parent company of a fiscal unity that held direct and indirect participations, some of which were established in the UK. An interest in the Dutch company was held via this UK branch. Internal reorganizations took place in 2008 and 2009 that also involved intercompany debt. After the reorganizations, the Dutch company was held directly by the fiscal unity, while the UK branch was held indirectly via a Luxembourg company. As a result of the reorganizations, a foreign exchange loss was incurred on the capital invested in the UK branch. The application of the participation exemption meant that such foreign exchange losses were, in principle, non-deductible. The question that arose was whether EU law would nevertheless require their deduction. With regard to this case and the issue of losses on EU participations, the CJEU found there is no violation of EU law. 

 

Read a February 2018 report prepared by the KPMG member firm in the Netherlands

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