Netherlands: Foreign exchange, deductible intererest | KPMG | GLOBAL

Netherlands: Fiscal unity and foreign exchange losses, deductible interest limits

Netherlands: Foreign exchange, deductible intererest

The Dutch Supreme Court has referred two issues to the Court of Justice of the European Union (CJEU) concerning questions related to fiscal unity under the corporate income tax law.


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  • One case concerns foreign exchange losses realized on EU participation.
  • The other case concerns the limitation imposed on the deduction of interest (“profit shifting”). 

In both cases, the Dutch high court took a “per element approach”—that is, when there are subsidiaries resident elsewhere in the EU, but no cross-border fiscal unity is possible, this situation is nevertheless comparable to those for which such fiscal unity would be possible. If the fiscal unity would have offered a benefit for a certain element, then the taxpayers would have the option to claim the benefits of the separate elements of the fiscal unity. 

In 2011, the Dutch Supreme Court rejected this “per element approach.” Accordingly, the requests filed for rulings with the CJEU appear to be a change in position by the high court.

Foreign exchange losses on a UK participation

An interest in a Dutch parent company of a fiscal unity that held direct and indirect participations, some of which were established in the UK, A was held by the UK branch. Internal reorganizations took place in 2008 and 2009, which also involved intercompany debt. After the reorganizations, the Dutch company was held directly by the fiscal unity, while the UK branch was held indirectly by 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 rule would mean that such foreign exchange losses are, in principle, non-deductible. The question that arose was whether EU law would nevertheless require the foreign exchange loss deduction.

Lower courts in the Netherlands held for the taxpayer. The Dutch Supreme Court in referring the case to the CJEU asked the following questions:

  • Does the EU freedom of establishment require that foreign exchange losses incurred on the capital invested in an EU subsidiary be deducted if this is also permitted in domestic situations?
  • If so, then (1) for the purposes of determining the foreign exchange loss, do indirectly held subsidiaries have to be included in the deemed fiscal unity, and (2) do the foreign exchange results from earlier years also have to be taken into account?

Profit shifting

The second case concerned a claim for an interest deduction. A Dutch company borrowed from the group’s Swedish “top” holding company and then used the borrowed funds to make a share contribution in an Italian subsidiary that, in turn, used the funds to “delist” another Italian group company. Given that this case involved a loan from a related entity for the purposes of making a contribution in a related entity, the question was whether a lower court judgment was correct in concluding that the loan and contribution were not business-motivated. 

The Supreme Court requested a preliminary ruling from the CJEU in this case, concerning whether the Dutch tax law provision (section 10a) violates the freedom of establishment in those situations when application of the provision in national situations would be avoided by setting up a fiscal unity.

KPMG observation

Given these requests filed with the CJEU, prudent taxpayers would consider the practical consequences—deduction of interest or deduction of foreign exchange losses incurred on EU subsidiaries—in light of their own situations. 


Read a July 2016 report prepared by the KPMG member firm in the Netherlands: Important judgments for corporate income tax; Supreme Court requests preliminary rulings from the CJEU on the ‘per element approach’

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