Bill on fiscal unity emergency remedial measures
State Secretary for Finance Snel sent a bill to the House of Representatives that provides for adjustment of the fiscal unity regime in corporate income tax to the so-called “per element” case law.
13 June 2018
Bill with retroactive force
On Wednesday 6 June 2018, State Secretary for Finance Snel submitted the bill on emergency remedial measures for the Dutch fiscal unity regime to the House of Representatives. The bill provides for adjustment of the fiscal unity regime in corporate income tax to the so-called “per element” case law of the CJEU. It involves the codification of the emergency remedial measures already announced on 25 October 2017, following the conclusion of the CJEU’s AG in the case X&X. In its judgment of 22 February 2018, the CJEU followed the AG’s opinion and - in essence - decided that the Dutch fiscal unity regime is contrary to EU law on some points. The recently submitted bill generally corresponds with the emergency remedial measures announced earlier. The changes to the fiscal unity regime will become effective after the House of Representatives and the Senate have approved the bill. Most of the changes apply with retroactive effect to 25 October 2017, 11:00 am.
Contents of the bill
The conflict which the CJEU perceives specifically relates to a number of statutory regulations (“the elements”) that turn out more favourably for taxpayers in purely domestic situations than in cross border situations. After all, taxpayers can create a fiscal unity in domestic situations to avoid application of these regulations. The CJEU believes such favouring of domestic situations to be contrary to the freedom of establishment, and argues that the Netherlands should also grant these benefits in similar cross-border situations. This means cross-border situations should also benefit from the elements, and not that the fiscal unity regime as such should be extended to cross-border situations. Since the government rules out granting these benefits in cross-border situations as a realistic option, it has chosen to treat domestic situations more strictly in order to solve the conflict with EU law. The difference in treatment between domestic and cross-border situations vanishes when the benefits are disallowed within fiscal unities in domestic situations.
The bill stipulates that the presence of a fiscal unity should be disregarded for the application of the following statutory regulations: art. 10a (limitation of interest deduction), art. 13 (paragraphs 9 up to and including 15 and paragraph 17; participation exemption), art. 13a (revaluation duty non-qualifying investment participation), art. 13l (limitation of interest deduction for excessive participation interest), and art. 20a (limitation of loss set-off upon change in ultimate beneficial interest) CITA 1969, and the 1965 Dividend Withholding Tax Act. By so doing, taxpayers in domestic situations are treated just as “unfavourably” as in cross-border situations.
The above also implies that the deduction of a proportionate part of the interest that is attributable to the period from 25 October through 31 December 2017 can be limited under art. 10a or art. 13l CITA 1969.
Transitional measure art. 10a CITA 1969
By way of concession to SMEs, the bill provides for a transitional measure for the application of art. 10a CITA 1969. This statutory provision rules out deduction of interest on intra-group loans insofar as such interest is related to a prohibited transaction, such as a dividend distribution or capital contribution. Since such tainted transactions remain invisible within a fiscal unity, the interest paid remains fully deductible.
Under the remedial legislation, and particularly the retroactive effect up to 25 October 2017, it should be determined which part of the interest is attributable to the period before and after that moment. However, under certain conditions the transitional provision rules out application of the emergency remedial measures relating to art. 10a CITA 1969 through 31 December 2018. This concession applies for debts that existed prior to the announcement of the emergency remedial measures and meet all the conditions for application of art. 10a CITA 1969. Furthermore, the aggregate interest on these debts may not exceed EUR 100,000 over 12 months. No concession applies for taxpayers with higher amounts of interests, not for the first EUR 100,000 in interest either. To avoid abuse, the transitional measure is not applicable if the Inspector can demonstrate that the debt or the related legal act is not predominantly based on business motives. No transitional measure applies for the other statutory regulations referred to above.
The bill also provides for an amendment of art. 13a CITA 1969 (revaluation duty for non-qualifying investment participation). Fiscal unities are to be disregarded for the application of this regulation, too. Since this regulation was not yet included in the announcement of the emergency remedial measures on 25 October 2017, the change will not become effective until 1 January 2019 and will not have retroactive effect.
The bill also remedies an omission regarding the rate for the innovation box, which will have retroactive effect to 1 March 2018. Effective 1 January 2017, the innovation box was adapted in line with international agreements under transitional law. On 1 January 2018, the effective rate of the innovation box was raised from 5% to 7%, but erroneously the transitional law was not amended accordingly. The bill now remedies this omission. As indicated above, this has nothing to do with the changes to the fiscal unity regime.