Legislative proposal: remedial measures for Dutch fiscal unities following CJEU case law
Today, the Netherlands Ministry of Finance published a legislative proposal containing remedial measures to the Dutch fiscal unity regime pursuant to the recent “per element” jurisprudence of the CJEU.
6 June 2018
Based on the legislative proposal, certain Dutch tax provisions should be applied ignoring the existence of a Dutch fiscal unity. As announced earlier, most provisions are intended to apply retroactively to 25 October 2017.
The Dutch fiscal unity regime entails an attribution of income, assets, liabilities and activities of a Dutch taxpayer to a parent company (at least 95% legal and economic relationship required). As a result of this attribution (“consolidation”), (tainted) loans and (tainted) transactions between as well as participations held by fiscal unity members are not visible. Only Dutch taxpayers may be included in a fiscal unity. On 22 February 2018, the CJEU pronounced judgment on two cases in which the CJEU in essence ruled that the Netherlands is not allowed to deny certain benefits (“elements”) of the fiscal unity regime in EU situations, only because EU resident companies are not entitled to be included in a fiscal unity. Previously, the Dutch State Secretary of Finance already announced in a letter emergency remedial measures, as a result of which specific discriminatory advantages of forming a fiscal unity in domestic situations would be eliminated. Hence, the discriminatory “elements” of the fiscal unity regime are resolved by denying these fiscal unity benefits in domestic situations as well.
Emergency remedial measures
According to the proposal, fiscal unities will be deemed not to exist for the application of a specific number of statutory provisions within the DCITA and DDWHTA. Most importantly the related party financing rules (article 10a DCITA) as well as the excessive participation financing rules (art. 13l DCITA) but also parts of the participation exemption (art. 13 (paragraphs 9 through 15 and paragraph 17) DCITA, the mandatory revaluation of low taxed portfolio investments (art. 13a DCITA), the limitation of loss compensation rules (art. 20a DCITA) and a specific withholding tax reduction (art. 11 DDWHTA) need to be applied as if no fiscal unity exists. It should be noted that due to the retroactive effect, the emergency remedial measures will already affect existing fiscal unities.
Related party financing rule
If a loan is taken out from a related party outside the fiscal unity in order to finance a tainted transaction within the fiscal unity (i.e. dividend distribution, repayment of capital, capital contribution or acquisition of shares), based on the proposal, as from 25 October 2017 this transaction will become visible for tax purposes and as such the loan will fall within the scope of art. 10a DCITA. The same applies to a loan taken out from a related party included within the fiscal unity provided the loan is linked to a tainted transaction either within or outside the fiscal unity. In this respect it should be noted that it is explicitly stipulated that even though, due to the consolidation, the interest expenses in effect are not taken into account at the level of the fiscal unity, the non-deductible interest cost should be added to the fiscal unity result. However, if one of the counter evidence rules of art. 10a (3) can be invoked, art. 10a should not apply. Specifically for loans taken out from related parties included within the fiscal unity, it should be possible to demonstrate that a sufficient compensating levy exists provided no loss carry forward can be applied. Moreover it is noted that the application of art. 10a can also be avoided by eliminating the tainted loan (e.g. through a legal merger or capitalization of the tainted loan). No guidance has been provided on whether it is possible to “untaint” a tainted loan in case the tainted transaction is eliminated (e.g. through a legal merger or otherwise). For the application of art. 10a a grandfathering rule is introduced. However, this rule will only apply if the overall art. 10a-interest expenses of the fiscal unity will not exceed EUR 100.000 during a 12-month period.
Participation financing rule
Art. 13l limits the deductibility of interest expenses on all debt that is deemed to finance investments in subsidiaries. In many cases, the effects of the rule are limited if the taxpayer can prove that his acquisition of a subsidiary is in the context of expanding the group’s operational activities. However, in case of a tax planning structure, the operational escape does not apply.
In many cases, a Dutch holding company has debts, and Dutch operational activities may be structured in a different company part of the same fiscal unity. Until the emergency remedial measures becomes effective, interest expenses on the debt may be fully deductible because the debt is deemed to first finance the business assets of the operational fiscal unity member. The remedial measures however require the taxpayer to ignore the fiscal unity when applying art. 13l. As a result, interest expenses may become non-deductible. This could also apply to loans taken out from related parties included in the same fiscal unity (as with art. 10a). One benefit is that the threshold of deductible interest of EUR 750.000 is also applied per entity.
Future of fiscal unity regime
Potentially other elements of the Dutch fiscal unity regime are also contrary to EU law, for which new remedial measures may be announced in the future. It is not yet clear how the “per element” approach will apply to the EBITDA rules which will be included in the DCITA as of 2019.
Given that the fiscal unity regime is affected in its fundaments by these EU law developments, the Dutch government is considering a new group regime.
The underlying proposed remedial measures are unprecedented in view of the significant impact of the rules and the application of the rules with retroactive effect, whereby the scope of the rules (and thus the possible countermeasures) are not known yet. This has caused a storm in the Dutch tax world, fed by tax literature and by members of parliament. However, the Dutch government has chosen to pursue the route of denying fiscal unity benefits to Dutch taxpayers in order to eliminate the breach of EU law; granting the elements of the fiscal unity as benefits to non-Dutch persons would have cost the treasury too much.
In view of the parliamentary motion caused by the earlier announcement of the underlying remedial measures, the parliamentary process may take some time. However, it is generally expected that the legislative proposal will be enacted within the next few month(s), albeit that the retroactivity will be subject to fierce debate.
Please note that the remedial measures may adversely impact every Dutch fiscal unity. In some cases the impact is significant. In many cases difficulties arise in practice when establishing the historical facts.