The Netherlands must allow the “per element approach” | Deloitte Netherlands


The Netherlands must allow the “per element approach”

The CJEU in essence concludes that the Netherlands may not favour domestic situations by allowing a benefit that is not open to cross-border groups.

22 February 2018

Facts and circumstances

On 22 February 2018, the CJEU pronounced judgment on two cases which the Dutch Supreme Court had referred to it for a preliminary judgment. One case concerned the Dutch anti-profit shifting rules (art. 10a CITA 1969) and the other was about the deduction of currency capital losses. The CJEU treated them as consolidated cases and the Court in essence ruled that the Netherlands is not allowed to favour domestic groups by creating a fiscal unity, while such a fiscal unity is not permitted in cross-border situations.

Webcast (in Dutch) 28/2 - Judgment CJEU fiscal unity


Interest deduction and capital losses

The first case concerned application of the limitation of interest deduction under art. 10a CITA 1969. In certain situations Dutch laws restrict deductions of interest to avoid base erosion, without distinguishing between domestic and cross-border situations. However, in fully domestic situations taxpayers can avoid application of art. 10a CITA 1969 by creating a fiscal unity with a Dutch group company. By doing so, the tainted transaction (i.e. the capital contribution) will become invisible for tax purposes, thus ruling out limitation of interest deduction.

The second case was about the rules for currency losses. In the Netherlands, positive currency results from participations are basically tax-exempt, while exchange rate losses are non-deductible under the participation exemption. In this case currency losses were sustained on a British participation of a Dutch parent company during a group’s restructuring process. The deduction of these losses was disallowed with reference to the participation exemption. Yet these losses could effectively have been deducted had the Dutch parent company and the British subsidiary been able to form a fiscal unity, which would have permitted the British subsidiary to be treated as a permanent establishment rather than as a participation.

Coincidence with fiscal unity

The similarity between both cases is that, in principle, national rules equally apply to domestic and cross-border situations. However, restrictive legislation can be avoided by forming a fiscal unity in a domestic situation. Since fiscal unities can only be formed between Dutch based companies, the interested parties in these cases argue that a combination of these rules on the one hand and a fiscal unity on the other may constitute a violation of EU law. In the similar French Groupe Steria case, the CJEU likewise ruled that this concerns an infringement of the freedom of establishment.

Contrary to freedom of establishment

The CJEU judged that the Dutch rules basically constitute a violation of EU law in intra EU/EEA relationships. The Court particularly believes this is the case for the interest deduction limitations, where all of the interest would be deductible since no tainted transaction is manifest in the fiscal unity. Cross-border situations do not qualify for this benefit and the interest deduction potentially remains limited because fiscal unities are only open to domestic situations. The Court dismisses the Dutch argument that the interest deduction limitation is an anti-abuse rule by arguing that Netherlands obviously disregards anti-abuse rules in fiscal unity situations. This approach is also referred to as the per element approach. This judgment does not imply that fiscal unities are also allowed in cross-border situations now, but that limitation of interest deduction may not be applied in these cross-border EU/EEA situations.

However, the Court ruled otherwise with respect to the currency capital losses. The CJEU referred to a previous judgment in a Swedish case, in which it had judged that deduction of currency capital losses may be disallowed. In the present case, the CJEU particularly seems to judge that a direct link between the rules on currency capital losses and fiscal unities is absent.


With this judgment, the CJEU follows the earlier opinion delivered by the AG to the CJEU. Immediately after this opinion was delivered, the State Secretary for Finance wrote a letter announcing emergency remedial measures. These measures will be submitted in the form of a bill in the second quarter of 2018. After both Houses of Parliament have approved this bill, the measures will take effect retroactively to 25 October 2017, 11.00 am.

As a result, fiscal unities will be deemed not to exist for the application of a specific number of statutory provisions, i.e., art. 10a (limitation of interest deduction), art. 13 (paragraphs 9 through 15 and paragraph 17; participation exemption), art. 13l (limitation of interest deduction for excessive participation interest), and art. 20a (limitation of loss set-off upon a change in the ultimate beneficial interest) CITA 1969.

Yet there still seems to be room for recourse to the per element approach for assessments over periods before 25 October 2017 that are not yet irrevocable, and for the application of statutory provisions not mentioned in the letter. This goes for both EU/EEA situations and in relation to non EU/EEA Member States. In the latter case, a number of additional conditions apply. Firstly, a tax treaty should exist between the Netherlands and the respective country, which provides for a certain non-discrimination provision. On top of that, there should be a parent company in the treaty State with a Dutch resident subsidiary that is taxed more heavily than in a fully domestic situation.

The remedial measures that will be implemented with retroactive effect merely herald the introduction of a future proof group scheme whose final shape and form is yet unclear. Yet in a response to the CJEU’s judgment, the State Secretary for Finance indicated that the idea of consolidation on which fiscal unities are based will likely be abandoned in the new scheme.

Source: CJEU of 22 February 2018 consolidated cases C-398/16 (X) en C-399/16 (X), ECLI:EU:C:2018:110

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