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On Thursday 22 February 2018 the European Court of Justice ("CJEU") decided that the benefits of elements of the fiscal unity regime can also be utilised in cross-border situations within the European Union. This decision could have a major impact on businesses.
Facts and circumstances
The CJEU has decided on two cases which the Dutch Supreme Court had referred to the CJEU for a preliminary ruling. Following these important decisions the fiscal unity in its current form will have to change. The cases concerned the Dutch anti-profit shifting rules (art. 10a CITA 1969) and the deduction of currency losses. In these cases, which the CJEU treated as consolidated cases, the CJEU concluded that the Netherlands is not allowed to favour domestic groups by neutralising (potentially harmful) tax provisions by applying a fiscal unity. This possibility does not exist for foreign group companies.
Interest deduction and currency losses
The first case concerns the limitation on interest deduction, which would not have been applicable in the case of a fiscal unity. Neutralisation of the limitation on interest deduction is a benefit based on the fiscal unity regime.
The second case concerns a similar issue with regard to currency losses on a British participation. In both cases the question was whether the Netherlands could decline the application of the separate benefits of the fiscal unity regime in cross-border situations.
Decision of the CJEU
The CJEU is of the opinion that the limitation on interest deduction is, in principle, a violation of EU law. By applying the fiscal unity, tainted transactions are no longer recognised and therefore interest would be fully deductible. The fiscal unity can only be applied in domestic situations. Therefore, the benefit could not be utilised in cross-border situations, which means that the interest might not be deductible. The argument of anti-abuse legislation of the Netherlands was not honoured.With regard to the currency losses the CJEU decided differently. The CJEU does not recognise an objectively similar case. The participation exemption implies benefits and disadvantages, therefore it is not always disadvantageous to foreign subsidiaries. Conclusion: there is no violation of the freedom of establishment.
Implications of the decision
In general, in cross-border situations it should be determined per element if there is a disadvantage in comparison with the fiscal unity situation. If so, based on the decision, this disadvantage is no longer allowed.
Response of the Secretary of State
In response to the conclusion of the AG in this case, the State Secretary of Finance pronounced an emergency remedial measure on 25 October 2017 to remit the tax benefits of the fiscal unity considering a possible negative outcome. The emergency remedial measures are designed in such a way that certain benefits for a fiscal unity are no longer allowed in domestic situations. These measures have retroactive effect until Wednesday 25 October 2017, 11:00 AM. This means that certain arrangements relating to corporate income tax and dividend withholding tax must be applied as if there was no fiscal unity. Next to art. 10a CITA 1969 as mention earlier, other examples are the participation exemption regime (with regard to the determination as to whether there is a qualifying investment participation, as well as anti-hybrid measures), the limitation on interest deduction with regard to excessive participation interest, loss set-off in the case of change of ownership and the deduction of dividend withholding tax in the case of flow through distribution. For other benefits, such as the tax-neutral transfer of assets and losses within the fiscal unity, the limitation would not be applicable. On 22 February 2018 it was announced that the legislative proposal will be presented to the Dutch Lower House in the second quarter of 2018.
Existing fiscal unities in the Netherlands could be affected by these new rules, which might lead to higher corporate income tax and/or dividend withholding tax. This measure also creates a higher administrative burden for the taxpayer, because the fiscal results as of the end of 2017 will have to be revised.
What to do?
If anti-abuse legislation was applicable in a cross-border situation, this might no longer be allowed as a result of this decision. If your company received loans from foreign group companies, then the interest payments might still be deductible for corporate income tax purposes. Also, other elements of the fiscal unity can be used with retroactive effect. For example, it could be questioned whether or not the making a distinction between holding and/or financing losses and operational losses will be allowed under this decision.For existing fiscal unities this decision might lead to higher corporate income tax and/or dividend withholding tax as a result of the emergency remedial measures. Restructuring might be necessary to mitigate the impact of these new measures. Please contact the tax specialists of AKD to determine the impact on your tax position.