Developments concerning Dutch fiscal unity regime

Thursday 23 June 2011

There have been some recent developments concerning the Dutch regime for consolidated tax groups or fiscal unities. These developments may trigger a change of the current system in the near future.

Current Dutch system
Current Dutch legislation provides the option for certain group companies to file a consolidated return (fiscal unity). Corporate Income Tax (“CIT”) is imposed on the parent company of the group as if the group members and the parent form one taxpayer. A consolidated return allows the offset of losses of one company against profits of another company in a particular year and a tax-free transfer of assets and liabilities and dividend distributions between the group members. Generally, corporate group members may file a consolidated return if there is a Dutch resident parent company that (i) owns legally and economically (in)directly at least 95% of the nominal issued and paid-up share capital of one or more other Dutch resident companies, (ii) these companies have the same financial year as the parent, (iii) are subject to the same tax regime as the parent and (iv) the shares in the companies are not held by the parent as stock in trade, (v) a joint request is filed within a certain timeframe.
The current system does not permit two Dutch subsidiary companies both held by a foreign parent company to form a fiscal unity.

Opinion European Commission
The European Commission considers that current Dutch legislation on fiscal unities is contrary to the freedom of establishment provided in Articles 49 and 54 of the Treaty on the functioning of the European Commission and Articles 31 and 34 of the European Economic Area Agreement. The Commission does not see any possible justification for the restrictions in the Dutch fiscal unity system, also in light of the clear case-law from the European Court of Justice (“ECJ”) concerning discriminatory tax regimes. In the Papillon Case (C-418/07), the ECJ ruled that a French parent company and a French subsubsidiary company should be able to form a consolidated group or fiscal unity, in spite of the intermediate subsidiary being situated in another Member State. The Dutch Government is to give a satisfactory response to the European Commission within two months, or otherwise the Commission may refer The Netherlands to the ECJ.

Dutch court ruling
Just before the notification from the of the European Commission, a Dutch Court ruled that the Dutch situation is contrary to the Papillon Case. The District Court of Haarlem considered that the refusal of the Dutch tax authorities to permit the establishment of a consolidated group between two Dutch companies separated by an intermediary holding company was contrary to the freedom of establishment. The opinion of the District Court was that the Dutch parent company and a Dutch subsidiary or in this case subsubsidiary should be permitted to form a fiscal unity/consolidated group. But the foreign intermediate company should not me part of the fiscal unity. Appeal may be filed against this ruling.

Given the foregoing the Dutch Government should respond on the developments concerning the consolidated group or fiscal unity regime. We would anticipate that during the course of 2011 more clarity on position of the government or possible changes to the regime should be provided. 
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