On 25 October 2017, Advocate General (AG) Campos Sánchez-Bordona issued his opinion in the Joined Cases C‐398/16 and C‐399/16 X BV & X NV versus the Dutch State Secretary of the ministry of finance (Staatssecretaris van Financiën). These cases were referred to the Court of Justice of the European Union (CJEU) in July 2016. They result directly from the ‘per element’ approach, as established by the CJEU in C‐386/14 Groupe Steria, for the Dutch fiscal unity particularly concerning interest deductibility and currency losses. If the CJEU follows the negative conclusion of the AG, this would have a major impact on the current Dutch fiscal regime.
Case C‐398/16 (interest deductibility)
The first case deals with the non-deductibility of interest on a loan received by a Dutch company from a related Swedish company to make a capital contribution in a non-resident subsidiary under the Dutch anti-base erosion provisions (Article 10a of the Corporate Income Tax Act). Within a domestic fiscal unity, the capital contribution would not be visible and as a result, the rule would not be applicable such that the interest would, hypothetically, be tax deductible. The taxpayer argued that if it had been permitted to form a fiscal unity with its non-resident subsidiary, it could have deducted the interest on the loan. Since the possibility to enter in a fiscal unity is only reserved for Dutch resident companies (and PEs of non-residents), the taxpayer argued that the freedom of establishment was restricted due to the non-deductibility of interest as investing in a non-resident subsidiary was less attractive than in a Dutch subsidiary.
In line with the CJEU’s judgments in X Holding and Groupe Steria, the AG concluded that the two situations were objectively comparable as they concerned the financial costs borne by the parent company related to its shareholding in a subsidiary, regardless whether there is a fiscal unity. The AG concluded that the two comparable situations were treated differently resulting a restriction on the fundamental freedoms. The Netherlands’ justifications regarding the need to maintain the coherence of the fiscal unity regime and the need to prevent tax evasion were not accepted by the AG. The AG argued thus in favor of the taxpayer.
Case C-399/16 (currency losses)
This case concerned a Dutch company, part of a Dutch fiscal unity, holding the shares in a UK subsidiary. These shares were subsequently contributed to another UK subsidiary. Upon contribution, the Dutch company incurred a currency loss on its contributed UK subsidiary. The Dutch tax authorities denied the deduction under the participation exemption rules. Under the participation exemption the benefits derived from a subsidiary and the transaction costs upon transfer of that subsidiary are exempt. The taxpayer claimed that if it had been permitted to form a fiscal unity with its UK subsidiary, it would have been able to deduct the currency loss incurred. This because the participation exemption rules are not applicable between entities included in the same fiscal unity. Since the possibility to enter in a fiscal unity is only reserved for Dutch resident companies (and PEs of non-residents), the taxpayer argued that the freedom of establishment was restricted due to the participation exemption. However,
The AG addresses the currency loss when the shares were transferred and the depreciation in the book value of the shares. Firstly, the AG recognizes a different treatment stating that a Dutch parent company cannot deduct a currency loss on an investment in an EU subsidiary where it would be able to do so if that subsidiary would have been part of a fiscal unity. However, the AG also concluded that the Dutch rule is symmetrical, meaning that insofar as currency gains are disregarded, currency losses may also be disregarded. With regard to the depreciation of the value of the shares, the AG did not come up with a clear answer. He suggests leaving the decision up to the national court to decide, if necessary.
Emergency response measures
Immediately after the Opinion of the AG, the Dutch Government announced new legislation in case the CJEU follows the AG’s Opinion in the case on the interest deductibility. Reason for these measures is that the Dutch Government is afraid that it needs allow interest deductibility with retrospective effect which would cost the treasury hundreds of millions. Under these measures certain provisions within the Dutch Corporate Income Tax Act and the Dutch Dividend Withholding Tax Act will apply within a fiscal unity, as if such fiscal unity was not present. Consequently, certain existing favorable elements of the fiscal unity for domestic situations are intended to be eliminated to have an equal treatment in a comparable EU situation. These measures will take effect as of 25 October 2017, subject to the CJEU’s judgment.
Additionally, if the negative conclusion of the AG is followed by the CJEU, the Dutch State Secretary of Finance announced that the Dutch fiscal unity regime will, within a foreseeable period, be replaced by a company tax group regime that is future-proof. That could entail a major overhaul of the Dutch tax consolidation regime.