The Dutch corporate tax group regime in discussion
Since the introduction of a corporate tax in the Netherlands this tax has known a group regime, the so called ‘fiscale eenheid’ (Section 2.9, Corporate Tax Act 1969 (CTA)). This regime is based on consolidation and taxes the group companies that are part of it as a single entity (full consolidation). One of the requirements that must be met to enjoy this group regime is that the parent company and its subsidiaries are residents of the Netherlands. This means that the advantages of the group regime are in principle not attainable with respect to foreign group members. The disputes that are discussed in this blog are about whether this outcome of the Dutch group regime is in line with the freedom of establishment of Article 49 and 54 TFEU (Treaty on the Functioning of the European Union). To put it all in perspective, first an overview will be given of the main advantages of the Dutch corporate tax group regime.
The advantages of the Dutch corporate tax group regime
The group regime of the CTA has several advantages. First of all, it allows the profits and losses of the companies that constitute the group to be consolidated. So, a group company can offset its loss against the profits made by other group companies. Secondly transactions carried out between the group companies remain neutral for corporate tax purposes. That is to say no profit is taken into account for these transactions. Thirdly internal capital participations, debts and receivables between the group companies are non-existent (this also means that interest payments between group companies are ignored). Fourthly the number of tax returns that have to be filed by the taxpayers and processed by the revenue authorities is substantially reduced.
Because the Dutch group regime has many advantages it is rather popular with Dutch corporate taxpayers. It is also unique in Europe and goes much further than other European group regimes because of the concept of full consolidation.
The first dispute
The first dispute regarding the compatibility of the Dutch corporate tax group regime with EU law resulted in CJEU 25 February 2010, X Holding (C-337/08). In this case a Dutch parent company argued it should be allowed to take into account the loss of a Belgian subsidiary although the latter was not a resident of the Netherlands. In paragraph 19 of C-337/08 the court ruled that the refusal of the Dutch tax authorities to accept the Belgian loss made it less attractive for the Dutch parent company to set up a subsidiary in another EU-Member-State and exercise its freedom of establishment. Nevertheless the court ruled that the refusal was justified “in view of the need to safeguard the allocation of the power to impose taxes between the Member States and that the restriction on the freedom of establishment stemming therefrom was proportionate to that objective” (CJEU 22 February 2018, X BV (C-398/16), paragraph 23).
The second dispute
In CJEU 12 June 2014 (SCA Group Holding and Others (C-39/13, C-40/13 and C-41/13)) the court had to rule amongst others on a case regarding a Dutch parent company claiming the Dutch corporate tax group regime with a Dutch subsidiary although the shares in the latter where not held directly but through an intermediate holding that was not a resident of the Netherlands but of another EU Member State. Since this was not in line with the CTA at the time the Dutch tax authorities refused the application of the group regime. However, the CJEU ruled that this refusal was discriminatory and could not be justified in the light of possible tax evasion. A similar decision was taken in a case regarding two sister companies that were residents of the Netherlands but had a German parent company. The two sister companies were allowed the Dutch corporate tax group regime. Although the Dutch tax authorities lost these cases the decisions of the CJEU did not alter the fact that only companies resident in the Netherlands could enjoy the benefits of the Dutch group regime.
The third dispute
The third dispute – CJEU 22 February 2018, X BV (C-398/16) – dealt with a Dutch subsidiary that was part of a Swedish group and had taken out a loan with a related Swedish company. The Dutch subsidiary used the money to contribute to the capital of an Italian company that it had set up to buy shares in another Italian company that was not yet fully owned by the Swedish group. The interest due on the loan was deducted by the Dutch subsidiary in its corporate tax return, but the Dutch tax authorities refused the deduction on the basis of Article 10a CTA. Article 10a CTA is a provision against tax base erosion and is applicable in cases as in this dispute.
The Dutch subsidiary did not accept the view of the tax authorities and argued that the interest would have been deductible if it could have opted for the Dutch group regime with its Italian subsidiary. In that case the contribution to the capital of the latter would have been non-existent for corporate tax purposes and Article 10a CTA would not have been applicable on the interest payment. By refusing this advantage of the Dutch group regime, because the immediate Italian subsidiary was not a resident of the Netherlands, the Dutch subsidiary argued it was denied its right to freedom of establishment.
When passing its judgment, the CJEU ruled in favor of the Dutch subsidiary. Referring to the facts of the case it decided that there was a difference in treatment between an entirely Dutch situation and a EU-cross border situation that could not “be justified by overriding reasons in the public interest”. Therefore the Dutch tax authorities were forced to allow the interest payment as claimed by the Dutch subsidiary. In passing this judgment the CJEU did however not abandon its contrary decision of 25 February 2010, X Holding (C-337/08). So some of the advantages – at least the consolidation of profits and losses – are still reserved for group companies that are resident in the Netherlands.
Reaction of the Dutch government and legislator
The Dutch government welcomed the outcome of the first dispute because it confirmed its view that the Dutch corporate tax group regime and its advantages did not have to be extended to group companies that do not reside in the Netherlands. Although the Dutch government was not happy with the outcome of the second dispute the Dutch legislator had no other option than to amend the CTA in line with the outcome of the dispute. However the Dutch government could still maintain its view that the advantages of the Dutch corporate tax group regime were not available for group companies that are not residents of the Netherlands. This changed with the outcome of the third dispute. The Dutch government recognized that some advantages of the Dutch group regime have to be shared with group companies that are residents of other EU Member States.
Since the Dutch government did not like this outcome and feared its budgetary impact, it decided to introduce a bill that ended the aforementioned advantages of the Dutch group regime for companies resident in the Netherlands. This bill was accepted in parliament and became law (State Gazette 2019, 175). In this way equal treatment was restored by the legislator for all EU-situations but not in the way taxpayers had hoped for. From their point of view it can be argued that now everyone is worse off.
Although the Dutch legislator acted rather swiftly the Dutch government is of the opinion that the new legislation may not be the final answer to the jurisprudence of the CJEU. It means that the altered group regime may still be vulnerable from a European law point of view and should therefor be replaced by a more robust and future-proof regime. In a so called internet consultation (https://www.internetconsultatie.nl/groepsregeling) it has presented four alternatives: continuation of the present regime (1), the complete abolishment of a corporate tax group regime (2), the introduction of a group relief regime in which solely losses or profits can be transferred from one group member to another (3) or the extension of the present regime to foreign group companies though with an exemption for foreign profits and losses (4). These four alternatives are discussed with the public and the outcome of this discussion will be used in a further legislative process.
Conclusions | The Dutch corporate tax group regime applies the concept of full consolidation and has important advantages for taxpayers. However a corporate taxpayer can participate in this regime only if it is a resident of the Netherlands. With respect to at least one but probably more advantages this is not in line with Article 49 and 54 TFEU, as was decided in CJEU 22 February 2018, X BV (C-398/16).
Rather than opening up the Dutch group regime for foreign group companies, the Dutch legislator decided to deny Dutch group companies the advantages that otherwise should be awarded to foreign group companies. Although one might think that this would be enough to bring the Dutch group regime in line with EU law the government has started a discussion about the future of the group regime.
Looking at the alternatives presented by the Dutch government continuation of the present regime seems to be favorite especially with small and medium enterprises. There is also support for a group relief regime because it is supposed to be less complicated by those who support this alternative. The Dutch government itself has initially declared that the concept of full consolidation, the unique feature of the Dutch group regime, is no longer maintainable. This would mean that continuation of the present regime is not an option. In the light of growing support for this alternative and the plans for a European Common Consolidated Corporate Tax the Dutch government might want to think again.