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Dutch Government publishes draft legislation amending fiscal unity regime to be in line with EU freedom of establishment

Executive summary

On 6 June 2018, the Dutch Government published draft legislation to amend the Dutch fiscal unity regime. This follows the announcement of the Dutch Government in its letter published 25 October 2017 to cancel various benefits of the Dutch fiscal unity regime with retroactive effect to 25 October 2017, 11:00 AM.1 In short, the legislative proposal stipulates that for the application of the following provisions, a fiscal unity would be deemed not to exist:

  1. Anti-base erosion rules
  2. Excessive participation debt rules
  3. Certain specific elements of the participation exemption rules
  4. The loss relief rules in the case of change of ownership
  5. A specific reduction of dividend withholding tax in the case of an immediate redistribution

With respect to the anti-base erosion rules, the legislative proposal does include a grandfathering rule for intercompany loans in place prior to 25 October 2017 that relate to a tainted transaction executed prior to 25 October 2017. However, the grandfathering rule only applies if the interest expense of the fiscal unity on such intercompany loans does not exceed €100,000 during a 12-month period.

The Dutch Government reiterated that the legislative proposal is an emergency response and that these measures should be replaced by a company tax group regime that is future (European Union (EU)) proof both from a technical, legal and executional perspective.

Taxpayers should assess the impact of the legislative proposal on all Dutch fiscal unities and take appropriate measures to mitigate adverse consequences, if not already done. If measures have already been taken, they should be reviewed to determine whether they are sufficient.

Detailed discussion

Background

Pursuant to the Opinion of the Advocate General (AG) of the Court of Justice of the European Union (CJEU) in two cases on 25 October 2017, the Dutch Government announced emergency legislation cancelling various (domestic) benefits of the fiscal unity regime with retroactive effect to 25 October 2017 upon confirmation of the Opinion by the CJEU. On 22 February 2018, the CJEU confirmed the Opinion of the AG and the Dutch Government confirmed the retroactive law changes to the fiscal unity regime.

Fiscal unity regime

A group of Dutch resident companies, and in certain cases also Dutch permanent establishments of foreign companies, can file a single tax return and calculate the Dutch corporate income tax on a consolidated basis by forming a fiscal unity.

One of the benefits of the regime is that transactions within a fiscal unity are typically ignored, as a result of which for example, assets may be transferred between group companies without tax consequences and loans may be disregarded.

The draft legislation basically stipulates that for the application of certain provisions, the existence of a fiscal unity should be disregarded and the provisions should be applied absent the consolidation of the fiscal unity, effectively reviving certain transactions between entities in the fiscal unity.

Base erosion rules – article 10a CITA

The deduction of interest may be denied under the Dutch anti-base erosion rules if a related party loan was used to fund a “tainted transaction” (e.g., dividend distribution, capital contribution or the acquisition of a share interest). Within a fiscal unity, transactions between members of the fiscal unity are in principle disregarded for Dutch corporate income tax purposes. Based on the legislative proposal however, the anti-base erosion rules should be applied as if no fiscal unity exists. Consequently, both related party loans within a fiscal unity and tainted transactions between entities in a fiscal unity will be taken into consideration. If it is not possible to successfully invoke the counter-evidence rules, the taxable profit of the fiscal unity will increase with the amount of the denied interest deduction.

According to the explanatory memorandum to the legislative proposal, in the case of related party loans between entities in a fiscal unity, it should generally be possible to demonstrate that the interest is sufficiently taxed at the level of the recipient, provided that the recipient of the interest does not have net operating losses available that were incurred before the recipient was included in the fiscal unity.

The legislative proposal does include a grandfathering rule for intercompany loans in place prior to 25 October 2017 that relate to a tainted transaction executed prior to 25 October 2017. However, the grandfathering rule only applies if the interest expenses of the fiscal unity on such intercompany loans do not exceed €100,000 during a 12-month period.

Excessive participation debt rules – article 13l CITA

The excessive participation debt rules may limit the deductibility of interest expenses on debt that is deemed to have financed investments in subsidiaries, subject to certain exceptions for debt used to finance the expansion of the operational business of the group. The first €750,000 of interest expense is always deductible under the excessive participation debt rules. The excessive participation debt rules are currently applied at the level of the fiscal unity.

Under the proposal, the excessive participation debt rules should also be applied without regard to the existence of a fiscal unity. Hence, similar as to article 10a of the Corporate Income Tax Act (CITA), both loans between entities within the fiscal unity as well as participations held within the fiscal unity will be considered, potentially resulting in the interest deductions being denied. The threshold of €750,000 is applied per stand-alone entity.

In this respect it is important to note that simultaneously with the introduction of the earning stripping rule as of 1 January 2019, article 13l CITA may be abolished.

Participation exemption – article 13 CITA

The Dutch participation exemption regime exempts all income from qualifying participations from Dutch corporate income tax. Before 25 October 2017 the application of the participation exemption only needed to be assessed to the shares held by the fiscal unity.

Pursuant to the legislative proposal, the application of the participation exemption should be assessed without regard to the existence of a fiscal unity.

It is expected that the impact of this change is limited, as the participation exemption generally should apply to shares held in a Dutch tax resident company which would be eligible to join a fiscal unity.

Next steps

The draft legislation was sent to Parliament to undergo the normal parliamentary procedures. It is expected that the draft legislation shall enter into force on the date of publication in the Official Gazette and that most provisions shall have retroactive effect to 25 October 2017, 11:00 AM.

Implications

The impact of the legislative proposal on all Dutch fiscal unities should be assessed. In the case of loans between group companies within the fiscal unity, or debt at the fiscal unity level, the impact of disregarding the fiscal unity for the anti-base erosion rules and the excessive participation debt rules should be carefully considered.

Endnotes

1. See EY Global Tax Alerts, European Court of Justice AG opines that the Netherlands to apply a “per-element” treatment for Dutch fiscal unity regime, dated 27 October 2017 and Dutch Government confirms retroactive law changes to fiscal unity regime following CJEU’s ruling that certain elements of regime are not in line with EU right of establishment, dated 22 February 2018.

EYG no. 03195-181Gbl

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