Changes to the Dutch fiscal unity regime announced

Dutch tax law allows corporate income taxpayers to apply a tax consolidation regime. In recent years rulings by the European Court of Justice ('ECJ') have heavily affected this so-called fiscal unity regime, because of its infringement with EU law. A conclusion delivered by the Advocate-General (‘AG’) of the ECJ on 25 October 2017 allowing the ‘per element approach, resulted in the announcement of an emergency repair measure by the Dutch government. In order to mitigate the budgetary financial impact, new legislation would be introduced with retroactive effect to 25 October 2017 11:00 am in case the ECJ would follow the AG’s approach. As expected this happened on 22 February 2018 in ECJ rulings C-398/16 and C-399/16.

On 6 June 2018, the Dutch government published a legislative proposal (‘Proposal’) to amend the Dutch tax consolidation regime. Based on the Proposal several provisions included in the Dutch corporate income tax act (‘CITA’) and the Dutch dividend withholding tax act (‘’DWTA) must be applied as if the Dutch tax consolidation regime is non-existent. This broadens the scope of interest deduction limitations (article 10a and 13l CITA), rules limiting the possibility of loss compensation following a change of control (article 20a CITA) and rules limiting the application of the participation exemption (article 13 and 13a CITA). For purposes of the DWTA, it is proposed to apply the so-called "remittance-reduction" to profit distributions as if no fiscal unity is existing. 

In relation to article 10a CITA the Proposal clarifies that the fiscal unity should not only be ignored in case of an intra-group debt to an entity not belonging to the fiscal unity, but also in case of debt between entities within the same fiscal unity. Although the latter was not addressed in the recent ECJ rulings and the potential abuse is much less likely, the Dutch government fears that these loans could also be exposed to the 'per-element' approach which was accepted by the ECJ. The Proposal clarifies that article 10a CITA should in principle not come into play, if the creditor (either belonging to a fiscal unity or not) is located in the Netherlands, because it should be sufficiently taxed. This may however be different if the debtor (or fiscal unity to which it belongs) has (or expects) tax losses. It is further clarified that a taxpayer can take measures to mitigate the (negative) tax effect of article 10a CITA, for example by way of converting debt into equity, or a legal merger of entities that belong to the same fiscal unity. Unfortunately, the Proposal is not limited to intra-group loans with a creditor outside the fiscal unity, but also covers intra-group loans within the fiscal unity. The Proposal does not address other rules for which the per element may be relevant, for instance article 20(4) CITA which may limit the availability of holding losses.  

If approved by Dutch parliament, the changes will in principle be effective as per 25 October 2017, 11:00 (except for article 13a CITA, that deals with low-taxed passive investment entities, which will enter into force per 1 January 2019). For purposes of article 10a and 13l CITA, interest is however only in scope of the proposed rules to the extent it can be allocated to the period after 25 October 2017, 11:00. In addition, for purposes of article 10a CITA the proposal grandfathers smaller sized loans for the period 25 October 2017, 11:00 up to and including 31 December 2018 if certain conditions are met. In order to be in scope of this grandfather regime, it is required that any qualifying loan is already in place on 25 October 2017, 11:00 and the total amount of interest for such loan does not exceed € 100,000 (per fiscal unity).   

In the explanatory notes to the Proposal it is mentioned that the Dutch fiscal unity regime will be replaced in its entirety by a new tax grouping regime. On an earlier occasion the State Secretary of Finance has already announced that in 2019 a public consultation will take place.

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