The advantages of the Dutch tax group for corporation tax purposes have been further undermined by the Court of Justice of the EU (CJEU). On Thursday 22 February 2018 the CJEU issued a ruling that will have an impact on the Dutch business community.
Tax group for corporation tax purposes
Dutch law offers companies in the Netherlands the option to form a tax group for corporation tax purposes. The condition is that at least 95% of the shares must be held by the parent company. If this condition is met, all the companies included in the tax group are regarded as one taxpayer. The advantage of a tax group is that profits and losses can be set off against one another.
The unique nature of the Dutch tax group is that for example even assets with an unrealised book profit can be transferred untaxed to other companies within the tax group. Intercompany loans, dividend payments and capital contributions are not visible. This is because there is only one taxpayer for corporation tax purposes.
The unique nature of the Dutch tax group is that for example even assets with an unrealised book profit can be transferred untaxed to other companies within the tax group.
A tax group cannot be formed with a subsidiary in another EU country. The CJEU has in the past already issued a ruling on the fact that a cross-border tax group does not contravene European law.
The present CJEU case – in short – involved the following situation.
- P as parent company was established in Sweden.
- P loaned money to its subsidiary S established in the Netherlands.
- S uses the money received to make a payment on the shares of the sub-subsidiary SS which is established in Italy.
The Dutch company – based on Dutch legislation – came up against an interest allowance restriction. This was because S had made a payment on the shares of SS with money borrowed from P. To avoid the interest allowance restriction S and SS would be able to form a tax group. However – as previously discussed – it is then not possible for S to form a tax group with SS since this company is established in Italy. S therefore feels disadvantaged that it cannot profit from the advantages of the tax group and therefore appeals for this specific advantage (element) of the tax group to also apply to it. The A-G (Advocate-General) and the CJEU rule that this is indeed an infringement of the freedom of establishment and permits the interest allowance for S.
Interest allowance restriction
The ruling of the CJEU does in fact relate to a Dutch provision that in certain cases restricts the interest allowance. There are three possible situations.
Say a parent company (P) has a 100% interest in two subsidiaries (S1 and S2). There is no tax group involved. S1 borrows an amount from S2. S1 then pays out the amount of the loan received as a dividend to P. Without the provision of evidence to the contrary, S1 cannot deduct the interest.
The same occurs if P pays up capital on the shares of S1 after which S1 loans the amount paid back to P bearing interest. Then too P may be faced with the fact that the interest is not deductible.
The latter case concerns the situation where P borrows money from S1 or S2 and with this buys another company (external or within the group). The allowance for the interest that P pays on the loan obtained from S1 or S2 may in certain cases be restricted.
All the cases aim to avoid erosion of the tax base. In particular within group relationships there is a possibility of creating receivable obligations.
In many cases a tax group can offer a solution when there is a risk of the interest allowance being restricted.
- Say that in situation 1 P enters into a tax group with S1. In that case the dividend payment of S1 to P is not visible so the interest allowance restriction is not applied.
- The same applies if in situation 2 P enters into a tax group with S1. The payment of capital and the loan back to P is simply not visible since P and S1 are treated as one taxpayer.
With the findings of the A-G pending the cabinet could already see the storm coming and has proposed an emergency repair with retroactive force up to 25 October 2017, 11:00 (date of findings of the A-G). The emergency repair means that the interest allowance restriction is applied as intended in Dutch law ‘as if’ there was no tax group. Say that in situation 2 P has formed a tax group with S1, then the interest for P is still restricted in spite of the presence of the tax group. In this way the domestic situation is brought back in line with the situation where a company within the group is established in another country.
The emergency repair means that the interest allowance restriction is applied as intended in Dutch law ‘as if’ there was no tax group.
What to do?
Where a tax group for corporation tax purposes is involved you are as well to assess – in conjunction with your adviser – whether intercompany loans have been used for dividend payments, capital contributions or deductions or the acquisition of another internal/external company. In that case the internal receivable obligations are eliminated as far as possible. The proposed legislation does not provide for a transitional arrangement for the time being. As a result old cases may also be affected by the emergency repair.
So does the ruling of the CJEU leave only bloodshed behind it?
Do you have outstanding assessments from old years that cover the period up to 25 October 2017? And were you affected by an interest allowance restriction because you could not form a tax group since a company was established outside the Netherlands? Then it is not the axe for you! Perhaps you can strike it lucky and avoid this!