The amendments, which were already announced on 25 October 2017, will result in disregarding the fiscal unity for purposes of the application of several provisions included in the Dutch corporate income tax act (“CITA”) and the Dutch dividend withholding tax act (‘WHTA”). Provided that the Dutch parliament approves the legislative proposal, most of the amendments will enter into force retroactively as per 25 October 2017, 11:00 am.
The proposed amendments first need to be discussed in the Dutch parliament and approved before they can be finalized and enter into force as per 25 October 2017 as proposed. The parliamentary process will probably take a few months.
The changes proposed will likely be in place for a limited period of time since the Dutch Ministry of Finance has confirmed, in accordance with earlier statements, that the Dutch fiscal unity regime will be replaced by a new, more sustainable, group regime in the near future. A proposal for a new regime will be published for consultation probably mid 2020 after first consulting with various interested parties, such as the business and scientific communities. Implementation of the new regime is expected on 1 January 2023 at the earliest.
Impact of the proposed amendments
If the legislative proposal of 6 June is approved and enacted, several Dutch corporate income tax rules will apply to entities included in a Dutch fiscal unity with disregard of the existence of a fiscal unity. This may have a major impact on the tax position of Dutch entities included in a fiscal unity. One of the aspects to consider is the fact that the application of the at arm’s length principle (article 8b CITA) with respect to transactions between fiscal unity members will become much more relevant than under the current regime.
The impact of the proposed amendments is far reaching and in our view exceeds what is needed pursuant to the judgment of the EU Court of Justice to bring the Dutch fiscal unity regime in line with EU law. It goes beyond the scope of this news article to further address this but the proposed amendments in certain circumstances could even cause domestic situations being treated less favorable than comparable cross border EU situations.
We highly recommend to assess the possible impact of the proposed amendments on your business within short term in order to be able to take possible measures as soon as possible. We would be pleased to assist you in this respect. We will of course keep you informed on any future developments on this topic.
The current Dutch fiscal unity regime, which is only available for companies resident in the Netherlands or Dutch permanent establishments of foreign companies, provides for group of companies which are included in the fiscal unity to be subject to corporate income tax as if there is only one taxpayer. Based on this regime, transactions and relationships between the members of the fiscal unity are largely disregarded. This may result in certain Dutch CITA rules not being applicable and certain transactions not being subject to tax whereas they would have been if there was no fiscal unity.
Following the opinion of the Advocate-General rendered on 25 October 2017, the EU Court of Justice ruled on 22 February 2018 that the Dutch fiscal unity regime is in violation of EU law where it denies certain advantages of the fiscal unity regime to comparable group of companies in the EU where not all companies are resident in the Netherlands. According to the Court of Justice the so- called ‘per element approach’ also applies with respect to the Dutch fiscal unity regime.
In order to bring the Dutch fiscal unity regime in line with the requirements under EU law and to treat domestic and non-domestic situations equally, the Dutch legislator proposed amendments included in the bill on the Fiscal Unity Emergency Repair Act (‘Wet spoedreparatie fiscale eenheid’) which result in specific benefits of the fiscal unity regime also being denied for Dutch companies in domestic situations.
The proposed amendments in more detail
Here below is an overview of the provisions of the CITA and the WHTA which according to the proposed Fiscal Unity Emergency Repair Act must be applied as if the Dutch fiscal unity regime does not apply. In other words, for purposes of these provisions, the entities included in a Dutch fiscal unity are treated as separate taxpayers.
(i) The anti-base erosion rules (article 10a CITA)
Article 10a CITA is an anti-abuse provision which denies deduction of interest on related party loans to the extent that these loans are related to certain tainted transactions.
Considering that transactions, including debt financing, between members of the fiscal unity are currently not visible for corporate income tax purposes, this could result in article 10a CITA not being applicable whereas it would have been applicable if there was no fiscal unity.
The proposed amendments require that article 10a CITA must be applied disregarding the fiscal unity whereby certain transactions and loans between fiscal unity members can trigger the application of article 10a CITA.
As mentioned above, under the current regime loans between members of the fiscal unity are disregarded for tax purposes. This means that such ‘internal’ loans do not give rise to any interest income and corresponding interest deduction for tax purposes. Based on the proposed amendments, ‘internal’ loans will become visible for purposes of applying article 10a CITA. This could result in interest, that would otherwise neither have been deducted by the debtor nor have been included by the creditor, having to be included in the Dutch tax base whereas the deduction of the corresponding interest payment is denied pursuant to article 10a CITA.
Where article 10a CITA is triggered, it remains possible to deduct the interest on the so- called 10a loan in case (predominant) business considerations with regard to both the debt and the related transaction can be demonstrated, and/or the interest income is subject to sufficient taxation at the level of the creditor.
The sufficient taxation test is met if:
(a) The interest income is effectively subject to a reasonable levy according to Dutch tax standards;
(b) There are no carry forward losses or other claims from previous years; and
(c) There is no loss compensation or use of other claims that arise in the year in which the loan is provided nor will arise in the near future.
In situations where a fiscal unity exists, the application of the sufficient taxation test at the level of the creditor is not straightforward as tax is levied from all entities included in the fiscal unity as if they are one taxpayer. Therefore, the explanatory notes provide some guidance on how the sufficient taxation test should be carried out in case article 10a CITA applies by reason of disregarding the fiscal unity pursuant to the proposed amendments. For purposes of requirement (a), a continuous assessment should be made whether the interest income is effectively subject to a reasonable levy according to Dutch tax standards. In case the creditor is resident of the Netherlands, regardless of whether the creditor is part of a fiscal unity, requirement (a) should in principle be met. According to the explanatory notes, requirements (b) and (c) should be assessed at the time the loan is entered into. In case the creditor is part of a fiscal unity and the loan existed prior to the creditor entering the fiscal unity, requirements (b) and (c) should in principle be met provided that the creditor does not avail of pre fiscal unity carry forward losses. In such cases, the sufficient taxation test should be met. In case the loan is entered into after the creditor becomes a member of the fiscal unity, requirements (b) and (c) should in principle be met provided that the creditor does not avail of pre fiscal unity carry forward losses and the fiscal unity does not have losses available for compensation either. According to the explanatory notes, also in such cases the sufficient taxation test should be met.
Finally, with respect to the application of article 10a CITA, the legislative proposal provides for a limited grandfathering rule for the period starting from 25 October 2017, 11:00 am, until 31 December 2018. This grandfathering rule in short stipulates that the proposed amendments do not apply with respect to loans entered into prior to 25 October 2017, 11:00am, provided that the total amount of interest falling within the scope of article 10a CITA does not exceed EUR 100,000 per fiscal unity. Every taxpayer can make use of the grandfathering rule including Dutch entities with foreign EU subsidiaries. However, the grandfathering rule does not apply in case the tax inspector demonstrates that the loan and/or the transaction are not based on sound business considerations.
(ii) The Dutch participation exemption for low-taxed portfolio investment subsidiaries (article 13 paragraphs 9 to 15 CITA and 13a CITA)
Under the current fiscal unity regime, it is not necessary to assess the application of the participation exemption regime with respect to companies included in the fiscal unity. Based on the proposed amendments, the assessment that a company qualifies for the participation exemption regime has to be made for every subsidiary within the fiscal unity. Considering that companies included in the fiscal unity are in principle at least subject to a sufficient level of taxation (one of the tests pursuant to which a shareholding in a company can be eligible for the participation exemption), the proposed amendments should in most situations not result in adverse consequences.
The legislative proposal also includes an amendment which was not previously announced. This relates to article 13a CITA based on which low-taxed portfolio investment companies, which do not qualify for the participation exemption, under certain circumstances have to be revalued each year. Based on the proposed amendments this provision should also apply to non-qualifying participations within the fiscal unity. As this amendment was not previously announced, it will not have retroactive effect but will be applicable as per 1 January 2019.
(iii) The anti-hybrid rule in the Dutch participation exemption (article 13 paragraph 17 CITA)
The anti-hybrid rule included in article 13, paragraph 17 CITA, is a response to an amendment of the EU Parent-Subsidiary Directive in order to prevent hybrid mismatches. Based on this provision the participation exemption does not apply with respect to a benefit derived from a subsidiary, where the corresponding payment/compensating is tax deductible at the level of the subsidiary. The legislative proposal includes an amendment which requires that also article 13, paragraph 17 CITA is applied to each company of the fiscal unity on a stand-alone basis.
(iv) Interest deduction limitation for excessive participation interest (article 13l CITA)
Article 13l CITA restricts the deduction of ‘excessive’ interest on debt of Dutch corporate taxpayers that have invested in exempt participations. Excessive interest is defined as the amount of interest and costs paid for both external and internal debt, times the average amount of the participation debt divided by the average amount of debt. Participation debt is deemed present if the cost price of a taxpayer’s participations exceeds the taxpayer’s equity for tax purposes.
Under the current fiscal unity regime, participations held in companies included in the fiscal unity are not visible and, therefore, the investment in those participations is not taken into account for purposes of calculating the participation debt.
The legislative proposal includes an amendment based on which article 13l CITA must be applied to each company of the fiscal unity, as if there was no fiscal unity. Each company within the fiscal unity may also apply the EUR 750,000 threshold before the limitation applies.
According to the explanatory notes, the legislator takes account of the complexity of article 13l CITA and the circumstance that the forces within the Dutch tax authorities are limited to actually assess and effectuate the correct application of article 13l CITA under the new rules. It appears from this and other comments made in the explanatory notes and other documents accompanying the proposal, that article 13L CITA will likely be abolished as per 1 January 2019 when the earnings stripping rules implementing the EU Anti-Tax Avoidance Directive enter into force.
(v) Carry forward losses and change in ultimate interest (article 20a CITA)
Article 20a CITA restricts the use of carry forward tax losses in case the ownership in a company with carry forward losses is changed for 30% or more. Pursuant to the proposed amendments the application of article 20a CITA must be assessed at the level of the individual companies included in the fiscal unity instead of only at the level of the parent company of the fiscal unity which is now the case.
(vi) The redistribution facility (article 11, paragraph 4 WHTA)
Article 11 WHTA provides certain rules with respect to dividend payments which immediately follow the receipt of foreign dividend income. Article 11, paragraph 4, WHTA is a specific provision which applies to dividend payments between companies within a fiscal unity. Based on the legislative proposal this specific provision will be abolished.