Supreme Court rejects fiscal unity between Dutch sister companies with a joint non-EU parent company

On 15 December, 2017 the Dutch Supreme Court ruled that a request to create a fiscal unity between Dutch sister companies with a joint parent company established in a third non- EU/EEA country does not have to be granted by the Dutch Tax Authorities. The judgement follows the earlier Opinion of the Advocate-General, but is opposed to the judgement of the Court of Appeal Arnhem-Leeuwarden.

In the underlying case four Dutch sister companies, with an Israeli parent company, submitted a request to form a fiscal unity. The taxpayer invoked the non-discrimination clause of the Tax Treaty between the Netherlands and Israel, concluded in 1973. This non-discrimination provision, which is almost conform the non-discrimination provision of the OECD Model Convention, prohibits higher taxation of companies if the shareholder is not established in the Netherlands. Therefore, the Court of Appeal ruled that the fiscal unity must be allowed in this case.

The Supreme Court, on the other hand, ruled that the fiscal unity should not be granted, by making the comparison to the situation that the Dutch entities were held by a domestic parent company.

Based on the comparison made, the Supreme Court ruled that when the parent company was also a Dutch tax resident, no fiscal unity would be possible without the inclusion of this parent company. Therefore, the judgement of the Dutch Tax Authorities not to grant the fiscal unity is, in their view, not in breach with the non-discrimination clause of the Dutch-Israeli Tax Treaty.

It should be noted that in the case at hand, the taxpayers requested to form a sister fiscal unity as of 1 January 2013. At that stage, it was not yet possible to form such a sister fiscal unity for Dutch corporate income tax purposes. Pursuant to a ruling of the ECJ from 2014, the Dutch fiscal unity regime was extended, allowing the formation of a sister fiscal unity between Dutch companies in case of a common EU/EER parent company. Under this change in law, it is still not possible to form a fiscal unity between two Dutch companies in case the common shareholder is a Dutch resident parent company, without including that parent company.

In addition, please note that pending EU court cases may lead to possible changes of the Dutch fiscal unity regime. In these pending EU cases, the ECJ was asked to decide whether taxpayers, despite being unable to enter into a fiscal unity with subsidiaries established elsewhere in the EU, are nevertheless eligible for benefits from separate elements of the fiscal unity regime as if a fiscal unity with foreign subsidiaries can be entered into (also referred to as the ‘per element’ approach). The opinion of Advocate General Sanchez in one of these cases is that certain benefits of the fiscal unity regime should be granted based on the EU freedom of establishment. The Ministry of Finance has already responded to the possible obligatory ‘per element’-approach with draft legislation , resulting in a major change of the fiscal unity regime, in case the ECJ will decide in accordance with the opinion of AG Sanchez.

We refer to our newsletter of 25 October, click here.

This judgement of the Supreme Court will, however, not bring any further amendments of the fiscal unity regime.