Following the ruling by the European Court of Justice on 22 February 2018 concerning the Dutch tax unity regime, the Netherlands has announced emergency remedial measures which apply retroactively from 25 October 2017, 11.00 am. These emergency measures are set out in the Emergency Amendment Act on Tax Unity which was published on 6 June.
The judgment
In its ruling, the European Court of Justice has determined that, through the fiscal unity regime, the Netherlands makes a distinction between Dutch subsidiaries and foreign subsidiaries. Unlike foreign subsidiaries, Dutch subsidiaries may form part of a tax consolidation group and thus benefit from certain tax advantages. This distinction unfairly discriminates against foreign subsidiaries. The Court of Appeal therefore ruled that it must also be possible for foreign subsidiaries to qualify for elements of the fiscal unity. For a further explanation of the judgment, please refer to the following article.
The emergency repair
The emergency measure means that certain provisions relating to corporation tax and dividend tax – such as the interest deduction restriction designed to prevent profit drainage – are applied as if there were no fiscal unity. The fiscal unity must, amongst other things, be disregarded in situations involving the revaluation obligation for low-taxed investment holdings, the interest deduction restriction on excessive interest on shareholdings, and the set-off of losses following a change in the shareholding. Disregarding the fiscal unity ensures that consolidation does not take place, resulting in a situation where the companies within the fiscal unity are independently liable for tax.
Transitional measures
The emergency measure is detrimental to existing tax entities. For this reason, the government has announced a transitional measure. This transitional measure means that the interest deduction restriction designed to prevent profit shifting in relation to interest, costs and foreign exchange gains will not apply, subject to certain conditions. The conditions attached to this are as follows:
- it must relate to a debt existing at 11.00 am on 25 October 2017 which, in law or in fact, is directly or indirectly owed to an affiliated entity;
- this debt must, in law or in fact, be directly or indirectly linked to one of the legal acts referred to in Article 10a(1) of the 1969 Corporation Tax Act;
- the legal acts referred to in Article 10a(1) of the 1969 Corporation Tax Act must have been carried out before 11.00 am on 25 October 2017;
- the total interest on all these debts combined may not exceed €100,000 per twelve months;
It should be noted that the inspector has the power to demonstrate that the debt or the related legal act is not, to a significant extent, based on commercial considerations. In that case, the transitional measure will not apply.
If you have any questions regarding the implications for your companies following this article, please do not hesitate to contact us.