On February 25, 2010, the European Court of Justice (“ECJ”) decided that the Netherlands is not required to allow the formation of a cross-border fiscal unity for corporate tax purposes. Under the Dutch Corporate Income Tax Act, foreign subsidiaries, having no activities in the Netherlands, cannot be included in a fiscal unity. The Dutch Supreme Court requested a preliminary ruling from the ECJ on this issue in July 2008, in particular, as regards the question of whether excluding a foreign subsidiary could be justified in light of the Marks & Spencer II case and the ECJ’s subsequent rulings
Facts and legal background
The case concerns a Dutch parent company, which was both resident in and incorporated under the laws of the Netherlands, and which held all the shares in a Belgian subsidiary. The subsidiary was both resident in and incorporated under the laws of Belgium, and had no activities in the Netherlands. In 2003, both companies had filed a request with the Dutch Revenue to form a fiscal unity, with the intention of being able to set off the Belgian subsidiary’s losses against the Dutch parent company’s results Dutch law requires both a parent company and its subsidiary to be resident, or have a branch in the Netherlands, in order to form a fiscal unity. The inspector rejected the request on the grounds that the Belgian subsidiary was neither resident in, nor had a branch in, the Netherlands.
The ECJ’s ruling
Although the ECJ held that excluding a foreign subsidiary from a fiscal unity would, in effect, restrict the parent company’s freedom of establishment, it considered that not allowing the set-off of the subsidiary’s losses was justified on the basis of the need to safeguard the allocation of the power to impose taxes between the Member States. Referring to its previous case law, the ECJ explained that by allowing the formation of a fiscal unity with a foreign subsidiary, the Dutch parent would, in effect, be free to choose the place where losses of that subsidiary could be taken into account. A tax system that prevented this would ensure that the allocation of the power to tax was safeguarded The ECJ went on to reject the argument based on a comparison between the losses of a foreign branch and those of a foreign subsidiary. The fact that the former could be set off in the Netherlands did not mean that the same treatment should apply to losses of a foreign subsidiary. The ECJ pointed out, again on the basis of its earlier case law, that these two situations were not comparable and therefore did not need to be treated in the same way.
KPMG Meijburg & Co’s comment
We are disappointed with this decision, but it seems unlikely that the Dutch Supreme Court will not follow the ECJ’s decision We would point out that a cross-border tax consolidation can be achieved in other ways. One possibility is a cross-border statutory merger under which a foreign subsidiary’s assets can be transferred, under universal title, to the Dutch parent company. Another possibility would be to alter the foreign subsidiary’s legal form in such a way as to render it transparent from a Dutch tax perspective. However, under these more complex approaches, consideration may need to be given to issues beyond Dutch taxation Finally, this decision is not, in our opinion, relevant for the litigation being conducted by KPMG Meijburg & Co, in which the issue in question concerns whether two Dutch companies with a common EU parent can be included in a fiscal unity. We are invoking the ECJ’s ruling in the Papillon case in those proceedings. In that case, the ECJ ruled that a French parent company and a second-tier French subsidiary could not be prevented from claiming tax consolidation under the French tax rules simply on the grounds that the French subsidiary was held through an intermediate Dutch holding company.