Preliminary ruling requested on refusal to allow a fiscal unity between sister companies of an EU parent
Publication date 17 January 2013
Under Dutch legislation, a fiscal unity for corporate income purposes cannot be set up between the sister companies of a foreign parent, or between the sister companies and the foreign parent. The question that has engaged the tax practice is whether this exclusion is in accordance with European law, in particular the freedom of establishment. The latest development in this area is the decision by the Amsterdam Court of Appeals to request a preliminary ruling from the Court of Justice of the European Union (CJEU), as stated in the interim judgment dated January 17, 2013 rendered in proceedings instigated by KPMG Meijburg & Co.
Legal requirements regarding the creation of a fiscal unity
Section 15 Corporate Income Tax Act 1969 stipulates a number of conditions regarding the creation of a fiscal unity. These conditions make it impossible to set up a fiscal unity between the sister companies of a foreign parent. A fiscal unity can only be set up between a taxpayer (parent company) and one or more other taxpayers (subsidiaries), if the parent is the legal and economic owner of at least 95% of the shares in the nominal capital of the other taxpayers.
A fiscal unity between two sister companies of a parent company resident abroad is only possible if the shareholding in the subsidiary forms part of the equity of the parent companys Dutch resident permanent establishment, whereby the permanent establishment acts as the parent of the fiscal unity. Often such a permanent establishment does not exist or the shares in the subsidiary/subsidiaries cannot be allocated to the permanent establishment. In such cases, the Dutch tax authorities have therefore consistently rejected all requests filed to date for a fiscal unity between sister companies with an EU parent. As a result thereof, a number of legal proceedings are pending, some of which have been instigated by KPMG Meijburg & Co. The European Commission has also instigated infringement proceedings against the Netherlands.
Relevant facts and the dispute
The proceedings before the Amsterdam Court of Appeals concerns an international group whose worldwide operations take place by way of a divisional structure. The group also operates in the Netherlands where it has set up operating, holding and financing companies. The share capital of these companies is directly or indirectly held by the German resident parent company. In 2007, the operating and holding companies suffered losses, while the financing companies held directly by the German parent generated a taxable profit.
In order to set off the losses suffered by one activity against the taxable profits generated by the other activity, a request to include the various sister companies in a fiscal unity, despite the fact that their parent company was resident elsewhere in the European Union, was filed for the year in question, thereby invoking the European principle of the freedom of establishment. The Dutch tax authorities rejected this request. One of the reasons for this rejection was the alleged risk of losses being deducted in both the Netherlands and Germany, i.e. international double loss set-off. However, the decision rendered by the CJEU in the British Philips Electronic case, clearly shows that this argument is not regarded as an objective justification by the CJEU.
The request for a preliminary ruling
In light of the fact that the Amsterdam Court of Appeals is of the opinion that the conditions which a fiscal unity must meet under Dutch corporate income tax law may be contrary to European law, it has requested a preliminary ruling from the CJEU on the following four questions:
1. Does the fact that the taxpayers are denied the right to apply the fiscal unity regime constitute a restriction of the freedom of establishment?
2. If so, is it relevant whether the shares in the Dutch sister companies are held through intermediate holding companies resident in the EU?
3. If question 1 is answered affirmatively, can the restriction be justified by overriding reasons of public interest ? in particular to maintain the coherence of the tax system which, in turn, requires the prevention of national and international double loss set-off?
4. If so, can such a restriction be regarded as proportionate?
The Amsterdam Court of Appeals has stayed the proceedings pending the ruling of the CJEU.
Commentary KPMG Meijburg & Co
The restriction being litigated can also be regarded as a restriction arising from the fact that a Dutch parent company can set up a fiscal unity with its Dutch resident subsidiaries, while an EU parent company (without a Dutch resident permanent establishment) cannot. Moreover, it should be noted that this does not involve a cross-border loss set-off; the loss set-off only relates to Dutch profits and losses .
Furthermore, we would also like to point out that a similar issue arises in the case of a Dutch parent with a Dutch sub-subsidiary that is held by an intermediate holding company resident elsewhere in the EU. In 2011, the Haarlem District Court ruled in a number of cases dealing with this issue that the Netherlands must allow the creation of a fiscal unity, despite the fact that the shares in the sub-subsidiary were held through a foreign company with no permanent establishment in the Netherlands. However, the District Court in the Hague reached the opposite conclusion, i.e. the Netherlands did not have to allow the creation of a fiscal unity. These judgments have all been appealed.