On 22 February 2018 the European Court of Justice ("ECJ") ruled that the effective non-application of the Dutch anti-base erosion rules in domestic corporate income tax fiscal unity situations breaches the principle of freedom of establishment (see our tax alert of 22 February 2018). On 24 April 2019, an urgent legislative proposal with retroactive effect from 1 January 2018 was adopted (the "Urgent Legislative Proposal"). The Urgent Legislative Proposal includes several repair measures that aim to mitigate budgetary damage.
At the time the Urgent Legislative Proposal was published, the State Secretary of Finance had already announced that the Dutch fiscal unity regime would, in time, be replaced by a new tax group regime which should be future-proof both from a practical and legal perspective (see our tax alert of 24 April 2019).
A public consultation document was published by the State Secretary of Finance on 17 June 2019 which includes four alternative concepts for a tax group regime (the "Consultation Document"). The State Secretary of Finance has invited experts, advisors and companies to comment further on these alternatives until 29 July 2019. Beforehand, on 14 February 2019, a kick-off meeting took place with different representatives of companies, science and interest groups to discuss the alternatives for a new group relief arrangement (the "Kick-Off Meeting").
The Consultation Document includes four alternative approaches for a tax group regime which could replace or amend the current fiscal unity regime (as amended by the Urgent Legislative Proposal). The preconditions for a new tax group regime are that the regime should be robust and legally sustainable, and ensure future compliance with EU law. The future tax group regime should not be prone to abuse or result in budgetary risks, should contribute to an attractive Dutch business climate and should be practical both for taxpayers and tax authorities. The budgetary effects of the required policy choices are of vital importance.
Four alternative approaches
The four alternative approaches are:
(1) continuance of the current fiscal unity regime;
(2) abolition of the fiscal unity regime;
(3) implementation of a profit and/or loss carry-over regime;
(4) cross-border group relief arrangement, with an object exemption for foreign income.
Below the alternative approaches and commentaries of the State Secretary are summarized.
Ad 1: Continuance of the current fiscal unity regime
The current fiscal unity regime (as amended by the Urgent Legislative Proposal) will be continued and where needed, as a result of potential EU legal risks, new repair measures may have to be introduced. This could result in a complex set of rules, potentially resulting in companies facing a higher administrative burden. Furthermore, the present (amended) fiscal unity regime is still vulnerable to potential EU legal risks, meaning that taxpayers could be confronted with legal uncertainty. If the current regime were to be continued, the Netherlands would remain the only EU Member State which provides for full consolidation of profits and capital. In the Kick-Off Meeting various parties were in favour of this option.
Ad 2: Abolition of the fiscal unity regime
The fiscal unity regime would be abolished and no alternative tax group regime would be introduced. A potential result of this may be that taxpayers will have an incentive to change and simplify their group structures. More corporate income tax returns would likely have to be filed, despite the incentive for taxpayers to amend their structures. The abolition would result in a structural increase in tax revenue (which would be reinvested in the Dutch corporate income tax) while the administrative burden will be higher for corporate income taxpayers, as well as for the Dutch tax authorities. Grandfathering rules or transitional law might also lead to a more complex implementation.
The rules would be simpler and would result in a legally sustainable system. The possible effects of the abolition on the Dutch business climate are not yet clear, and would also depend on how the additional budgetary revenue is used.
Ad 3: Implementation of a profit and/or loss carry-over regime
A profit or loss carry-over regime would result in maintaining the key advantage of the current fiscal unity regime; namely the possibility to settle profits and losses within a group. In a profit or loss carry-over regime, each group member should first determine its own profit or loss. Afterwards, the group can determine how to carry over the profits and losses between the different members of the group. Each group member would still file its own tax return. An alternative approach is that after each group member has determined its stand-alone profit or loss, the results of the group members would be pooled, and one group member designated to file a joint corporate income tax return.
Nevertheless, the initial administrative burden for taxpayers would be higher. Reorganisations, for example, would be more difficult. The Consultation Document asks responders whether an additional alternative internal reorganisation facility is required to minimise this obstacle.
The profit and/or loss carry-over regime could be vulnerable to abuse, and therefore more anti-abuse measures should be implemented. The implementation process of a profit and/or loss carry-over will take the Dutch tax authorities at least three years, according to the Consultation Document.
Ad 4: Cross-border tax group regime with an object exemption for foreign income
In this approach, the fiscal unity regime would also include foreign group companies (i.e. not based in the Netherlands) and the regime would, in principle, not be in breach of the principle of freedom of establishment. This would also mean that measures included in the Urgent Legislative Proposal could be abolished.
In this scenario, the Netherlands would be the only member state allowing cross-border group consolidation in the EU. Aside from the budgetary and administrative implications, this may also result in new proceedings at the ECJ. The State Secretary of Finance expects that it would be easier to erode the Dutch tax base and create new fiscal mismatches, and may result in double taxation.
Based on the feedback to the Consultation Document, it is envisaged that a letter including an outline of the future tax group regime will be sent to the Dutch parliament in the autumn of 2019. During the course of 2020, there is expected to be a legislative proposal available for another internet consultation.