On 22 February 2018 the European Court of Justice ('ECJ') decided on two cases (C-398/16 and C-399/16), which are relevant for purposes of the 'per-element-approach' concerning the Dutch corporate income tax ('CIT') fiscal unity regime. To mitigate the (negative financial) impact of the decisions of the ECJ, the Dutch State Secretary announced last year that new legislation (with retroactive effect to 25 October 2017) will be introduced to amend the CIT fiscal unity regime.
In this respect, we refer to our newsletters of 22 February and 24 April 2018. As a follow up, the Dutch Secretary filed a legislative proposal on 4 June 2018, and explanatory notes were published on 6 June 2018.
The legislative proposal
According to the legislative proposal specific (anti-abuse) tax rules laid down in the CIT Act ('CITA') and Dutch dividend withholding tax Act ('DWTA'), should be applied to entities belonging to the fiscal unity as if the Dutch fiscal unity is non-existent. More specifically, the proposal refers to (among others) rules that: may limit the deductibility of interest (article 10a and 13l CITA), relate to the application of the Dutch participation exemption (article 13 and 13a CITA), and may limit the availability of tax losses after a change of control (article 20a CITA). It is up to the fiscal unity to take these rules into account when determining its taxable profit, hereby assuming there is no fiscal unity. For purposes of the DWTA, it is proposed to apply the so-called "remittance-reduction" to profit distributions as if no fiscal unity is present.
In relation to article 10a CITA, the proposal makes clear that the fiscal unity should not only be ignored in case of an intra-group debt to an entity not belonging to the fiscal unity, but also in cases where the debt is between entities that belong to the same fiscal unity. Although the latter (i.e. loans within a fiscal unity) was not addressed in the two ECJ cases and the potential abuse is much less likely, the State Secretary is concerned that these loans could also be covered by the 'per-element' approach which was accepted by the ECJ. The proposal, however, clarifies that article 10a CITA should in principle not come into play, if the creditor (either belonging to a fiscal unity or not) is located in the Netherlands, because it should be sufficiently taxed. This may however work out differently if the debtor (or fiscal unity to which it belongs) has (or expects) tax losses. The State Secretary further clarifies that a taxpayer can take measures to mitigate the (negative) tax effect of article 10a CITA, for example by way of converting debt into equity, or a merger of entities that belong to the same fiscal unity.
The new rules will in principle enter into force per 25 October 2017, 11:00 (except for article 13a CITA, that deals with low-taxed passive investment entities, which will enter into force per 1 January 2019). For purposes of article 10a and 13l CITA, interest is however only in scope of the proposed rules as far as it can be allocated to the period after 25 October 2017, 11:00. In addition, for purposes of article 10a CITA the proposal grandfathers smaller sized loans for the period 25 October 2017, 11:00 up to and including 31 December 2018 if certain conditions are met. To be in scope of this grand farther regime, it is among others required that the article 10a-loan(s) are already in place on 25 October 2017, 11:00 and the total amount of interest for these loans does not exceed € 100.000 (per fiscal unity).
The proposal also amends an omission in relation to the Dutch innovation box legislation. Per 2018, the innovation box rate was increased from 5 to 7 percent, but this higher rate does not apply yet to innovation box income that is covered by transitional law introduced already before 2018. It is now proposed to amend this and tax this innovation-box income at 7 percent, with retroactive effect until 1 March 2018.
To conclude, the proposal to amend the fiscal unity regime is not a big surprise and is largely in line with what was already expected. Unfortunately, the proposal is not limited to intra-group loans with a creditor outside the fiscal unity, but also covers intra-group loans within the fiscal unity. Likely more guidance regarding the scope and interpretation of the new rules will become available later this year during the legislative process. The proposal does not address other rules for which the per element may be relevant, for instance article 20(4) CITA which may limit the availability of holding losses. In its letter of 9 May 2018 the State Secretary of Finance announced that in 2019 a consultation will take place dealing with overhauling the current fiscal unity regime and introducing a new consolidation regime. This will be followed by a (draft) legislative proposal, prepared in the second half of 2019. In 2020 a final legislative proposal dealing with the new consolidation regime is expected. Finally, we would like to note that a proposal to implement the EU ATAD is expected shortly, which includes the introduction of an earning stripping rule. The latter may effect existing interest deduction limitation rules, for instance though the possible abolishment of article 13l CITA.