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By Linda A. Thompson
A highly anticipated Dutch tax ruling by one of Europe’s highest courts is likely to slash the amount of paid interest group companies are allowed to deduct from their tax bills, practitioners say.
The matter ( C-398/16 and C-399/16), set to be decided Feb. 22 at the Court of Justice of the European Union, revolves around the question of whether the combined effect of two tax provisions can constitute an infringement of EU rules on freedom of establishment since only one of the two—the Dutch fiscal unity regime—is open to resident taxpayers.
Under Dutch law, only domestic companies can form a tax consolidation group or fiscal unity, which treats related companies as a single entity for tax purposes.
The joined cases were referred by the Supreme Court of the Netherlands in July 2016 and pit the former Deputy Minister of Finance Eric Wiebes against two unnamed companies.
Advocate General Manuel Campos Sanchez-Bordona’s Oct. 25 opinion in the case advised the bloc’s highest court to rule that the Dutch legislation is incompatible with EU law. The CJEU follows the opinion of the AG in the majority of cases.
Dutch officials have previously made it clear hundreds of millions of dollars are at stake, and a ruling against them would require a serious rewrite of some the country’s corporate tax provisions. Here’s a preview of what to expect in the potentially explosive decision:
A ruling against the Netherlands would bring significant work for companies that would have to reverse practices they implemented long before the October ruling.
The Oct. 25 ruling left Dutch lawmakers with two options: expand the benefits of the fiscal unity to group companies in cross-border situations, or rescind the tax benefits currently offered to resident related companies under the fiscal unity regime.
The government immediately announced proactive “urgency repair measures” to cancel the impact of a future ruling. Practitioners say that under those measures, a number of Dutch tax regimes would be applied as if “there were no fiscal unity"— a legislative about-face that could have far-reaching consequences for companies in the Netherlands.
Because of the repair measures Dutch lawmakers have announced, the impact of a ruling in favor of the companies would be tremendous, said Alexander Bosman, a tax adviser at the Loyens & Loeff law firm. All resident companies who have benefited from or intend to apply the country’s fiscal unity regime would be affected, he told Bloomberg Tax.
“This will have adverse effects for Dutch businesses because they will be affected by a bevy of interest limitation deductions that previously did not apply to them because the provisions of the fiscal unity applied,” he said Feb. 20. “This is the painful thing about the urgency repair measures: that the Netherlands will also revoke the benefits of the fiscal unity for domestic situations, so this will affect all taxpayers.”
The repair measures included an interest deduction limitation aimed at preventing profit skimming and an interest deduction limitation on excessive participation interests.
Since the formation of a fiscal unity will no longer cancel out existing interest limitation deductions under the repair measures, companies will have their homework cut out for them if the ruling goes against the Netherlands.
For every interest deduction that falls under the scope of article 10a of 1969 Law on corporation tax, an interest limitation deduction for certain group loans, “companies will have to prove that economic reasons exist for the loan or transaction, or that there is reasonable taxation according to Dutch standards,” said Eric Kemmeren, a professor of international taxation and tax law at Tilburg University and of counsel to the Rotterdam branch of EY Tax Advisers. “All companies that use the fiscal unity will thus face an increased administrative burden,” he said.
Everything would remain the same, if the ruling went in favor of the Netherlands, practitioners said.
A ruling against the taxpayers in the two conjoined cases would be a “victory for the Netherlands because the fiscal unity regime could continue to exist in its current form,” Bosman said. “It would mean that the fiscal unity regime is compatible with EU law and that the benefits of the fiscal unity regime don’t have to be granted in cross-border situations—which is what the Netherlands has always said.”
Almost immediately following the Oct. 25 ruling, Wiebes warned in a news release that if the court follows the AG’s opinion, the Netherlands stands to lose “some hundreds of millions of euros” in tax revenue in one single year. He also noted that a ruling against the Netherlands would “facilitate erosion of the Dutch tax base by companies that operate internationally.”
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