European Union Tax: AG Kokott accepts Dutch cross-border loss rules

European Court of Justice (ECJ) Advocate General (AG) Kokott issued her opinion in the X Holding case (C-337/08) on 19 November 2009, concluding that Dutch legislation regarding the fiscal unity regime does not constitute an infringement of EC law.

The fiscal unity regime allows companies in a group to consolidate their accounts so that they are taxed as a single taxpayer. For the regime to apply, the parent company must, among other criteria, own at least 95% of the shares of the subsidiaries, all the companies must apply the same rules for the determination of taxable profits, all companies must have the same financial year and all companies must be established in the Netherlands. Consequently, companies established in other EU Member States cannot benefit from the regime.

X Holding BV, a company resident in the Netherlands, wanted to be included in a fiscal unity for corporate income tax purposes with its wholly owned subsidiary, a company resident in Belgium. The Dutch tax authorities denied the request because the subsidiary was not resident in the Netherlands for tax purposes nor did it have a permanent establishment (PE) in the Netherlands. The Dutch Supreme Court referred the case to the ECJ to decide whether the regime should be extended to EU situations.

According to AG Kokott, the Dutch fiscal unity legislation makes a distinction between domestic and cross-border situations: it applies when the group companies are all established in the Netherlands, but not insofar as a company is established abroad. Disadvantages of not applying the fiscal unity regime in cross-border situations include the following:
- Each company has to file its own tax return, resulting in a higher expenditure and administrative burden than when a single tax return is filed for the entire group;
- The companies may not offset profits and losses;
- It is not possible to implement restructuring within the group (e.g. transferring assets) without fiscal implications; and
- Transactions between the companies are not neutral for tax purposes, which increases the administrative burden, since, for example, transfer pricing documentation is necessary.

If the fiscal unity applied in an EU situation, the EU subsidiary would be treated as a PE from a Dutch tax perspective, so the losses of the EU subsidiary could be offset against Dutch profits in the year the losses are incurred. However, the losses would be recaptured if the EU subsidiary became profitable in a later year.

AG Kokott concluded that the different treatment of domestic and cross-border situations constitutes an infringement of the freedom of establishment, but that the restriction can be justified based on the allocation of taxing rights and the risk of double loss compensation and tax avoidance. AG Kokott also opined that there could be a risk of double loss compensation in specific situations. It is now up to the ECJ to decide whether to accept AG Kokott's recommendations.