Domestic court extends ECJ decision on tax consolidation to fiscal unity regime and European Commission takes action.
The Tax Court of First Instance of Haarlem issued a decision on 9 June 2021 (X BV) allowing a fiscal unity between a Dutch parent company and its lower tier subsidiaries that were held by two German intermediary companies. Basing its decision on the 2008 European Court of Justice (ECJ) ruling in the Papillon case, the Haarlem court held that the Dutch fiscal unity regime violates the freedom of establishment in the EU Treaty.
In Papillon, the ECJ had to rule on the compatibility of the French tax consolidation rules with EU law. Those rules allowed an indirectly held French subsidiary to be included in the French parent company’s tax consolidation only if the intermediary company also was included in the consolidation, and to be included in a tax consolidation, a company had to be established in France. The ECJ held that a French parent company and a French sub-subsidiary should be permitted to form a consolidation even if an intermediary company is resident in another EU Member State, and that the denial of such a consolidation violates the freedom of establishment principle.
Comparable to the French regime at issue in Papillon, the Dutch fiscal unity regime aims at consolidating the results of group companies, allowing the offset of profits and losses of group companies and neutralizing intra-fiscal unity transactions. Following the ECJ decision, Dutch taxpayers requested authorization to form fiscal unities between Dutch group entities without consolidating intermediary companies from other EU Member States. However, the Dutch tax authorities considered Dutch law substantially different from French law and, therefore, disallowed the consolidations.
The Haarlem Tax Court of First Instance concluded that the disallowance of the fiscal unity regime based only on the place of residence of the intermediary company is an infringement of EU law. The fact that a fiscal unity between a parent company and its sub-subsidiary also is impossible if the intermediary company is a Dutch resident (without being consolidated) was considered irrelevant.
Although the court found that the restriction could be justified based on the coherence of the tax system (primarily because of rules avoiding double loss compensation in domestic situations), the restriction was considered disproportionate because the Dutch tax authorities can request information from the tax authorities in other EU Member States if they consider the information relevant for Dutch tax purposes and because alternative anti-abuse measures are available that are preferable to a general exclusion on granting a fiscal unity. Thus, the Haarlem tax court ruled that the disallowance of a fiscal unity between a Dutch parent company and its Dutch sub-subsidiary without consolidating the EU intermediary company is an infringement of the freedom of establishment principle and consolidation should be allowed.
The Dutch State Secretary of Finance is expected to appeal this decision.
Beyond the fate of the court’s decision in X BV on appeal, taxpayers also are left with the question of whether a fiscal unity should be granted in the case of two or more Dutch resident companies held (at least 95%) by the same EU parent company without the parent company being consolidated. In analogy to the Papillon case, the position could be taken that two subsidiaries should be allowed to form a fiscal unity without the common EU parent company being consolidated as well.
Since there is no direct shareholding relationship between the consolidated companies, it is not yet fully certain that this fiscal unity has to be allowed. In an unpublished decision, the Haarlem Tax Court of First Instance already decided that this does not infringe EU law. The European Commission, on the other hand, recently requested the Netherlands to amend its fiscal unity legislation on the grounds that a denial of a fiscal unity between subsidiaries without consolidating the common EU/EEA parent company would infringe the freedom of establishment.
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