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Court of Appeals approves a fiscal unity between Dutch subsidiaries of a joint non-EU parent company

Last updated: 19-05-2016

Recently, the Court of Appeals Arnhem-Leeuwarden ruled in its case 15/00206 on 24 April 2016, that under the application of the non-discrimination clause of a Tax Treaty concluded by the Netherlands and another country which is not a member of the European Union ('EU'), neither is a member of the European Economic Area ('EEA'), a request to form a fiscal unity for corporation tax purposes between two Dutch sister companies with a joint non-EU/non-EEA arent company, must be granted.

Briefly speaking, a fiscal unity is a consolidation regime for corporation tax purposes. The parent company of a fiscal unity files a tax return on a consolidated basis. A fiscal unity allows the offset of losses of one company against profits of another company in a particular year and a tax-free transfer of assets and liabilities and dividend distributions between the companies that belong to it.

A fiscal unity can be formed upon joint request if a resident company holds, directly or indirectly, at least 95% of the share capital and the voting rights of one or more other resident companies. A fiscal unity may not be formed with a foreign subsidiary. Under conditions, foreign companies with a permanent establishment in the Netherlands may be part of a fiscal unity as a parent company or subsidiary. However, with effect from 16 December 2014 (following the Court of Justice of the European Union's ('ECJ') decision in SCA Group Holding  (Case C-39/13)), a fiscal unity may be formed between: (i) a resident parent company and a resident sub-subsidiary, where the parent holds that sub-subsidiary through non-resident companies which do not have a permanent establishment in the Netherlands; and (ii) resident sister companies, the common parent company of which neither has its seat in the Netherlands nor has a permanent establishment there. The Dutch State Secretary of Finance published a Decree and later a Bill in which it states it limits the application of the ECJ's ruling to EU and EEA situations.

In the case at hand the Court of Appeals Arnhem-Leeuwarden ruled by invoking the non-discrimination clause of the Israel-Netherlands Tax Treaty (article 27), a request for a fiscal unity with three Dutch sister companies and one Dutch grandchild company with a joint ultimate Israeli parent company, had to be granted. The non-discrimination clause in the Israel-Netherlands Tax Treaty is almost completely in line with the non-discrimination clause of OECD Model Tax Convention (article 24). The ruling of the Court of Appeal raises the question if the Netherlands should approve fiscal unity between Dutch companies with a joint non-EU or non-EEA parent company if the country of residence of the parent company and the Netherlands have concluded a tax treaty which contains a non-discrimination clause as set out in Israel-Netherlands Tax Treaty.

The ruling of the Court of Appeal gives an opportunity to international groups of companies which have several companies in the Netherlands, which do not have a joint parent company in the Netherlands, EU or EEA, but in a 'third country', to file a request to form a fiscal unity for corporation tax purposes in the Netherlands. However, we have the expectation that Dutch State Secretary of Finance will appeal this ruling to the Supreme Court. As such, it is the expectation that the Tax Authorities will deny the request for a fiscal unity. However, by filing an objection against the rejection of the request for a fiscal unity the Dutch companies have safeguarded their position in the event the Supreme Court follows the ruling of the Court of Appeals Arnhem-Leeuwarden. Please note that the request for a fiscal unity can have retroactive effect to no more than three months.

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