Repair tax entity corporate income tax in the making

26 February 2018 - On 22 February 2018, the EU Court of Justice ruled that despite the fact that tax payers cannot form a tax entity with their EUR subsidiaries, they do qualify for the benefits of separate elements of the tax entity regime. According to the state secretary, this ruling results in a structural loss of tax revenues that may amount to several hundreds of millions of euros per year. For this reason, the state secretary, in anticipation of the ruling, had already announced repair measures that will have retroactive effect.

The EU Court of Justice ruled in the case concerning an international group consisting of, among others, a Dutch company and an Italian subsidiary. The Dutch company paid interest to its Swedish parent company. This interest was affected by the Dutch interest deduction restrictions. If the Dutch company could have formed a tax entity with its Italian subsidiary, it would have been able to deduct the interest. According to the EU Court of Justice, the interest deduction restrictions are therefore contrary to EU law.

The consequences of the ruling of the Court of Justice are both positive and negative. The negative consequences relate to the announced repair measures that will have retroactive effect until 25 October 2017, 11 am.

Positive consequences

Insofar assessments on previous years, until 25 October 2017, 11 am, have not been established irrevocably, tax payers may rely on the ruling of the EU Court of Justice. Based on this ruling, the benefits of a tax entity may in principle no longer be withheld from tax payers in EU situations.

Negative consequences

As of 25 October 2017, 11 am, several regulations in corporate income tax and dividend tax must be applied as if there were no tax entity. Among others, this applies to the interest deduction restrictions. With the emergency repair measures it is achieved that for the application of those regulations in domestic relationships as well, the consolidation resulting in the tax entity is not effected. Therefore, the tax entity will henceforth be ignored for the relevant regulations. In principle, each tax entity will have to check for itself whether the measures have consequences.

What will change precisely?

The state secretary has announced that the legislative proposal with the repair measures will be submitted to the Lower House of Parliament in the second quarter of 2018. Only then will there be clarity on what is exactly going to change.

Furthermore, the state secretary has stated that within the foreseeable future, the repair of the tax entity will have to be followed by a group scheme that is future-proof. In the new regulation, the consolidation element of the current regulation appears not to return.

To which situations may the measures relate?

Among others, the announced repair measures may have the following consequences:

  • If loans have been taken out by a tax entity in which that loan is used for the distribution of profits, the payment of capital or the acquisition / expansion of an interest
  • If there is an excessive interest in a loan that has been taken out to finance a participation
  • Certain situations in which a tax entity holds a foreign participation
  • If a participation has been bought that has carry over losses; and / or
  • The tax reduction of the dividend tax in case of a redistribution of dividends.

Want to know more?

Do you have any questions about the announced repair measures? Or would you like to know what is changing for you? If so, please contact Netty van Kreveld by e-mail or phone: +31 (0)88 277 10 22 or Mike Vrijmoed by e-mail or telephone: +31 (0)88 277 10 12. They will be pleased to help.