”Fiscale Eenheid” emergency repair

The European Court of Justice issued a judgment about the ”Fiscale Eenheid” for corporate income tax purposes on 22 February 2018. Based on this judgment, the Dutch State Secretary for Finance had already announced that he would be taking additional measures. These measures have now been enshrined in the legislative proposal for the ”Fiscale Eenheid” Emergency Repair Act.

What is a ”Fiscale Eenheid”?

A ”Fiscale Eenheid” is a corporate income tax facility that allows two or more Dutch-based entities or permanent establishments to file their corporate income tax return as a single taxpayer. The advantages of a ”Fiscale Eenheid” are:

• Intercompany balances are not recognised in the annual results.
• Losses incurred by one group entity can be offset against profits generated by another.
• Equity components can be transferred from one group entity to another without becoming liable to tax.
• The members of the tax entity only have to file one corporate income tax return.

Judgment of European Court of Justice

Using a “Fiscale Eenheid” is open to Dutch-based companies only. In its judgment of 22 February 2018, the Court of Justice of the European Union ruled that it must be assessed on a case-by-case basis whether the inability to form a ”Fiscale Eenheid” in a foreign situation leads to discrimination against foreign legal entities and favours Dutch legal entities. The Court of Justice opined that the advantage derived from a ”Fiscale Eenheid” cannot therefore be limited to Dutch-based parent companies and subsidiaries. Read our earlier newsletter about the judgment here.

”Fiscale Eenheid” emergency repair

As the judgment would cause the Dutch treasury to forego huge amounts in tax revenue, the State Secretary for Finance, Mr Snel, submitted the legislative proposal for the Tax Entity Emergency Repair Act to the House of Representatives on 6 June 2018.

The proposal contains measures relating to the utilisation of tax losses, interest relief and the potential for claiming exemption from income tax. The measures involving the utilisation of tax losses and interest relief may impact your business in particular.

If one group entity issues a loan to another group entity, the latter’s options for claiming deduction of the interest paid on this loan may be restricted. This will result in a higher taxable profit for the tax entity, which may lead to a higher corporate income tax assessment. SMEs qualify for a temporary transitional measure in the form of a threshold. If a entity’s total interest expense stays below € 100,000, the interest relief restriction will not apply. This amount is calculated on a time-weighted basis for 2017.

It may be beneficial for your company that group entities repay their intercompany balances, so that they no longer have to charge each other interest. This may limit the interest deduction restriction, thereby reducing your taxable profit.

If a company has tax loss potential and the shares in this company are transferred, the right to utilise these losses may be lost. Within a tax entity, however, losses can effectively be utilised irrespective of a change in shareholding structure. The introduction of the emergency measures may also cause losses within a ”Fiscale Eenheid to no longer qualify for utilisation following a change in shareholding structure.

What are the potential advantages?

Based on this new judgment, you can object to your final corporate income tax assessment. Objecting to your corporate income tax assessment will pay off if your company was not in a position to form a ”Fiscale Eenheid” before 25 October 2017 because one or more of your group members are based outside the Netherlands and intercompany transactions were conducted, such as loans or transfers of equity components.

Legislative proposal

Subject to the approval of the House of Representatives and the Senate, this emergency repair, which concerns a legislative proposal, will apply with retroactive effect from 25 October 2017 (11 a.m.). We will keep you posted on any developments concerning tax entities.

Advisory services

We would be happy to advise you on how to address the potential implications of the judgment and the legislative proposal. To find out more, please do not hesitate to contact an accon■avm adviser without any obligation. To do so, you can send an email to international@acconavm.nl or use the contact form below.