A Dutch court of appeal recently ruled that the Dutch fiscal
unity regime is incompatible with the Netherlands/Israel double tax
treaty. As a result of the decision, the Netherlands will be
required to extend its fiscal unity regime to Dutch companies that
have a foreign parent resident in Israel or a resident in a country
that has a tax treaty similar to the Netherlands/Israel treaty.
Although we expect the Dutch government to challenge the decision,
international concerns may want to start examining the benefit of
forming a fiscal unity.
Currently, the Dutch corporate income tax act allows a Dutch tax
resident company to form a fiscal unity with its Dutch subsidiaries
if it holds at least 95% of the legal and economic ownership of the
subsidiaries. Forming a fiscal unity brings many advantages: tax
losses can be offset against taxable profits, and profits on
intercompany transactions can be eliminated, essentially allowing
the tax-free transfer of assets and liabilities between all fiscal
unity members. This can result in a lower effective tax rate.
In this case, an Israeli tax resident parent company directly
and indirectly owned two Dutch tax resident subsidiaries. The
Israeli concern filed a request to form a fiscal unity between the
two subsidiaries. The tax inspector denied this request because,
under Dutch law, a fiscal unity was not permitted between Dutch
companies that have a foreign parent. The lower court upheld the
decision of the tax inspector, but the court of appeal ruled
otherwise, concluding that the Dutch law conflicts with the
Netherlands/Israel tax treaty's non-discrimination clause. This
clause reads as follows:
'"Enterprises of a Contracting State, the capital
of which is wholly or partly owned or controlled, directly or
indirectly, by one or more residents of the other Contracting
State, shall not be subjected to any taxation or any requirement
connected therewith which is other or more
burdensome than the taxation and connected requirements to which
other similar enterprises of the Netherlands are or may be
The tax inspector's defence was mainly based on the 2008
commentary to the OECD model tax convention. This commentary states
that the effect of the non-discrimination rules cannot force the
state to allow identical treatment to foreign companies with rules
that allow consolidation, transfer of losses, or a tax-free
transfer of property between companies under common ownership.
Therefore, if the domestic tax law of a state allows a resident
company to consolidate its income with that of a resident parent
company, that state should not have to grant identical treatment to
a resident company and a non-resident parent company.
The court of appeal, however, decided to apply a static
interpretation of the OECD commentary instead of an ambulatory
interpretation, and said that since the Netherlands/Israel tax
treaty dates back to 1996, the OECD commentary applicable in 1996
is leading, not the 2008 commentary. The court concluded that
denying the fiscal unity was a violation of the non-discrimination
clause in the treaty.
The court went on to say that even if the 2008 OECD commentary
applied, a fiscal unity should still be allowed between the sister
companies since the request only involves the consolidation of
Dutch subsidiaries, not the consolidation of a resident company and
a non-resident company.
The case may have wider implications, though. The court's
decision appears to require the Dutch government to expand the
applicability of the Dutch fiscal unity regime to other structures
with foreign parent companies if the state of the foreign parent
company and the Netherlands conclude a double tax treaty with a
similar non-discrimination clause. Most of the tax treaties of the
Netherlands have similar clauses.
Earlier, in December 2014, in response to European Court of
Justice cases like Papillon, the Dutch State Secretary of Finance
issued a decree allowing fiscal unities, among other entities,
between: (i) Dutch sister companies with an EU/EEA parent, and (ii)
a Dutch indirect subsidiary and a Dutch grandparent if the indirect
subsidiary is held through one or more EU/EEA intermediary holding
A legislative proposal is pending that, if adopted in its
current form, will allow both fiscal unities. However, the decree
and the current legislative proposal do not allow fiscal unities
with non-EU/EEA subsidiaries or parent companies.
Following the court's ruling, it appears that the decree
must be expanded to allow groups between subsidiaries of foreign
parents that are not from the EU/EEA to form a fiscal unity if the
applicable tax treaty includes a non-discrimination clause. We
assume, however, that the State Secretary of Finance will go to the
Supreme Court to challenge the decision of the Dutch Court of
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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