The situations in which the Dutch corporate income tax Act allows a group of entities to form a fiscal unity for Dutch corporate income tax purposes are limited. Two Dutch sister companies for example cannot form a fiscal unity without also including in that fiscal unity their Dutch parent company that owns at least 95% of the shares in both of these sister companies. The same goes if a foreign entity owns all the shares of two Dutch sister companies and these two Dutch sister companies would like to form a fiscal unity for Dutch corporate income tax purposes. Based on the text of the Dutch corporate income tax Act, these two sister entities cannot form a fiscal unity for Dutch corporate income tax purposes. Neither can they form cross-border fiscal unity which includes their foreign parent company (assuming that the shareholdings in the Dutch entities are not allocated to a Dutch permanent establishment of the foreign parent company).

 

On June 12, 2014 the CJEU judged in the joined cases C-39/13, C-40/13 and C-41/13 (SCA Group Holding & Others) a.o. that Articles 49 TFEU and 54 TFEU must be interpreted as precluding legislation of a Member State under which treatment as a single tax entity is granted to a resident parent company which holds resident subsidiaries, but is precluded for resident sister companies the common parent company of which neither has its seat in that Member State nor has a permanent establishment there.

 

As a reaction to this ruling of the CJEU, on December 16, 2014 the Dutch State Secretary for Finance issued a decree in which, anticipating on an upcoming change of law, he approves that under conditions sister companies whose shares are held (directly or indirectly) by a top holding that is/are resident within the EU/EEA can form a fiscal unity for Dutch corporate income tax purposes.

 

On October 16, 2015 the Dutch Government presented a law proposal that is supposed to bring the Dutch corporate income tax Act in line with the CJEU judgment in joined Cases C-39/13, C-40/13 and C-41/13 (for more information see our article from October 17, 2015). The law proposal a.o. allows sister companies of which at least 95% of the shares are (directly or indirectly) held by the same EU/EEA resident parent company to form a fiscal unity for Dutch corporate income tax purposes.

 

On April 26, 2016 the Court of Appeal of Arnhem-Leeuwarden (Gerechtshof Arnhem-Leeuwarden) judged in a case that is somewhat similar to that of C-40/13 except for the fact that this time the parent company is not residing in an EU country but in a country with which the Netherlands has a DTA in place. This judgment of the Court of Appeal was published on May 6, 2016 (ECLI:NL:GHARL:2016:3320). In its judgment the Court of Appeal rules that a non-Discrimination clause of a DTA under circumstances can provide access to the fiscal unity facility as included in the Dutch corporate income tax Act. It should be noted however, that the Dutch Secretary of State can still file an appeal with the Dutch Supreme Court against this judgement of the Court of Appeal. Furthermore it should be noted that until the Dutch Supreme Court has judged on either the underlying case, or a similar case, Courts can judge differently in similar cases.

 

Facts

The structure that the Court of Appeal had to judge upon was as follows:

X Ltd (resident in Israel) has two 100% subsidiaries which are both resident in Israel (B Ltd and D Ltd). B Ltd in its turn has a 99.9% shareholding in F BV (Dutch entity), a 50% shareholding in J BV (Dutch entity) and a 0.1% shareholding in H BV (Dutch entity). D Ltd on its turn has a 99.9% shareholding in H BV, a 50% shareholding in J BV and a 0.1% shareholding in F BV. F BV and H BV each had a 50% shareholding in L BV (also a Dutch entity).

 

·        The taxpayers (F BV, H BV, J BV and L BV) have requested that as of January 1, 2013 the Dutch Group entities are to be treated as a single tax entity for Dutch corporate income tax purposes (in other words they want form a fiscal unity for Dutch corporate income tax purposes as of January 1, 2013).

 

·        The tax authorities have declined the request.

 

·        The taxpayers subsequently filed a contest against the decision of the tax inspector. The tax inspector decided negative on this contest.

 

·        The taxpayers then filed an appeal with the District Court of Gelderland against this latter decision. On January 22, 2015 the District Court of Gelderland judged in favour of the tax inspector.

 

·        The taxpayers subsequently filed an appeal with the Court of Appeal of Arnhem-Leeuwarden against the decision of the District Court of Gelderland. On April 26, 2016 the Court of Appeal ruled in favour of the taxpayers and judged that because of Article 27, Paragraph 4 of the Dutch-Israeli DTA (the non-Discrimination article) the taxpayers have access to the fiscal unity facility as included in the Dutch corporate income tax Act. According to the Court of Appeal the Dutch Group entities (F BV, H BV, J BV and L BV) therefore form a fiscal unity for Dutch corporate income tax purposes as of January 1, 2013.

 

As stated above, at the time of writing this article the deadline for filing an appeal with the Dutch Supreme Court against the judgment of the Court of Appeal has not yet expired. Therefore it is possible that the State Secretary for Finance (or the taxpayers) will still file an appeal with the Dutch Supreme Court (the deadline for filing such an appeal expires on June 7, 2016).

 

The dispute

The Dutch-Israeli DTA was concluded in 1973 and came in effect on September 9, 1974. In 1996 the DTA was partially amended by a Protocol which was signed on January 16, 1996 and that entered into force on July 26, 1996.

 

Article 27, Paragraph 4 of the DTA (“non-Discrimination”) reads as follows:

Enterprises of one of the States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other State, shall not be subjected in the first-mentioned State 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 that first-mentioned State are or may be subjected.

 

The dispute between the taxpayers and the tax authorities focuses on the question whether or not in the underlying case Article 27, Paragraph 4 of the DTA leaves room for the Dutch tax authorities to deny the request of the taxpayers to form a fiscal unity or whether they have to approve the request and treat the Dutch entities as a single tax entity for Dutch corporate income tax purposes as of January 1, 2013.

 

The taxpayers (the Dutch companies) argue that a rejection of the request results in an impermissible discrimination as meant in Article 27, Paragraph 4 of the DTA. In this respect they argue that in case of a rejection, the Dutch group companies are taxed higher and differently than similar enterprises would be taxed. The taxpayers furthermore argue that this higher taxation is caused by the fact that their shares are (in)directly held by Israel-resident entities. The tax inspector disagrees with the taxpayers. He a.o. argues, making reference to the comments made on the non-discrimination article of the OECD Model Treaty, that Article 27, Paragraph 4 of the DTA is not intended to arrange that national consolidation rules that apply with respect to domestic enterprises, should also apply to foreign situations. In addition, the Inspector argues that in the underlying case a rejection of the request doesn’t result in impermissible discrimination, because in a purely domestic situation (the situation in which the parent company of the Dutch group companies would not be resident in Israel but in the Netherlands) the sister companies would also not have been able to form a fiscal unity without including their parent company in that fiscal unity, since for being able to form a fiscal unity the “unbroken chain” requirement has to be met.

 

In the view of the Court of Appeal the wording of Article 27, Paragraph 4 of the DTA does not exclude that in occurring situations also the rejection of a Contracting State of the possibility to consolidate the capital and income of different entities that are subject to taxes can be covered the term “by other or more burdensome taxation” as meant in Article 27, Paragraph 4 of the DTA.

 

In this respect the tax inspector points out that the text of Article 27, Paragraph 4 of the Dutch-Israeli DTA is identical to that of Article 24, Paragraph 5 of the OECD Model Tax Treaty from 1963. At the time the DTA was concluded, the Comment to Article 24, Paragraph 5 of the OECD Model tax Treaty read as follows:

57. This paragraph forbids a Contracting State to give less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other Contracting State. This provision, and the discrimination which it puts an end to, relates to the taxation only of enterprises and not of the persons owning or controlling their capital. Its object therefore is to ensure equal treatment for taxpayers residing in the same State, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital.

 

The tax inspector furthermore points out that in 2008 the following paragraph was added to the comments on Article 24, Paragraph 5 of the OECD Model Tax Treaty:

77. Since the paragraph relates only to the taxation of resident enterprises and not to that of the persons owning or controlling their capital, it follows that it cannot be interpreted to extend the benefits of rules that take account of the relationship between a resident enterprise and other resident enterprises (e.g. rules that allow consolidation, transfer of losses or tax-free transfer of property between companies under common ownership). For example, if the domestic tax law of one State allows a resident company to consolidate its income with that of a resident parent company, paragraph 5 cannot have the effect to force the State to allow such consolidation between a resident company and a non-resident parent company. This would require comparing the combined treatment of a resident enterprise and the non-resident that owns its capital with that of a resident enterprise of the same State and the resident that owns its capital, something that clearly goes beyond the taxation of the resident enterprise alone.

 

In this respect the Court of Appeal states that it does not agree with the tax inspector and in its view from the aforementioned it cannot be concluded that in deviation from the text of Article 27, Paragraph 4 of the DTA the Netherlands and Israel have intended a limited effect of the non-Discrimination clause regarding consolidation regulations. According to the Court of Appeal, assuming that the Contracting States wanted to follow the comments on the Article, the comments as they existed at the date of the conclusion of DTA are leading (The Court adds that when conluding the DTA, the Contracting States could not foresee the additions made to the comments in 2008). In these comments the Court does not read the limited effect as argued by the tax inspector.  Especially not since rejecting the consolidation of the Dutch entities could lead to discriminating exactly those Dutch entities because of them being taxed higher or earlier in comparison to Dutch entities that a Dutch parent company.

 

As an additional argument the Court of Appeal refers to the Public Discussion Draft “Application and interpretation of article 24 (non-discrimination)” which was published by the OECD on May 3, 2007. In this Discussion Draft a.o. the following is stated:

7. It has been argued that the current wording of paragraphs 1, 3 and 5 of Article 24 could have the effect of requiring a State to extend the provisions of its domestic law that apply to a group of companies (e.g. group relief of losses, consolidation, tax-free transfers between companies of the same group) to cover companies of the group which are not residents of that State.

 

According to the Court of Appeal this also shows that the wording of Article 24, Paragraph 5 of the OECD Model Treaty and the comments applying thereto until 2008 do not require that the interpretation as argued by the tax inspector is to be followed.

 

Subsequently the Court of Appeal comes to the conclusion that the real ground for which the taxpayers of the underlying case are treated differently than similar companies when requesting to be treated as a single tax entity is because their shareholders are not residing in the Netherlands but in Israel.

 

Parties had already agreed on the fact that under circumstances the fact that the taxpayers in the underlying case cannot form a fiscal unity can lead to the tax payers having to pay more or earlier (corporate income) tax in comparison to the situation in which they would be able to form such a fiscal unity.

 

The decision of the Court of Appeal

Based on the aforementioned the Court of Appeal rules that in the underlying case the taxpayers (F BV, H BV, J BV and L BV) can form a fiscal unity for Dutch corporate income tax purposes as per January 1, 2013. They will have to appoint one entity to be the head of the fiscal unity, which in the underlying case will be J BV.

 

Click here to be forwarded to the judgment of the Court of Appeal of Arnhem-Leeuwarden as available on the website of rechtspraak.nl. (the judgment is available in the Dutch language)

 

Conclusion

As stated above the Dutch Supreme Court has not yet judged on this case. Until the Dutch Supreme Court judges on this, or a similar case, it seems that with this judgement the Court of Appeal of Arnhem-Leeuwarden has opened the door to the fiscal unity facility as included in the Dutch corporate income tax Act to another sort of situations. Situations in which the facts/structure are/is similar to that of the underlying case (cases in which except for the place of residency of the parent company, all other conditions for being allowed to form a fiscal unity are met) if the parent company can call in a non-Discrimination clause from the DTA as concluded between the country of its residence and The Netherlands that is identical to the one of Article 27, Paragraph 4 of the Dutch-Israeli DTA.

 

It will be interesting to see how other Courts and especially the Dutch Supreme Court might rule in this or similar cases. Will they rule in line with the underlying judgment of the Court of Appeal? Or will they rule differently and deny the possibility to form a fiscal unity in the underlying case, or in cases similar to the underlying one? It will also be interesting to see how Courts might rule in similar cases in which the taxpayers call in a non-Discrimination clause of a DTA that has been concluded after the comments on the Article 24 of the OECD Model Tax Treaty have been updated (2008).

 

 

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