On September 17, 2021, on the website of the Dutch courts (De Rechtspraak) the opinion of Advocate-General Wattel in Case number: 21/00415, ECLI:NL:PHR:2021:769 was published. The taxpayer in the underlying case is a French Société anonyme (SA) with a Permanent establishment (PE) in the Netherlands. The assets of the Dutch PE include a.o. a shareholding in B NV. The taxpayer acquired this shareholding in 2007 by an exchange of shares and the issuing of convertible bonds. The exchanging shareholders in B could choose between newly to be issued shares in the SA or Obligations Remboursale en Actions (ORAs: convertible bonds) to be issued by the SA. The SA incurred costs of €9,424,557 with respect to the issuing of the ORAs and €34,700,000 with respect to the issuing of the new shares (hereafter together called “issuing costs”).

 

Because of its Dutch PE, the SA is a non-resident taxpayer for Dutch corporate income tax purposes. The SA and the Dutch tax authorities are disputing whether the cost incurred with respect to the issuing of the ORAs and the shares are deductible from the result of the PE. In the initial case in front of the District Court the parties were only disputing the attribution of the costs incurred with respect to the issuing of the ORAs. However, after she was successful in the District Court on this issue, in appeal the SA also challenged the attribution of the costs incurred with respect to the issuing of the shares. The tax authorities refuse a deduction of these costs because the tax authorities do not only consider the shares, but also the ORAs, to constitute equity. To the Dutch tax authorities’ opinion, cost incurred with respect to the issuing of equity are organ costs (costs that are specific to the legal form of an equity company), which must therefore be attributed to the company as such, i.e. to the SA’s French head office.

 

Parties are not disputing that if the ORAs are debt, the costs incurred with their issuance are to be attributed to SA’s Dutch PE and therefore deductible for Dutch corporate income tax purposes.

 

The District Court ruled that the costs incurred with respect to the issuing of the ORAs are attributable to the PE and therefore deductible for Dutch corporate income tax purposes. Reason here for is that the District Court does not consider the organ costs case law to be conclusive for the issue being disputed, since in the underlying case both the head office and the PE are part of the same legal entity.

 

In appeal, the Court of Appeal denied the deduction because it considers all issue costs, both those incurred with respect to the issuing of the shares and those incurred with respect to the issuing of the ORAs, to be organ costs that cannot be attributed to any specific part of the profit or company, but only to the legal entity as such. The Court of Appeal was of the opinion that neither Art. 7, paragraph 3 of the Dutch-French DTA (stemming from 1974) nor the Commentary to the 1963 OECD Model Convention provides support for the view that organ costs can be attributed ed to the PE. Furthermore, the Court of Appeal was of the opinion that a denial of the deduction did not constitute a discrimination against the PE within the meaning of Article 25, paragraph 4 of the Dutch-French Treaty nor was it according to the Court of Appeal an infringement of the freedom of establishment.

 

The pleas of the taxpayer

SA has 5 pleas:

(i)    First plea argues that the ORAs are not part of the equity because a repayment obligation exists, and it is irrelevant that it this repayment obligation is conditional or that repayment is unlikely;

(ii)   Second plea contests the Court's finding that the costs incurred with the issuing of the ORAs are to be considered organ costs, since convertible bonds are not shares and a company can exist without bonds but not without share capital; Therefore the costs incurred with respect to the issuing of the ORAs are not specific for the legal form;

(iii)  Third plea contests the Court's finding that art. 7, paragraph 3 of the Dutch French DTA does not attribute either the costs incurred with respect to the issuing of the ORAs nor the costs incurred with respect to the issuing of the shares to the PE;

(iv)  Fourth plea argues that based on the non-discrimination provision as laid down in Article 25, paragraph 4 of the Dutch-French DTA the refusal to allow SA to deduct constitutes a prohibited discrimination; and

(v)   Fifth 5 argues that based on the EU freedom of establishment (Article 43 TFEU) the refusal to allow SA to deduct these costs constitutes prohibited discrimination.

 

Summary of the analysis of the Advocate General

 

To the opinion of the Advocate-General the first, second, fourth and fifth plea are all unsuccessful.

 

Third plea

According to art. 7 Dutch-French DTA the question is whether the issuing costs could be considered to be costs which the PE might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment (paragraph 2), respectively whether the issuing costs are 'general administrative expenses'/'frais généraux d'administration' which are 'incurred for the purposes of the permanent establishment' respectively its 'exposées aux fins poursuivies par cet établissement stable' (paragraph 3). The Advocate-General agrees with the Court of Appeal that the emission costs cannot be considered costs that the PE would have made if it had been a separate and demerged company, since a division of equity within one legal entity is inconceivable as a transaction between independent third parties (paragraph 2 deals with transactions). However, the Advocate General states that he does not see why the issuing costs could not be considered to constitute 'general administrative expenses incurred for the purposes of the permanent establishment' / 'frais généraux d'administration exposées aux fins poursuivies par cet établissement stable' (paragraph 3 deals with head office costs), even not if under national law issuing costs would (still) be considered to be organ costs. After all, that national peculiarity is irrelevant for the purposes of treaty applicability.

 

Moreover, there is no attribution problem in this case: there can apparently be no doubt that the emission costs only relate to within the PE employed capital that generates profit only there. In the opinion of the Advocate-General, this satisfies the criterion of HR 2005/224 that those costs are 'related to certain (...) benefits to be obtained [by the PE] in such a way that they can be attributed to those benefits. The OECD Commentary 1963 that is relevant for the underlying case does give a different view. However, BNB 1997/221 is a contraindication because in a mirror situation and under a different tax treaty (Switzerland 1951) the Dutch Supreme Court ruled that there no such relationship existed between the issuing costs of a Dutch head office and the Swiss PE-benefits to be obtained with the capital raised that justified that those issuing costs could be attributed to those Swiss benefits. The 1951 Dutch-Swiss DTA however, is worded very differently, dates from before 1963 and does not contain a provision that is similar to Article 7, paragraph 3 the Dutch-French DTA. Moreover, since the already mentioned judgments BNB 2005/224 and BNB 2011/86, it has no longer been said that issuing costs still are considered organ costs that cannot be separated. Especially BNB 2011/86 in suggests that they can be separated. Moreover, BNB 1997/221 leads to a discrimination of equity financing: an organ costs approach to issuing costs necessitates that take-overs by Dutch PEs are financed with debts, of which the costs are deductible. However, it is not clear why external costs of debt financing are attributed to the PE and external costs of equity financing with equity are not attributed to the PE. The District Court has assumed – and it is obvious – that France will also attribute the issuing costs to the PE. The Advocate-General is therefore of the opinion that plea 3 is successful.

 

The full text of the opinion of the Advocate-General (only available in Dutch) can be found here.

 

 

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