Dutch government announces plans to tackle corporate tax avoidance; emergency measures to counter the effect of ECJ decision announced
On 23 February 2018, the Dutch State Secretary of Finance published an agenda of measures to curtail the role of the Netherlands in international tax planning structures aimed at base erosion and to protect the Dutch taxable base (the International Tax Policy Letter). The announced plans will make these structures, which have been used for many decades in international tax planning, less attractive. With these plans, the Dutch government wants to change the international perception that the Netherlands is facilitating these structures, and confirm its role as a serious partner in combatting international tax avoidance.
Although some of the plans had been announced previously, the International Tax Policy Letter firmly confirms that the Dutch government will no longer support, neither through legislation nor administrative practice, the use of the Netherlands in international structures aimed at base erosion. It represents what seems to be the culmination of a shift in the Netherlands’ international tax policy, as a result of international pressure from the OECD, the EU, trading partners and domestic public opinion.
The Dutch State Secretary of Finance also announced emergency legislation, to be applied with retroactive effect, with respect to the fiscal unity regime (the Fiscal Unity Letter) to limit the impact on the government budget of a decision rendered by the European Court of Justice on 22 February 2018.
Key aspects of the International Tax Policy Letter and the Fiscal Unity Letter are:
The International Tax Policy Letter
The International Tax Policy Letter describes the following main concrete measures and actions:
The Fiscal Unity Letter
On 22 February 2018, the Dutch State Secretary of Finance published a letter announcing emergency legislation, to be published in the second quarter of 2018, that will apply with retroactive effect from 25 October 2017 and that will deny several benefits of the fiscal unity regime that are currently available. The announcement of the emergency legislation is in response to the judgment of the European Court of Justice (ECJ) of 22 February 2018 (C-398/16). The ECJ confirmed that the application of an interest deduction limitation to transactions that occur between a Dutch resident taxpayer and its EU subsidiary is an unjustified breach of the freedom of establishment, because that limitation does not apply to the same transaction between two Dutch resident taxpayers that could form a fiscal unity. Therefore, the interest paid in relation to the transactions with EU subsidiaries should be deductible as well, according to the ECJ.
Although the judgment of the ECJ deals with the application of article 10(a) of the Dutch Corporate Income Tax Act 1969 (CITA), its impact is expected to be much wider and cover several other provisions of the CITA and thus have a major impact on Dutch corporate tax revenue. The Dutch State Secretary of Finance has therefore announced emergency legislation. The emergency legislation will require a fiscal unity to apply article 10(a) CITA and certain other provisions which are also incompatible with EU law on a company-by-company basis, in the same way as these provisions would apply with respect to EU subsidiaries, i.e., in this respect disregarding the existence of the fiscal unity notwithstanding the changing legislation. Taxpayers may claim the benefits of the ECJ’s decision until 25 October 2017 for any tax book years not yet finally assessed. Nevertheless, the emergency legislation will likely result in significant increased tax charges for taxpayers and the need to restructure intercompany relationships within existing fiscal unities. In addition, the emergency legislation is likely to cause a significant increase in the administrative burden as transactions within the fiscal unity will have to be traced, not only in the future but also for the past, in order to assess the applicability of the provisions of the emergency legislation.
The decision of the ECJ essentially marks an end to the fiscal unity regime that has been part of CITA since 1969. The State Secretary of Finance has announced that a future-proof group taxation regime will be designed to replace the current fiscal unity regime. This process is expected to take several years. In the meantime, the emergency legislation will be applicable.