The Dutch Supreme Court issued decisions in case no.15/00194 and no. 15/00878 related to interest deduction limitation and the (non-) deductibility of currency losses on certain participations. The issues for both cases were whether the Dutch tax law (i.e., fiscal unity) is compatible with the freedom of establishment.
This case is about a parent company established in a Member State that is not allowed to deduct interest in respect of a loan taken out with a related company to finance a capital contribution to a subsidiary established in another Member State, whereas if the subsidiary was established in the same Member State, the parent company could avail itself of that deduction by forming a fiscal unity.
With reference to the CJEU’s conclusions, the Supreme Court concluded that the application of the interest deduction limitation, in light of the beneficial effect of a fiscal unity in purely domestic situations, infringes the freedom of establishment and cannot be justified. Therefore, Section 10a CITA (interest deduction limitation rule to prevent base erosion) must be disregarded in the present case. Besides, the Supreme Court also noted that comparison does not have to be made with the hypothetical situation in which there is a cross-border fiscal unity.
The second case concerned the impossibility to deduct a currency loss suffered by a Dutch parent company on a subsidiary residing in the EU under the Dutch participation exemption if the parent company and the subsidiary would have been included in a fiscal unity, a currency loss related to the assets of the consolidated subsidiary would have been deductible. However, the fiscal unity regime only applies to Dutch resident subsidiaries. Therefore, the non-deductible currency loss could not be avoided even though the subsidiary is included as fiscal unity.
In response to the case, the Supreme Court, aligned with CJEU judgment, concluded that there is no infringement of the freedom of establishment and is presented based on a symmetry argument: under Dutch law both currency losses and currency profits are not taken into account. A Dutch company will normally not incur a currency loss on participation in a Dutch subsidiary unless that shareholding is denominated in another currency than the profits of the parent company.
Regarding the cases mentioned earlier, the Dutch Ministry of Finance published a legislative proposal that contains measures to bring the fiscal unity regime in line with the per-element approach taken by the CJEU and under which several provisions in the CITA and the dividend withholding tax would be applied ignoring the existence of fiscal unity. Once both houses of parliament approved the proposed bill, the measures will apply retroactively as from 1 January 2018.
One of TPA’s technology partners Cygnet Infotech has developed a comprehensive VAT solution named R7VAT MTD, which is amongst others recently approved by HMRC for use by companies in the UK to automate and manage their VAT returns filing process but can also be used broadly within the EU.
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