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Netherlands Responds To ECJ Tax Ruling

by Ulrika Lomas,, Brussels

27 February 2018

The Dutch Government plans to amend tax legislation in response to a recent ruling by the European Court of Justice (ECJ).

The Government announced on February 22 that the "emergency" legislative measures will be introduced in parliament in the second quarter of 2018, but will be effective retrospectively from October 25, 2017, when an Advocate General to the ECJ issued a similar decision on the case.

The ECJ ruled on February 22 that a Dutch-registered company's right to freedom of establishment under EU law was denied when the Netherlands denied a deduction for interest paid on a loan provided by its Swedish parent, in X BV v. Staatssecretaris van Financiën (Case C-398/16).

In this case, X BV, a Dutch company which was part of a Swedish group, had purchased shares in an Italian subsidiary of the group from a third party through a capital contribution in a newly formed Italian company using funds borrowed from the Swedish parent company. The case revolved around the disallowance by the Dutch tax authority of an interest deduction claimed by X BV on its tax return for 2004 in respect of interest paid on the loan from the Swedish parent.

The tax authority disallowed the deduction on the basis that under article 10 of the Dutch Law on corporate tax, interest on loans between related entities cannot be deducted if the loan relates to a capital contribution, in particular in the form of the purchase of shares in a related entity.

Disputing the disallowance of the deduction, X BV argued that the deduction would have been treated differently had the transaction in question taken placed between Dutch resident entities with a Dutch parent under the country's fiscal unity regime. This is because companies which opt for that scheme are taxed jointly at the level of the parent company. Consequently, mutual equity links, such as a capital contribution from a parent company to its subsidiary, become non-existent for the purposes of taxation, as a result of consolidation.

X BV argued therefore that this difference in tax treatment constituted an infringement of freedom of establishment under EU law.

The Dutch Government countered that difference in treatment is justified by the need to safeguard the allocation of the power to impose taxes between the member states. Secondly, it said that the denial of the deduction stemmed from the need to ensure the coherence of the Netherlands tax system. And thirdly, it contended that limiting the use of the interest deduction was a tool necessary to combat tax evasion.

However, in its ruling, the ECJ rejected the Government's arguments, concluding that the Dutch tax rules at issue take no account of the place of taxation of the income comprising the interest paid and, therefore, on ascertaining which state benefits from that taxation. On the second point, the court said that the Government had not made a strong enough claim that the coherence of the fiscal unity scheme would be jeopardized if the deduction of interest in respect of a loan intended to finance the purchase of shares in a non-resident subsidiary were permitted. The ECJ also said there was no justification for denying the tax deduction on the grounds of preventing tax evasion, since the Government has not attempted to show that the difference in tax treatment is based on an intention to prevent abuse.

The court stated that: "Articles 49 and 54 TFEU must be interpreted as precluding national legislation, such as that at issue in the main proceedings, pursuant to which a parent company established in a Member State is not allowed to deduct interest in respect of a loan taken out with a related company in order to finance a capital contribution to a subsidiary established in another Member State, whereas if the subsidiary were established in the same Member State, the parent company could avail itself of that deduction by forming a tax-integrated entity with it."

TAGS: court | tax | Netherlands | interest | law | legislation | transfer pricing | Europe

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