On 22 February 2018, the Court of Justice of the European Union (CJEU) ruled on the compatibility of the Dutch fiscal unity regime with EU Law. The CJEU decided that the current fiscal unity regime for the corporate income tax law is not in line with the freedom of establishment deriving from EU law.
The fiscal unity regime provides for certain fiscal advantages, like losses from one company may be set off against the profits of other members of the fiscal unity. Transactions within the fiscal unity are also invisible. It is therefore possible to transfer real estate from one company to another company without having to pay corporation tax on the difference between book value and the fair value of the property. For example, a development company may transfer a completed property tax-free to an investment company within the fiscal unity.
As the fiscal unity can only be established between a parent and subsidiary/subsidiaries which are established in the Netherlands, the CJEU ruled that the advantages of the fiscal unity should be applicable on subsidiaries abroad as well. This conclusion is in line with the ruling of the Advocate-General of the CJEU.
After the ruling of the Advocate-General the Dutch State Secretary for Finance announced that to be compliant with EU law he prefers to limit the advantages of the fiscal unity regime which are only available in domestic situations and not in intra-EU situations. With this limitation the fiscal unity regime loses some of its advantages. The announced repair measures will enter into force retroactively to 25 October 2017.
The proposed adjustment of the fiscal unity regime will result in a stand-alone approach for deduction of interest payments, carry forward of losses in case of change of control and the participation exemption.
For real estate groups with investments in European subsidiaries, the judgment of the CJEU may allow for more opportunities to deduct interest paid. Currently non-deductible interest payments could be deductible retroactively announced to 25 October 2017 under the proposed new rules. However, real estate groups that use a fiscal unity for their Dutch companies can be confronted with unexpected tax disadvantages.