MAY 2017 EDITION 114. Quoted. The Fiscal Unity (Amendment) Act

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1 MAY 2017 EDITION 114 Quoted The Fiscal Unity (Amendment) Act

2 In this edition - Introduction - The Papillon fiscal unity - The Sister fiscal unity - Additional conditions for termination and the requirement for continued existence - Fiscal unity including a foreign taxpayer - Supporting measures - Other changes in the fiscal unity system - Other developments in the fiscal unity system - Conclusion

3 Quoted 3 The Fiscal Unity (Amendment) Act 1. Introduction The Act in amendment of the Dutch Corporate Income Tax Act 1969 and of some other laws, to implement certain changes in the fiscal unity regime (the Fiscal Unity (Amendment) Act) came into force on 9 December The implementation of the Fiscal Unity (Amendment) Act aligns the fiscal unity regime in the Dutch Corporate Income Tax Act 1969 ( CITA ) more closely with European law. Previously it had been impossible to form a so-called Papillon or Sister fiscal unity in the Netherlands. A judgment of the Court of Justice of the European Union ( CJEU ) of 12 June 2014, found this incompatible with the freedom of establishment prompting the change in Dutch law. 2 Following on from the CJEU judgment, the Amsterdam Appeal Court has ruled on similar lines. 3 A Papillon fiscal unity means a consolidated group of a parent company and a sub-subsidiary, both resident in the Netherlands, whereby an intermediate holding company resident in the EU or EEA, but outside the Netherlands, holds the shares in the sub-subsidiary (Example 1). A Sister fiscal unity means a consolidated group of two subsidiaries resident in the Netherlands, where a joint parent company resident in the EU/EEA, but outside the Netherlands, holds the shares in both companies (Example 2). Example 1 Example 2 On 16 December 2014 the State Secretary of Finance anticipated to the change in law in a decree by already permitting taxpayers to form a Papillon fiscal unity or a Sister fiscal unity on certain. 4 The Fiscal Unity (Amendment) Act allows this possibility under the CITA and expands the fiscal unity regime. Individual supporting measures have also been introduced to ensure correct implementation of the new fiscal unity variants under the CITA and Fiscal Unity Decree Pursuant to the Fiscal Unity (Amendment) Act, other adjustments have been made to the fiscal unity regime. The amendments to the Fiscal Unity Decree 2003 entered into force with retroactive effect from of 1 January Bulletin of Acts and Decrees (Stb.) 2016/479 of 8 December The Fiscal Unity (Amendment) Act has no retroactive effect for existing tax unities of the Papillon type, or of sister companies. The schemes that have entered into force due to this legislative change only apply to such fiscal unities from 9 December CJEU 12 June 2014, C-39/13, C-39/40 and C-39/41 (SCA Group Holdings, X AG et al, and MSA International Holdings), ECLI:EU:C:2014: Amsterdam Appeal Court, 11 December 2014, no. 11/00180bis, ECLI:GHAMS:2014:5186, Amsterdam Appeal Court 11 December 2014, no. 11/00587a, ECLI:GHAMS:2014:5185, and Amsterdam Appeal Court 11 December 2014, no. 11/00824ba, ECLI:GHAMS:2014: Decree of the State Secretary of Finance of 16 December 2014 amending the Decree of 14 December 2010, no. DGB2010/4620M, Government Gazette 2010, (Stcrt. 2014, 38029). 5 See the letter from the State Secretary of Finance of 9 February 2017.

4 4 In this edition of Quoted, we review the changes to the fiscal unity regime introduced by the Fiscal Unity (Amendment) Act. We have structured this article into nine sections, of which Section 2 deals with the Papillon fiscal unity, and Section 3 with the Sister fiscal unity. In Section 4, we deal with the additional requirements for termination of a fiscal entity under the CITA, while Section 5 looks at the example of a fiscal unity including a foreign taxpayer. Section 6 examines the supporting measures introduced under the CITA. In Section 7, we briefly review the other changes brought about by the Fiscal Unity (Amendment) Act. In Section 8, we describe the expected developments in the fiscal unity regime. Finally, Section 9 summarizes a few practical considerations. 2. The Papillon fiscal unity 2.1 Introduction At its simplest, a Papillon fiscal unity is a consolidation of a Netherlands-based parent company and sub-subsidiary, where an intermediate holding company based in the EU/EEA, but outside the Netherlands, holds the shares in the sub-subsidiary (see Section 1, Example 1). Where this article uses the term Papillon, it refers to this variant, unless otherwise stated. The geographical scope of the Papillon fiscal unity is therefore limited to the EU/EEA. The intermediate holding company is not itself part of the Papillon fiscal unity, so its assets and results are not included in the consolidation of assets and results for Dutch corporation income tax ( CIT ) purposes. Nevertheless, the starting-point upon implementation of the Papillon fiscal unity in the CITA was the existing fiscal unity regime, in which such a consolidation of assets and results for CIT purposes does take place. As a consequence, there is a full consolidation of the assets and results of the parent company and the sub-subsidiary for CIT purposes. 2.2 Conditions to form a Papillon fiscal unity In order to set up a Papillon fiscal unity, the parent company must meet the same conditions with respect to its interest held in the sub-subsidiary, as that apply upon the formation of an ordinary fiscal unity. This includes the ownership requirement. In brief, this means the parent company must be the full legal and beneficial owner of at least 95% of the shares in the nominal paid-up capital of the sub-subsidiary. For the Papillon fiscal unity, it is however permitted to meet this ownership requirement in the sub-subsidiary indirectly, i.e. through one or more qualifying intermediate holding companies. The addition of the word full to the ownership requirement is one of the other amendments under the Fiscal Unity (Amendment) Act, as discussed in detail in Section 7. In Text Box I, we included the conditions set for the formation of an ordinary fiscal unity. We have included the conditions to qualify as an intermediate holding company in Text Box II. In addition, a parent company s interest in an intermediate holding company must also meet the ownership requirement as outlined above. Two variants of Papillon type of fiscal unity are as follows: Example 1 Example 2 100% 100% 100% 50% 50% 100%

5 Quoted 5 Text Box II: Conditions for an intermediate holding company i. An intermediate holding company must be an NV, a BV or an undertaking of similar nature and construction ( legal form requirement ); ii. An intermediate holding company must have been incorporated in accordance with the law of the BES Islands, the law of Aruba, Curaçao or Sint Maarten, the law of an EU/EEA Member State or the law of a state with which the Netherlands has concluded a tax treaty ( incorporation requirement ); iii. An intermediate holding company must be resident in a Member State (not the Netherlands) in accordance with the tax legislation of that Member State, and on the basis of a tax treaty concluded by that state not be a resident of a state outside the EU/EEA ( establishment requirement ); iv. An intermediate holding company would be subject to CIT if it were a resident in the Netherlands ( taxability requirement ); and v. An intermediate holding company may not carry out a business enterprise through a permanent establishment in the Netherlands. Not only the formation of a Papillon fiscal unity, but also its continuing existence depend both on the intermediate holding company status of one entity, and on the parent s qualifying shareholding in that company. If any of these conditions ceases to be met, the fiscal unity is automatically terminated, possibly with negative fiscal consequences. Bear in mind that certain legal transactions may therefore have far-reaching consequences for an existing fiscal unity. One example might be an intermediate holding company s purchase of real estate in the Netherlands. At that point, the holding company acquires a permanent establishment in the Netherlands and ceases to comply with the conditions on which its intermediate holding company status depends. In this event, it may be possible to form a follow-on fiscal unity: see Section 4 below. Text Box I: Conditions for forming an ordinary fiscal unity i. The parent company must be the full legal and beneficial owner of at least 95% of the shares in the subsidiary at the date of acquisition ( ownership requirement ); ii. The parent company and subsidiary should in principle (i) have the same financial year, (ii) the same profit-determination rules and (iii) the same functional currency; iii. The parent company and the subsidiary must have a qualifying legal form (for the parent company this is a cooperative, an NV, a BV or a body similar by nature and construction; for the subsidiary, this is an NV, BV or an undertaking of similar nature and construction); iv. The parent company and subsidiary must both be based in the Netherlands (the notion that companies incorporated in Dutch law are always based in the Netherlands does not apply to the fiscal unity), both on the basis of national law and of a tax treaty that has been concluded; and v. The shares in the subsidiary may not be held as stock (the shares in the subsidiary may not be held for quick resale).

6 6 2.3 Intermediate holding company status An intermediate holding company is not included in a Papillon fiscal unity. Consequently, it has no part in the consolidation of assets and results of the fiscal unity. Nevertheless, the shares held directly by the parent company in the sub-subsidiary count towards the ownership requirement (95%). In an ordinary fiscal unity, the parent company s direct shareholding only counts towards the ownership requirement if these shares are directly held by a company that is actually part of the fiscal unity concerned. This concept is also known as the ownership chain and still applies under the revised regime. This means that upon the formation of a fiscal unity, only a non-included intermediate holding company that meet the above conditions can break the vertical chain of companies. Example 1 Example 2 Unlike the ordinary system, the intermediate holding company is not included in the Papillon fiscal unity. The implications are twofold: i. All asset-holding relations between a parent company and an intermediate holding company, and between an intermediate holding company and a sub-subsidiary, remain visible and continue to have CIT implications. One example is the shareholding link that exists between a parent company and an intermediate holding company. Another is the relationship of lender and borrower that may exist between an intermediate holding company and a sub-subsidiary. ii. All transactions between a parent company and an intermediate holding company, and between an intermediate holding company and a sub-subsidiary, remain visible and continue to have CIT implications. The formation of a Papillon fiscal unity nearly always leads to an increase in the equity on the parent company s fiscal balance sheet. The reason is that the shareholding held in the intermediate holding company is preserved, while the assets of the consolidated sub-subsidiary appear on the parent company s fiscal balance sheet. The increase in equity therefore consists of the sub-subsidiary s equity and is untaxed. With regard to the shareholding in the intermediate holding company, it is worth noting that the participation exemption, exclusions from the participation exemption or the participation credit apply as if no fiscal unity was formed. The same goes for all related provisions to the participation exemption. This is laid down in the new Article 13, paragraph 18 CITA. In principle, the implications for parent and sub-subsidiary of forming a fiscal unity are similar, whether it is an ordinary or a Papillon fiscal unity. Like an ordinary fiscal unity, the Papillon type includes the results and assets of a consolidated sub-subsidiary in those of the parent company, which becomes the (notional) taxpayer for CIT purposes. This implies that transactions and asset-holding relations between parent and sub-subsidiary are not visible for CIT purposes. It is therefore still possible to offset the results of the parent company and sub-subsidiary against each other and to transfer assets between them without the levy of CIT. Such an internal transfer has two consequences if not priced according to the arm slength principle:

7 Quoted 7 i. If a parent within a Papillon fiscal unity transfers assets to a sub-subsidiary for a price that exceeds the arm s-length price, an informal capital contribution to the intermediate holding company is recorded for CIT purposes. This may, for example, be of significance for the liquidation loss regime (see Section 6.2). ii. If a sub-subsidiary transfers assets to the parent company within a Papillon fiscal unity for a price below the arm slength price, a deemed profit distribution from the sub-subsidiary to the intermediate holding company and from the intermediate holding company to the parent company is recorded for CIT purposes. In most cases, such a deemed profit distribution has no tax implications under the participation exemption of the CITA and the withholding exemption of the Dividend Tax Act This may, for example, be of significance for the liquidation loss regime (see Section 6.2). 3. The Sister fiscal unity 3.1 Introduction At its simplest, a Sister fiscal unity is a consolidation of two subsidiaries resident in the Netherlands whose shares are held by a parent company resident in the EU/EEA, but not in the Netherlands (referred to below as the top company ) (see Example 2, Section 1). Where this article refers to a Sister fiscal unity, it means this variant, unless otherwise stated. The system of the Sister fiscal unity is also limited to situations within the EU/EEA. In addition, a top company does not form part of the fiscal unity, so its results and assets are not consolidated within the fiscal unity. A full fiscal consolidation of assets and results does take place between the consolidated sister companies. 3.2 Conditions for forming a fiscal unity between sister companies In order to form a Sister fiscal unity, a top company s interest in a consolidated subsidiary must directly or indirectly meet the ownership requirement. The interest in the consolidated subsidiaries can be indirectly held through one or more intermediate holding companies. If this is the case, each intermediate holding company in turn must meet the intermediate holding company conditions as described in Section 2.2. The following variant of a Sister fiscal unity is possible: Example 1 Ten aanzien van een topmaatschappij zijn in art. 15, lid 6, Wet VPB nadere voorwaarden gesteld. Deze voorwaarden zijn 100% 100% 100% 100%

8 8 Apart from the ownership requirement, the subsidiaries belonging to a Sister fiscal unity must meet the same conditions as apply to the formation of an ordinary fiscal unity (see Text Box I). For example, the subsidiaries should have the same financial year and determine their profits by the same rules. Note also that both subsidiaries should close their financial year immediately prior to consolidating, like consolidation in an ordinary fiscal unity. There is no exception for the designated parent company of the Sister fiscal unity (see Section 3.3). Further conditions have also been set for a top company, as summarised in Text Box III. Text Box III: Top holding company conditions i. A top holding company is an NV, BV, a cooperative or a mutual insurance association or a body similar in nature and construction ( legal form requirement ); ii. A top holding company should be established in accordance with the law of the BES Islands, the law of Aruba, Curacao or Sint Maarten, the law of an EU/EEA Member State or the law of a state with which the Netherlands has entered into a tax treaty ( incorporation requirement ); iii. A top holding company must be resident of a Member State (not the Netherlands), in accordance with the tax legislation of a that Member State, and based on a tax treaty concluded by that State not be a resident outside the EU/EEA ( establishment requirement ); iv. A top holding company would be liable for CIT if it were a resident in the Netherlands ( taxability requirement ); and v. A top holding company cannot carry out a business enterprise through a permanent establishment in the Netherlands (i.e. cannot be a foreign taxpayer). Note, again, that not only the formation of a Sister fiscal unity, but also its continuing existence depend on whether an entity qualifies as a top company. If any of the above conditions is no longer met, the fiscal unity will automatically be terminated. Bear in mind that certain legal transactions may therefore have far-reaching consequences in practice for an existing fiscal unity. One example might be a top company s purchase of real estate in the Netherlands. At that point, the top company acquires a permanent establishment in the Netherlands and ceases to comply with the set conditions. In this event, one way of preserving the fiscal unity is to form a follow-on fiscal unity: see Section 4 below. 3.3 Top holding company status The top holding company of a Sister fiscal unity is not included in the fiscal consolidation of assets and results. As a result, there is no natural parent company in this fiscal unity variant and one of the consolidated sister companies has to be designated as the parent company of the fiscal unity. Once the fiscal unity is formed, the designated parent company is the (notional) taxpayer for CIT purposes. One implication is that the parent company draws up and files the CIT return for the Sister fiscal unity. Several factors are important when designating a parent company. See Text Box IV for the relevant considerations.

9 Quoted 9 Text Box IV: Relevant considerations when designating a parent company i. If a fiscal unity is terminated in respect of the designated parent company, this applies for the entire fiscal unity. Because terminating a fiscal unity can have adverse effects, a choice may be made to designate that subsidiary, which is expected to remain in the fiscal unity for a long time, as the parent company. For this purpose, setting up a separate entity can even be considered. ii. Deductible losses arising during the fiscal unity period are attributed to the parent company on termination of the fiscal unity or on the deconsolidation of a subsidiary from that fiscal unity, except in the case where losses of the fiscal unity are transferred to the deconsolidated subsidiary to which these losses are attributable pursuant to Article 15af, paragraph 1 CITA. The designation as a parent company can therefore have an impact on the potential for offsetting the loss after terminating the fiscal unity. iii. The choice of the designated parent company may be of significance to the competent fiscal unity. iv. The choice of the designated parent company may be of significance for the application of the interest deduction restriction of Article 13l CITA For example, the consolidation alone of a subsidiary is regarded as a potential reorganisation within the meaning of the Decree on deduction restriction for excessive participation interest. v. The choice of the designated parent company may be of significance for the possibility of restructuring in the future without implications by merger or demerger. vi. The conditions for the date on which the fiscal unity comes into effect. Pursuant to Article 5, paragraph 1 of the Fiscal Unity Decree 2003, in a newly incorporated parent company, the first financial year is not only factually but also under the articles of association a short financial year. Unlike the ordinary system, the top holding company is not consolidated as part of the fiscal unity. This means that: i. All asset-holding relations between the top holding company and the designated parent company, and the top holding company and the subsidiary, remain visible and relevant for CIT purposes. One example is the shareholding held by the top holding company in the designated parent; another is the borrower/lender relationship that may exist between the top holding company and a subsidiary. ii. iall transactions between a top holding company and the designated parent company, and a top holding company and the subsidiary, remain visible and relevant for CIT purposes. D1 D2 Let us assume that D1 is the designated parent company of a Sister fiscal unity. On formation, this type of fiscal unity nearly always generates an increase in the equity on the parent company (D1 s) fiscal balance sheet. The reason is that D1 and D2 hold no participation in each other, while D2 s assets do appear on D1 s fiscal balance sheet. The increase in equity on D1 s fiscal balance sheet therefore consists of D2 s equity and is not subject to CIT.

10 10 As far as D1 and D2 are concerned, there is in principle no difference between the formation of a Sister fiscal unity and an ordinary fiscal unity. In a Sister fiscal unity, the results and assets of the consolidated subsidiary (D2) form part of the parent company (D1), which is the taxpayer for CIT purposes. One implication is that transactions and asset-holding relations between D1 and D2 are nog longer visible for CIT purposes. It is therefore still possible to offset the results of D1 and D2 and to transfer assets between them without the levy of CIT. Bear in mind that such a transfer, when it is not priced according to arm s length principles, constitutes a deemed dividend distribution from the transferee company to the top company (in this case at too low a price). In most cases, given the withholding exemption under the Dividend Tax Act 1965, this deemed dividend distribution will have no Dutch tax consequences. On the other hand, such transaction also constitutes an informal capital contribution from the top company to the (receiving) company. 4. Additional conditions for termination and the requirement for continued existence 4.1 The additional conditions for termination In addition to the existing cases of automatic termination of a fiscal unity, it has been deemed necessary by the legislator to require expressly that the fiscal unity must end in a number of additional cases, especially with respect to a Sister fiscal unity: i. If the designated parent company is changed, other than by a sister company joining an existing fiscal unity and being designated as the new parent company; ii. If the top company in a Sister fiscal unity changes, for example, because the shares in a consolidated subsidiary are transferred to a group company that (also) qualifies as a (new) top company; iii. If the top company of a Sister fiscal unity becomes liable for tax in the Netherlands, for example if a top company acquires a permanent establishment in the Netherlands; iv. If an ordinary or Papillon fiscal unity is transformed into a Sister fiscal unity; and v. If a Sister fiscal unity is transformed into an ordinary or Papillon fiscal unity. 4.2 The continued existence rule As described, the background to the amendments in the fiscal unity regime lies in European law. This means that undertakings in the EU/EEA should not be treated less favourable than they would have been if the undertaking had been resident in the Netherlands. This requirement of equal treatment prompted the legislator to introduce a rule on continued existence in the Fiscal Unity Decree This rule allows the fiscal unity to continue seamlessly if the fiscal unity is broken in the situations described in Section 4.1. Anyway, a totally seamless continuation is not possible, since the deconsolidation and subsequent consolidation can only be disregarded for a limited number of statutory provisions. 6 In most cases, the continued existence rule will be sufficient to prevent adverse tax consequences. The conditions for using the continued existence rule are laid down in Article 41 of the Fiscal Unity Decree 2003 and can be summarised as follows: i. The deconsolidated company joins the follow-on fiscal unity; and ii. The previous fiscal unity would not end, as far as the deconsolidated company was concerned, if the top company in the former or follow-on fiscal unity and any intermediate holding company involved had been based in the Netherlands and had been part of the fiscal unity. 6 The following sections can be disregarded under Article 41 of the Fiscal Unity Decree 2003: Sections 15ab, 15af, 15ai, 15aj and 20 of the Corporation Tax Act, as well as Article 7b of the Fiscal Unity Decree Sections that the continuation rule does not refer to are, for example, Sections 7(4), 13l and 15(7) of the Corporation Tax Act, as well as Articles 33b, 47 and 48c of the Fiscal Unity Decree 2003.

11 Quoted 11 The second condition is instigated by (European) anti-discrimination provisions. For the application of this condition a compare has to be made with the situation in which the relevant top or intermediate holding company forms part of the fiscal unity. Here is an example to illustrate this further. M and D have formed a fiscal unity. M s parent company qualifies as a top holding company within the meaning of Article 15, paragraph 6 CITA. At a given moment, D s shares are transferred to the top holding company. This transforms an ordinary fiscal unity into a Sister fiscal unity and marks a break in the fiscal unity (see Section 4.1, point iv). M M D D To determine whether the continued existence rule can be used, a comparison has to be made with a top holding company based in the Netherlands and forming part of the fiscal unity concerned. In that situation, the fiscal unity would not be broken, as the transfer a subsidiary within the fiscal unity does not cause the fiscal unity to end. The continued existence rule can therefore be applied in this situation. M M D D It is also very important to apply in good time to form a fiscal unity. An application must be filed no later than three months after the desired time of consolidation, i.e. no later than three months after the date of termination of the former fiscal unity.

12 12 5. Fiscal unity including a foreign taxpayer 5.1 Introduction The CITA already provided the option of forming a fiscal unity including a foreign taxpayer that carries out a business enterprise through a Dutch permanent establishment in the Netherlands. The Fiscal Unity (Amendment) Act expands the possibilities for forming such a fiscal unity, but only in EU/EEA situations, as explained below. 5.2 Fiscal unity including a foreign taxpayer In certain circumstances, it was already possible to form a fiscal unity including a foreign taxpayer that carries out a business enterprise through a permanent establishment in the Netherlands. One example of this is if a foreign company holds real estate in the Netherlands. In general, there are two distinct fiscal unity variants in this respect: i. A fiscal unity including a subsidiary that can be considered a foreign taxpayer for CIT purposes. Here, a parent company resident in the Netherlands and a subsidiary residing abroad, but subject to tax in the Netherlands through a permanent establishment, have formed a fiscal unity (Example 1). ii. A fiscal unity including a parent company that can be considered a foreign taxpayer for CIT purposes. Here, a parent company residing abroad, but subject to tax in the Netherlands through a permanent establishment, and a subsidiary resident in the Netherlands have formed a fiscal unity(example 2). Example 1 Example 2 VI VI D1 D2 These fiscal unity variants are rather like the Papillon and the Sister fiscal unity. Although the foreign taxpayer is really included in the fiscal unity in these situations, the consolidation includes only the income and assets attributable to the Dutch permanent establishment. Here, too, the asset-holding relations between the consolidated companies of a fiscal unity and the head office of the permanent establishment remain fiscally visible and therefore relevant for CIT purposes. Unlike the Papillon and Sister fiscal unity, in principle any foreign taxpayer resident in a country with which the Netherlands has concluded a treaty can form part of a fiscal unity of this type, provided the other conditions are met. A prescribed condition for a fiscal unity with a foreign taxpayer as parent company is that the D1 and D2 shares are attributable to the permanent establishment in the Netherlands. Under the Fiscal Unity (Amendment) Act, this allocation requirement for cases within the EU/EEA lapses. This means the following fiscal unity variants are now also possible.

13 Quoted 13 VI D1 VI VI 6. Supporting measures 6.1 Introduction The systemic approaches adopted for Sister and Papillon fiscal unities differ from the ordinary fiscal unity, since a top holding company of a Sister fiscal unity and an intermediary holding company of a Papillon fiscal unity are not consolidated. This made it necessary to add provisions for such fiscal unity variants to the CITA and the Fiscal Unity Decree The supporting measures can be broadly distinguished as (i) measures to prevent double loss compensation ( double dipping ) and (ii) a measure against widening the deduction of excessive participation interest (Article 13I CITA). The supporting measures entered into force on 9 December 2016 and therefore only apply from then on to Papillon and Sister fiscal unities previously formed under the decree of 16 December Measures to prevent double dipping in the liquidation loss regime Liquidation of intermediate holding company There is a risk of double dip with a Papillon fiscal unity. If the consolidated sub-subsidiary in such a fiscal unity suffers a loss, this loss can be directly offset within the fiscal unity against the parent company s profits. On the other hand, in some circumstances, the parent company can show this loss again, in the form of a liquidation loss on its shareholding in the intermediate holding company. The sub-subsidiary s loss-making activities decrease the value of the parent company s shareholding in the intermediate holding company. As described in Section 2.3, the participation exemption regime applies to the parent company as if the fiscal unity does not exist. Without supporting measures, a parent company could, in certain circumstances, show a sub-subsidiary s loss twice. To prevent this, a new paragraph has been added to the liquidation loss provision (Article 13d, paragraph 9 CITA).

14 14 In short, the newly introduced provision ignores the liquidation loss on an undertaking which qualifies, or used to qualify, as an intermediate holding company insofar as the fiscal unity has already accounted for this loss. The measure actually means that the loss amount is adjusted in the intermediate holding company. This scheme also applies to fiscal unities including a foreign taxpayer (see Section 5). The provision does not apply to a Sister fiscal unity, as there is no (indirect) participation relationship in a consolidated subsidiary in a fiscal unity of this type. 6.3 Measures to prevent double dip in creditor/debtor relationships Section 2.3 of this article deals with the continued visibility of asset-holding relations between a parent and an intermediate holding company, as well as between a sub-subsidiary and an intermediate holding company, in a Papillon fiscal unity. Section 3.3 describes the same visibility of asset-holding relations between a designated parent company and a top holding company, and between a subsidiary and a top holding company, in a Sister fiscal unity. Creditor/debtor relations between such companies remain therefore fiscally visible. This means that the risk of double dipping also occurs in this context, as will be illustrated below with regard to a Papillon fiscal unity. Let us assume that the parent company, in a Papillon fiscal unity, holds a loan receivable from the intermediate holding company. If the consolidated sub-subsidiary suffers a loss in this situation, it can be directly offset against the parent company s profits within the fiscal unity. On the other hand, the parent company may show this loss again, by write-down of its receivable from the intermediate holding company. Write-down of loan receivable Write-down of loan receivable Without supporting measures, the parent company could, in some circumstances, show the sub-subsidiary s loss twice. To prevent this, the following scheme has been introduced. If there is a write-down loss on a claim against an undertaking which, at any time, has been designated: i. as an intermediate holding company; or ii. as a top holding company; or iii. as a foreign parent company or subsidiary liable for tax in the Netherlands, and the loss written down is, or was, part of the same fiscal unity as the taxable person, this write-down is only deductible if it cannot be attributed sufficiently to the fiscal unity s loss. The provision described above applies to Papillon and Sister fiscal unities, as well as to fiscal unities which include a foreign taxpayer as subsidiary.

15 Quoted 15 The double dipping countered by the supporting measure can also occur with ordinary fiscal unities. One example is where a member-company of a fiscal unity holds a loan receivable from a group company outside the fiscal unity that in turn holds a loan receivable from another company within the fiscal unity. Following a motion by the Dutch parliamentarian Van Vliet, the State Secretary of Finance was instructed to take action against such double dipping. In his letter of 30 March 2017, the Secretary of State has stated that the provision is being expanded to bring also ordinary fiscal unities within the scope of the provision. 6.4 A measure against widening interest deduction by limit on the deduction of excessive participation interest Sections 2.3 and 3.3 of this article describe how an increase in equity may appear on the parent company s balance sheet when a Papillon or Sister fiscal unity is formed. This equity increase can have consequences under Article 13l CITA (the limitation on the deduction of excessive participation interest). This limit seeks to restrict the deduction of surplus interest relating to the financing of participations. The provision uses a mathematical calculation of this participation interest surplus. In short, a taxpayer s equity must be deducted from the price of its acquisition of a participation. The remaining balance is designated as an excessive participation debt, from which the deduction of interest is restricted. The increase in the taxable person s equity on joining a Papillon or Sister fiscal unity may therefore reduce the limit on deduction (the same applies to a fiscal unity including a foreign parent or subsidiary liable to Dutch tax). The legislator considers this to be an undesirable result of forming a Papillon fiscal unity and has therefore introduced a measure that disregards the positive increase in assets for Papillon fiscal unities, but also for fiscal unities with a foreign taxpayer as subsidiary, for the purpose of calculating the participation debt under Article 13l CITA. This measure does not apply to a Sister fiscal unity (or a fiscal with foreign taxpayer as parent company), as there is no indirect participation relationship in a consolidated company in such a fiscal unity. If we take the example of a Papillon fiscal unity in Section 2.3 as a starting point, then the adjustment is the lower of the following two amounts: the sub-subsidiary s equity; or the qualifying amount of the acquisition price in the intermediate holding company, as referred to in Article 13l, paragraphs 5 and 10 CITA. An example may clarify the scheme

16 16 Assume that the equity of 1 is nil. Through external financing, 1 acquires the shares in EU/EEA for 1,000. The qualifying acquisition price of the shares in EU/EEA for applying Article 13l CITA is 800. This part of the acquisition price may be disregarded for calculating the participation debt. The equity for tax purposes of 2 is 1,000. If no Papillon fiscal unity is formed between 1 and 2, the calculation of the participating debt can be calculated as follows. Acquisition price of EU/EEA participation 200 Equity of 1 0 (-/-) Participation debt 200 The participation debt is therefore 200. If 1 and 2 form a Papillon fiscal unity, there will be an increase in the equity on 1 s fiscal balance of 1,000, which is the book value of 2 s equity. The fiscal equity of 1 is therefore 1,000 instead of zero. This has the following effect on the calculation of the participation debt. Acquisition price of EU/EEA participation 200 Equity of (-/-) Participation debt 800 (-/-) At that time, there would no longer be any participation debt. An adjustment to the participation debt is required based on the implemented legislative change in Article 13l, paragraph 4 CITA. This adjustment in this example is 800, which is whichever is the lower: 2 s equity (1,000) or the amount of the qualifying acquisition price of EU/EEA (800). The calculation of the participation debt is as follows. Acquisition price of EU/EEA participation 200 Equity of (-/-) Adjustment: qualifying component of EU/EEA acquisition price 800 (+) Participation debt 0 The participation debt in the example is reduced by 200 by consolidation in a Papillon fiscal unity. This means that Article 13l CITA no longer restricts the deduction of interest. The extent of the advantage of applying Article 13l CITA obtained by forming a Papillon fiscal unity is equivalent to the advantage under Article 13I obtainable when forming an ordinary fiscal unity if the intermediate holding company were included in the consolidation. 7. Other changes in the fiscal unity system 7.1 Introduction The legislator has also used the Fiscal Unity (Amendment) Act to implement some other changes in the fiscal unity regime. The adjustment of the ownership requirement referred to in Article 15, paragraph 1 CITA appears to be the most relevant for tax practice. The change in the ownership requirement is outlined below. 7.2 The change in the ownership requirement With the entry into force of the Fiscal Unity (Amendment) Act, the ownership requirement of Article 15, paragraph 1 CITA has changed. In the text, the word legal has been replaced by full legal. The addition of the word full refers to legal and to beneficial ownership. Since 9 December 2016, Article 15, paragraph 1 CITA has read as follows:

17 Quoted 17 Where a taxpayer (parent company) holds the full legal and beneficial ownership of at least 95% of the shares in the nominal paid-up capital of another taxpayer (subsidiary) and this holding represents at least 95% of the statutory voting rights in the subsidiary under the articles of association and in all cases entitles it to at least 95% of the profits and at least 95% of the subsidiary s assets, at the request of both taxpayers the tax is charged to them as if there were one taxpayer, in the sense that the operations and the assets of the subsidiary are part of the parent company s operations and assets. The tax is levied on the parent company. The taxpayers together are then treated as a fiscal unity. A fiscal unity may comprise more than one subsidiary. The change means that that a taxpayer is now required to satisfy the ownership requirement both materially and formally. The change rectifies a 2010 judgment of the Supreme Court which had supplemented the ownership requirement, prescribed by the legislator, in too much of a material manner. 7 According to the legislator, the interpretation given by the Supreme Court was not consistent with a regime such as the fiscal unity. A strict ownership requirement is needed for such a group system. This means that a fiscal unity cannot be formed if the legal ownership of the shares in the subsidiary is held by an administration office foundation ( STAK ) and not by the parent company of the relevant fiscal unity. The change in the ownership requirement has consequences particularly for fiscal unities with an administration office foundation included in the fiscal unity structure. Fiscal unities in which shares in a subsidiary are held by a foreign undertaking that is transparent for Dutch tax purposes, but which does have legal personality, will no longer satisfy the ownership requirement. A 24-month transitional period applies to fiscal unities affected by the amended ownership requirement. It commenced after submission of the bill on 16 October 2015; therefore, the deadline is 16 October Miscellaneous Article 5, paragraph 5 was reintroduced in the Fiscal Unity Decree 2003 after it had previously been erroneously abrogated. This paragraph of the Article offers taxpayers the possibility of including a subsidiary in a fiscal unity subject to conditions, even if the first financial year of this subsidiary is not yet the same as that of the parent company of the fiscal unity. Another change to mention here is the amendment to Article 15ag CITA. The provision has been rewritten in line with the Supreme Court ruling of 6 November 2015, which held that the liquidation of a subsidiary also comes under the scope of Article 15ag CITA and cannot lead to a widening of the parent company s loss set-off Other developments in the fiscal unity system 8.1 Introduction The Fiscal Unity (Amendment) Act aligns the Dutch fiscal unity system more closely with European law, though it is not yet certain whether this alignment is complete. Also, recent developments in tax case law have raised the question whether a Papillon or Sister fiscal unity can be formed if the intermediate or top holding company is resident in a non- EU/EEA country with which the Netherlands has concluded a tax treaty which includes a non-discrimination clause. This will, of course, be particularly relevant to countries that are not members of the EU/EEA. 7 Supreme Court 18 June 2010, no. 08/3662, ECLI::HR:2010: BK Supreme Court 6 November 2015, no. 15/00451, ECLI::HR:2015:3226.

18 The Groupe Steria judgment On 2 September 2015, the CJEU handed down an important judgment for the Dutch fiscal unity system (Groupe Steria). 9 It may be deduced from this case that the Netherlands should allow the per-element approach in the fiscal unity regime. The Dutch Supreme Court had previously rejected the per-element approach, but it partially reversed this rejection in , in response to the Groupe Steria judgment, by referring preliminary questions to the CJEU. In principle, companies that cannot be considered a Dutch tax resident cannot be included in the fiscal unity. In short, the per-element approach means that a separate assessment must be made of any advantage obtainable through the fiscal unity regime, as to whether the denial of this advantage to companies based in the EU/EEA (because they cannot be consolidated) constitutes an obstacle in breach with the European freedom of movement. If there is an unjustified obstacle, this means that the Netherlands must also grant the relevant advantage to these companies, although they are not part of a Dutch fiscal unity. The per-element approach can therefore have a major impact on the Dutch fiscal unity regime. 12 Consideration should be given as to whether invocation of the per-element approach can be advantage on a case-by-case basis. See Text Box V for a non-exhaustive list of schemes where invocation of Groupe Steria may be advantageous. Text Box V: Schemes where invocation of Groupe Steria is possibly advantageous i) Holding Company Loss Scheme (Section 20, paragraph 4 CITA). ii) Investment participation (Section 13, paragraph 9 CITA). iii) Participation interest (Section 13l CITA). iv) Deduction of currency loss participation (Section 13 CITA). v) Definitive foreign Marks & Spencer losses. vi) Profit shifting (Section 10a CITA). vii) Taking account of reinvestment intention of a subsidiary under the reinvestment scheme (Section 3.54 Personal Income Tax Act) into account. viii) Activities test provision against trade in reinvestment scheme undertakings (Section 12a CITA) and provision against trade in lossmaking undertakings (Section 12a CITA). ix) Thin cap scheme (Section 10d (former) CITA). The legislator briefly considered the possible consequences of the Groupe Steria judgment during the parliamentary handling of the Fiscal Unity (Amendment) Act. It was stated that developments are not anticipated and that further case law from the CJEU is awaited at this point. If it is to their advantage, taxpayers may consider objecting to the relevant assessment in order to preserve rights. 9 CJEU 2 September 2015, C-386/14 (Groupe Steria), NTFR 2015/ See for example: Supreme Court 24 June 2011, no. 09/05115, BNB 2011/ Supreme Court 8 July 2016, no. 15/00194, BNB 2016/197 and Supreme Court 8 July 2016, no. 15/00878, BNB 2016/ In Annex II, see a list of articles where following the per-element approach may be advantageous.

19 Quoted Arnhem-Leeuwarden Appeal Court ruling of 26 April 2016 On 26 April 2016, the Arnhem-Leeuwarden Appeal Court gave an interesting ruling on the Dutch fiscal unity regime. The Appeal Court ruled that a Sister fiscal unity with a parent company residing in Israel should be permitted, based on the non-discrimination clause included in the tax treaty concluded between the Netherlands and Israel. Such a fiscal unity is not possible under the Fiscal Unity (Amendment) Act since the Israeli parent company does not qualify as a top holding company within the meaning of the new Article 15 paragraph 6 CITA, as it is not based in the EU/EEA. The State Secretary of Finance appealed to the Supreme Court against the ruling of the Arnhem-Leeuwarden Appeal Court. Advocate-General Wattel pleaded on 30 November 2016, for good reasons in our opinion, that the Netherlands does not have to allow a Sister fiscal unity based on the non-discrimination clause included in the Netherlands/Israel treaty. 13 The decision of the Supreme Court is now awaited. In these cases, it is also necessary to consider for each situation whether using the formation of a Sister or Papillon fiscal unity entails an advantage for a taxpayer. In particular, loss off-setting within a fiscal unity can be relevant in this respect. In that case, it is recommended to submit a fiscal unity request to maintain rights and/or to object to the relevant tax assessment. 9. Conclusion This article has discussed the changes in the fiscal unity system resulting from the Fiscal Unity (Amendment) Act, which allows the possibility of forming a Papillon or Sister fiscal unity under the CITA. Some of the relevant considerations in practice are listed below: An assessment should be made, on a case-by-case basis, whether a Papillon or Sister fiscal unity can be formed and whether this is advantageous. A possible advantage could be mutual offsetting of results between the consolidated companies of the fiscal unity concerned. The Papillon and Sister fiscal unity offer more flexibility when establishing a fiscal unity in cross-border structures, but also involve complex laws and regulations. During the existence of a Papillon or Sister fiscal unity, there must be continuous monitoring of whether all requirements for forming a fiscal unity are met. Failure to meet the conditions (as with an ordinary fiscal unity) leads to termination of the fiscal unity. In certain cases, it has specifically been made possible to form a follow-on fiscal unity. In the case of a Sister fiscal unity, it is worth considering which undertaking within the fiscal unity is best able to act as designated parent company of the unity. If an advantage can be obtained by relying on the per-element approach (Groupe Steria), consideration should then be given to maintaining the right to raise objections to the relevant tax assessment and/or to apply to form a fiscal unity. If an advantage can be obtained by forming a fiscal unity including an undertaking not based in the Netherlands, while the Netherlands has concluded a tax treaty, containing a non-discrimination requirement, with the country of establishment of the undertaking, consideration should be given to maintaining the right to raise objections to the relevant tax assessment and/or to apply to form a fiscal unity. The change in the ownership requirement can affect an existing fiscal unity in some cases. In certain circumstances, the transitional period allowed for this purpose may be invoked. 13 AG 30 November 2016, 16/02919, ECLI:: PHR:2016:1240.

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