NOVEMBER 2017 EDITION 116. Quoted. Outbound investments: foreign subsidiary or branch?

Transcription

1 NOVEMBER 2017 EDITION 116 Quoted Outbound investments: foreign subsidiary or branch?

2 In this edition - Introduction - Conditions for an exemption - The exemption for results from participations and permanent establishments - Loss recognition re. participations and permanent establishments - EU aspects - Conclusions

3 Quoted 3 1. Introduction 2. Conditions for an exemption When making cross-border investment decisions, entrepreneurs always face the question whether a foreign investment should be set up in the form of a foreign subsidiary (participation) or in the form of a branch (permanent establishment) of a Dutch company. The same question applies for real estate investments 1. Not only Dutch tax considerations play a part in this choice. Also in the country in which the investment takes place, the consequences of investing via a participation or via a permanent establishment may differ. In particular local dividend tax is a point of attention; often, this is likely to be owed on distributions made by a participation but not on withdrawals from a permanent establishment. In addition, there may be regulatory and business law differences, as well as commercial considerations that may play a part. In this issue of Quoted, only the Dutch tax law aspects are discussed. From a Dutch tax perspective, the differences between the two variants have shrunk as a result of the introduction of the object exemption for profits from permanent establishments. In many ways, this exemption is similar to the participation exemption for benefits from participations. In principle, for example, losses of permanent establishments have, as well as losses on participations, been no longer deductible in the Netherlands from the introduction of the object exemption onwards. Prior to that introduction, the deductibility of (start-up) losses was one of the major advantages of investing in the form of a permanent establishment. Later profits would be taxed, however, up to the sum deducted previously. Despite this way of bringing permanent establishments and participations more in line with each other, differences can still be recognised in their treatment under Dutch tax law. Below, the following differences are discussed: - the differences in the conditions for an exemption; - the differences in calculating the exempt result; - the differences in loss recognition; and - the European law aspects of these differences. The participation exemption applies to shares in a subsidiary; in principle, it is required that at least 5% of the nominal amount of capital of the subsidiary is held. Since 2007, it has no longer been required for a subsidiary in which the participation is held, to be subject to tax. The participation exemption has been ruled out for nonqualifying investment participations, however, which are participations: - that are held for investment; - that are insufficiently taxed; and - whose assets directly or indirectly largely consist of insufficiently taxed free investments. For the object exemption no quantitative requirement applies. The object exemption also applies to profits from a minimal participation in a foreign enterprise (for example in the form of a transparent partnership). Profit is exempted if: - the Netherlands is obliged to grant exemption, based on a tax treaty; - the profit is attributable to a permanent establishment in a non-contracting state; or - it concerns profit from real estate in a non-contracting state. As such, also the object exemption does not have a subject to tax condition. However, if a tax treaty makes exemption conditional on such taxability (as, for example, does the tax treaty between the Netherlands and the United States), this condition also applies for the object exemption. After all, under the treaty this relieves the Netherlands from the exemption obligation; effectively, no object exemption is granted. In particular the more recent Dutch tax treaties also make an exception for profits from passive (financing) activities for which no exemption is granted. Another exception to the object exemption applies for low-taxed investment enterprises: an arrangement that, in its effect and conditions, is comparable to that for the non-qualifying investment participation in the participation exemption. A significant difference is that this exception may be overruled by a tax treaty. If, based on a tax treaty, 1 Where a permanent establishment is referred to in this contribution, this also includes real estate, except where this is explicitly excluded.

4 4 the Netherlands is obliged to grant exemption for the profits of a permanent establishment that is a low-taxed investment enterprise, that exemption is also actually granted, as part of the object exemption. 3. The exemption for results from participating interests and the permanent establishment Both the participation exemption and the object exemption eliminate qualifying benefits from a taxpayer s total profits. In both exemptions, this applies both to positive and negative amounts. Accordingly, the introduction of the object exemption has made the method of exemption the same. However, that introduction has had no consequences for determining the amount of the exempt benefits from a permanent establishment. This means that the already existing differences between the exempt benefits from a participation and from a permanent establishment have remained unchanged. Those differences mainly stem from the independence of a subsidiary versus the non-independence of the permanent establishment. The subsidiary is an independent entity with legal personality, to which rights and obligations, as well as benefits and disadvantages can be attributed. The shareholder has no direct interest in the subsidiary s results. The interest is an indirect one, in the form of a shareholding in the subsidiary. Only benefits from this shareholding (such as dividends) or benefits upon alienation thereof are included in the taxable profit, or exempted under the participation exemption, as soon as they are considered part of the taxpayer s profits based on the provisions to determine the taxable profit. The permanent establishment is actually a part of the company, to which for purposes of profit determination no separate rights and obligations and also no benefits and disadvantages can be attributed. The taxpayer has a direct interest in the results of the permanent establishment. Accordingly, transactions between the Dutch part of the taxpayer (head office) and the permanent establishment are non-existent for the determination of the head office s profits. On the other hand, however, the permanent establishment is actually assigned a quasi-independent status in the state of the permanent establishment, since only part of the activities of the taxpayer is taxable in that state. The method to establish the exempt profits from a permanent establishment links in with that fiction of independence. The difference in these two approaches explains the distinction between the profits of the permanent establishment that are included in a taxpayer s overall taxable profit (contributory profit) is determined, and the profits for which an exemption is granted (deductible or exempt profits). These differences particularly affect internal transactions and exchange rate results/inflation; these are discussed in more detail below. 3.1 Internal transactions When a parent company transfers assets to a participation, this is perceived as an actual transaction. 2 Based on the overall profit-concept and transfer pricing rules, an at arm s length price must be taken into account in such a case; tax will have to be paid on the difference between that price and the book value. When assets are transferred from a foreign subsidiary to its Dutch parent company, generally also tax will have to be paid abroad, and the assets in question will appear on the tax balance sheet of the Dutch parent company at their market value. Exemption in the Netherlands of the profits taxed abroad upon the transfer will not be granted until those profits are distributed by the subsidiary to the Dutch shareholder. This results in taxation on internal transfers of assets, even if the group as such does not realise a profit yet. For Dutch purposes, no tax transaction will be perceived to have taken place upon the transfer of assets from a Dutch head office to a foreign permanent establishment, because of the non-independence of the permanent establishment. Accordingly, when the contributory profit is determined, no profit recognition will take place in respect to that transfer. Also the book value of the transferred assets will remain unchanged, for lack of realisation. Possible hidden reserves will not escape taxation in the Netherlands, however. After all, to determine the deductible profit (i.e. the exempt profit of the permanent establishment) the book value of the transferred assets is set at the fair 2 The Netherlands Supreme Court decided already in NL Supr. Ct. 8 May 1957, no , BNB 1957/208 that in mutual transactions between parent and subsidiary companies, profit recognition for tax purposes may not be postponed.

5 Quoted 5 market value. This is in line with the idea that a step-up is granted in the foreign country. The Netherlands would do the same when an asset starts to belong to the assets of a Dutch permanent establishment. To that extent, future profits are part of the contributory profits (lower book value); they result in lower deductible profits, however (because of the increased book value). Example BV A has machines with a tax book value of 10,000,000 and an actual value of 30,000,000. As of 2017, the machines are permanently designated to be used in a German permanent establishment of BV A and for that reason, attributed to the permanent establishment s assets. The machines are sold in 2018 at a price of 35,000,000. Elaboration The transfer of the machines to the assets of the permanent establishment does not result in any profit realisation; accordingly, for a determination of the contributory profit the tax book value remains 10,000,000. Upon the sale of the machines for 35,000,000 in 2018, a contributory profit of 25,000,000 results. For determining the deductible profit, however, the book value is set at the market value at the time of the transfer: 30,000,000. The deductible profit at the later sale is 5,000,000, therefore. On balance, this results in a taxable profit in the Netherlands of 20,000,000, which equals the hidden reserve in the machines at the moment of transfer. In the years after the transfer and up to the time of the sale, partial taxation on the hidden reserve will already take place, in the form of lower depreciation on the book value for the calculation of the contributory profit (which results in a higher contributory profit) and a higher write-off on the higher book value for the calculation of the deductible profit (resulting in a lower deductible profit). The difference between the two sums is effectively taxed in the Netherlands. supposed profit realisation by the permanent establishment for this profit to be exempted in the Netherlands. However, for the contributory profit there is no visible transaction between head office and permanent establishment. All this results in: - supposed taxation on the hidden reserve in the state of the permanent establishment; - no contributory profit in the Netherlands; but - an exempt profit, equal to the sum in hidden reserves in the Netherlands. On balance, this means that the Netherlands offers compensation for the taxation abroad. This foreign taxation is neutralised by the fact that a deductible profit is taken into account (without a contributory profit being observed). Not until a later sale of the asset to a third party will taxation in the Netherlands actually take place: at that time, the profit upon alienation is taxable in the Netherlands, without any further exemption (which, after all, had already been granted). Example BV A has machines with a tax book value of 10,000,000 and an actual value of 30,000,000 in a German permanent establishment. From 2017, the machines are permanently designated to be used at the Dutch head office of BV A; accordingly, they are no longer attributable to the permanent establishment s assets. The machines are sold for 35,000,000 in Elaboration The transfer of the machines from the assets of the permanent establishment to the head office does not result in any profit realisation; accordingly, for determining the contributory profit, the tax book value remains at 10,000,000. However, for the deductible profit the transfer of the machines is considered a realisation, which results in an exempt profit of 20,000,000. On balance, in the year the transfer takes place this results in a deductible sum of 20,000,000. This equals the sum of the supposed profit realisation for German purposes upon withdrawal of the assets from the permanent establishment. Upon the transfer of an asset from a foreign permanent establishment to a Dutch head office, a comparable effect occurs. Generally, profit realisation will take place in the state of the permanent establishment; after all, that state perceives an asset with a possible hidden reserve leaving its tax jurisdiction. Taxation just before that transfer is self-evident in such a case. It would be in line with this Upon the sale to a third party for 35,000,000 in 2018, a contributory profit of 25,000,000 is taken into account. No exemption is granted: this was already granted in Accordingly, in the Netherlands on balance a profit of 25,000,000-20,000,000 = 5,000,000 is taxed.

6 6 This sum equals the appreciation of the machines in the period that these were attributable to the Dutch head office. Comparable differences occur in the cross-border creation or use of a reinvestment reserve. It is impossible for a reinvestment reserve, formed at the level of a Dutch parent company, to be used at the level of a (foreign) subsidiary or vice versa. In case of permanent establishments, a reinvestment reserve may be created in the Dutch head office and for Dutch tax purposes then used in a permanent establishment; also the reverse is possible. Under certain circumstances, this will allow one to benefit from a longer postponement of taxation. The Dutch system regarding the transfer of assets from a Dutch head office to a foreign permanent establishment will likely remain unchanged even upon implementation of the EU anti-tax avoidance directive. 3 This directive prescribes statutory tax payment on such transfers. In the Dutch implementation proposal that was published for consultation on 10 July , it is assumed that the Netherlands will be able to keep the current system, since the Dutch taxing right on accrued hidden reserves is not lost in this current system. Example A sum of 10,000,000 is invested in an Argentinian subsidiary. In Argentinian Pesos (AR$) this investment is worth AR$ 100,000,000 (conversion rate: 10 to 1) at the time of the investment. The subsidiary does business on the local market with this money, and makes a profit in Argentinian Pesos that is partly caused by inflation. An equity increase to AR$ 150,000,000 results, and local corporation tax is paid on the profit of AR$ 50,000,000. As a result of depreciation of the Argentinian Peso as compared to the Euro (the conversion rate becoming 15 to 1), the value of the shares in the subsidiary remains unchanged at 10,000,000, however. Elaboration Calculated in Euros, the taxpayer has not made a profit. Accordingly, the benefit from participation will be nil and as a result, there is no exempted benefit from the participation. Locally, however, tax has been paid on a profit of AR$ 50,000,000, for which no compensation is given in the Netherlands. In this situation, the taxpayer will find itself confronted with a consolidated profit in Euros that is nil and a corporation tax burden in Argentina on AR$ 50,000,000. This quasi double taxation (tax paid over nil profit) is not relieved by the Dutch participation exemption. 3.2 Exchange rate results and inflation In participation relationships, the profit on a foreign participation is calculated in Euros (the situation in which functional currencies are used is disregarded here). For this sum calculated in Euros, an exemption is granted. To this extent, it is irrelevant whether, in the state in which the subsidiary is resident for tax purposes, there have been inflationary profits, deflationary profits or currency rate results. The profit in Euros is decisive. This may lead to a situation in which, calculated in Euros, there is no profit whatsoever to be included in the Dutch tax base and to be exempted, whereas calculated in the local currency, there has been a taxable profit on which tax was paid abroad. This happens with local inflationary profit and when the foreign currency depreciates in comparison with the Euro. There is no direct relationship between the profit to foreign standards in local currency, that is taxed abroad, and the amount of profit exempted in the Netherlands. This is different with permanent establishments. The contributory profit of the permanent establishment is determined in Euros and considered part of the taxpayer s profit. However, to determine the deductible or exempt profit the calculation must be done in the local currency of the state of the permanent establishment, as evidenced in the Rupiah judgments. 5 The profit thus determined is then converted into Euros at the average exchange rate, and constitutes the exempt sum. If profit is realised in the local currency, that profit is exempted. In this respect, it is irrelevant whether, calculated in Euros, that profit exists to the same extent. Example A sum of 10,000,000 is invested in an Argentinian permanent establishment. In Argentinian Pesos, this investment is worth AR$ 100,000,000 (exchange rate: 10 to 1) at the time of the investment. The permanent 3 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market. 4 To be consulted through 5 NL Supr. Ct. 4 May I960, no , BNB 1960/163 and NL Supr. Ct. 29 April 1959, no , BNB 1960/164.

7 Quoted 7 establishment does business on the local market with this money, and makes a profit in Argentinian Pesos that is partly caused by inflation. The assets of the permanent establishment increase to AR$ 150,000,000 as a result of this, and locally, corporation tax is paid on the profit of AR$ 50,000,000. However, because of a depreciation of the Argentinian Peso compared to the Euro (exchange rate 15 to 1), the value of the assets/liabilities in the permanent establishment remains unchanged at 10,000,000. in local currency there is a loss of AR$ 25,000,000, for which locally, a loss assessment has been obtained. This loss, converted into Euros, is exempted under the object exemption, in other words, is not deductible. Conversion at the average exchange rate (8.75 to 1) results in an exempt loss of 2,857,000. Since there is no contributory profit, whereas there is a non-deductible loss, on balance this results in an addition to the profit of 2,857,000, which is taxed in the Netherlands. Elaboration Calculated in Euros, the taxpayer has not made a profit. Accordingly, the contributory profit is nil. Calculated in local currency, however, the profit is AR$ 50,000,000; locally, tax has also been paid on this. As such, exemption is granted for this sum, converted into Euros. Conversion at the average exchange rate (12.5 to 1) results in an exempt profit of 4,000,000. Since there is no contributory profit, whereas there is an exempt profit, on balance this results in a deductible sum of 4,000,000 to be offset against the other domestic profit in the Netherlands. As such, the object exemption for permanent establishments is more in line with the taxation that takes place abroad. In the example herein above, this has a positive effect (an exemption without contributory profit) and the taxpayer on balance receives compensation for foreign taxation whereas, calculated in Euros, there is no profit. The theoretical taxation is then on balance nil (taxation in Argentina compensated by the deductible in the Netherlands) on a profit in Euros that is nil. Example A sum of 10,000,000 is invested in an Argentinian permanent establishment. In Argentinian Pesos, this investment is worth AR$ 100,000,000 (exchange rate: 10 to 1) at the time of the investment. The permanent establishment does business on the local market with this money, and makes a loss in Argentinian Pesos that is also partly caused by deflation. As a result, the assets of the permanent establishment decrease to AR$ 75,000,000. In Argentina, an assessment stating a deductible loss is issued in regard to this loss. However, because of an appreciation of the Argentinian Peso compared to the Euro (exchange rate 7.5 to 1), the value of the assets/liabilities in the permanent establishment remains unchanged at 10,000,000. Elaboration Considered in Euros, the taxpayer has made neither profit nor loss; accordingly, the contributory profit is nil. However, All in all, there is still a balanced exemption. The taxation in the Netherlands is offset by the (future) tax reduction in Argentina caused by local loss offsetting. 4. Loss recognition for participations and permanent establishments As a rule, losses on a participation and on a permanent establishment are both excluded from deduction. Both for participations and for permanent establishments, there are exceptions, however: For participations, there is the liquidation loss rule and for permanent establishments, the discontinuation loss rule. Both the conditions for loss recognition and the amount of the loss to be taken into account differ. The main differences are explained below; the first three relate to the conditions, the last to the amount of the loss to be taken into account. 4.1 Liquidation and winding up versus discontinuation From a Dutch perspective, losses are bound to a legal entity and disappear at the end of that legal entity s existence. The option to use losses at a subsidiary s level disappears upon that subsidiary s liquidation. This justifies that losses can subsequently be deducted at the parent company s level. For that reason, the liquidation loss rule applies on condition that the subsidiary is liquidated and that the winding up has been completed. For a permanent establishment, this requirement cannot be made since, generally, the permanent establishment is unlikely to be an independent legal entity. Therefore, in regard to a permanent establishment, the demand of its discontinuation is made. Discontinuation sets in when the taxpayer stops enjoying profits from another state. It can either concern discontinuation in the traditional sense (activities stopping in that state) or a sale of the activities; also then, the taxpayer stops enjoying profits from that state.

8 8 The background to this requirement is comparable with the demand of liquidation and winding up in the liquidation loss scheme: losses in the state of the permanent establishment will no longer be usable; after all, no more profits are being made. Starting from this idea, it can also be explained that all the taxpayer s activities in the state in question must be stopped. Discontinuing a permanent establishment, whereas real estate is retained in the state of that permanent establishment, results in the refusal of a discontinuation loss as the losses may then still be used locally Restrictions on continuation of the activities of the subsidiary or the permanent establishment Both in the liquidation loss rule and in the discontinuation loss rule, a restriction applies if activities are continued. In the liquidation loss rule, the continuation of activities of the liquidated subsidiary by the taxpayer or an affiliated entity constitutes an impediment to a liquidation loss being taken into account. 7 Also continuation in a state other than that of the liquidated subsidiary is a problem. Allowing other activities to continue or starting up new activities in the state of the liquidated subsidiary does no harm, however. In the event of a continuation, a liquidation loss may be taken into account at a later time: either at the time the taxpayer discontinues the activities (if the taxpayer continues the activities) or, if the activities are continued by a subsidiary (affiliated entity), upon liquidation of that subsidiary. The discontinuation loss rule is less stringent in some respects. First of all, only continuation in the state of the permanent establishment is an impediment: unlike with the liquidation loss rule, continuation in a different state does no harm. In addition, claiming of a discontinuation loss is hampered only once a considerable continuation sets in. Continuation up to 30% does not impede a discontinuation loss being taken into account. In addition, continuation by the taxpayer under the discontinuation loss rule is unthinkable (after all, it would have to stop enjoying profit from that state anyway); accordingly, the legal arrangement is restricted to continuation by entities affiliated to the taxpayer. As in the liquidation loss rule, a passing on option for the non-deductible loss has been provided. The net loss is passed on, as it were, to the continuing entity; upon later discontinuation by that continuing entity, it can still be used (on condition that there is still a loss at that time, and on condition that the continuing entity is taxable in the Netherlands). In case of continuation by an affiliated foreign entity, in which the taxpayer holds a participation, this foreign entity cannot deduct a loss upon discontinuation in the Netherlands. This entity is not subjected to the Dutch taxation. However, the liquidation loss rule provides the option of having the discontinuation loss taken into account upon later liquidation of the foreign entity. Finally, continuation is not considered to have occurred if the continuing affiliated entity discontinues the activities after all, within three years. Without this exception, a deductible discontinuation loss might simply be shifted within a group to an entity that might make better use of it. In such a case, the loss is attributed to the taxpayer who had the activities previously after all, and can only be deducted by that taxpayer. 4.3 Already used or yet to be used losses After liquidation, it is not permitted that the losses of the liquidated subsidiary are available for set-offs for the taxpayer or an entity affiliated. If the liquidated subsidiary s business is continued by a third party, also that third party should no longer be able to use the losses. This condition must be met at the time of the winding up; otherwise, the liquidation loss will be lost permanently. Unlike with the non-continuation requirement, the liquidation loss will not be taken into account after all if the conditions are met at a later time. Also the discontinuation loss rule includes a condition in regard to losses yet to be used. For that condition, it is no impediment that the losses are still available for the taxpayer itself; even availability at affiliated entities is not a problem. However, availability of losses at another than the taxpayer or an affiliated entity is a problem. This definition targets cases wherein losses of a permanent establishment are passed on to the party that takes over 6 This logic does not always apply, e.g. where in the Netherlands, there can be a fiscal unity of two taxpayers who both have a permanent establishment in a specific state, whereas that state fails to recognise the Dutch fiscal unity and perceives two taxpayers. 7 With the exception of a minimal continuation of less than 5%; see the Decision of the State Secretary for Finance of 20 January 2017, no BLKB2016/803M, Government Gazette 2017, no. 5003, section

9 Quoted 9 the activities, for example, losses that follow the object (the enterprise/the activities) and are not taxpayer-related under foreign systems. The discontinuation loss rule has an additional condition in regard to losses, which pertains to any loss setoffs that were done in the past (i.e. prior to the discontinuation). Think of a situation where losses of a permanent establishment in the foreign state may be offset against profits of subsidiaries in that same state. The United Kingdom has such a system, called group relief. Insofar as losses of the permanent establishment have already been utilised this way under a foreign system, the discontinuation loss cannot be deducted in the Netherlands Recommencing activities Under the liquidation loss rule, no restriction applies if in the state of the liquidated subsidiary, new activities are started within a specific term after liquidation. This is deemed irrelevant as long as it does not concern substantive continuation of the activities in question. The discontinuation loss rule does have a restriction. If the Dutch taxpayer starts to enjoy profit from the state in question within a term of three years from the moment the discontinuation loss was deducted, tax losses in that state will often still be available, to be used for setoffs against profits from the new activities after all. The discontinuation loss deducted earlier should then be taken back, in the year in which the new activities are started up: a sum in the amount of the discontinuation loss will be considered part of the profits, and taxed. At the same time, this sum will also be regarded as a loss from the new activity, so that upon a future discontinuation, it can still be deducted (after offsetting with the results from the new activity). 4.5 The amount of the loss to be taken into account Under the liquidation loss rule, the loss is determined by comparing the cost base of the participation and the liquidation payment or payments. The difference constitutes the deductible loss. The cost base generally consists of the purchase price of the shares, plus subsequent amounts contributed, minus redemptions and other repayments of the cost base. The liquidation payment consists of what the subsidiary pays to the shareholder upon liquidation, plus specific dividend payments certain years preceding the liquidation. It is irrelevant how much profit, to Dutch standards, the actual subsidiary made in the years preceding the liquidation. Because of these calculating rules, the liquidation loss to be taken into account may differ from the overall loss suffered by the subsidiary. In the discontinuation loss rule, the results of the permanent establishment according to Dutch standards are followed. Annually, the result of the permanent establishment (the exempted profit) to Dutch standards is determined. Sound business practice rules must be applied in that determination, but also overall profitdetermining arrangements (such as interest deduction restrictions, the participation exemption etc). If the balance of the exempt profits and losses of the permanent establishment, thus determined, is a negative sum, this is the sum that may be deducted. If the profit determination rules in the foreign country are the same as in the Netherlands, the loss deducted in this system equals the loss incurred abroad. Naturally, tax base differences may interfere with this basic rule. 5. EU aspects 5.1 Introduction One might ask to what extent the differences described above, in the Dutch tax treatment of participations on the one hand and permanent establishments on the other, are permitted under EU law. In particular the freedom of establishment is important in this respect. Case law of the European Court of Justice does not show that there is a right to neutrality as to legal form; i.e., if a subsidiary is treated differently from a permanent establishment, that alone is not yet an impediment to the freedom of establishment. Such an impediment pertains only if the cross-border situation is treated less well, when compared to a comparable, domestic situation. The case law of the Court of Justice shows that the source state cannot treat a permanent establishment of a foreign enterprise differently from a domestic entity (see for example Saint Gobain). The state of residence cannot treat a foreign permanent establishment or a foreign participation differently from a purely domestic situation. 8 Incidentally, for the liquidation loss scheme the Ministry, in the recently published decision on the participation exemption, Decision of 20 January 2017, no BLKB2016/803M, Government Gazette 2017, no 5003, takes the position that losses previously passed on impede consideration of a liquidation loss.

10 Per-element approach: difference between foreign participation and foreign permanent establishment removed further In purely domestic relationships, under some conditions a parent company may form a fiscal unity together with its subsidiary, with taxation imposed as on a single taxpayer. In such a case, the domestic subsidiary is treated as if it were a domestic permanent establishment. In the case of a Dutch parent holding shares in a foreign subsidiary, no fiscal unity may be formed, also not under EU law. Accordingly, a domestic subsidiary can be treated as a domestic permanent establishment, but a foreign subsidiary cannot be treated as a foreign permanent establishment. In the X Holding 9 judgment, the European Court generally accepted this as a justified impediment. However, the French Groupe Steria judgment 10 of the Court of Justice of the European Union shows that specific elements - benefits that a fiscal unity regime may offer - that may be obtained under a domestic fiscal unity still hamper free economic transactions if those elements are not permitted in a cross-border situation. In the matter in question, domestic dividends in the fiscal unity had been exempted for 100%, whereas foreign dividends received (without a fiscal unity) were exempted only for 95%. The European Court concluded that the 100% exemption that can be obtained under the French domestic consolidation should also be allowed in a comparable, foreign situation. The question is whether this so-called per-element approach may be applied also under the Dutch fiscal unity regime. The Netherlands Supreme Court put relevant preliminary questions to the European Court in two cases. The first matter concerns the case in which a currency loss on a foreign participation is not deductible. In a domestic situation, this currency loss can be deducted by forming a fiscal unity. The interested party in question had not applied for a cross-border fiscal unity in this matter (which, based on X Holding, would also be refused); the question is, however, whether based on the per-element approach this currency loss should be deductible. In his Opinion A-G Campos Sanchez-Bordona comes to the conclusion that this different tax treatment does not limit the freedom of establishment because neither currency gains nor currency losses may be taken into account 11. The second matter concerns a case in which, because a fiscal unity had been formed, specific interest deduction restrictions could be put out of effect. This legislation denies deduction of interest if specific transactions are carried out (for example in the case of capital contributions or dividend distributions); in a fiscal unity, such transactions are not visible (since tax is levied as though there were a single taxpayer, as a result of which such transactions are not visible). Since the fiscal unity is limited to domestic situations, these interest deduction restrictions can only be avoided in purely domestic situations by forming a fiscal unity; question is whether this constitutes an impediment to the freedom of establishment, now that this benefit of the fiscal unity cannot be invoked in foreign situations. In this case AG Campos Sanchez-Bordona is of the opinion that there is a restriction of the freedom of establishment 12. Another situation in which applying the per-element approach is defensible, is the participation interest deduction restriction. Also this restriction can be prevented in a fiscal unity. The question is whether this element of the fiscal unity may also be invoked in a cross-border situation (i.e., with a foreign participation). 5.3 Marks & Spencer judgment: taking into account losses that have remained non-deductible in the foreign subsidiary state or the permanent establishment state Based on the Marks & Spencer judgment 13 one could argue that losses that have remained non-deductible and as such, can no longer be used in the state of the subsidiary ( final losses ), should be taken into account at the level of the parent company. Although it is uncertain whether the Marks & Spencer judgment is also applicable under Dutch corporation tax (Marks & Spencer was a decision for the British version of corporation tax), the liquidation loss rule (see above) offers the option to take such a loss into account. Nevertheless, it is not sure whether this liquidation loss rule meets the requirements of the Marks & Spencer judgment in every aspect. 9 CJEU 25 February 2010, case C-337/08, X Holding. 10 CJEU 2 September 2015, C-9/14, Groupe Steria. 11 See: Opinion of 25 October 2017 in joined cases C-398/16 and C-399/ See: Opinion of 25 October 2017 in joined cases C-398/16 and C-399/ CJEU 13 December 2005, case C-446/03, Marks & Spencer.

11 Quoted 11 After all, a liquidation loss can only be taken into account once the company in question has been wound up. Since the loss may have become final already at an earlier time, this rule may contravene the Marks & Spencer judgment. This happens, for example, in situations in which a loss can no longer be deducted at the level of a subsidiary because a loss evaporates, e.g. where the term to offset it has expired, or because it can no longer be offset because an anti-abuse provision impedes this. In other words: also where there is no liquidation of a subsidiary, there may be losses that can no longer be used by the subsidiary. The liquidation loss rule offers no solution for this. In addition, it is also the question whether the amount of the loss to be taken into account under the liquidation loss rule is in accordance with the Marks & Spencer judgment. Because of the rules for determining a liquidation loss, the actual loss at the level of a subsidiary may be higher than the liquidation loss to be taken into account. In addition, the liquidation loss cannot be included in the deduction if the enterprise of the entity that was liquidated is continued within the group (non-continuation requirement). Since in such a case, the loss could be lost definitively, also this rule seems to interfere with the freedom of establishment. - In determining the amount of the exempt benefits, significant differences can still be seen, in particular with exchange rate results, inflationary results and internal transactions. - The conditions for loss recognition are comparable, but for some essential aspects, still very different. In particular with investments in a state with a volatile exchange rate or inflation, and with risky investments whereby potential loss recognition is important, the Dutch tax consequences of doing business in the form of a permanent establishment or participation will differ, therefore. Particularly in those cases, it is important to consider all the possible alternatives when choosing the legal form of the investment. The tenability under European law of the differences found will have to be reviewed in all cases in which a difference in the cross-border situation turns out to be a disadvantage. On account of the uncertainty of the scope of the perelement approach and the Marks & Spencer judgment, case law on this point is still largely unsettled. Unused foreign losses of a foreign permanent establishment may be taken into account based on the discontinuation loss rule. The Dutch legislator sees this rule as the inclusion of the Marks & Spencer judgment in Dutch tax law; however, also here, the question is whether this rule is entirely in line with the case law of the Court of Justice of the European Union. The question is whether the heavier burden of proof for the discontinuation loss ( show in foreign situations, as compared to make plausible in domestic ones) contravenes EU law. Also the non-continuation requirement (see above at the liquidation loss rule) may not be in line with European case law. 6. Conclusions Although the differences between doing business in the form of a permanent establishment and a participation have become smaller, relevant distinctions can still be recognised. - In practice, conditions for an exemption hardly differ, except under specific older tax treaties based on which permanent establishments with specific passive activities are granted an exemption.

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