Is Dutch legislation contrary to the Treaty on the EU?

Although both disputes seemed similar at first glance and were therefore heard together, it is surprising that they were concluded with different results. While the Dutch legal provision applied in case C-398/16 was assessed as being contrary to Articles 49 and 54 of the TFEU, the provision applied in case C-399/16 was assessed as being compliant with the aforementioned articles.

The subject of the dispute in case C-398/16
The rejection of deductibility of interest arising from a loan on the part of a Dutch parent company which used funds borrowed from a Swedish company in the same group to purchase an equity investment in an Italian subsidiary. Dutch law limits the deductibility of interest expenses and other related borrowing expenses arising from a loan that is legally or factually directly or indirectly payable to a related party or a related natural person, if this loan is connected to the acquisition or purchase of shares in profit, share certificates and membership rights in a related party. Nevertheless, the Dutch parent company still deducted the interest from its tax base and it was therefore issued an additional payment assessment.

However, the Dutch parent company filed a legal action against the additional payment assessment, stating that its freedom of establishment had been restricted, which is contrary to the aforementioned Articles 49 and 54 of the TFEU, since if it had used the borrowed funds to purchase an equity investment in a subsidiary resident in the Netherlands, it could have created a single entity with this subsidiary for tax purposes (tax consolidation).

Dutch law allows the creation of a single unit for tax purposes to a parent company that owns at least a 95% holding in the paid-up share capital of another taxpayer (subsidiary) in the legal and economic sense. If this condition is met, it is possible upon request of both taxpayers to collect tax arising from income in the Netherlands in the same way as if they were just one taxpayer. Which, in other words, means that thanks to the consolidation, mutual relations arising from capital participation such as the parent company’s capital investment in a subsidiary become tax natural within one tax entity.

The CJEU concluded this dispute by stating that the Dutch government has committed a difference in treatment that cannot be justified by the necessity to maintain the allocation of the power to impose taxes between the member states or the necessity to maintain the coherence of the Dutch tax system, and the applied procedure also cannot be justified as a prevention of abusive tax practices.

The subject of the dispute in case C-399/16)
The second discussed dispute  concerned concerned the rejection of deductibility of an exchange rate loss of a Dutch parent company arising from the revaluation of a holding in a subsidiary based in the United Kingdom. The reason is that Dutch legislation stipulates that determination of profit does not take into account income from an equity investment or expenses incurred with respect to the acquisition or transfer of this equity investment (this rule is also called the “holding exemption”).

In this case the Dutch parent company likewise appealed against the additional payment assessment. The reason for filing the appeal was the parent company’s belief that its freedom of establishment had been restricted, since if it held an equity investment in a company resident in the Netherlands, it could create a single entity for tax purposes with this subsidiary and all relations resulting from the capital participation in it would become non-existent for tax purposes thanks to the consolidation.

However, the actions of the Dutch government were assessed as being compliant with the freedom of establishment since the rules of the “holding exemption” stipulate that the increase or decrease in the value of the holding arising from exchange rate development of the foreign currency in which the value of the holding is denominated shall not be taken into account for profit determination purposes. This is the principal reason why the Dutch parent company could not deduct the exchange rate loss it incurred as a shareholder with respect to the value of its investment (subsidiary based in the United Kingdom) from its taxable profit.

In the CJEU’s opinion, a difference in treatment cannot be based on the assumption that if the Dutch company incurred a loss in relation to its holding in a subsidiary resident in the Netherlands, it could create a single taxpayer with the subsidiary and make this exchange rate difference tax neutral, because it is highly improbable that this holding would be denominated in a currency different from the one in which the company’s profit is denominated.