In deviation from the District Court Gelderland, the Court of Appeals Arnhem-Leeuwarden ruled on April 26, 2016 that under certain tax treaties a request to form a fiscal unity between sister companies must be granted, even if the joint parent company is established in a third country (a country outside the European Union (EU) or European Economic Area (EEA)). The impact of this can be significant, because in such situations it is not possible under EU law to successfully argue for a fiscal unity. In such cases it is advisable to request a fiscal unity between sister companies with a third country as soon as possible and to file a notice of objection against the rejection of the request. This also applies, in our view, to situations where there is an intermediary that is established in a qualifying third country, while the parent and sub-subsidiary companies are established in the Netherlands (a ‘Papillon fiscal unity’).
Limited effect of EU law
The earlier case law which made it possible to form both a fiscal unity between sister companies and a ‘Papillon fiscal unity’ was based on the EU law principle of the freedom of establishment. However, this only applies within the EU and the EEA. In the bill pending before the Lower House as a response to this case law and the Decree of December 16, 2014 issued in anticipation of the bill, parent companies and intermediaries established in Member States are thus correctly regarded as qualifying top and intermediary companies. Although the EU law principle of the free movement of capital does cover third countries, it cannot – to put it briefly – be invoked against national regulations that only apply to shareholdings which allow the shareholder to exercise decisive influence on the policy of the subsidiary, such as is the case with the fiscal unity due to the 95% requirement. EU law therefore does not solve the problem of a parent company or intermediary that is established in a third country.
Tax treaties may provide solution
The Court of Appeals Arnhem-Leeuwarden recently ruled however that by invoking the non-discrimination clause of the tax treaty concluded between the Netherlands and Israel in 1973, a request for a fiscal unity also had to be granted in the case of four Dutch companies (partly sister companies) with a joint ultimate parent company that was established in Israel (without a permanent establishment in the Netherlands). It is significant that this clause is almost completely the same as Article 24(5) of the OECD Model Convention (OMC). From the wording of the clause and the accompanying OECD Commentary, the Court ultimately inferred that the fiscal unity must be allowed.
Because the Court based its decision on the OMC, this judgment can, in our view, in principle also be referred to in situations – including those involving Dutch permanent establishments – where the parent company or intermediary is established in another third country (than Israel), provided that the Netherlands has concluded a tax treaty with the particular country, which includes a non-discrimination clause that is based on the OMC. Incidentally, the Deputy Minister of Finance is expected to appeal this judgment before the Supreme Court. If the Supreme Court upholds the judgment of the Court of Appeals Arnhem-Leeuwarden, the bill, or the Act that has been adopted in the meantime, will have to be amended. Until then, it is advisable in such cases to request a fiscal unity between sister companies or a ‘Papillon fiscal unity’ with a third country as soon as possible and to file a notice of objection against the rejection of the request. It is essential that the request for a fiscal unity has retroactive effect to no more than three months.
Meijburg & Co would be pleased to help you identify and assess the opportunities that are available as a result of the Court of Appeals judgment. Please feel free to contact us.
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