Start of consultation process for new grouping regime in corporate income tax

18/06/19

The intention is that the current group scheme in Dutch corporate income tax (the so-called fiscal unity regime) will be succeeded by a new, robust and future-proof group scheme, partly in response to case law of the Court of Justice of the European Union (CJEU). The new grouping scheme had already been announced during the parliamentary debate on the Bill on emergency repair measures, which was adopted earlier this year.

Selection document with four possible solutions

The internet consultation document presents four possible solutions for a new grouping scheme. According to the consultation, every solution needs to be screened based on the following criteria: the new grouping scheme must be robust and legally stable, compatible with EU law, it should contribute to a good business environment and be well enforceable for both companies and tax authorities concerning transition aspects.

Below is a description of the four possible solutions:

1. Continuation of the current fiscal unity regime with the emergency repair measures and, if necessary, extension of these measures

If it is decided that the current fiscal unity regime shall continue to apply, the concept of fiscal consolidation will be maintained and the emergency repair measures will continue to apply. This also means that EU law risks - and therefore a budgetary risk - will continue to exist, if it follows from new case law that new repair measures are needed. This does not contribute to legal certainty and robustness, and will increase the complexity of the regime, resulting in a higher administrative burden on companies.

2. Complete abolition of the fiscal unity regime

A second solution would be to completely abolish the existing fiscal unity regime, without replacing it with another grouping scheme. This would mean that every company will be separately liable to tax and have to file a tax return at its own account. A setting off of losses and profits between group companies would no longer be possible. Finally, intra-group transactions could, in principle, no longer take place without tax consequences. This is expected to lead to a considerable budget inflow for the state treasury. The intention would be to channel this revenue back within the corporate income tax system as this could possibly compensate for the possible negative consequences for the business environment. As a result of the abolition of the fiscal unity regime, the number of taxpayers would increase. This would also lead to a fundamental increase in the administrative burden for companies. At the same time, the abolition would result in the application of fewer rules, which would benefit the robustness and legal stability of the Dutch corporate income tax system.

3. Introduction of a loss or profit transfer scheme

The advantage of the fiscal unity regime taking the form of an offsetting of the profits and losses of different companies within a group can be retained in the case of a loss or profit transfer scheme or a result pooling scheme. Within a loss or profit transfer scheme, each company belonging to a tax group determines its own taxable result. A loss or profit can be transferred to a company with a profit or loss that belongs to that tax group.

Another possibility is a result pooling scheme. Based on this scheme, tax provisions are applied by each company individually. Subsequently, the taxable profit or the tax loss of all companies belonging to the "tax group" is taken into account with a designated company of the tax group. That company also files a joint corporate income tax return. This scheme requires a single corporate income tax return for the group. Depending on the requirements for the application of the grouping scheme, the budgetary consequences could be neutral. However, if separate tax returns have to be made, the administrative burden on companies will increase.

Under the consultation document, in the CJEU’s view, a grouping regime that is solely limited to the settlement of profits and losses of companies belonging to a domestic tax group, is compatible with EU law. There are, however, various drawbacks of these regimes in the area of business succession, small-scale investment deductions, innovation box, rates etc. This is mainly due to the fact that each entity within the group must determine its own result on a separate basis. In addition, anti-abuse provisions would be required, comparable to the provisions of the existing fiscal unity regime.

4. Cross-border grouping arrangement with object/base exemption method

Within this solution, the fiscal unity concept would be fully extended to cross-border situations. In this way, the current fiscal unity regime could be fully maintained accompanied by an object/based exemption for the results attributable to foreign activities (foreign profits and foreign losses). Certain existing emergency repair measures could be abolished. Such a regime does not yet exist in other countries. This would make the regime vulnerable to proceedings before national courts, as well as the CJEU. In addition, this option would lead to a structural budget loss for the state treasury. The government has already indicated that a cross-border fiscal unity is not considered a realistic option because this could possibly contribute to a further erosion of the Dutch taxable base.

The consultation document states a number of specific questions for each of the four possible solutions, to which a response can be given by the public. Interested parties, companies, scholars and others can respond from 17 June 2019 up to and including 29 July 2019. Based on these responses, a letter is expected to be sent to the Dutch Parliament in the autumn of 2019 containing a proposal for the intended grouping arrangement. The draft Bill is expected to be presented for internet consultation by mid-2020.

What does this mean for you?

Whichever of the four possible solutions for the new grouping arrangement is chosen, each choice may have far-reaching consequences for all currently existing fiscal unities. The exact consequences depend strongly on your specific situation. Contact your PwC adviser to assess which consequences the four possible solutions for the new grouping arrangement may have for your situation.