Dutch Corporate Tax Law is in contradiction with EU law provisions.

19.06.2014

On the 12^th of June, 2014 European Court of Justice (ECJ) decided the SCA Group Holding BV and others, Case in accordance with prejudicial procedure. (Prejudicial procedure means that the request about the meaning of the relevant EU Law provision was made by the domestic Court to the ECJ). Prejudicial request was made to ECJ by Dutch court with connection to three cases. All cases arose from disputes between companies and tax service of The Netherlands. Therefore, three prejudicial requests were united into one single action.

According to the Dutch Law on Corporate Tax 1969, company that holds 95% of another company’s nominal capital may be considered as a single taxation entity with daughter companies by filing the request.

Two cases were about companies SCA and MSA incorporated in the Netherlands with daughter companies in Germany. German companies, in their turn, held nominal capital in their daughter companies, which were registered again in the Netherlands. SCA and MSA made the request to the tax authority of Holland in order for them to be considered as a single taxation entity with its Dutch sub-subsidiaries. The request was denied. Tax service said that the direct subsidiaries were not registered in Holland as well as direct parent companies for The Dutch sub-subsidiaries were incorporated in Germany. The cases were heard before the Regional Appellate Court in Amsterdam (Gerechtshof, Amsterdam), which made the prejudicial request to ECJ asking for the answers for the following questions:

1. whether the non-appliance of the single taxation entity regime for the sub-subsidiaries and its parent company restricts the freedom of establishment in the sense of articles 43 and 48 of the Treaty on the Functioning of the European Union (TFEU);

2. If the answer to the first question is positive, whether it matters that parent company, subsidiaries and sub-subsidiaries are incorporated in different Member States;

3. If the answer to the first question is positive, whether there are conditions under which such restrictions shall be justified;

4. If the answer to the third question is positive, what kind of conditions shall be considered proportionate?

The third case was about German company that held three subsidiaries X3, D1 and D2 registered in the Netherlands. These three companies made request to tax service to be considered as a single taxation entity. Request was denied on the grounds that their parent company was not registered in the Netherlands. Questions send to the ECJ by the Regional Appellate Court in Amsterdam in this case were practically identical to the two previous ones. In her Special Opinion on this case General Advocate, Mrs. Kokkott, said, that as to the second question of the proceedings attention must be paid to two aspects of the freedom of establishment, that could be restricted in this case: firstly, it is a freedom of establishment of the parent company, and, secondly, it is a freedom of establishment of subsidiaries in another Member State.

According to the articles 43, 48, 49 and 54 TFEU the company incorporated in EU Member State may conduct its business activities in other Member States as well. The case law of ECJ stated that the freedom of establishment shall be considered restricted if there is a difference in treatment of non-resident companies with respect to the treatment of domestic companies.

In this case the Court held that such a difference is in place since the Corporate Tax Law 1969 is allowing to be considered as single taxation entity only companies registered in the Netherlands with daughter companies incorporated in the Netherlands. Therefore, such regime, as stated by the Court in para.46, gives benefit to the Dutch companies. Law 1969 puts restriction on freedom of establishment provided by TFEU.

With regards to the second and third questions, Court said that difference between places of incorporation should not be a justification for this kind of restrictions.

Therefore, ECJ held, that Articles 49 TFEU and 54 TFEU must be interpreted as precluding legislation of a Member State under which a resident parent company can form a single tax entity with a resident sub-subsidiary where it holds that sub-subsidiary through one or more resident companies, but cannot where it holds that sub-subsidiary through non-resident companies which do not have a permanent establishment in that Member State. And Articles 49 TFEU and 54 TFEU must be interpreted as precluding legislation of a Member State under which treatment as a single tax entity is granted to a resident parent company which holds resident subsidiaries, but is precluded for resident sister companies the common parent company of which neither has its seat in that Member State nor has a permanent establishment there.

Source: http://curia.europa.eu/juris/liste.jsf?language=en&jur=C,T,F&num=C-39/1&td=ALL

Expert’s opinion

It is crucial to take into account the special character of prejudicial procedure and importance of decisions made by ECJ in accordance with this procedure. Deciding the case on the prejudicial request ECJ is performing its prime and exclusive function of interpretation of EU Law. All domestic courts of Member States shall follow this interpretation when deciding on the merits of the cases. ECJ does not decide on the merits of the case, it does not provide a decision on the question which were asked before the court in Amsterdam, for example. ECJ just answers the question whether the Dutch legislation is in accordance with the EU law provisions.

Freedom of establishment is one of the basic freedoms of economic union. IT allows companies to make business over the whole territory of EU and supports another four freedoms of the single market – movement of goods, services, persons and capital. So, the regulation of freedom of establishment shall be unified on the whole territory of integration entity. Creation of the beneficiary conditions for resident companies puts restriction for the enforcement of the freedom of establishment in EU. Companies may feel as they do not want to do business over all EU choosing only countries with more beneficiary taxation system.

The ECJ decision put new colors to articles 49 and 54 TFEI, which were considered from a new angle: what difference does make the residence of the company in connection to its place in corporate structure? Nowadays, when the process of globalization of business made corporate structures look like many-leveled pyramids, to study this point of freedom of establishment of companies is very important.

With this decision ECJ is one more time proved its readiness to fight for the unity of single market, to provide for realization of the freedom of establishment and to improve the functioning of economic part of EU.

Ekaterina Myznikova ( Paralegal, Honest&Bright)