Advocate General finds Dutch tax consolidation regime to infringe the freedom of establishment

23 November 2017
Author: JHA

These are two joined cases, X BV concerning the application of the Dutch interest deduction limitation rule to prevent base erosion, and X NV concerning the non-deductibility of currency losses on a participation in a non-Dutch/EU subsidiary under the Dutch participation exemption.

The facts of the first case are as follows: X BV was part of a Swedish group and received a loan to acquire shares in an Italian company, which it had done by incorporating another Italian company (NewCo) to which it contributed capital. Under the Dutch interest deductibility rule, the interest paid by X BV to a related party, where the debt is connected with a capital contribution in a subsidiary, is non-deductible. However, the tax treatment of the same structure would have been different if the Italian NewCo would have been established in the Netherlands and part of a Dutch fiscal unity (or consolidated tax group), which is reserved for Dutch resident companies. If such a fiscal unity was possible, then the capital contributions would not have been recognized for tax purposes and the deductibility of the interest would have been allowed. The AG argued that such a rule constituted an infringement of the freedom of establishment.

The second case concerned a Dutch company, X NV, which was part of a fiscal unity regime in the Netherlands and which held shares in a UK subsidiary through another Dutch subsidiary. These shares were subsequently contributed to another UK subsidiary. The Dutch company incurred a currency loss on its contributed shares as a result of exchange rate fluctuations. The deduction of the currency loss was denied by the Dutch tax authorities. Such loss would have been deductible if X BV was allowed to form a fiscal unity with its UK subsidiary. The AG argued that the difference in treatment of the currency loss does not constitute an infringement of the freedom of establishment.

The Dutch Government announced several emergency legislation, in the event that the CJEU follows the AG’s Opinion in the first case, and which would have retrospective effect to the time and date of publication of the AG Opinion (25 October 2017).

This article appears in the JHA November 2017 Tax Newsletter, which also features:


  1. Commission State Aid Enquiry – UK CFC Provisions
  2. 2017 Budget – Cross Border Issues
  3. A Oy – immediate taxation of capital gains of non-resident PE
  4. Belgian rules limiting interest deduction to the extent of dividends received
  5. Jacobs v French Minister for Finance and Public Accounts (C-327/16)
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