The Advocate General (“AG”) of the European Court of Justice (“ECJ”) rendered an opinion that the Netherlands does not have to allow a fiscal entity for corporate income tax for a Dutch parent company and its foreign subsidiary. This opinion was published on November 19, 2009. It is now a question of waiting to see whether the ECJ will accept this opinion.

Facts and legal framework of the Dutch case

 A Dutch parent company, which is both based in and incorporated under the laws of the Netherlands, holds all the shares in a Belgian subsidiary, which is both based in and incorporated under the laws of Belgium. The latter has no activities in the Netherlands. In 2003, the Dutch parent company and Belgian subsidiary jointly requested that they qualify as a fiscal unity for corporate income tax purposes. The companies wanted to form a fiscal unity so that the Belgian subsidiary’s losses incurred through its Belgian activities could be set off against the Dutch parent company’s results.

 To form a fiscal unity, both the parent company and subsidiary must either reside or have a branch in the Netherlands. The inspector did not allow the companies to form a fiscal unity, because the Belgian subsidiary was not resident, and had no branch, in the Netherlands.  

The ECJ AG’s opinion

 The AG holds, in principle, that excluding a foreign subsidiary from a fiscal unity is a restriction of the freedom of establishment. The AG then examined the grounds for justifying such an exclusion, particularly for excluding the consolidation of the foreign subsidiary’s results.

The AG saw the disruption of the allocation of authority to levy taxes between the Member States where the companies are based as the main danger in permitting cross-border consolidations. On the grounds of this allocation, at least in principle, the Netherlands has no right to levy taxes on the Belgian subsidiary’s results. According to the AG, the fact that this case concerned the setting-off of loss does not alter this.

The AG then examined whether or not the exclusion of the foreign losses is possibly disproportional, particularly because, as a result of the “claw-back” facility, the foreign losses in the Netherlands, in principle, only have temporary, limited consequences. The AG’s opinion, however, is that the fact that there is a claw-back facility for permanent establishments abroad does not compel the Netherlands to extend the facility to include the losses from subsidiaries abroad. The AG’s opinion is based on the fact that a permanent establishment and a subsidiary in another Member State are not in a comparable situation with regard to the allocation of the authority to levy tax. In principle, foreign subsidiaries do not fall under the tax jurisdiction of the parent company’s Member State, while foreign permanent establishments remain under the jurisdiction of the Member States in which the main office is based. The AG did not, for that matter, consider the fact that the foreign subsidiary was, from a Dutch tax perspective, transformed into a permanent establishment by its inclusion in the fiscal unity. According to the AG, the fact that double loss recognition can effectively be ruled out, which is partially due to the claw-back facility, does not detract from the exclusion of a fiscal unity pursuant to the maintenance of the allocation of the authority to tax.