This proposal of law was adopted on 10 December 2002. See "10. Entry into force" here below for further details as to when it became effective.
This proposal of law has been submitted to the Dutch Second Chamber on 25 September 1999; after many changes, it has been accepted by that Chamber on 4 October 2001 and submitted to the First Chamber (which formally can not change it any more) on the same day. After requesting insight into the General Decree of Government before approving the proposal, which decree was published in draft form on 31 May 2002, and following further changes to the law through other proposals of law still being dealt with in the Second Chamber, it was accepted by the First Chamber on 10 December 2002. We refer to our separate general memorandum on the current tax consolidated group regime.
The following are the main characteristics of the new consolidated group regime.
taxpayers that want to form a tax consolidated group must fulfill a number of criteria. They must have the required legal form, must be resident in the Netherlands, or resident in a country with a tax treaty with the Netherlands and have a permanent establishment in the Netherlands, they must have the same financial year, be subject to the same tax regime and the ultimate parent in the group must have an interest of at least 95 in all the subsidiaries in the tax consolidated group (15'3 CIT). Finally, a request must be filed with the tax inspector of the parent company in the group (15'8 CIT).
The tax consolidated group can not commence earlier than three months before the request to form a tax consolidated group is filed (15'5 CIT).
The tax consolidated group ends (15'6 CIT):
Under the new regime, the tax inspector must honor the request for deconsolidation.
Based on case law, a company incorporated under Dutch law and resident outside the Netherlands, could form part of a tax consolidated group, because companies incorporated under Dutch law are deemed to be resident in the Netherlands (2'4 CIT). The new regime is excluded from this presumption, whereby such companies can no longer form part of a tax consolidated group. There is no specific grandfathering provided.
Entities incorporated under the laws of in the Kingdom of the Netherlands, Aruba, the EU or a country which concluded a tax treaty with the Netherlands containing a non-discrimination clause (most treaties), which have a legal form similar to an NV or a BV and are resident in the Netherlands for tax purposes, can form part of a tax consolidated group. According to the State Secretary of Finance, most tax treaty partners have legal forms similar to the Dutch NV or BV.
The following combinations of permanent establishments are possible:
provided that the foreign company is incorporated under the laws of a treaty country and is resident in that country.
In case a Dutch parent forms a tax consolidated group with the Dutch permanent establishment of its foreign subsidiary, the participation exemption can still apply with regard to income from that subsidiary which are not allocated to its Dutch permanent establishment.
It is not the intention, currently or under the new regime, to allow results of the tax consolidated group to be mixed with result of its members from before the existence of the consolidated group, unless those results can be allocated to that particular member. This means that if a company has tax losses which have not been offset before that company joins the tax consolidated group, then those losses can afterwards only be offset by profits of that company to the extent that those profits are not offset against current results of the tax consolidated group already. Likewise, losses of the tax consolidated group, can only be set off against preconsolidated profits of a company within that group, to the extent that those losses can be allocated to that particular company (15ae'1 CIT).
The above rules also make it necessary to track the individual results of the members of the tax consolidated group and to limit the transfer of profits within the tax consolidated group in order to facilitate the carry over of losses and profits across the time of consolidation. Thus, if assets containing hidden reserves are transferred within the tax consolidated group, the realisation of those reserves are allocated to the transferor, which prevents the transferee from using such gains to compensate preconsolidation losses.
Whilst it is possible under the current regime to have a deconsolidated subsidiary take its preconsolidation losses with it, losses made during the period of consolidation generally remain with the parent company in the consolidated group, even if those losses can be allocated to the deconsolidated subsidiary. Under the new regime the parent and the deconsolidated subsidiary can request such losses to go with that deconsolidated subsidiary (15af'1 CIT and 15af'2 CIT).
This measure concerns the transfer of hidden reserves within the tax consolidated group, followed by a tax free disposal of those reserves, e.g. through the participation exemption. The most common example of this is a company (ACo) having an asset worth 1000, including a hidden reserve of 500). Instead of selling that asset directly to a buyer and paying 35 percent tax on the 500 hidden reserve realised, ACo incorporates BCo; forms a consolidated group with BCo; transfers the asset to BCo; deconsolidates BCo and sells BCo to the buyer. The hidden reserve remains with BCo and ACo is said to have transformed its taxable profit into an exempt gain under the participation exemption.
A significant amount of overkill has been eliminated by determining that only the transferred asset, rather than all the assets of the relevant company must be marked to market directly before deconsolidation.
No markup is required if more than 6 calendar years expired since the transfer of the hidden reserves. In case the hidden reserves were transferred within the tax consolidated group in connection with an asset merger solely against the issue of shares of the acquirer, then the recapture period is reduced to 3 years (same anti abuse period applies for tax free asset mergers outside a tax consolidated group) (15ai'3 CIT).
One of the main areas of interaction concern the rules on the deductible losses from liquidation of a participation and the tax consolidated group. First, it is not possible to take a loss from liquidation on a subsidiary within the tax consolidated group. Second, certain deemed forms of abuse with regard to the liquidation of subsidiaries are combatted. See our detailed memorandum for more info. Finally, shares held as stock in trade for purposes of the participation exemption will not be allowed to be consolidated.
In case a subsidiary in a tax consolidated group becomes bankrupt, the parliamentary history dictates that the tax consolidated group remains in tact in spite of the bankruptcy. The outstanding and unpaid debts of the subsidiary are no longer a liability of the tax consolidated group, whereby a taxable profit is realised. After amendments to the original proposal of law, the final version limits this forced realisation to available tax losses of the tax consolidated group. (15aj'3 CIT).
Dutchtax.net remains of the opinion that it is unjust to force a tax liability onto other members of the tax consolidated group, where no such liability would have existed, were there no consolidation. Although the tax authorities' policy on this matter is in line with their view in case of the bankruptcy of, among others, Fokker Aircraft BV that the outstanding and unpaid debts of Fokker constituted a taxable gain, thereby increasing the (privileged) claim of the tax authorities on the remaining assets of Fokker and although the Dutch Supreme Court ruled on 18 October 2002 that such is not the case, it is doubted whether this measure will be withdrawn in the foreseeable future.
The calculation of foreign profits are made on a per company basis. The result of this is that if two companies (ACo and BCo) in a consolidated group have permanent establishments in the same country of which one (ACo) makes a profit and the other (BCo) a loss, then full relief can still be granted to ACo's profit without reducing it with BCo's loss first. However, as is common to the Dutch system for the prevention of double taxation, future p.e. profits made by BCo must first be set off against the previous loss, before any relief will be granted for double taxation on those profits.
As is the case with profits and setting off losses against them, unused tax relief from before the existence of the tax consolidated group, can only be set off against results of during the consolidation period to the extent that those results are attributable to the company bringing the unused tax relief to the group.
If a member of a tax consolidated group holds foreign real estate or a permanent establishment financed by loans from other members of the consolidated group, it is possible to get an exemption for a larger amount than the amount taxed by the country where the real estate or permanent establishment is situated. The reason is that the foreign country may allow an interest deduction for the previously mentioned loan, whilst the Netherlands may exempt the gross foreign income since the interest on the loan is lost in the consolidation of the group results. This perceived form of abuse has long be fought by the inclusion of a condition to the formation of a tax consolidated group, stating that the exemption given for the tax consolidated group can not be higher than that which the members could have gotten on a stand alone basis. After the Dutch Supreme Court determined this condition to be unconstitutional, the government enacted an amended version of the condition into the current law and included it into article 15ac, fifth paragraph of the proposed law.
Finally, the limitation on the deduction of interest in case of leveraged take overs is limited (15ad'1 CIT). In short, this means that if a company borrows from the group and acquires a target and forms a tax consolidated group with that target, then the profits of the target can not be offset by the interest costs related to the acquisition during the first seven years following the acquisition. However, those costs may be set off against other results of the tax consolidated group.
Leveraged take over:
Profit Dutch Sub can offset interest cost to Parent, but not profit Dutch Target
Upon deconsolidation, unused tax relief of a subsidiary does not remain with the parent, as is currently the case for withholding taxes at the source, but follows the subsidiary from which the tax was withheld or to which the p.e. results can be allocated.
The new tax consolidated group regime will enter into force as of 1 January 2003. In principle it will apply to all tax consolidated groups as of the first day of their first financial year starting on or after 1 January 2003. It will also apply to existing tax consolidated groups whereby their existing conditions will be replaced by the new conditions as of that date. However, existing tax consolidated groups can choose to have the old regime apply to them as it was on 31 December 2002 up until the end of the second financial year after 1 January 2003.
This grandfathering does not apply for tax consolidated groups where one of the members is resident outside the Netherlands. It also does not apply anymore if a new member joins the tax consolidated group.
If the conditions for forming a tax consolidated group under the new regime are not met and an existing group must be deconsolidated, taxpayers do have the right to choose whether they want the deconsolidation to take place according to the existing rules or the new rules. This choice may be important, for instance in giving uncompensated losses or foreign tax relief to a deconsolidated subsidiary.