General Memorandum on Tax Consolidated Groups (fiscal unity) until 1-1-2003

Introduction

This memorandum describes the tax regime for consolidated tax groups as it is at the moment. There is a regime as of 1 January 2003 which is dealt with in a separate memorandum. Please note that we use the term "tax consolidated group" rather than the term "fiscal unity", which is a literal translation of the Dutch legal term (fiscale eenheid) often used by Dutch advisors.

Formation of a consolidated tax group

Under the consolidated tax group regime the subsidiaries in the group are generally treated as if they have been dissolved into the ultimate parent of the group. A company can become a member of a consolidated tax group if:

• the members of the group will own an interest of at least 99 percent in that company;
• the company and the group has the same financial year, unless it concerns a deviating first financial year;
• a request to form a consolidated group is filed before the end of the financial year in which the consolidated group should be formed. The tax inspector will then set the conditions under which the tax group may be formed and these must be accepted within two months by both the parent and the joining subsidiary;
• the companies are subject to the same tax regime (e.g. one is not a fiscal investment fund, and the other not);
• both companies are resident in the Netherlands for tax purposes.

At the time of forming a consolidated group, any receivables among the future group members must generally be valued at fair market value, which means that the debtor of distressed debt will realise a taxable profit on such a debt.

Consequences during lifetime of a consolidated tax group

During the existence of the consolidated group:

• the profits and losses of members of the group can be off set against one another, except that it is generally not possible to utilise losses outside the period during which the group exists, unless the group's losses have been compensated and the company having these other losses have excess profits which have not been used by group losses;
• assets and liabilities can be moved within the group, without triggering capital gains. However, anti-abuse measures exist for the prevention of using consolidated group regime to avoid taxation on the disposal of such assets and liabilities;
• the parent company files one Dutch corporate income tax return on behalf of itself and all its group members; and
• group members remain jointly and severally liable for the corporate income tax liabilities of the group and the receiver may off set the tax liabilities of the group against tax receivables of group members.

Dissolution of a consolidated tax group

A consolidated group can be dissolved in a variety of ways. It can be done by not meeting the requirements described here above (e.g. selling shares in group members to related companies outside the group) or upon request to the tax authorities. As long as all the conditions for forming a consolidated group are fulfilled, a tax inspector can not dissolve a consolidated group. A consolidated group is dissolved with retro-active effect to the beginning of the financial year in which it is dissolved.

Upon dissolution:

• the companies must continue the same book values and tax policies with regard to their assets, as the consolidated group did;
• for purposes of future losses from liquidation, the value in the participation in a company leaving the consolidated group is adjusted to the equity of the subsidiary at that time;
• the tax losses of the group generally remain with the parent company;
• movements of hidden reserves during the last 6 years to any company leaving the consolidated group may trigger the deemed realisation of all the hidden reserves of that company just before leaving the consolidated group. Exceptions exist, but should be examined on a case by case basis. On 11 February 2003, the Ministry of Finance issued a Q&A decree on various aspects of this anti abuse measure. Please see this document for further information; and
• any foreign profits carried forward for exemption or foreign losses which have not yet been offset against foreign profits follow the company taking the relevant permanent establishment or dependent agent.

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