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

1. Introduction to tax consolidated groups

This memorandum describes the tax regime for consolidated tax groups as of 1 January 2003. 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. For the parliamentary history, see our separate memorandum. Hereafter, a brief description will be given of the structure of the law and the Tax Consolidated Group Decree 2003, after which the conditions for forming a consolidated group, the tax consequences of forming, having and breaking up a tax consolidated group and certain anti-abuse measures are described.

2. Description of the law

The bulk of the arrangement is found in the articles 15 through 15aj of the Corporate Income Tax act (hereafter "CIT") and the Tax Consolidated Group Decree 2003 (hereafter "Decree 2003").

3. Conditions for forming a consolidated tax group

A company can become a member of a consolidated tax group if:

• the members of the group own a legal and beneficial interest of at least 95 percent in that company (15'1 and 15'2 CIT). See our detailed memorandum for more details.
• the company and the group have the same financial year (15'3 CIT). In case of newly incorporated companies, a tax consolidated group could be formed upon the incorporation of a company, provided that, except for the first financial year of the newly incorporated company and the current year of the existing company with which a consolidated group is to be formed, the financial years of the companies are the same and the newly incorporated company closes its first financial year at the same time that the existing company closes its current year (5'1 (new parent) and 5'3 (new subsidiary) Decree 2003);
• the companies are subject to the same tax regime, e.g. it is not so that one is a fiscal investment fund, and the other not (15'3 CIT);
• either the companies are resident in the Netherlands for tax purposes or they have permanent establishments in the Netherlands and fulfil a number of additional conditions (see under 3.1 "Non-resident taxpayers" hereafter);
• a request to form a consolidated group is filed by the parent and the subsidiary to form a tax consolidated group. The group can not be formed earlier than three months prior to the time of filing the request (15'5 and 15'8 CIT); and
• the shares in the subsidiary are not held as stock in trade (15'3 CIT).

3.1 Non-resident taxpayers

Non-resident taxpayers with a taxable permanent establishment in the Netherlands can have that permanent establishment form part of a tax consolidated group. The non-resident taxpayer must fulfil the following conditions:

• it is incorporated under the laws of the Netherlands Antilles, Aruba, a member state of the European Union or another treaty country, which treaty contains a non-discrimination clause (15'3'd and e CIT);
• it is resident in the Netherlands Antilles, Aruba, a member state of the European Union or another treaty country, which treaty contains a non-discrimination clause (15'3'd and e CIT);
• it is similar in nature and kind to an NV or a BV (15'3'd and e CIT). See our detailed memorandum for details.
• if a Dutch subsidiary of the company having the permanent establishment is to become part of the tax consolidated group, then the shares in that subsidiary must form part of the assets of the permanent establishment (15'4, second sentence, letter c, CIT (for consolidated parents) and 30, Decree 2003)

The following combinations are possible:

• the Dutch permanent establishment of a foreign parent, with a 95 percent Dutch subsidiary of that foreign parent;
• the Dutch permanent establishment of a foreign subsidiary, with the Dutch 95 percent parent of that foreign subsidiary; and
• the Dutch permanent establishment of a foreign parent with the Dutch permanent establishment of a foreign 95 percent subsidiary of that parent.

Contrary to what one might expect, e.g. from the decision of the EU Court of Justice in the ICI-case, it is not possible to form a tax consolidated group between:

• two sister companies, resident in the Netherlands, if their parent is not resident in the Netherlands or does not have a Dutch permanent establishment;
• the Dutch permanent establishments of two foreign sister companies if their parent is not resident in the Netherlands or does not have a Dutch permanent establishment;
• a Dutch grandparent and its grandchild, or a Dutch permanent establishment of that grandchild, if the parent company is not resident in the Netherlands or does not have a permanent establishment.

4. Formation of a tax consolidated group

Under the tax consolidated group regime the subsidiaries in the group are generally treated as if they have been dissolved into the ultimate parent of the group. The extent to which this happens under the new regime has been somewhat limited in order to remove any doubt that subsidiaries in a tax consolidated group are subject to an income tax and therefore can be entitled to tax treaty protection as residents of the Netherlands as meant under article 4 of the OECD Model Tax Convention.

At the time of forming a consolidated group:

• shares in subsidiaries joining the consolidated group must be marked to market (15ab'1 CIT). This leads to a taxable realisation of hidden reserves, unless they are sheltered by the participation exemption;
• receivables and liabilities between the future members of the group are marked to market (15ab'6 CIT) This too leads to a taxable realisation of hidden reserves, generally at the side of the debtor;
• the equity of the tax consolidated group upon consolidation is determined (6'2 (beginning of financial year) and 6'3 (during financial year) Decree 2003);
• the tax related rights and obligations of the company joining the consolidated group are transferred to the consolidated group (7'1 Decree 2003);
• the subsidiary joining the consolidated group must close its financial year at the time of joining the consolidated group.

See our detailed memorandum for more information on foreign taxpayers.

5. 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 offset 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 which suffered these losses outside the consolidation period has excess profits which have not already been offset by group losses (15ae'1 CIT);
• assets and liabilities can be moved within the group, without triggering capital gains. However, anti-abuse measures exist for the prevention of using the consolidated group regime to avoid taxation on the disposal of such assets and liabilities (see hereafter under "7.3 Transfer of hidden reserves and subsequent disposal");
• the parent company files one Dutch corporate income tax return on behalf of itself and all its group members;
• The reduction of taxation under measures for the prevention of double taxation is calculated as if the companies of the tax consolidated group are one taxpayer (15ac'4 CIT), although exceptions exist with regard to the financing of foreign real estate or branches (see hereafter under "7.1 Internal financing of foreign branches"); and
• group members remain jointly and severally liable for the corporate income tax liabilities of the group and the receiver may offset the tax liabilities of the group against tax receivables of group members.

5.1 Loss compensation

Our detailed memorandum provides an example of how loss compensation takes place within the tax consolidated group and how preconsolidation losses are dealt with.

5.2 (De)mergers within tax consolidated group

It is beyond the scope of this memorandum to deal with all the consequences of (de)mergers within tax consolidated groups in detail. Further information is provided in our detailed memorandum.

5.3 Foreign taxpayers

Foreign parent companies of which the Dutch permanent establishment forms the parent in a tax consolidated group are treated such that for purposes of the relations with the foreign headquarters, the consolidated group is not deemed to exist (33'1 Decree 2003). The effect of this is that e.g. interest payments due from the Dutch subsidiary to the Dutch permanent establishment of the foreign parent are not deductible, but such payments to the foreign headquarters could be. See our detailed memorandum for more information on the rules regarding participations.

5.4 Foreign results

The results of the tax consolidated group are first of all reduced by tax exemptions and credits regarding foreign income arising during the consolidated period. Remaining results may be carried across the time of consolidation if certain conditions are fulfilled (42 Decree 2003). These conditions concern three categories of foreign income and foreign taxes:

a) foreign profits and losses from an active permanent establishment and the foreign taxes thereon;
b) foreign profits and losses from a passive permanent establishment and the foreign taxes thereon; and
c) foreign dividends, interest and royalties and the source tax thereon.
Our detailed memorandum provides further information.

6. Dissolution of a consolidated tax group

The tax consolidated group is dissolved (15'6 CIT):

• when the conditions for forming a tax consolidated group are no longer met (e.g. selling shares in group members to related companies outside the group);
• when the company resident outside the Netherlands of which the Dutch permanent establishment forms part of a tax consolidated group, immigrates to the Netherlands;
• when the company resident inside the Netherlands and forming part of a tax consolidated group, emigrates from the Netherlands; and
• upon the request of the parent and the relevant subsidiary in a tax consolidated group.

Upon dissolution:

• the parent files a balance sheet with its tax return showing the equity of the deconsolidated subsidiary and the financial relations with that subsidiary directly after the deconsolidation (13'1 Decree 2003);
• the preconsolidation losses of the deconsolidated subsidiary remains with it upon request;
• through the disposal of the shares in a subsidiary, the disposal is deemed to take place after the deconsolidation (14'1 Decree 2003). This means that the participation exemption could be applicable, if all conditions are fulfilled;
• through a (de)merger, the (de)merger is deemed to take place after the deconsolidation 14'2 Decree 2003). Our detailed memorandum provides further information on this point;
• 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;
• 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. See under "7 Anti-abuse measures" hereafter; 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.

Interest which is not deducted during the first seven years after the acquisition of the target under the anti-abuse measure can be deducted for 25 percent per year of the remaining total thereafter (15ac'6 CIT).

7. Anti-abuse measures

There are various anti-abuse measures, the most important of which are dealt with hereafter.

7.1 Internal financing of foreign branches (15ac'5 CIT)

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. The government enacted an amended version of the anti-abuse measure into the law as applicable before 1 January 2003 (15'6 CIT) and the current law (15ac'5 CIT). Under the amended version, the intragroup interest charges related to this permanent establishment are added to the total taxable income of the consolidated group when calculating the available exemption.

Relief is provided under 15ac'6 CIT. Article 15ac'5 is not applicable to the extent that the taxpayer can show that the intragroup interest is not deductible in the country of the permanent establishment.

See our detailed memorandum for further information and examples.

7.2 Leveraged takeovers (15ad CIT)

The limitation on the deduction of interest in case of leveraged take overs is limited. 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 of the target during the first seven years following the acquisition. However, those costs may be set off against other results of the tax consolidated group, provided that these other profits are not exempt from taxation under a measure for the prevention of double taxation.

Leveraged take over:
Profit Dutch Sub can offset interest cost to Parent, but not profit Dutch Target

This anti-abuse measure is not applicable if:

• the loan is ultimately attracted from a third party and the interest income is subject to a reasonable income tax in the hands of the creditor (15ad'3'a CIT); or
• the loan was used for a capital contribution and the interest income is subject to a reasonable income tax in the hands of the creditor no later than one year after the interest is due or the capital contribution is used for an enterprise or part of an enterprise (15ad'3'b CIT).

The total amount of interest which could not be deducted during the first seven years after the acquisition of the target under the anti-abuse measure, can be deducted thereafter against profits from the target as well. The deduction is limited to 25 percent of the abovementioned total per year (15ad'5 CIT).

See our detailed memorandum for further information and examples.

7.3 Transfer of hidden reserves and subsequent disposal (15ai 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. In order to prevent this, the law dictates that the asset must be marked to market just before the deconsolidation of BCo (15ai'1 CIT); if the taxpayer can prove the value of the asset at the time of the transfer, then the asset may be marked to its value at the time of the transfer, less subsequent depreciations instead (15ai'2 CIT).

No markup is required if:

• 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, and more than 3 years expired(same anti abuse period applies for tax free asset mergers outside a tax consolidated group); or
• more than 6 calendar years expired since any other transfer of the hidden reserves; or
• the transfer took place in connection with ordinary business activities fitting the size and nature of the transferor and the acquirer.
  "Ordinary business activities" indicate that the transfer must not have been incidental.

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.

8. Entry into force

The new tax consolidated group regime entered into force as of 1 January 2003 (VIII'1 Law 26 854). In principle it applies to all tax consolidated groups as of the first day of their first financial year starting on or after 1 January 2003. It also applies to existing tax consolidated groups whereby their existing conditions are 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 (IV'2 Law 26 854).

This grandfathering does not apply for tax consolidated groups where one of the members is incorporated under Dutch law, but is resident outside the Netherlands. Nor does it apply 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 (V Law 26 854). This choice may be important as it could have consequences, for instance in giving uncompensated losses or foreign tax relief to a deconsolidated subsidiary.

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