Written by Seringe S.T. Touray
The year of 1952 saw the establishment of the Luxemburg-based European Court of Justice (ECJ), the judicial institution of the EU that links and tackles disputes between member states and parties. Among its significant functions – the safeguarding of the concept of a ‘one entity’ Europe, whereby European law is interpreted and executed equally throughout the EU. Today, the power of the ECJ continues to resonate in its continuing search for equality as thousands of companies tremble in the wake of the court’s ruling abolishing a Dutch government-imposed tax advantage (a ‘fiscal unity’) which only some Dutch parent companies with Dutch subsidiaries/ daughter companies benefitted from. While the news dawns upon parent companies (with daughter companies in the Netherlands) now obligated to repay their earnings from the eliminated benefit, companies with foreign rather than domestic subsidiaries, which had no previous claim to the benefit, now have legal authority to claim their fair share from the Dutch government, a claim that will reportedly cost the treasury approximately EUR 400 million. The motivation behind this new EU law as revealed by the Advocate General of the ECJ was to put an end to the discriminative national law drawing a line between companies – a line which limited the freedom of many companies to expand beyond national borders.
As reported by Volkskrant, former State Secretary of Finance in the Netherlands Eric Wiebes issued a warning last year about the possibility of such ruling by the ECJ, warning based upon the Advocate General’s statement pointing out the conflict between the Dutch and EU law. In his warning, Wiebes estimated the potential setback for the Dutch treasury amounting to EUR 400 million. But what specifically does the ECJ law entail? On the national level, Dutch regulation previously allowed an interest deduction advantage if a Dutch parent company lends money to a subsidiary with which it forms a tax entity, while both two companies are established in the Netherlands. Parent companies with subsidiaries established outside of the Netherlands couldn’t claim such benefits, a rule naturally at odds with EU laws safeguarding freedom to set up anywhere within the EU without drawback. According to Wiebes, the setback now faced by the Cabinet and Dutch treasury is the result of retroactive claims by Dutch parent companies with foreign subsidiaries – a claim for their previously denied tax advantage now granted by the ECJ.
Per the constitution governing member states, EU law takes precedence. This prompted the Dutch government to revise its national law in accordance with the ECJ ruling in an emergency act, putting previously benefiting companies at a disadvantage. As speculation on how the treasury will be impacted negatively continues, it is worth taking into account that companies with Dutch subsidiaries will also be in the debt of the government and thus the national treasury itself. The treasury will thus represent a transit vault so to speak, transferring funds collected from the negatively affected parent companies via tax authorities to funnel it back to the positively impacted firms now claiming overdue benefits. The overall picture draws neither a winner nor a loser, as it puts companies on either side on a level playing field, while in the long run posing no threat of irreparable damage to the treasury. It is no surprise however that companies with foreign subsidiaries are revelling in the benefit they were previously denied. To these companies, the new ECJ regulation is a massive gain. To disadvantaged companies, hope fuelled by a previous national law dies abruptly, leaving them with a burdensome obligation to return previously granted benefits.
Amidst news of this ruling, the role of the Advocate General of the European Court of Justice echoes through wads of articles, indicating the role’s influence in the EU Court decision. Besides its appointed judges, the ECJ traditionally fills Advocate General positions whose title holders assist in preparing cases and judgements made by the court. The Advocate General makes comments on cases and offers unbiased written opinions which, while not binding upon the court, usually influence its decisions. Therefore, it is no surprise that the ECJ ruling stems from the opinion of the Advocate General who deemed the line between Dutch companies discriminative, an opinion whose result reinforces the power the title wields. Now that the ECJ ruling will take effect, some degree of pushback is reported by organizations like VNO-NCW and MKB-Nederland, both of whom estimate that 11,000 companies will be negatively impacted, a figure taken from the then State Secretary of Finance Wiebes’s warning. The organizations consider this imposition by the ECJ a significant loss for Dutch companies with domestic subsidiaries, and call on the current State Secretary of Finance Menna Snel to concoct a different regulation tout de suite to prevent companies within the abolished fiscal unity from being hit hard by the ECJ. According to the organizations, the Netherlands has to remain as close to the previous system of fiscal unity as possible. However, the State Secretary determines to comply with the ECJ, proposing to send a repair law to the Dutch parliament. The repair law will be retroactively implemented as of October 25th 2017, ensuring that interest deduction for Dutch parent companies with their daughter companies within the Netherlands will cease to exist.
Due to the ECJ ruling, and hence the retroactive repair law, parent and daughter companies altogether based in the Netherlands are obligated to revise their tax returns of last year.