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The EU freedom of establishment does not preclude legislation of a Member State which makes it possible for a parent company to form a single tax entity (fiscal unity) with its resident subsidiary, but which prevents the formation of such fiscal unity with a non-resident subsidiary, where that non-resident subsidiary is not subject to the fiscal legislation of that Member State.

With regard to the respective case, the corporation X Holding BV (X), located in The Netherlands, was sole shareholder of the company F NV (F) located in Belgium. F has no permanent establishment in The Netherlands and is not subject to Dutch corporate income tax. In 2003, X and F applied for a fiscal unity in order to offset profits and losses of the same fiscal year. However, the Dutch fiscal administration rejected such application, since F did not meet the necessary requirements for a fiscal unity.

After rejection in the first instance, X filed an appeal with the Dutch Supreme Court (Hoge Raad) and argued that the exclusion of a cross-border group taxation in The Netherlands constitutes a violation of the EU freedom of establishment. In response, the Dutch Supreme Court filed a request for a preliminary ruling at the European Court of Justice on 21 July 2008.

The European Court of Justice ruled that in case a parent company and its subsidiary located in another member state are denied the benefit of forming a fiscal unity, it becomes less attractive for the parent company to use its right of freedom of estab-lishment, since this would keep it from founding a subsidiary in another member state.

In order for such a difference in treatment to be compatible with the provisions of the EC Treaty on the freedom of establishment, it must relate to situations which are not objectively comparable or be justified by an overriding reason in the general interest.

According to the European Court of Justice' opinion, the comparability of a situation where a resident parent company wants to form a fiscal unity with a resident subsidi-ary and a situation where a resident parent company wants to form a fiscal unit with a non-resident subsidiary, is given. However, the European Court of Justice also holds the opinion that the difference in treatment is justified in particular on the ground of safeguarding the allocation of the power to impose taxes between the Member States.

Contact persons:
Jan Boekel, Rotterdam
jan.boekel@wtsnl.com

Michael Röll, Frankfurt am Main
michael.roell@wts.de