On February 25, 2010 the European Court of Justice issued its ruling in X Holding (C-337/08 X Holding Judgment.pdf). Under the facts of the case, a Dutch parent wanted to be allowed to combine with its Belgian subsidiary under the Dutch tax consolidation rules to use the latter losses, which it would have been allowed to use had the subsidiary been a branch. The Dutch fiscal unit system, which disregards intra group transactions, is consolidation. Under Dutch tax law, the Netherlands does not tax a foreign branch's profits, but allows a deduction for foreign branch's losses subject to recapture of branch's profits in the following years for an amount equal to losses allowed in prior years. The Belgian subsidiary could still use its losses in Belgium, so it was clear that the losses would not be deductible under Marks & Spencer holding and the case rested on a cash flow argument that the parent should be allowed to use the losses sooner in the Netherlands. The Attorney General's opinion concluded that the denial of consolidation of foreign subsidiaries is justified under the balanced allocation of taxing powers, coherence of tax system and need to protect member state's tax base and the restriction to the freedom of establishment is proportional and justified. The European Court of Justice upheld the AG's opinion and ruled in favor of the Dutch government. The Court rejected the taxpayer's argument that taxpayer should be allowed the same treatment granted in case of a foreign branch, on the ground that a foreign branch and a foreign subsidiary are not in a comparable situation, the former being subject in principle to the tax jurisdiction of the member state of origin, while the latter being an independent legal and tax entity subject only to the tax jurisdiction of the member state of destination.
