Issues with SPF

The SPF is a unique vehicle that enjoys great popularity in Curaçao. However, this column does not concern the position of an SPF in Curaçao but in the Netherlands. It often happens that such SPFs conduct activities in the Netherlands or are even actually established there. In such cases, the question arises whether, and if so, what tax consequences are involved. In a case currently pending before the Dutch Supreme Court, this issue is being addressed. This involves not only Dutch tax law but possibly also EU law. Enough reason, therefore, to consider the matter.

The issue is simple. It involves an SPF that is actually established in Curaçao but invests in Dutch real estate. Unfortunately, this exploitation is loss-making. The Dutch tax authorities have issued so-called loss decisions, a phenomenon unknown in Curaçao. In the Netherlands, such a decision is a prerequisite for offsetting the loss in a later year with a positive result. The SPF objected to this decision, which is possible. The reason is that it allows for discussion about the amount of the loss. This cannot be done in the year the loss is hopefully offset. The SPF objected to the decision, not because it wanted to contest the amount, but because it believes it is not liable for tax in the Netherlands at all. The main argument for this is that the Dutch Income Tax Act includes a provision that a so-called Separated Private Capital (APV) is fiscally transparent. An SPF is undoubtedly such an APV and is therefore transparent for tax purposes, with profits being attributed to the underlying participants.

The complaining SPF seems to have a point, but a crucial condition has been overlooked. The fiscal transparency applies only to the application of income tax and not to corporate tax. This may sound strange: for corporate tax, the SPF's own results must be taxed, and concerning the participants, the results are attributed to the underlying participants. This leads directly to double taxation: the profit is taxed at the SPF and again taxed at the participants in the SPF. The SPF argued that, given the transparency in income tax, there is no tax liability for corporate tax. This question has already been addressed in case law and answered: indeed, in these cases, there is a double tax liability simply because the aforementioned fiction expressly applies only to income tax. A schizophrenic situation, but deliberately intended by the legislator.

This seemed to be the end of the matter, but the question is whether that is really the case. The SPF has filed an appeal in cassation, and the Advocate General (A-G) at the Supreme Court has already issued an opinion. A key theme in the opinion is, in short, whether everything is consistent with EU law. The A-G struggles with this and proposes to refer the issue to the European Court of Justice. This concerns not so much the problem outlined above, but the question of whether foreign SPFs active in the Netherlands, like the interested party, are treated worse than SPFs actually established in the Netherlands. In the latter case, as strange as it may sound, there is no corporate tax liability. The interested party argues that this difference in treatment is contrary to EU law.

This stance raises several issues. First, there is the important question of whether EU law can be invoked at all. After all, Curaçao is an Overseas Country and Territory (OCT), to which EU law applies only very limitedly. The key question here is whether a claim can be made on the free movement of capital. If Curaçao is considered a third country relative to the Netherlands as an EU member state, this would be the case. In the past, this was litigated in the well-known X BV and LTG Ltd. case. This case law concerned dividend tax. The European Court ruled then that EU law could not be invoked in the relationship between an OCT and its own member state, whereas in earlier case law, it ruled that EU law could be invoked in the relationship between an OCT and another member state (Prunus). This case law still causes confusion. The present case may provide clarity. It is a fact that the A-G believes that the so-called OCT decision applies in this case and that an appeal can be made to the free movement of capital, but this is not entirely certain. For this reason, he advises the Supreme Court to refer the case to the European Court. If the European Court considers the free movement of capital applicable, the interested party is not yet done. There is also a so-called standstill provision, which, in short, means that if the provision to be tested already existed before 1994, it cannot be tested against EU law. Whether this provision applies in this case is also unclear. If not, EU law is in principle applicable, and finally, it must be examined whether there is an obstacle that cannot be justified. In my opinion, there is. This conclusion would then mean that the SPF's tax liability is contrary to EU law. In short, material for the jurists of the European Court.

Peter Kavelaars is a professor of Tax Economics at Erasmus University Rotterdam and of counsel at Deloitte Dutch Caribbean.