State Aid: Time to Investigate Informal Capital Rulings

Abstract

This paper discusses the question of whether the Dutch informal capital scheme constitutes state aid. This scheme endorses tax deductions for payments or charges between group companies, even where such payments are not actually made. Informal capital structures are based on a mismatch between the Dutch corporate tax and the foreign profit tax. The issue of whether the scheme is selective would appear to boil down to the question whether the scheme can be justified by the arm’s-length principle. The objective of the arm’s-length principle purportedly is the allocation of an arm’s-length profit to the Netherlands and nothing more. However, this does not explain why the unilateral downward adjustment is only granted on the condition that the foreign affiliated person who provided the advantage would have been subject to Dutch tax had it been resident in the Netherlands. This condition has the effect that double non-taxation is avoided in domestic but not in cross-border situations and is discriminatory. Therefore, the present author is of the view that the prima facie selectivity of the Dutch informal capital scheme cannot be justified by the arm’s-length principle. Accordingly, the present author submits that European Commission should investigate the Dutch informal capital scheme.

Keywords: State aid, tax rulings, arm’s length principle, informal capital, mismatch, deemed payments, selective advantage, unilateral downward adjustment, double non-taxation, discriminatory

JEL Classification: K34