Financial links without a majority interest?

The Dutch reading of the financial links test has been cracking since the NGD judgment. Advocate General Ettema advises the Supreme Court to take a broader view, but clarity is still lacking.

In the Netherlands, associated businesses can together form a single taxable person: the VAT group. For that, businesses established in the Netherlands must be linked financially, organisationally and economically. The legislature did not define when that is the case, so in the late 1980s the Supreme Court filled the gap. For companies with share capital, there are financial links where a majority of the shares and the associated control are in the same hands. A clear and workable test.

A majority of the control is not required

Although the Supreme Court confirmed that reading two years ago, it has been cracking since. At the end of 2022, in NGD, the Court of Justice of the EU took Germany to task for construing financial links too strictly. Subordination is not a requirement for a VAT group, and the German approach, which like the Dutch one requires a majority of the shares and the associated control, went further than necessary. How the concept should be construed instead, the Court unfortunately did not say. It was therefore a question of when, not whether, the Dutch approach would be challenged.

A majority interest is not required

A case is pending before the Supreme Court on whether a shareholder holding 50% of the shares but in fact exercising all the control meets the test. Both the district court and the appeal court said no, for want of a majority interest. Advocate General Ettema advises the Supreme Court to find that there are financial links: those exist at any rate where the shareholder is able to impose its will, and in fact that is the position here. She relies on NGD.

Although we would find it logical and desirable to treat a majority of the control as decisive, NGD gives no answer on that. There the shareholder held 51% of the shares but only 50% of the control. The Court does not rule out financial links in that situation. Whether a 50% interest combined with full de facto control suffices cannot, in our view, be derived from it.

Where does that leave us?

That the Dutch approach must be relaxed is clear, but no more than that. Tellingly, the State Secretary for Finance states in a recent decree that there are financial links at any rate where there is a majority of the shares and the associated control.

For practitioners that uncertainty is unwelcome. A district court recently held that a shareholder with 51% of the shares was not financially linked to its subsidiary, because some powers could not be exercised without the approval of the general meeting. It is not clear from the ruling why that approval requirement would stand in the way of the shareholder imposing its will.

To avoid a debate in every borderline case about whether the links are sufficient, and how that is measured, by reference to formal or de facto control, the Supreme Court needs to give a clear answer. In our view that answer should not be too generous. A situation in which two shareholders can each be financially linked to the same subsidiary, one on the basis of a majority of the shares and the other on the basis of a majority of the control, should be avoided.

Because the VAT group is originally an exception in the VAT Directive to the independence of a taxable person, treating a majority of the control as decisive is the obvious approach. Its advantage is that it also works for entities without share capital, such as foundations and associations, and is therefore neutral as to legal form. The difficulty is that, according to the Court, subordination may not be a condition. It would therefore not surprise us if the Supreme Court left the untying of this knot to the Court of Justice by referring questions.

Until the Supreme Court has ruled, there are at any rate financial links where there is a majority of the shares and the associated control. If you fall just short of that and would still like to form a VAT group, we are happy to consider whether the broader reading advocated by the Advocate General offers scope, and how you can protect your position.