On 14 March 2024, Advocate General (AG) Emiliou of the European Court of Justice (ECJ) delivered his Opinion in response to the request for a preliminary ruling from the Dutch Supreme Court. The case concerns the question whether the Dutch interest deduction limitation of Article 10a Corporate Income Tax Act 1969 (CITA) constitutes a breach of the EU treaty freedoms. The final decision of the ECJ may prove to be a landmark for the tenability of Article 10a CITA.
Background
Article 10a CITA limits the deduction of interest payments on loans taken up from related parties if the loan is connected with certain tainted transactions. In the Lexel case, the ECJ ruled that a similar interest deduction limitation rule in Sweden was not compatible with EU law and seemed to imply that a loan concluded under at arm's length conditions cannot be considered artificial. Following the Lexel case, the Dutch Supreme Court referred to the ECJ for a preliminary ruling on the compatibility of Article 10a CITA with the EU treaty freedoms. For a more detailed discussion of the Lexel case we refer to our EU Tax Alert.
The Opinion
The AG is first of all of the opinion that Article 10a CITA falls within the scope of the freedom of establishment. This means that taxpayers with loans from related parties outside the EU could not invoke EU law in respect of Article 10a CITA.
The AG agrees that Article 10a CITA in principle restricts the freedom of establishment. He is, however, of the opinion that this restriction can be justified on the grounds relating to the fight against tax avoidance. In that regard, the AG does note that Article 10a CITA bears a striking resemblance to the rules at issue in the Lexel case. The judgment of the ECJ in the Lexel case was clear being that the purpose for which a loan was concluded is irrelevant and, instead, a distinction should be made between loans contracted on an arm's length basis (which it regarded as genuine) and those which are not contracted on such basis (which it regarded as artificial).
The AG, however, is of the opinion that the purpose for which a loan is contracted should in fact be decisive. In his view, intra-group loans, that are put in place without any valid commercial and/or economic justification for the sole (or main) purpose of creating a deductible debt constitute 'wholly artificial arrangements'. Whether the loans are concluded on an at arm's length basis should not be decisive. The AG therefore urges the ECJ to revisit its approach taken in the Lexel case.
The AG concludes that the restriction on the freedom of establishment entailed by Article 10a CITA can therefore be justified on the grounds relating to the fight against tax avoidance.
Impact of the Opinion
The Opinion of the AG is not binding on the ECJ, which will issue its judgment at a later date. Pending the decision of the ECJ, we recommend reviewing existing financing structures where the deductibility of interest payments is denied by Article 10a CITA and assessing whether an objection should be filed with reference to this case.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
