On January 20, 2021, the Court of Justice of the European Union (ECJ) ruled that a Swedish company pays market interest rates to an EU / EEA-based group company on a loan, the terms of which are similar to those between independent parties, which cannot be refused deductibility if such interest were deductible in a domestic situation. Such tax legislation violates the freedom of establishment under Article 49 of the Treaty on the Functioning of the European Union (TFEU) (C-484/19).
Facts and legal context
The case concerns the intra-group acquisition of a stake in a Belgian company by a Swedish company. The purchase price was financed with a loan from a French group company that acted as a bank. The French lender could offset the interest paid by the Swedish borrower against tax losses. Sweden denies the deduction of interest on a cross-border intra-group loan unless the loan was taken out for business reasons or was taxed at a rate of at least 10%.
The judgment of the ECJ
As mentioned above, Swedish tax law did not dispute the interest deduction in a domestic situation. In order to assess whether there is a distinction or discrimination, the ECJ first assesses whether the situation at hand, a French lender and a Swedish borrower, is in a comparable situation to a Swedish lender and a Swedish borrower. The ECJ found that these situations are comparable and that Swedish law therefore makes a distinction.
The Swedish authorities argued that there were two reasons for the tax measure. First, it is a measure to combat tax abuse. Second, this is a measure to balance the division of tax rights.
In short, the ECJ found that since the Swedish measure targets all cross-border loan transactions, it does not appear to be aimed solely at fully artificial agreements and therefore cannot be accepted as an anti-abuse measure.
In addition, the ECJ found that the Swedish measure cannot be accepted, as the interest would have been deductible if a similar interest payment had been made to a third party, since the division of tax rights has to be balanced, and no combination of the two possible justifications is fundamental accepted for the same reasons.
This decision is relevant for the application of the Dutch interest deduction restriction of Article 10a of the Dutch Corporate Income Tax Act 1969. Article 10a denies the deduction of interest payments to group companies in connection with certain transactions, unless the taxpayer can prove that the transaction and the loan were made Made for solid business reasons or because the related interest income is effectively subject to a profit tax of 10% versus a tax base comparable to the Dutch tax base. If such a tax is levied, the tax inspector can still prove that the transaction and loan were not granted for business reasons. In this case, the interest deduction can still be refused:
- Article 10a, based on the effective tax rate test of 10%, distinguishes between situations in which the creditor is liable for tax in the Netherlands and situations in which this is not the case. This requirement is generally always met if the obligee is taxable in the Netherlands, as the obligee is subject to the Dutch CIT. This distinction cannot be justified, since this anti-abuse measure is also aimed at interest payments that are made at normal market conditions and cannot be entirely artificial after this decision.
- Special tax incentives that reduce the recipient’s effective tax rate below 10%, such as B. notional interest deductions in Cyprus or Malta, do not shift the burden of proof to the taxpayer, as this would be an unjustified distinction ;; and
- The loss carryforward aspect can have an impact on the effective tax rate test of 10%, as this also applies to Dutch taxable creditors, which means that no distinction is made in this regard.