Advocate General Urges European Court Of Justice To Revisit Lexel Judgment In His Opinion Concerning Dutch Interest Deduction Limitation Rule – Income Tax

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.