The Supreme Court in the Netherlands requested a preliminary ruling from the European Court of Justice to clarify its case-law on, inter alia, the freedom of establishment laid down in Article 49 TFEU, specifically whether it is compatible with that freedom for the tax authorities of a Member State to refuse to a company belonging to a cross-border group the right to deduct from its taxable profits the interest it pays on such a loan debt.
The anti-avoidance rule in question is contained in Article 10a of the Wet op de vennootschapsbelasting 1969. The rule is specifically designed to tackle tax avoidance practices related to intra-group acquisition loans. Under that legislation, the contracting of a loan debt by a taxable person with a related entity – for the purposes of acquiring or extending an interest in another entity – is, in certain circumstances, presumed to be an artificial arrangement, designed to erode the Netherlands tax base. Consequently, that person is precluded from deducting the interest on the debt from its taxable profits unless it can rebut that presumption.
The Dutch Supreme Court (Hoge Raad) asked the European Court of Justice to clarify its findings in its judgment in Lexel, on whether such intra-group loans may be, for that purpose, regarded as wholly artificial arrangements, even if carried out on an arm’s length basis, and the interest set at the usual market rate.
“(1) Are Articles 49 TFEU, 56 TFEU and/or 63 TFEU to be interpreted as precluding national legislation under which the interest on a loan debt contracted with an entity related to the taxable person, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is not deductible when determining the profits of the taxable person because the debt concerned must be categorised as (part of) a wholly artificial arrangement, regardless of whether the debt concerned, viewed in isolation, was contracted at arm’s length?
(2) If the answer to Question 1 is in the negative, must Articles 49 TFEU, 56 TFEU and/or 63 TFEU be interpreted as precluding national legislation under which the deduction of the interest on a loan debt contracted with an entity related to the taxable person and regarded as (part of) a wholly artificial arrangement, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is disallowed in full when determining the profits of the taxable person, even where that interest in itself does not exceed the amount that would have been agreed upon between companies which are independent of one another?
(3) For the purpose of answering Questions 1 and/or 2, does it make any difference whether the relevant acquisition or extension of the interest relates (a) to an entity that was already an entity related to the taxable person prior to that acquisition or extension, or (b) to an entity that becomes an entity related to the taxpayer only after such acquisition or extension?”
Opinion of the Advocate General
The Advocate General found that the Dutch anti-avoidance rule in Article 10a was both justified, appropriate and necessary – and therefore not in conflict with Article 49 of the TFEU – irrespective of the Court’s earlier judgment in the Swedish Lexel Case.
Excerpts
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71. In my view, the approach suggested by the intervening governments and the Commission is the correct one. Consequently, I urge the Court to revisit the approach it took in the judgment in Lexel on the matter at issue.
72. Freedom of establishment, as guaranteed by Article 49 TFEU, offers quite a wide opportunity for tax ‘optimisation’. The Court has repeatedly held that European groups of companies can legitimately use that freedom to establish subsidiaries in Member States for the purpose of benefiting from a favourable tax regime. (30) Thus, as X submits, A could legitimately choose to establish the internal bank of its group, C, in Belgium for that very purpose. Similarly, C may well grant loans to other companies of the group established in other Member States, like X in the Netherlands. Cross-border intra-group loans are not, per se, objectionable. (31) Certainly, such a loan may entail a reduction of the corporate tax base of the borrowing company in the Member State where it is established. Indeed, by deducting the interest on that loan from its taxable profits, that company reduces its tax liability with respect to that Member State. In effect, some of the profits made by the borrowing company are shifted, in the form of interest charges, from the Member State where it is established to the Member State where the lender company has its seat. However, that is something that the Member States must, in principle, accept in an integrated, single market such as the internal market of the European Union.
73. Nevertheless, the Court recognised a clear limit in that regard. It is a general legal principle that EU law, including freedom of establishment, cannot be relied on for abusive ends. The concept of ‘wholly artificial arrangements’ must be read in that light. Pursuant to the settled case-law of the Court, it is abusive for economic operators established in different Member States to carry out ‘artificial transactions devoid of economic and commercial justification’ (or, stated differently, ‘which do not reflect economic reality’), thus fulfilling the conditions to benefit from a tax advantage only formally, ‘with the essential aim of benefiting from [that] advantage’.(32)
74. Furthermore, in its judgment in X (Controlled companies established in third countries), (33) the Court has specified, with respect to the free movement of capital guaranteed by Article 63 TFEU, that ‘the artificial creation of the conditions required in order to escape taxation in a Member State improperly or enjoy a tax advantage in that Member State improperly can take several forms as regards cross-border movements of capital’. In that context, it held that the concept of ‘wholly artificial arrangement’ is capable of covering ‘any scheme which has as its primary objective or one of its primary objectives the artificial transfer of the profits made by way of activities carried out in the territory of a Member State to [another country] with a low tax rate’.
75. That interpretation is equally valid, in my view, with respect to the intra-group transactions covered by the freedom of establishment. Indeed, that interpretation is perfectly in line with the explanation given in point 73 above. Furthermore, with respect to national legislation tackling intra-group transactions, such as the contested Netherlands rules, free movement of capital and freedom of establishment are inextricably linked. It is because capital cannot circulate freely between companies of the same group that freedom of establishment is restricted. Thus, those rules could, theoretically, be reviewed under either fundamental freedom. Hence, there is no reason to apply different criteria depending on the applicable freedom.
76. In sum, as the intervening governments and the Commission submit, in order to determine whether an intra-group loan constitutes (or is a part of) a ‘wholly artificial arrangement’, the objective pursued by the economic operators in question is decisive. An intra-group loan constitutes such an ‘arrangement’ where that transaction was carried out for the sole (or main) purpose of benefiting from a tax advantage (such as the deduction of the interest on that loan from taxable profits), as demonstrated by the fact that it is otherwise devoid of economic and/or commercial justification (or, stated differently, ‘does not reflect economic reality’). Whether that is the case requires an overall assessment of the relevant facts and circumstances of the case. (34)
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80. As the intervening governments and the Commission observe, if intra-group transactions devoid of economic and/or commercial justification could never be regarded as ‘wholly artificial arrangements’ where they are carried out in an arm’s length basis, that would seriously impede the potential for national tax authorities to combat abusive tax avoidance. The arm’s length principle would, effectively, be turned into an undesirable ‘safe harbour’ for multinational groups. Their astute tax advisers would be free to conjure up all sorts of convoluted arrangements designed for the sole purpose of eroding a company’s corporate tax liability in a Member State and transferring its profits to another State with a lower tax rate. As long as those advisers cleverly stipulate terms therein reflecting the ones usually found on the market, those arrangements would be ‘immune’ from counteracting measures by tax authorities. (38)
81. That would be all the less desirable given the fact that national tax authorities have, under the general principle of prohibition of abuse of EU law, not merely the right, but the duty to prevent tax advantages being obtained through ‘wholly artificial arrangements’. Indeed, effective measures against tax avoidance are essential not only to ensure the sovereign right of the Member States to tax income and profits generated in their territory, but also for the functioning of the internal market, generally. Abusive tax avoidance threatens the economic cohesion and the proper functioning of the internal market, by distorting the conditions of competition. (39)
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87. In that regard, I would observe that the contested Netherlands rule are formulated much like other anti-abuse clauses found in national law and EU law. In particular, the application of the ‘general anti-abuse rule’ laid down in Article 6 of the Anti Tax Avoidance Directive to a given transaction similarly depends on whether that transaction was made ‘for valid commercial reasons which reflect economic reality’ and not ‘for the main purpose … of obtaining a tax advantage’. Admittedly, those are open concepts which, by nature, create some degree of uncertainty as to their scope. Furthermore, as I indicated in point 76 above, whether such conditions are fulfilled in a given case requires a case-by-case, overall assessment of a set of facts and circumstances, which also creates some degree of uncertainty.
88. Nevertheless, that degree of uncertainty is an unavoidable and acceptable side effect of such anti-abuse provisions. As Advocate General Kokott observed in her Opinion in SGI, (45) ‘legislation aimed at counteracting abusive practices must inevitably have recourse to imprecise legal concepts in order to cover the greatest number of conceivable arrangements created for the purposes of tax avoidance’. Furthermore, those provisions are meant to tackle conduct which is disguised as legitimate and is, thus, complex to apprehend.
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95. In my view, there will always be grey areas in the operation of an anti-abuse clause such as Article 10a(1)(c) of the Law on Corporation Tax. This does not make that rule incompatible with the principle of legal certainty. In the present case, the practice of the tax authorities and the Netherlands courts will progressively clarify the issue highlighted by X. In that regard, I will limit myself to observing that, when evaluating whether an arrangement should be regarded as artificial or economically justified, tax authorities and courts should consider all valid economic reasons, including financial ones. (52) It cannot be excluded that the reason advanced by X qualifies as such. It would be for the referring court to assess the matter.
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V. Conclusion
106. In the light of all the foregoing considerations, I propose that the Court answer the questions referred by the Hoge Raad der Nederlanden (Supreme Court of the Netherlands) as follows:
Article 49 TFEU
must be interpreted as meaning that it does not preclude national legislation under which the interest on a loan contracted with an entity related to the taxable person is not deductible when determining the profits of that person, where the conclusion of that loan was predominantly motivated not by commercial considerations, but by the objective of creating a deductible debt, even where the interest rate stipulated therein does not exceed that that would have been agreed upon between companies which are independent of one another. In that situation, the deduction of the interest shall be disallowed in full.”
Netherlands Interest deduction limitation AG opinion March 2024