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?”
The AG issued an opinion in March 2024 in which it was concluded 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.
Judgment of the Court of Justice
The Court of Justice agreed with the conclusion of the AG that the Dutch anti-avoidance rule in Article 10a was not in conflict with Article 49 of the TFEU. According to the Court Article 49 TFEU must be interpreted as not precluding national legislation under which, in the determination of a taxpayer’s profits, the deduction of interest paid in respect of a loan debt contracted with a related entity, relating to the acquisition or extension of an interest in another entity which becomes, as a result of that acquisition or extension, an entity related to that taxpayer, is to be refused in full, where that debt is considered to constitute a wholly artificial arrangement or is part of such an arrangement, even if that debt was incurred on an arm’s length basis and the amount of that interest does not exceed that which would have been agreed between independent undertakings.
Excerpts
“The Court also noted that the legislation at issue in the case that gave rise to the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34, paragraph 53), was capable of applying to debts arising from transactions governed by civil law, namely those concluded on an arm’s length basis, but did not concern fictitious arrangements.
82 It follows that the Court did not adopt a position, in that judgment, on the situation envisaged by the legislation at issue in the main proceedings with the specific aim of combating wholly artificial arrangements, as is apparent from paragraphs 60 and 61 of the present judgment, namely where the debts are incurred without business reasons, even though the loan terms correspond to those which would have been agreed between independent undertakings.
83 In particular, as is apparent from the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34), the economic validity of the loan and the related transactions at issue in the case giving rise to that judgment had neither been challenged before the Court nor examined by the Court.
84 Consequently, it cannot be inferred from paragraph 56 of the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34), that, where a loan and the related transactions are not justified by economic considerations, the mere fact that the terms of that loan correspond to those which would have been agreed between independent undertakings means that that loan and those transactions do not, by definition, constitute wholly artificial arrangements.
85 Therefore, the need to establish that a loan and the related legal transaction are based, to a decisive extent, on economic considerations does not appear to go beyond what is necessary in order to attain the objective pursued.
86 In addition, the referring court asks whether a total refusal of the right to deduct goes beyond what is necessary to achieve the objective pursued, since, in paragraph 51 of the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34), the Court recalled its case-law according to which, where the tax authorities consider, after examining evidence of any commercial justification for a transaction, that a loan contracted by a taxpayer with a related entity constitutes a purely artificial arrangement, in the absence of any real commercial justification, the principle of proportionality requires that the refusal of the right to a deduction should be limited to the proportion of that interest which exceeds what would have been agreed had the relationship between the parties been one at arm’s length.
87 As the Advocate General observed in points 103 to 105 of his Opinion, where the artificial nature of a given transaction results from an exceptionally high rate of interest on an intra-group loan which also reflects economic reality, the principle of proportionality requires the deduction of the proportion of interest paid on that loan which exceeds the normal market rate. It would go beyond the objective of preventing wholly artificial arrangements to refuse all deduction of that interest.
88 By contrast, where the loan is, in itself, devoid of economic justification and, but for the relationship between the companies and the tax advantage sought, would never have been contracted, it is consistent with the principle of proportionality to refuse the deduction of the whole of the said interest, since such a wholly artificial arrangement must be ignored by the tax authorities when calculating the corporate tax due. The refusal to deduct only a fraction of the interest paid in respect of the said loan would allow the taxpayer to obtain a part, or even the entire tax advantage sought through abusive means, which would call into question the coherence of the anti-abuse regime.
89 Nor does such legislation appear to be contrary to the requirements stemming from the principle of legal certainty which must be complied with in order for legislation not to be regarded as going beyond what is necessary to attain the objective pursued (see, to that effect, judgment of 5 July 2012, SIAT, C 318/10, EU:C:2012:415, paragraph 59).
90 In that regard, the Court has ruled that the principle of legal certainty requires that rules of law must be clear, precise and predictable as regards their effects, in particular where they may have unfavourable consequences for individuals and undertakings (see, to that effect, judgment of 5 July 2012, SIAT, C 318/10, EU:C:2012:415, paragraph 58 and the case-law cited).
91 As the Advocate General observed in points 87 and 88 of his Opinion, it must be noted that it is inevitable that a provision prohibiting abusive practices uses abstract concepts in order to cover the greatest number of situations created for the purpose of tax fraud and avoidance.
92 However, the use of abstract concepts does not mean that the application of the legislation at issue in the main proceedings is left entirely to the discretion of the tax authorities, rendering it unpredictable in its effects, since, as noted in paragraphs 70 and 71 of the present judgment, that application is subject to criteria clearly established in that legislation, enabling the taxpayer to determine the scope of that legislation beforehand and with sufficient precision, without leaving any uncertainty as to its applicability (see, to that effect, judgment of 5 July 2012, SIAT, C 318/10, EU:C:2012:415, paragraph 57).
93 In the light of all of the foregoing, the answer to the questions referred is that Article 49 TFEU must be interpreted as not precluding national legislation under which, in the determination of a taxpayer’s profits, the deduction of interest paid in respect of a loan debt contracted with a related entity, relating to the acquisition or extension of an interest in another entity which becomes, as a result of that acquisition or extension, an entity related to that taxpayer, is to be refused in full, where that debt is considered to constitute a wholly artificial arrangement or is part of such an arrangement, even if that debt was incurred on an arm’s length basis and the amount of that interest does not exceed that which would have been agreed between independent undertakings.
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