On October 4 2024, the Court of Justice of the European Union (CJEU) published a ruling on prejudicial questions regarding the Dutch interest deduction limitation in Article 10a of the Dutch Corporate Income Tax Act 1969 (Article 10a). The CJEU ruled that the limitation is not in breach of EU law.
Background
Article 10a was introduced to prevent tax base erosion by limiting the deduction on debt interest payments between related entities when the debt is used for certain transactions (a capital contribution, a dividend distribution, or the acquisition of a subsidiary). The limitation can be rebutted if certain requirements are met.
The question at hand has been whether Article 10a breaches EU law; more specifically, the freedom of establishment as meant in Article 49 of the Treaty on the Functioning of the European Union. This was uncertain, since domestic groups are more likely to be able to rebut the limitation than cross-border groups.
If Article 10a would be a restriction on the freedom of establishment, this could still be allowed if the rule is proportionate to prevent tax fraud and wholly artificial constructions.
In the past, the CJEU ruled on a Swedish interest deduction limitation rule in Lexel (C-484/19). Some Dutch tax practitioners interpreted Lexel as meaning that a loan with arm's-length terms, consistent with what independent parties could have agreed upon, by definition, does not constitute a wholly artificial arrangement.
CJEU ruling
The CJEU concludes that Article 10a restricts the freedom of establishment in the EU. However, the CJEU goes on to explain that this restriction can be justified if the aim is to combat fraud and wholly artificial arrangements.
Although Article 10a introduces a presumption of wholly artificial arrangements in the event that related-party debt is incurred by a Dutch taxpayer in relation to certain transactions, the CJEU considers this proportionate. In this respect, the Dutch taxpayer can rebut this presumption when the debt and the transaction are motivated by business reasons.
Apparently, the question of whether debt has been agreed on arm's-length terms is only part of the overall rebuttal analysis.
Additionally, the CJEU notes that the Swedish interest deduction limitation in Lexel was not equal to the Dutch limitation. In this respect, the scope of the Swedish limitation was to prevent aggressive tax planning and not just wholly artificial arrangements, as is the case in Article 10a of the Dutch Corporate Income Tax Act 1969. It also sought to clarify its ruling in Lexel as not to mean that arm's-length financing terms, by definition, cannot be artificial arrangements.
Key takeaways
The CJEU considers the Dutch interest deduction limitation included in Article 10a to be compatible with EU law.
After the CJEU's Lexel judgment (January 2021), it has been market practice to file objections against Dutch corporate income tax assessments that were adversely impacted by Article 10a in order to preserve rights in case Article 10a was not in accordance with EU law. In most cases, these filed objections can be withdrawn, since the chance of successfully challenging Article 10a based on EU law seems minimal based on the CJEU's judgment dated October 4 2024 (this is a general statement, not advice, considering all the possible fact patterns that Dutch taxpayers may have).
Instead, Dutch taxpayers should consider whether other avenues to minimise an adverse Article 10a impact could be more successful. One potential solution is performing a transfer pricing analysis to argue for the lowest interest rate possible, limiting the amount of non-deductible interest. The Dutch transfer pricing mismatch rules should also be considered for such a strategy.
