CJEU rules Dutch interest deduction limitation not in breach of EU law

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

CJEU rules Dutch interest deduction limitation not in breach of EU law

Sponsored by

Sponsored_Firms_piper.png
CJEU

Jian-Cheng Ku, Roland Kleimann, and Nick Schmidt of DLA Piper Netherlands explain how the Court of Justice of the European Union recently addressed whether a Dutch tax provision contravenes the freedom of establishment principle

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.

more across site & bottom lb ros

More from across our site

The government’s move is potentially the most seismic shift to VAT since it was first introduced, one expert argues
There has been a decrease in investigations known as Code of Practice 8 and 9 cases, it has been reported
The Caribbean country became the 149th member of the international treaty, which aims to combat illicit financial flows
Clients of audit services should also be disallowed access to firms’ other services, it was claimed; in other news, Ireland approves amount B
The ruling follows the Federal Court of Australia’s full court deciding in favour of the soft drink company in June
Sweeping changes are headed for Germany’s TP system in the New Year. Tax teams will need to be well-prepared, say Andreas Katz and Anna Kupprion of Kreston Bansbach
Local experts say the Tax Cuts and Jobs Act is due a revival after Donald Trump won the US presidential election
Slovakia increases VAT rate, Chile goes big on VAT reform and more
Thin capitalisation rules limit the amount of debt deductions that can be claimed but regard must also be given to other income tax law provisions, the ATO said
Police may be inside the Sydney office for ‘several days’, PwC Australia’s chief executive officer said
Gift this article