On December 5, 2022 in the Official Journal of the European Union the questions that the Dutch Supreme Court referred to the Court of Justice of the European Union (CJEU) in Case C-585/22 for a preliminary ruling were published. On September 2, 2022 the Dutch Supreme Court decided to halt the proceedings and to file pre-judicial questions with the CJEU. The questions were lodged on September 7, 2022.
Introduction
The request for a preliminary ruling brought under Article 267 TFEU concerns the question whether EU law precludes national legislation on the basis of which the deduction of interest in respect of a debt contracted by a taxable person with a related entity for the purpose of acquiring or extending an interest in another entity, which subsequently becomes a related entity, is not possible where there is an artificial arrangement, irrespective of whether the debt concerned was contracted at arm’s length and, in the negative, irrespective of whether companies that are independent of one another would have agreed on a lower interest rate, as well as the question whether it is relevant in this regard that the entity concerned was already an entity related to the taxable person before that acquisition or extension, or only subsequently becomes such an entity.
Facts and procedure in the main proceedings
1 The appellant is a company belonging to a group of affiliated companies consisting of company A, company B and company C. In 2000, the appellant acquired the majority shareholding in company F. Following that acquisition, company F became an entity related to the appellant. The appellant financed this transaction through loans taken out with company C. The latter company granted these loans from its own funds, which it had obtained shortly before through a capital injection by company A.
2 Under the Dutch Wet op de vennootschapsbelasting 1969 (the Dutch corporate income tax Act), when profits are being determined, the interest on debts contracted with a related entity, among other things, may not be deducted in so far as such debts relate to the acquisition or extension of an interest in an entity which, after such acquisition or extension, is an entity related to the taxable person. Where this applies, the deduction of the interest concerned will be disallowed in full, even if those interest expenses are equal to the interest expenses that would have been agreed upon between companies which are independent of one another. This rule applies both to the financing of an acquisition or extension of an interest in an entity that was already an entity related to the taxable person prior to such acquisition or extension (internal restructuring) and to the financing of an acquisition or extension of an interest in an entity that only subsequently becomes an entity related to the taxpayer (external acquisition).
3 However, the deduction of these interest expenses is possible if the taxable person can demonstrate that there are predominantly sound business reasons for the debt and for the associated legal transaction (the acquisition or extension of the interest).
4 This restriction on the deduction of interest aims to prevent the erosion of the Netherlands tax base by completely artificial arrangements, where interest expenses are due on debts contracted arbitrarily and without business reasons.
5 The Gerechtshof (Court of Appeal) held that that legislation is not contrary to EU law because the restriction placed by that legislation on the freedoms enshrined in Articles 49, 56 and 63 TFEU is justified. After all, the aim of that legislation is to prevent the Netherlands tax base from being eroded through abusive practices whereby interest expenses are deducted from profits, whereas in reality those interest expenses do not incur any taxes. According to the Gerechtshof, that legislation is proportionate, as the taxable person has the opportunity to demonstrate that the choice to finance the acquisition or expansion of the interest in question by means of a loan from a related entity is based on commercial considerations.
6 The appellant has lodged an appeal in cassation against that judgment with the referring court (the Dutch Supreme Court).
Questions referred for a preliminary ruling
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?
Copyright – internationaltaxplaza.info
Follow International Tax Plaza on Twitter (@IntTaxPlaza)
