62022CJ0585_RES
Case C‑585/22
X BV
v
Staatssecretaris van Financiën
(Request for a preliminary ruling from the Hoge Raad der Nederlanden)
Judgment of the Court (First Chamber) of 4 October 2024
(Reference for a preliminary ruling – Freedom of establishment – Article 49 TFEU – Corporation tax – Intra-group cross-border loan for the purposes of financing the acquisition or the extension of an interest in a company not related to the group concerned that becomes, as a result of that transaction, related to that group – Deduction of interest paid on that loan – Loan contracted on an arm’s length basis – Concept of ‘wholly artificial arrangement’ – Principle of proportionality)
Freedom of establishment – Freedom to provide services – Free movement of capital – Provisions of the Treaty – Examination of a national measure affecting both freedoms – Criteria for determining the applicable rules
(Arts 49, 56 and 63 TFEU)
(see paragraphs 23-25)
Freedom of establishment – Tax legislation – Corporation tax – Intra-group cross-border loan for the purposes of financing the acquisition or the extension of an interest in a company that becomes, as a result of that transaction, related to that group – Complete refusal to deduct the interest on debt in the case of a wholly artificial arrangement – Admissibility – Loan contracted on an arm’s length basis – Interest amount not exceeding that which could be agreed between independent undertakings – Irrelevant
(Art. 49 TFEU)
(see paragraphs 41-46, 49-51, 60, 61, 63-93 and operative part)
Résumé
In a reference for a preliminary ruling from the Hoge Raad der Nederlanden (Supreme Court of the Netherlands), the Court of Justice rules on the compatibility with freedom of establishment of national legislation limiting the deduction of interest paid in respect of an intra-group loan.
X is a company incorporated under Netherlands law which belongs to a multinational group of companies. That group includes, inter alia, companies A and C, both established in Belgium. A is the sole shareholder of X and the majority shareholder of C. In 2000, X acquired the majority of the shares in a company incorporated under Netherlands law, in which A acquired the remaining shares. X financed that acquisition by means of loans contracted with C, which used for that purpose own funds obtained through a capital contribution made by A.
In the corporation tax assessment notice addressed to X for 2007, the Staatssecretaris van Financiën (State Secretary for Finance, Netherlands) refused to deduct the interest paid by that company to C.
X challenged that refusal before the Netherlands courts, the last of which being the referring court. The referring court raises the question of the compatibility of the relevant Netherlands legislation with, inter alia, the freedom of establishment, since that legislation is liable to place cross-border situations at a disadvantage. In accordance with the law on corporation tax, (
1
) interest paid in respect of intra-group debts, which relate, as in the present case, to the acquisition or extension of an interest in an entity that becomes, after that transaction, an entity related to the taxpayer, may only be deducted if the taxpayer demonstrates either that the loan and the related legal transaction are based, to a decisive extent, on economic considerations, or that the tax ultimately levied on the interest results in taxation of at least 10% of the taxable profit determined in accordance with the criteria of Netherlands law. (
2
) According to the referring court, that second condition, laid down in Article 10a(3)(b) of that law, is generally satisfied by resident entities, but is less often satisfied by a non-resident entity.
Nevertheless, the referring court considers that such a restriction is justified by the need to combat tax fraud and avoidance. It asks, however, whether, in the light, in particular, of the judgment in Lexel, (
3
) it must be held that transactions contracted on an arm’s length basis are not, for that reason alone, wholly artificial.
Findings of the Court
In the first place, the Court finds that, although it is applicable without distinction, the Law on Corporation Tax entails a difference in treatment which is liable to have a deterrent effects on the exercise of the freedom of establishment, guaranteed by Article 49 TFEU. If taxation at a rate lower than 10% were not practised under the Netherlands tax regime, which is for the referring court to ascertain, the inevitable and not uncertain consequence of Article 10a(3)(b) of that law would be that that condition would affect only cross-border situations. Only companies established in the Netherlands which pay interest to a related entity established in another Member State may not satisfy that condition where the latter Member State subjects that entity to a lower tax.
Such a difference in treatment is permissible only if it relates to situations which are not objectively comparable or if it is justified by an overriding reason in the public interest and is proportionate to that objective.
In that regard, in the second place, the Court considers that, with regard to legislation which seeks to confer the possibility of deducting, in the context of determining profit, interest on debts due to a related entity only where that loan interest is not generated artificially, a company is not in a different situation merely because the related entity, the recipient of the interest concerned, is established in another Member State, in which that interest is subject to a rate not exceeding 10% on a taxable profit determined according to the criteria of Netherlands law. In such a situation, the loan in respect of which that interest is paid and the related legal transaction may also be based on economic considerations. (
4
)
In the third place, as regards the existence of an overriding reason in the public interest capable of justifying a restriction on the exercise of a freedom of movement guaranteed by the FEU Treaty, the Court notes that Article 10a(3)(b) of the Law on Corporation Tax pursues the objective of combating tax fraud and avoidance and seeks to prevent the group capital from being presented, in a contrived manner, as funds borrowed by a Netherlands entity of that group and the interest on that loan from being deducted from the taxable profit in the Netherlands. That objective also applies to cases where, as in the present case, an entity becomes an entity related to the same taxpayer only following the acquisition or extension of an interest.
In the fourth place, as regards the proportionality of the legislation at issue, the Court notes that it is appropriate for ensuring the attainment of the objective pursued and does not go beyond what is necessary to attain that objective.
First, the legislation at issue in the main proceedings establishes a presumption that interest paid in respect of intra-group loan debts, contracted according to criteria which it lays down as indicators, constitutes or forms part of wholly artificial arrangements. The possibility for the taxpayer to rebut that presumption by demonstrating that the conditions laid down in Article 10a(3)(a) and (b) of the Law on Corporation Tax are satisfied makes it possible to limit the refusal to deduct loan interest solely to situations where the loan is dictated by tax reasons to such an extent that that loan is not necessary for the attainment of economically justified objectives and where it would not have been contracted between entities which have no special relationship.
Second, as regards the question whether transactions established on an arm’s length basis do not, by definition, constitute wholly artificial arrangements, the Court emphasises that the examination of compliance with arm’s length conditions must relate not only to the terms of the loan agreement relating, in particular, to the amount or the interest rate, but also to the economic logic of the loan at issue and the related legal transactions, in order to ascertain the economic reality of the transactions, whose absence constitutes one of the decisive factors in classifying a transaction as a wholly artificial arrangement. In that regard, it cannot be inferred from the judgment in Lexel, which concerned Swedish legislation with different practical consequences, that, in the absence of any economic reason, the mere fact that the conditions of intra-group loan correspond to those which would have been agreed between independent undertakings means that that loan and the related transactions do not, by definition, constitute wholly artificial arrangements.
Third, the Court points out that the refusal of all deduction of interest paid on an intra-group loan would go beyond the objective of preventing wholly artificial arrangements. Where the artificial nature of a given transaction results from an exceptionally high rate of interest on such 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. By contrast, where the loan at issue 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 interest.
Fourth, the legislation at issue in the main proceedings does not appear to be contrary to the requirements arising from the principle of legal certainty either. The Court notes that it is inevitable that a provision prohibiting abusive practices uses abstract concepts in order to cover the greatest number of situations. However, the use of abstract concepts does not mean that the application of that legislation is left entirely to the discretion of the tax authorities, since 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.
(
1
)	Wet op de vennootschapsbelasting 1969 (Law on Corporation Tax of 1969), in the version in force in 2007 (Stb. 2006, no631), (‘the Law on Corporation Tax’).
(
2
)	See Article 10a(3)(a) and (b) of the Law on Corporation Tax.
(
3
)	Judgment of 20 January 2021, Lexel (C‑484/19, EU:C:2021:34).
(
4
)	Within the meaning of Article 10(3)(a) of the Law on Corporation Tax.