Case C-524/04: Judgment of the Court (Grand Chamber) of 13 March 2007 (reference for a preliminary ruling from the High Court of Justice (Chancery Division) (United Kingdom)) — Test Claimants in the Thin Cap Group Litigation v Commissioners of Inland Revenue (Freedom of establishment — Free movement of capital — Corporation tax — Loan interest paid to a related company resident in another Member State or in a non-member country — Interest treated as a distribution — Cohesion of the tax system — Tax avoidance)
Date: 2007-04-28
Institutions: Court of Justice
Subjects: borrowing, corporation tax, interest, interpretation of the law, multinational enterprise, tax rebate, tax relief, tax system

28.4.2007

EN

Official Journal of the European Union

C 95/5

Judgment of the Court (Grand Chamber) of 13 March 2007
(reference for a preliminary ruling from the High Court of
Justice (Chancery Division) (United Kingdom)) — Test Clai-
mants in the Thin Cap Group Litigation v Commissioners
of Inland Revenue

(Case C-524/04) (1)

(Freedom of establishment — Free movement of capital —
Corporation tax — Loan interest paid to a related company
resident in another Member State or in a non-member country
— Interest treated as a distribution — Cohesion of the tax
system — Tax avoidance)

(2007/C 95/07)

Language of the case: English

Referring court

High Court of Justice (Chancery Division)

Parties to the main proceedings

Applicant: Test Claimants in the Thin Cap Group Litigation

Defendant: Commissioners of Inland Revenue

Re:

Reference for a preliminary ruling — High Court of Justice
(Chancery Division) — Interpretation of Articles 43, 49 and 56
EC — National tax legislation — Ability of a company estab-
lished on national territory to deduct for tax purposes interest
paid on a loan granted by its parent company — Situation
differing according to the State where the parent company
established

Operative part of the judgment

for

resident

1. Article 43 EC precludes legislation of a Member State which
restricts the ability of a resident company to deduct,
tax
purposes, interest on loan finance granted by a direct or indirect
parent company which is resident in another Member State or by a
company which is
in another Member State and is
controlled by such a parent company, without imposing that restric-
tion on a resident company which has been granted loan finance by
that legislation
a company which is also resident, unless,
provides for a consideration of objective and verifiable elements
which make it possible to identify the existence of a purely artificial
arrangement, entered into for tax reasons alone, to be established
and allows taxpayers to produce, if appropriate and without being
to undue administrative constraints, evidence as to the
subject
transaction in question and,
commercial

justification for

first,

the

secondly, where it is established that such an arrangement exists,
such legislation treats that interest as a distribution only in so far
as it exceeds what would have been agreed upon at arm's length.

2. Article 43 EC has no bearing on legislation of a Member State,
such as the legislation referred to in Question 1, where that legisla-
tion applies to a situation in which a resident company is granted a
loan by a company which is resident in another Member State or
in a non-member country and which does not itself control the
borrowing company and where
is
controlled, directly or indirectly, by a common parent company
which is resident in a non-member country.

companies

each of

those

3. In the absence of Community legislation, it is for the domestic legal
system of each Member State to designate the courts and tribunals
having jurisdiction and to lay down the detailed procedural rules
governing actions for safeguarding rights which individuals derive
from Community law, including the classification of claims brought
by injured parties before national courts and tribunals. Those courts
and tribunals are, however, obliged to ensure that individuals have
an effective legal remedy enabling them to obtain reimbursement of
the tax unlawfully levied on them and the amounts paid to that
Member State or withheld by it directly against
tax. As
regards other loss or damage which a person may have sustained by
reason of a breach of Community law for which a Member State is
liable, the latter is under a duty to make reparation for the loss or
damage caused to individuals under the conditions set out in para-
graph 51 of the judgment in Joined Cases C-46/93 and C-48/93
Brasserie du Pêcheur and Factortame [1996] ECR I-1029, but
that does not preclude the State from being liable under less restric-
tive conditions, where national law so provides.

that

Where it is established that the legislation of a Member State
constitutes an obstacle to freedom of establishment prohibited by
Article 43 EC, the national court may, in order to establish the
recoverable losses, determine whether the injured parties have shown
reasonable diligence in order to avoid those losses or to limit their
extent and whether, in particular, they availed themselves in time of
all legal remedies available to them. However, in order to prevent
the exercise of the rights which Article 43 EC confers on indivi-
duals from being rendered impossible or excessively difficult, the
national court may determine whether the application of that legis-
lation, coupled, where appropriate, with the relevant provisions of
double taxation conventions, would, in any event, have led to the
failure of the claims brought by the claimants in the main proceed-
ings before the tax authorities of the Member State concerned.

(1) OJ C 57, 5.3.2005.