SARL Electro Brest had deducted a loss in its taxable income as a result of a debt waiver grranted to a related party. Following an audit the tax authorities disallowed the deduction which they found to be an abnormal act of management and not in compliance with arm’s length principle contained in Article 57 of the General Tax Code. SARL Electro Brest applied to the Administrative Court for a discharge, but in December 2022, the Administrative Court dismissed its application. An appeal was then filed by SARL Electro Brest with the CAA. Judgement of the Administrative Court of Appeal The CAA upheld the assessment of the tax authorities and dismissed the appeal of SARL Electro Brest. Excerpt “5. On the one hand, it is clear from the investigation that SARL Electro Brest holds the entire capital of its subsidiary, but has no commercial relations with it. Although the two companies use some of the same suppliers, they do not have any customers in common. However, the applicant company argues that the debt waiver granted is of a commercial nature on the grounds that a default in payments by its German subsidiary, or even its receivership, would expose it to the risk of severing its commercial relations with its suppliers and in particular Siemens AG. However, neither the alleged default by this subsidiary in the absence of aid, nor the existence of a risk of deterioration in commercial relations with the suppliers of SARL Electro Brest are established by the documents in the file, while it is clear from the investigation that at the date of the assignment of the claim, the main common supplier of the applicant and its subsidiary represented only 11.5% and 9.8% respectively of their respective turnover. It is also clear from the terms of the agreement of 31 March 2017 that the debt waiver was motivated by financial considerations relating to SARL Electro Brest’s desire to balance its subsidiary’s balance sheet with its customers and suppliers. Lastly, although the company alleges that the aid in dispute was granted with regard to its subsidiary’s development prospects, it has not produced any evidence to establish that, at the date on which the debt waiver was recognised, it was intended to safeguard the prospects of an increase in its own sales. In these circumstances, the tax authorities were right to consider that the debt waiver at issue did not constitute deductible commercial assistance within the meaning and for the application of the provisions of Article 39(13) of the French General Tax Code. Consequently, the department was right to reinstate the disputed debt waiver in the applicant company’s results for the purposes of determining corporation tax for the year ended 2016. 6. Secondly, SARL Electro Brest is not entitled to rely, on the basis of Article L. 80 A of the Book of Tax Procedures, on the administrative instruction BOI-BIC-BASE-50-10 relating in particular to the tax treatment of debt waivers, which cannot be regarded as containing an interpretation of tax law different from that applied above. 7. It follows from the foregoing that SARL Electro Brest has no grounds for claiming that, by the judgment under appeal, the Rennes Administrative Court wrongly refused to grant its application. As a result, its application, including its submissions seeking application of the provisions of Article L. 761-1 of the Code of Administrative Justice, must be dismissed.” Click here for English translation Click here for other translation ...

The Supreme Court in the Netherlands requested a preliminary ruling from the European Court of Justice to clarify its case-law on, inter alia, the freedom of establishment laid down in Article 49 TFEU, specifically whether it is compatible with that freedom for the tax authorities of a Member State to refuse to a company belonging to a cross-border group the right to deduct from its taxable profits the interest it pays on such a loan debt.  The anti-avoidance rule in question is contained in Article 10a of the Wet op de vennootschapsbelasting 1969. The rule is specifically designed to tackle tax avoidance practices related to intra-group acquisition loans. Under that legislation, the contracting of a loan debt by a taxable person with a related entity – for the purposes of acquiring or extending an interest in another entity – is, in certain circumstances, presumed to be an artificial arrangement, designed to erode the Netherlands tax base. Consequently, that person is precluded from deducting the interest on the debt from its taxable profits unless it can rebut that presumption. The Dutch Supreme Court (Hoge Raad) asked the European Court of Justice to clarify its findings in its judgment in Lexel, on whether such intra-group loans may be, for that purpose, regarded as wholly artificial arrangements, even if carried out on an arm’s length basis, and the interest set at the usual market rate. “(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?” Opinion of the Advocate General The Advocate General found that the Dutch anti-avoidance rule in Article 10a was both justified, appropriate and necessary – and therefore not in conflict with Article 49 of the TFEU – irrespective of the Court’s earlier judgment in the Swedish Lexel Case. Excerpts “(…) 71. In my view, the approach suggested by the intervening governments and the Commission is the correct one. Consequently, I urge the Court to revisit the approach it took in the judgment in Lexel on the matter at issue. 72. Freedom of establishment, as guaranteed by Article 49 TFEU, offers quite a wide opportunity for tax ‘optimisation’. The Court has repeatedly held that European groups of companies can legitimately use that freedom to establish subsidiaries in Member States for the purpose of benefiting from a favourable tax regime. (30) Thus, as X submits, A could legitimately choose to establish the internal bank of its group, C, in Belgium for that very purpose. Similarly, C may well grant loans to other companies of the group established in other Member States, like X in the Netherlands. Cross-border intra-group loans are not, per se, objectionable. (31) Certainly, such a loan may entail a reduction of the corporate tax base of the borrowing company in the Member State where it is established. Indeed, by deducting the interest on that loan from its taxable profits, that company reduces its tax liability with respect to that Member State. In effect, some of the profits made by the borrowing company are shifted, in the form of interest charges, from the Member State where it is established to the Member State where the lender company has its seat. However, that is something that the Member States must, in principle, accept in an integrated, single market such as the internal market of the European Union. 73. Nevertheless, the Court recognised a clear limit in that regard. It is a general legal principle that EU law, including freedom of establishment, cannot be relied on for abusive ends. The concept of ‘wholly artificial arrangements’ must be read in that light. Pursuant to the settled case-law of the Court, it is abusive for economic operators established in different Member States to carry out ‘artificial transactions devoid of economic and commercial justification’ (or, stated differently, ‘which do not reflect economic reality’), thus fulfilling the conditions to benefit from a tax advantage only formally, ‘with the essential aim of benefiting from [that] advantage’.(32) 74. Furthermore, in its judgment in X (Controlled companies established in third countries), (33) the Court has specified, with respect to the free movement of capital guaranteed by Article 63 TFEU, that ‘the artificial creation of the conditions required in order to escape taxation in a Member State improperly or enjoy a tax advantage in that Member State improperly can take several forms as regards cross-border movements of capital’. In that context, it held that the concept of ‘wholly artificial arrangement’ is capable of covering ‘any ...

The conditions of financial transactions between independent enterprises will be the result of various commercial considerations. In contrast, an MNE group has the discretion to decide upon those conditions within the MNE group. Thus, in an intra-group situation, other considerations such as tax consequences may also be present ...

MNEs are free to organise their business operations as they see fit. Tax administrations do not have the right to dictate to an MNE how to design its structure or where to locate its business operations. In making commercial decisions, tax considerations may be a factor. Tax administrations, however, have the right to determine the tax consequences of the structure put in place by an MNE, subject to the application of treaties and in particular of Article 9 of the OECD Model Tax Convention. This means that tax administrations may make, where appropriate, adjustments to profits in accordance with Article 9 of the OECD Model Tax Convention and other types of adjustments allowed by their domestic law (e.g. under general or specific anti-abuse rules), to the extent that such adjustments are compatible with their treaty obligations ...

The conditions of financial transactions between independent enterprises will be the result of various commercial considerations. In contrast, an MNE group has the discretion to decide upon those conditions within the MNE group. Thus, in an intra-group situation, other considerations such as tax consequences may also be present ...

MNEs are free to organise their business operations as they see fit. Tax administrations do not have the right to dictate to an MNE how to design its structure or where to locate its business operations. In making commercial decisions, tax considerations may be a factor. Tax administrations, however, have the right to determine the tax consequences of the structure put in place by an MNE, subject to the application of treaties and in particular of Article 9 of the OECD Model Tax Convention. This means that tax administrations may make, where appropriate, adjustments to profits in accordance with Article 9 of the OECD Model Tax Convention and other types of adjustments allowed by their domestic law (e.g. under general or specific anti-abuse rules), to the extent that such adjustments are compatible with their treaty obligations ...