CFE ECJ Task Force: Opinion Statement ECJ-TF 1/2021 on the ECJ Decision of 20 January 2021 in Lexel AB (Case C-484/19) Concerning the Application of the Swedish Interest Deductibility Rules

The case concerned the Swedish interest deductibility rules. In Sweden, interest payments are generally deductible. As an exception to this rule, interest payments made to an associated company are generally not deductible. Interest may be deductible, however, if the underlying debt is justified on commercial grounds. Interest payments between two Swedish associated companies are always deductible due to the intra-group financial transfer system. The ECJ had to decide whether or not the difference in treatment of interest payments made to other EU companies, in comparison to interest payments made to Swedish companies, can be justified by overriding reasons in the general interest.

The ECJ held that the Swedish rules were not compatible with the freedom of establishment. It held that the different treatment could neither be justified by the need to fight tax evasion and tax avoidance nor by the need to maintain a balanced allocation of the power to impose taxes between the Member States. In addition, the Court also stated that even if the transaction in question represents a purely artificial arrangement, the principle of proportionality requires that interest payments that are in line with the arm’s length principle must be deductible.

The decision is of particular interest as many EU Member States have introduced similar interest deductibility rules. Further, it is of interest in respect of the proposed source state rules under the OECD’s Pillar Two Blueprint. [2.]