The Netherlands I: X BV, Case C-585/22; Impact of lexel AB on Dutch interest limitation rule

It is generally recognised that companies belonging to the same multinational group can finance their activities in two ways: through debt or equity. In virtually all Member States, interest payments on debt are generally tax deductible – as opposed to dividend payments on equity, which are not – although both interest and the normal return on equity are usual forms of remuneration for supplying the funds to finance a company’s capital. It is generally recognised that the choice as to how to finance business activities within a group of companies can be significantly influenced by this different tax treatment between debt and equity, resulting in excessive debt finance. Notably, as concerns interest expenses incurred on loans between companies belonging to the same group, this may easily occur since shareholder-creditors are in a position different from that of unrelated creditors. This is because the shareholder-lender participates in full in the revenue in the case of a profit, whereas he is in a position to claim a refund of the debt in the case of a loss. A regular lender, on the other hand, never reaps the full upside potential of the injected capital. Thus, from the business perspective of a whole group of companies, it is to a large extent immaterial whether the activities of a single group company are financed with equity or with inter-company debt (if no third-party creditors are involved).
The decision as how to finance business activities within a group of companies may thus be highly motivated by tax considerations. Consequently, taxable income arising in the territory of a (high-tax) Member State and generated by a company forming part of a multinational enterprise could be decreased by allocating inter-company debts to that company. In addition, by providing group-financing services from a low-tax jurisdiction or from a country that applies a favourable regime for the taxation of group interest, taxation of the corresponding interest receivables may also be avoided.
In response, most EU Member States have general and/or specific measures in force which, under certain circumstances, defer or deny the deduction of interest expenses paid on inter-company or third-party loans. The basic rationale behind these measures is often to avoid erosion of the national tax base of the Member State involved as a result of the deduction of interest payments on (excessive) debts. One may think of measures prescribing the application of the arm’s length standard, thin capitalization rules and other specific anti-abuse provisions which aim at combating the deduction of artificially created interest expenses within a group of companies. Also, more general measures are conceivable such as those which limit the deduction of interest to a fixed percentage of a company’s (adjusted) taxable profits, as recently adopted under the Anti-Tax Avoidance Directive , and those which put the tax treatment of interest payments on a par with the tax treatment of dividend payments. Finally, the introduction of source (or origin-based) country taxes that ensure taxation at the level of the creditor could also be considered. Case law of the CJ EU demonstrates that all these measures have to comply with the requirements imposed by the Treaty freedoms.
In the case discussed in this chapter, a specific Dutch anti-base erosion interest limitation rule is at stake. The question is whether this interest limitation rule constitutes a forbidden restriction on the freedom of establishment, the free movement of capital and/or the free movement of services.