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ECJ V Scheuten Solar: Verdict Concluded
On 21 July 2011 the ECJ concluded the Scheuten Solar Technology case. In its tax return, Scheuten Solar, a German corporate tax payer, had to add back 50% of the interest paid on a loan to the parent company in the Netherlands to its tax base for German trade tax purposes. This meant half the interest was effectively non-deductible. Since such payment of interest leads to an additional amount of trade tax (Gewerbesteuer), it was questioned whether this provision was compatible with the EU Interest and Royalty Directive which aims to ensure that certain payments between associated companies shall be only once subject to tax. Taxand Germany and Taxand Netherlands review the outcome of the case.
The Advocate General concluded that the Interest and Royalty Directive does not preclude a provision such as the German add-back rule, in which interest paid by a company located in one Member State to an associated company in another Member state may be added to the tax base.
The Advocate General argued that:
(i) the wording of article 1, paragraph 1, on the Interest and Royalty Directive is not more comprehensive than the wording of the Parent-Subsidiary Directive
(ii) the Interest and Royalty Directive covers only the juridical double taxation and not the economical double taxation.
The ECJ followed the AG in her decision on 21 July 2011. The Court ruled that article 1 of the Interest and Royalty Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, must be interpreted as not precluding a provision of national tax law under which interest paid by a company established in one Member State to an (associated) company in another Member State.
The outcome of the Scheuten Solar case was closely monitored not only in Germany but in other EU member states as well. It was argued that this case potentially could have an impact on the interest deduction limitations existing in various EU Member states such as the Netherlands. The ECJ concluded, however, that the German add-back rule is not in conflict with the Interest and Royalty Directive and followed the opinion of the AG. The outcome of the Scheuten Solar case is certainly a set back for those who argued the Dutch thin-cap rules are not EU proof. Despite this outcome, however, it has to be seen whether other Dutch interest deduction limitations or certain elements included therein could not be contrary of EU rules or with provisions included in tax treaties that the Netherlands has concluded with other countries. The fact that the German Supreme Tax Court brought this case before the ECJ indicates, that there is room for doubt concerning the compatibility of national limitations of interest deduction. It remains to be seen whether similar cases will be brought to the ECJ by other EU member states.
Taxand will continue to inform you should there be new developments that taxpayers should be aware of.
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