BDO Corporate Tax News

European Union - Netherlands: AG opines on the Dutch interest expense deduction limitation rule: Does this portend a shift in interest deductions for EU businesses?

Advocate General (AG) Emiliou of the Court of Justice of the European Union (CJEU) released his opinion on 14 March 2024 in a case concerning the compatibility of the Dutch interest expense deduction limitation in article 10a of the Corporate Income Tax Act with the freedoms under the EU treaty. Article 10a is designed to prevent erosion of the tax base and disallows the deduction of interest on loans from related parties based on a presumption that such loans are aimed at artificially lowering the tax base even if the transaction was on arm’s length terms. A taxpayer can avoid forfeiting the deduction if it can demonstrate that there are predominantly sound business reasons for the debt and the “tainted transaction.”
In 2021, the CJEU ruled in the Lexel case that Sweden’s interest expense deduction limitation rule, which also aims to combat the artificial lowering of the tax base and has similarities to the Dutch rule, is incompatible with EU law because it targeted more than purely artificial arrangements. Like the Dutch rule, the Swedish rule disallowed a deduction where the taxable entity obtained the loan from a related entity and also encompassed transactions that were conducted on arm’s length terms. (The taxpayer could rebut the presumption of an artificial arrangement if it could show that the loan was justified primarily on commercial grounds and was not concluded to create deductible debt.) The CJEU decision seems to imply that intragroup transactions—such as obtaining a related party loan—cannot be considered wholly artificial arrangements if the transactions are carried out on an arm’s length basis. Since that decision, there has been uncertainty in the Netherlands as to whether the Dutch rule is fully in line with EU law.

To put an end to this uncertainty, in 2022, the Dutch Supreme Court asked the CJEU to clarify whether the Dutch interest expense deduction limitation complies with EU law, particularly the freedom of establishment (for prior coverage, see the tax alert dated 16 September 2022). Notably, the CJEU was asked to clarify its findings in Lexel on whether such intragroup loans may be regarded as wholly artificial arrangements even if carried out on arm’s length terms and the interest is set at the usual market rate.
AG opinion
AG Emiliou first states in his opinion that article 10a of the Dutch Corporate Income Tax Act does fall within the scope of the EU freedom of establishment and that the Dutch rules restrict that freedom, but that the restriction can be justified based on the need to combat tax avoidance. However, the AG is of the opinion that because of the similarity of the Dutch interest expense deduction limitation to the Swedish rule in the Lexel case, the Dutch measure complies with EU law and can be justified but the AG recommends that the CJEU revisit its approach in Lexel, i.e., that intragroup loans cannot be regarded as wholly artificial if they are carried out on an arm’s length basis and thus interest on these loans should be deductible. It is the AG’s opinion that intragroup loans concluded without a valid commercial and/or economic justification for the sole (or main) purpose of creating deductible debt constitute “wholly artificial arrangements,” regardless of whether the loans are on arm’s length terms.
Key takeaways
For EU taxpayers, especially those involved in cross-border business activities, AG Emiliou’s opinion—if followed by the CJEU—has potentially far-reaching consequences. The AG opinion advocates for a nuanced approach, suggesting that the CJEU should examine not only the financial terms (i.e., the arm’s length nature) of the loan in order to receive the interest expense deduction, but also the underlying intent, i.e., whether the loan serves a legitimate commercial purpose or is primarily aimed at obtaining tax benefits.

The CJEU is not obliged to follow AG Emiliou’s opinion. A decision by the court that the Dutch rule violates EU law could necessitate a strategic overhaul in how businesses finance their EU-wide expansions/acquisitions and document their arrangements. This possible outcome underscores the EU's intensified efforts to clamp down on tax avoidance, potentially challenging businesses to adapt their tax planning and corporate structuring strategies in response. Potentially affected taxpayers may wish to consider a strategic review of their planning and structures and should closely monitor future developments in this case.

Frederik Boulogne
Lisanne Rijff
BDO in Netherlands
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