CJ, 04-10-2024, nr. C-585/22

Pursuant to the Court's settled case-law, for national provisions to be considered necessary in the light of the objective of preventing wholly artificial arrangements, designed to escape the tax normally due on the profits generated by activities carried out on the national territory, the application of those provisions must be limited to such arrangements, leaving legitimate transactions aside. 25.

The issue of whether the Netherlands rules satisfy that requirement was left open by the Court in its judgment in X and X. Nevertheless, the intervening governments and the Commission submit that it is satisfied. Indeed, Article 10a(1)(c) of the Law on Corporation Tax covers only transactions which do not reflect economic reality, where intra-group loans are concluded with a taxable entity in the Netherlands for the only (or main) purpose of creating a debt deductible from the taxable profits of that entity, thus, eroding the Netherlands tax base. By contrast, where the loan and associated transaction predominantly rest on valid commercial reasons, that provision does not apply, according to Article 10a(3)(a) of that law.

X disagrees. In its view, the opposite conclusion is set out in the judgment in Lexel. In that case, the Court reviewed the compatibility with Article 49 TFEU of the Swedish rules on corporate tax, specifically the provisions on deduction of interest expenses. Much like the Netherlands rules, those provisions stated, in substance, that such a deduction was, by way of an exception, not allowed where the taxable entity had taken the loan in question with a related entity, unless it was shown that that loan was justified primarily on commercial grounds and, thus, had not been concluded just to create a deductible debt. There as well, the Swedish Government argued that those provisions aimed at preventing wholly artificial arrangements designed to escape the tax normally due on the profits generated by activities carried out on the national territory. The Court considered that the Swedish provisions could not be justified on that ground because, in its view, their application was not limited to such arrangements. The Court stated the following in that regard:

In X's view, it follows that national tax authorities cannot consider an intra-group loan (or the series of transactions it is part of) to be a wholly artificial arrangement and refuse, on that ground, the deduction of interest, simply because that loan was contracted for tax reasons. It would be perfectly legitimate for a group to do so. Such a loan would be artificial only if, and in so far as, the interest paid by the borrowing company to the lending company exceeds what those companies would have agreed upon on an arm's length basis, that is to say if the applicable interest rate is higher than the market rate those companies would have agreed on if they had not formed part of the same group. By contrast, if such a loan is carried out on an arm's length basis, then, irrespective of its purpose, it cannot be regarded as artificial. That is the case with respect to the loans concluded between X and F. 26.

Still in the appellant's view, because Article 10a(1)(c) and (3) of the Law on Corporation Tax erroneously focuses on the purpose for which an intra-group loan had been contracted (whether it is tax avoidance or commercial reasons) instead of the terms applicable to that loan, the deduction of interest may be refused not only in relation to loans with excessive interest rates (which are artificial, as explained above), but also in relation to loans to which the usual market rate applies (and which, for that reason, cannot be regarded as such). Hence, just like in the case that led to the judgment in Lexel, the scope of those provisions is not limited to wholly artificial arrangements, but encompasses legitimate transactions as well.

That debate is at the heart of the first question of the referring court. Clearly, one cannot determine whether Article 10a(1)(c) of the Law on Corporation Tax applies only to ‘wholly artificial arrangements’ if the very meaning of that concept is in dispute. It is equally clear that the intervening governments and the Commission, on the one hand, and X, on the other, suggest very different approaches in that regard. The first approach consists in focusing on the purpose for which a loan was contracted. The second one focuses only on the terms applicable to that loan. The first approach gives the Netherlands tax authorities a significantly wider margin of manoeuvre than the second, which, conversely, offers more certainty to tax payers. 27. Under the first approach, national tax authorities can characterise an intra-group loan as a ‘wholly artificial arrangement’ (or as a part of such an ‘arrangement’) and refuse, on that ground, the deduction of interest, if it was taken for the main purpose of obtaining a tax advantage, irrespective of the terms applicable to the loan. Under the second approach, an intra-group loan is ‘immune’ against such consequences as long as its terms, including the interest rate, are, so to speak, ‘normal’, even if it was put in place for tax purposes.

At this stage, I wish to highlight that, while the intervening governments and the Commission spent a significant part of their respective submissions explaining that ‘their’ approach is not contrary to the judgment in Lexel because (i) the present case should be distinguished from the case that led to that judgment and/or (ii) that judgment cannot be read in the way suggested by X, I am not convinced by those explanations. It follows from point 66 above that, on all relevant aspects, 28. the contested provisions of Netherlands law bear a striking resemblance to the rules at issue in Lexel. Notably, those rules have an identical target: intra-group loans taken for the sole (or main) purpose of obtaining a tax advantage. The general issue, thus, is the same: if, and to what extent, such a loan can be regarded as a ‘wholly artificial arrangement’ (or as a part of such an ‘arrangement’) and treated as such by tax authorities. Furthermore, the judgment in Lexel is neither vague nor ambiguous and, thus, open to different readings on that issue. In my view, it can only be read in the way that X understood it. 29. The Court considered, indeed, that the purpose for which the loan was concluded is not relevant and, instead, distinguished between loans contracted on an arm's length basis (which it regarded as genuine) and those which are not contracted on such basis (which it regarded as artificial). Therefore, the only question left is whether the Court should, in the present case, confirm Lexel, or depart from it.

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.

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.

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.

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 scheme which has as its primary objective or one of its primary objectives the artificial transfer of the profits made by way of activities carried out in the territory of a Member State to [another country] with a low tax rate’.

That interpretation is equally valid, in my view, with respect to the intra-group transactions covered by the freedom of establishment. Indeed, that interpretation is perfectly in line with the explanation given in point 73 above. Furthermore, with respect to national legislation tackling intra-group transactions, such as the contested Netherlands rules, free movement of capital and freedom of establishment are inextricably linked. It is because capital cannot circulate freely between companies of the same group that freedom of establishment is restricted. Thus, those rules could, theoretically, be reviewed under either fundamental freedom. Hence, there is no reason to apply different criteria depending on the applicable freedom.

In sum, as the intervening governments and the Commission submit, in order to determine whether an intra-group loan constitutes (or is a part of) a ‘wholly artificial arrangement’, the objective pursued by the economic operators in question is decisive. An intra-group loan constitutes such an ‘arrangement’ where that transaction was carried out for the sole (or main) purpose of benefiting from a tax advantage (such as the deduction of the interest on that loan from taxable profits), as demonstrated by the fact that it is otherwise devoid of economic and/or commercial justification (or, stated differently, ‘does not reflect economic reality’). Whether that is the case requires an overall assessment of the relevant facts and circumstances of the case. 34.

As the Netherlands Government observes, and as the Court implied in the judgment in Test Claimants in the Thin Cap Group Litigation, 35. two scenarios may be distinguished in that regard.

On the one hand, an intra-group loan concluded for valid economic and/or commercial reasons may contain specific terms which do not ‘reflect economic reality’. An excessively high interest rate may be agreed (artificially, since the group is, ultimately, paying that interest to itself) in an otherwise legitimate transaction with the aim of benefiting from a correspondingly high tax deduction in the Member State where the borrowing company is established. The arm's length principle (that is, whether unrelated companies would have agreed on the same terms in comparable circumstances) serves as an objective benchmark to determine whether that is indeed the case. 36.

On the other hand, related companies may also conclude a loan which is overall devoid of economic and/or commercial justification, for the sole (or main) purpose of generating interest payments in the seat of the borrowing company. Contrary to what the Court ruled in paragraph 54 of the judgment in Lexel, and as indicated in point 76 above, that motive, demonstrated by that absence of justification, is a decisive consideration. For that very reason, such a loan must be regarded as ‘wholly artificial’. Whether the terms applicable to that loan correspond to those that would have been agreed by unrelated entities in similar circumstances is, by contrast, an irrelevant consideration. As the Netherlands Government submits, such a loan cannot be regarded as ‘reflecting economic reality’ simply because the applicable interest rate is set at market value. In fact, that loan does not ‘reflect economic reality’ because, but for the relationship between the companies and the tax advantage sought, it would never have been taken. 37. Such artificially generated debts are precisely the target of Article 10a(1)(c) of the Law on Corporation Tax.

As the intervening governments and the Commission observe, if intra-group transactions devoid of economic and/or commercial justification could never be regarded as ‘wholly artificial arrangements’ where they are carried out in an arm's length basis, that would seriously impede the potential for national tax authorities to combat abusive tax avoidance. The arm's length principle would, effectively, be turned into an undesirable ‘safe harbour’ for multinational groups. Their astute tax advisers would be free to conjure up all sorts of convoluted arrangements designed for the sole purpose of eroding a company's corporate tax liability in a Member State and transferring its profits to another State with a lower tax rate. As long as those advisers cleverly stipulate terms therein reflecting the ones usually found on the market, those arrangements would be ‘immune’ from counteracting measures by tax authorities. 38.

That would be all the less desirable given the fact that national tax authorities have, under the general principle of prohibition of abuse of EU law, not merely the right, but the duty to prevent tax advantages being obtained through ‘wholly artificial arrangements’. Indeed, effective measures against tax avoidance are essential not only to ensure the sovereign right of the Member States to tax income and profits generated in their territory, but also for the functioning of the internal market, generally. Abusive tax avoidance threatens the economic cohesion and the proper functioning of the internal market, by distorting the conditions of competition. 39.

In fact, the growing impact of tax base erosion and profit shifting strategies by multinational groups on the public treasury of the Member States and the functioning of the internal market led the European Union to deal with this matter. The EU legislature has adopted various measures in that regard, including Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market 40. (‘the Anti Tax Avoidance Directive’). 41. That directive contains, in Article 6, a ‘general anti-abuse rule’, drafted in the light of the case-law of the Court referred to in point 73 above, and which should be interpreted accordingly. 42. If national tax authorities could not treat intra-group transactions devoid of economic and/or commercial justification as ‘wholly artificial arrangements’ where they are carried out at an arm's length basis, that policy would be undermined. Furthermore, the ‘anti-abuse rule’ in question would lose a significant part of its effectiveness. A great deal of transactions put in place not ‘for valid commercial reasons which reflect economic reality’ but ‘for the main purpose … of obtaining a tax advantage’ (to use the terms of that provision) would be out of its reach.

For the reasons set out above, I am of the view that the Court should, in the present case, depart from paragraphs 53, 54 and 56 of the judgment in Lexel. 43. Intra-group loans, put in place without any valid commercial and/or economic justification for the sole (or main) purpose of creating a deductible debt in the seat of the borrowing company constitute ‘wholly artificial arrangements’, whether or not they are carried out on an arm's length basis. National provisions which target such loans must be considered necessary in the light of the objective to prevent those ‘arrangements’.

With that being clarified, some final arguments brought forward by X concerning the scope of Article 10a(1)(c) of the Law on Corporation Tax remain to be examined.

First, X submits that the Netherlands tax authorities may apply that provision to an ill-defined range of intra-group transactions because its scope depends on a condition formulated in vague and ambiguous terms, namely whether or not the loan and the associated legal transaction ‘are predominantly based on commercial considerations’ (under Article 10a(3)(a) of that law). For that reason, the contested Netherlands rules do not comply with the principle of legal certainty, as companies could not foresee with sufficient precision which transactions could be regarded as abusive by the tax authorities.

Pursuant to the settle case-law of the Court, the principle of legal certainty requires, most notably, that rules of law be sufficiently clear, precise and predictable in their effect, especially where they have negative consequences on taxpayers. 44.

In that regard, I would observe that the contested Netherlands rule are formulated much like other anti-abuse clauses found in national law and EU law. In particular, the application of the ‘general anti-abuse rule’ laid down in Article 6 of the Anti Tax Avoidance Directive to a given transaction similarly depends on whether that transaction was made ‘for valid commercial reasons which reflect economic reality’ and not ‘for the main purpose … of obtaining a tax advantage’. Admittedly, those are open concepts which, by nature, create some degree of uncertainty as to their scope. Furthermore, as I indicated in point 76 above, whether such conditions are fulfilled in a given case requires a case-by-case, overall assessment of a set of facts and circumstances, which also creates some degree of uncertainty.

Nevertheless, that degree of uncertainty is an unavoidable and acceptable side effect of such anti-abuse provisions. As Advocate General Kokott observed in her Opinion in 45. ‘legislation aimed at counteracting abusive practices must inevitably have recourse to imprecise legal concepts in order to cover the greatest number of conceivable arrangements created for the purposes of tax avoidance’. Furthermore, those provisions are meant to tackle conduct which is disguised as legitimate and is, thus, complex to apprehend.

It does not follow that the application of such a legislation is left to the complete discretion of the tax authorities, making it unpredictable in its effects. As the referring court and the Netherlands Government indicate, whether a given arrangement is ‘wholly artificial’ is determined on the basis of objective and verifiable elements. 46.

As indicated in point 79 above, the decisive question is whether, but for the relationship between the companies and the tax advantage sought, the intra-group loan in question would never have been taken. The type of analysis to be carried out under such a test is sufficiently clear. The assessment of the relevant facts and circumstances involves an examination of the overall structure and apparent purpose of the arrangement whose that loan forms part. As the referring court indicates, the questions are essentially the following: had the tax advantage not been there, would the taxpayer concerned have had an interest in setting up the arrangement in question? Does the structure of the arrangement appear, in the light of its stated purpose, overly complex and, especially, includes steps which appear (if were not for their impact on tax liability), unnecessary? These are questions that should not be difficult to address for tax professionals and multinational groups of companies, who can regulate their conduct accordingly. 47.

In the case in the main proceedings, the referring court and the Netherlands Government explain that, while the acquisition of an external entity and the taking of a loan for that purpose by a taxable entity with a related entity are generally regarded as ‘predominantly based on commercial considerations’ within the meaning of Article 10a(3)(a) of the Law on Corporation Tax, the arrangement surrounding the acquisition of F by X has been seen as ‘wholly artificial’ because of its complex nature and the (apparently) unnecessary steps involved. Those steps were, I recall, (i) the redirection of A's own funds towards C; (ii) the subsequent conversion of those funds into a loan granted to X; (iii) the acquisition of F by X; and (iv) the constitution of a single fiscal unit between F and X, so that the interest charges paid by X to C could be deducted from the taxable profits generated by F in the Netherlands. 48.

In particular, the fact that the loan granted to X was provided with funds ‘redirected’ from A taints, prima facie, the whole arrangement. It begs the question of whether that loan was really needed and why it was X, instead of A, that acquired F. The Commission submits that, in a counterfactual scenario reflecting economic reality, F would have been acquired by A and, as such, fewer steps would be involved in that acquisition. However, in that scenario, X would pay, with respect to the profits generated by it and F in the Netherlands, dividends to A. Such a distribution would not entail a reduction of the corporate tax liability in the Netherlands. By contrast, under the arrangement pursuant to which F was acquired by X through a loan granted by C with funds redirected from A, because X deducted the interest on that loan from the taxable profits generated by it and F in the Netherlands, the tax liability of those two companies in that Member State was reduced to almost zero. 49.

In such a situation, the referring court and the Netherlands Government highlight that it is for the taxpayer to justify, to a plausible degree, the economic and/or commercial reasons underpinning the steps of the arrangement and, in particular, the ‘redirection’ of the funds lent. In accordance with the case-law of the Court, the taxable person is duly given the opportunity, without being subject to undue administrative constraints, to provide evidence in that regard. 50. Furthermore, if the tax authorities, in the light of the explanations and evidence provided by the taxpayer, still considers the arrangement to be artificial, the latter can challenge those authorities' decision before the courts. Simply, X did not manage to provide such evidence in the case in the main proceedings, and the national courts confirmed the tax authorities' decision.

X replies that the issue of which economic and/or commercial reasons can validly be advanced to justify such a ‘redirection’ of funds is unclear in the practice of the Netherlands tax authorities and courts. Until now, explanations have always been rejected. Furthermore, those authorities and courts fail to take into account, in that regard, considerations pertaining to the structure of the group at issue, such as the fact that the lending company generally plays (like C in the present case) a key role in the financing of that group. 51.

In my view, there will always be grey areas in the operation of an anti-abuse clause such as Article 10a(1)(c) of the Law on Corporation Tax. This does not make that rule incompatible with the principle of legal certainty. In the present case, the practice of the tax authorities and the Netherlands courts will progressively clarify the issue highlighted by X. In that regard, I will limit myself to observing that, when evaluating whether an arrangement should be regarded as artificial or economically justified, tax authorities and courts should consider all valid economic reasons, including financial ones. 52. It cannot be excluded that the reason advanced by X qualifies as such. It would be for the referring court to assess the matter.

Secondly, X contests the allocation of the burden of proof under the contested provisions of Netherlands law. Specifically, the appellant submits that Article 10a(1)(c) of the Law on Corporation Tax introduces a general presumption of abuse, going beyond what is necessary to achieve the objective pursued. 53. The Netherlands tax authorities may, on the basis of that provision, refuse a taxable entity the deduction of the interest it pays on an intra-group loan without being required to provide even prima face evidence of abuse, whereas that entity, to obtain that tax advantage, has the burden to prove, under Article 10a(3)(a) of that law, that the loan and the associated legal transaction are predominantly based on commercial considerations.

I disagree. Clearly, where national tax authorities seek to refuse a tax advantage to a taxpayer on grounds of abuse, they have, generally speaking, the burden of establishing that the latter is attempting to obtain that advantage through a ‘wholly artificial arrangement’, taking into account all the relevant facts and circumstances of the case, in the light of the criteria discussed above. 54. It does not mean, however, that Member States are prevented from enacting legal presumptions in their national law, provided that they are specific and rest on sufficient grounds.

In the present case, Article 10a(1)(c) of the Law on Corporation Tax, and the obligation for the tax payer to justify that the arrangement in question is genuine, apply, in principle, only in cases where an intra-group loan has been concluded by a taxable entity with a related entity established in another Member, in which the interest charges collected by the latter are not taxed, or not taxed at a reasonable rate. 55. Those specific circumstances can legitimately be regarded as indications of conduct that might amount to abusive tax evasion, justifying a reversal of the burden of proof. 56.

Once the national tax authorities have determined that such an intra-group loan falls within the scope of that provision and, thus, might have been concluded for tax avoidance purposes, it is not excessive for those authorities to require the taxpayer to adduce evidence of the economic and/or commercial character of the arrangement and to refuse the deduction of the interest on that loan where it fails to do so. 57. After all, the taxpayer is best placed to furnish explanations and evidence of the motives of the transactions it carries out. Besides, the Court has repeatedly ruled that ‘there is no reason why the tax authorities concerned should not request from the taxpayer the evidence that they consider they need for a concrete assessment of the taxes … concerned and, where appropriate, refuse the [advantage] applied for if that evidence is not supplied’. 58.

Pursuant to Article 10a(1)(c) of the Law on Corporation Tax, where an intra-group loan is found to constitute a wholly artificial arrangement (under the conditions discussed in the previous subsection), the deduction of the interest on that loan is disallowed in full when determining the profits of the borrowing taxable entity in the Netherlands.

While the referring court considers that such a consequence logically follows from the finding of artificiality of the loan, it nevertheless wonders (specifically, by its second question) whether, in the light of paragraph 51 of the judgment in Lexel, a complete refusal of the right to a deduction goes beyond what is necessary to achieve the objective pursued. Indeed, the Court stated, in that paragraph, that, where tax authorities take the view that a loan concluded by a taxable entity with a related entity represents a wholly artificial arrangement, ‘the principle of proportionality requires that the refusal of the right to a deduction should be limited to the proportion of that interest which exceeds what would have been agreed had the relationship between the parties been one at arm's length’. 59.

I agree with the intervening governments and the Commission that that is not the case. In that respect, the two scenarios mentioned in points 78 and 79 above should be distinguished here as well.

On the one hand, where artificiality consists in the unusually high interest rate stipulated in an otherwise genuine intra-group loan, the answer in accordance with the principle of proportionality is to proceed to a correction concerning the fraction of interest charges that is above the usual market rate. It would go beyond the objective of preventing wholly artificial arrangements to refuse all deduction on that interest.

On the other hand, where the loan is, in itself, devoid of economic and/or commercial justification and, but for the relationship between the companies and the tax advantage sought, would never have been taken, it is perfectly logical and proportionate to refuse the deduction of the whole interest, not a mere fraction of it. Such a wholly artificial arrangement must, indeed, be ignored by the tax authorities when calculating the corporate tax due. Without the loan, there is no interest to deduct.

If tax authorities were to refuse deduction of only a fraction of the interest on the loan in the second scenario, the coherence of the anti-abuse regime would be called into question. Indeed, a part (or even the entire) tax advantage sought through abusive means would end up being granted to the taxpayer, contrary to the objective pursued. 60.