Supreme Court asks CJEU on interpretation of Lexel judgement


On Friday 2 September 2022, the Dutch Supreme Court asked preliminary questions to the CJEU in the PwC case of the Belgian coordination centre where the interest deduction in the Netherlands in respect of an acquisition debt was at issue. The questions concern the interpretation of the CJEU judgement in the Lexel case with respect to article 10a of the Dutch Corporate Income Tax Act (CITA). The Supreme Court decided to stay the proceedings in this PwC case pending the answers of the ECJ. In this article, we explain which preliminary questions the Supreme Court has asked and what consequences the line of reasoning of PwC may have for your company.


Facts of the case

The interested party in this case is X BV, which, together with its Belgian parent company, acquired a company from a third party. After an internal restructuring, X BV ultimately owns all the shares in the acquired company. X BV financed this acquisition with three loans granted from the equity of a Belgian finance company that is also part of the group. The financing is thus internal. The Belgian company is a so-called “coordination centre” under Belgian law, to which a favourable tax regime applied at the time. The interest income was relatively low taxed in Belgium. On the other hand, X BV incurred interest expenses that it sought to deduct in the Netherlands. X BV did not deduct the interest on one of the loans for the period 2002 to 2006 because, in its opinion, the deduction was limited by law. For the later period and with regard to the other two loans, X BV did claim interest deduction. The interest deduction on all three loans is in dispute, with the Dutch tax authorities being of the opinion that the interest deduction is limited by article 10a CITA.


The interest deduction limitation under article 10a CITA

The Dutch legislator has introduced various rules to limit interest deductions, including Article 10a of the Dutch CITA. This article aims to protect the Dutch tax base from being artificially eroded by the creation of interest expenses within a group of affiliated taxpayers.

In short, these rules prohibit the deduction of interest on loans to affiliated companies that are used to finance, among other things, dividend payments, capital repayments, or the acquisition or expansion of shares in a company that is deemed to be an affiliated company of the taxpayer after acquisition (so-called 'tainted transactions'). The present situation concerns the acquisition/expansion of an interest in a company in connection with an acquisition.

However, interest paid on intercompany loans used to finance tainted transactions remains deductible (among other things) if the taxpayer can demonstrate that the transaction and its financing are predominantly based on business motives (rebuttal rule). Based on Dutch tax law, it must then be demonstrated that both the transaction and the financing are at arm's length (the 'double arm's length requirement'). The question in the present case is whether this double requirement is in line with EU law. 


CJEU Lexel

In the Lexel judgement, the CJEU considered that related transactions that are 'at arm's length' are, by definition, not entirely artificial and that, in such cases, no abuse of rights can be established (paragraph 56 of the CJEU judgement). Affiliate transactions are 'at arm's length' if commercial prices are charged. On this basis, a restrictive national anti-abuse provision, like article 10a CITA, may not be justified by reference to combating abuse. In addition, according to the CJEU, it follows from EU law that if there is no commercial reason for a certain (legal) structure, the proportionality principle prescribes that the deduction of interest is only limited to the extent that it is not at arm's length. As such and assuming that in the present case the interest and the conditions of the loan are at arm's length, article 10a CITA should not restrict the deduction of the interest.


Preliminary questions Dutch Supreme Court

The questions of the Dutch Supreme Court to the CJEU concern the interpretation of the Lexel judgement and its effect on article 10a CITA In essence, the core question is whether the freedom of establishment (Art. 49 TFEU), services (Art. 56 TFEU) and capital movements (Art. 63 TFEU) (together 'the EU freedoms') and article 10a CITA can coexist or whether the application of article 10a is limited by these freedoms. More specifically, the Dutch Supreme Court asks whether it is contrary to the EU freedoms to limit interest in the case of a loan that is part of a completely artificial construction, regardless of whether the loan concerned, viewed in isolation, has been contracted at market conditions - i.e. at arm's length. If the answer to this question is negative, the Supreme Court asks whether it is perhaps contrary to the EU freedoms if the entire interest expense is deducted, even if that interest does not exceed the amount that would have been agreed upon between independent companies. 

Finally, the Supreme Court asks whether the answers to the first two questions would be different in (1) the event of an internal acquisition/expansion or in (2) the event of external acquisition.

The Supreme Court considers the request to answer these questions justified in view of:

  1. the divergent views in the literature on the impact of the CJEU judgement in Lexel on article 10a CITA,

  2. the EVA judgement in PRA Group Europe AS, and

  3. the fact that the Swedish provision in Lexel only applied to internal acquisitions (as opposed to Article 10a Vpb which applies to both internal and external acquisitions).


What’s next?

It is now up to the CJEU to answer the questions and thus decide whether article 10a CITA is compatible with EU law. This will probably take about 1.5 to 2 years. First a case number will be assigned, then - in our estimation - an A-G opinion will be published and finally the ruling of the CJEU. Then the Dutch Supreme Court will rule with the answer of the CJEU in mind. We will inform you as soon as these steps take place.

Impact of the judgement on other jurisdictions

Article 10a Dutch CITA bears similarities to the Swedish Article that was considered incompatible in Lexel. There are also other interest deduction limitation rules in the 27 EU Member States that need to be carefully examined in the light of Lexel. The judgement of the CJEU in the current case will be an important one and may have a considerable impact on the interpretation - or even existence - of this type of interest deduction limitations.



What does this mean for you?

If your company is confronted with an amount of non-deductible interest under article 10a CITA, it is advisable to consult with your advisor in order to preserve rights by objecting to the corporate income tax assessment in which the interest deduction limitation has been incorporated. It may be possible to agree with the Inspector that they will 'stay' the decision on the objection until the CJEU and/or the Dutch Supreme Court have ruled on this (preliminary) procedure.

Contact us

Vassilis Dafnomilis

Vassilis Dafnomilis

Manager Tax, PwC Netherlands

Tel: +31 (0)61 399 87 29

Maarten van Brummen

Maarten van Brummen

Senior Manager, PwC Netherlands

Tel: +31 (0)61 061 65 09

Maarten de Wilde

Maarten de Wilde

Director, PwC Netherlands

Tel: +31 (0)63 419 67 89

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