Case C‑593/14

Masco Denmark ApS
and
Damixa ApS

v

Skatteministeriet

(Request for a preliminary ruling from the Vestre Landsret)

(Reference for a preliminary ruling — Freedom of establishment — Tax legislation concerning thin capitalisation of subsidiaries — Inclusion in the taxable income of a lending company of the loan interest paid by a non-resident borrowing subsidiary — Tax exemption for interest paid by a resident borrowing subsidiary — Balanced allocation between Member States of the power to impose taxes — Need to prevent the risk of tax avoidance)

Summary — Judgment of the Court (Fourth Chamber), 21 December 2016

Freedom of establishment — Tax legislation — Corporation tax — Tax relief — National legislation exempting interest paid by a resident borrowing subsidiary which is not entitled to deduct that interest from the taxable income of a parent company — Exclusion of that exemption where such interest is paid by a non-resident borrowing subsidiary — Not permissible

(Art. 49 TFEU and 54 TFEU)

Article 49 TFEU, read in conjunction with Article 54 TFEU, must be interpreted as precluding legislation of a Member State which allows a resident company a tax exemption for interest paid by a resident subsidiary, in so far as that subsidiary is not entitled to a tax deduction for the corresponding interest expenditure by reason of the rules limiting the deduction of interest paid in cases of thin capitalisation, but which excludes the exemption that would result from the application of its own thin-capitalisation legislation in the case where the subsidiary is resident in another Member State.

The exclusion of such an advantage for a resident parent company in relation to interest paid to that company by a subsidiary resident in another Member State, in so far as that interest cannot be deducted from the taxable profits of that subsidiary by reason of the legislation of that Member State on thin capitalisation, is liable to render less attractive the exercise by that parent company of its freedom of establishment by deterring it from setting up subsidiaries in other Member States. Such a difference in treatment, resulting solely from the rules in the Member State of residence of the parent company, is permissible only if it relates to situations which are not objectively comparable or if it is justified by an overriding reason in the public interest. Nevertheless, a tax exemption which is intended to avoid a situation in which resident parent companies would be taxed on interest paid to them by subsidiaries of theirs to which they had granted loans in cases where those subsidiaries were not entitled to a tax deduction, in whole or in part, in respect of the corresponding interest expenditure as a result of rules limiting the right to deduct interest paid in cases of thin capitalisation, means that, on the one hand, the situation in which a resident parent company which has granted a loan to a resident subsidiary that is subject to thin capitalisation rules and, on the other hand, the situation in which a resident parent company which has granted a loan to a non-resident subsidiary that is subject to thin capitalisation rules in the Member State in which it is resident for tax purposes are, in the light of that objective, objectively comparable. In each of those situations, the interest income received by the parent company is liable to be subject to economic double taxation or to a series of charges, which is what the tax exemption for interest income seeks to avoid.

Legislation of a Member State which limits the tax exemption in question solely to interest paid by a resident subsidiary, appropriately ensures a balanced allocation of the power to impose taxes between the Member States concerned. Without that limitation, the Member State in which the parent company is resident would be foregoing, on the basis of the choice made by companies having relationships of interdependence, its right to tax the interest income received by the parent company depending on the rules on thin capitalisation adopted by the Member State of residence of the subsidiary. Thus, freedom of establishment cannot be understood as meaning that a Member State is required to draw up its tax rules on the basis of those in another Member State in order to ensure, in all circumstances, taxation which removes any disparities arising from national tax rules, given that the decisions taken by a company as to the establishment of commercial structures abroad may be to the company’s advantage or not, depending on the circumstances. Accordingly, Article 49 TFEU, read in conjunction with Article 54 TFEU, cannot have the effect of requiring the Member State of residence of a parent company which has granted a loan to a subsidiary resident in another Member State, to go beyond according a tax exemption to that parent company for the amount of interest expenditure which could not be deducted by the subsidiary if the thin capitalisation rules of the first Member State were to be applied.

Nevertheless, where a Member State has a system for preventing or mitigating a series of charges to tax or economic double taxation for dividends paid to residents by resident companies, it must treat dividends paid to residents by non-resident companies in the same way. In that regard, in a situation where a parent company has a subsidiary resident in another Member State which has more stringent rules on thin capitalisation, the granting, by the Member State in which the parent company is resident, of a tax exemption to that parent company for interest paid by that subsidiary up to the amount that the subsidiary was not entitled to deduct under the thin capitalisation rules of the latter Member State would not call into question the balanced allocation of the power to impose taxes and would constitute a measure less restrictive of freedom of establishment than that provided for in the legislation at issue in the main proceedings.

(see paras 27, 28, 30, 31, 38, 40-43, 47, operative part)