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The “Lexel” case: CJEU ruling on interest deductibility

27/08/21

According to recent CJEU case law (CJEU 20.01.2021, C-484/19, Lexel case), the Swedish limitation on the deduction of interest on intra-group loans restricts the freedom of establishment. This may also influence the interpretation of the Austrian interest limitation rule on low taxed interest stemming from intra-group loans.

The CJEU case Lexel

The Swedish company Lexel, which belongs to a French group, acquired shares within the group in December 2011. To finance this acquisition, Lexel received a loan from a group company resident in France.

The Swedish tax authorities rejected the deduction of interest costs by the Swedish Lexel , though the recipient in France was taxed at more than 10%. In their justification, the tax authorities referred in particular to the applicability of the so-called ‘exception’ for substantial tax benefits laid down in the limitation rule of the Swedish Income Tax Act (ITA).

This exception was introduced with the aim of preventing aggressive tax planning using interest deduction (burden of proof lies with the Swedish interest paying entity). The exception does not apply to comparable circumstances at a national level.

The CJEU has held that the limitation rule treats comparable circumstances in different ways and that this inequality cannot be justified by overriding reasons in the public interest, such as the fight against tax evasion and tax avoidance or balanced allocation of the taxation rights between Member States, and thus restricts the freedom of establishment.

Impacts for Austria

This exception provision tested by the CJEU in the Lexel case is similar to the Austrian interest limitation rule (no interest or royalty deduction if the income on the level of a foreign affiliate recipient is subject to a tax rate of less than 10%). The Austrian limitation rule likewise intends to prevent intra-group profit transfers by means of interest or royalty payments to low tax jurisdictions or jurisdictions providing for special tax regimes. The Austrian limitation rule applies irrespective of whether the intra group loan is at arm’s length and does not provide for any exception for non-tax related reasons (no good faith/ ‘bona fide’ clause).

Due to the similarity with the Swedish exception, the conformity of the Austrian limitation rule for low taxed interest or royalties with European Union law should be critically examined, not least because it lacks exceptions for arm’s length loans and ‘bona fide’ cases; vice versa it does not only cover purely artificial arrangements (and thus could be excessive). Any response of the Austrian tax authorities and Austrian legislators remains to be seen.

Hence, where companies are affected by the Austrian limitation rule in a case that is (1) obviously at arm’s length, (2) non-abusive, and (3) features EU/EEA loan/IP-structures, critical examination is recommended. In particular, it is worth considering whether and (if yes) how non-application of the rule might be justifiable in the light of its potential conflict with European Union law.

Further information on the case law can be found in the following newsletter.

Authors: Richard Jerabek & Martina Gruber

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