Thin Cap Group Litigation (C-524/04)

According to a decision in the above case, the United Kingdom ‘thin capitalisation’ legislation may be applied only to purely artificial tax arrangements.

The United Kingdom tax legislation contains anti-avoidance rules which are targeted at ‘thin capitalisation’. Thin capitalisation involves the financing of a company by way of loan in preference to equity capital, in order to benefit from a more advantageous tax treatment – the interest should be deductible in computing the taxable profits. Up to 2004, the UK restricted the deductibility of the interest where a loan was granted by a non-resident company to a resident subsidiary. The rules did not apply to companies which paid interest to another UK resident company.

The Court held that the UK thin capitalisation rules gave rise to a difference in treatment between resident borrowing companies according to the place in which the lending company has its seat; and that the tax position of a company which pays interest to a non-resident company is less advantageous. Accordingly, the United Kingdom rules relating to thin capitalisation constitute a restriction on the freedom of establishment.

However, similar to the Cadbury Schweppes case on the UK CFC rules, the restriction of freedom of establishment may be justified where it specifically targets wholly artificial arrangements.

A copy of judgement is available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=C-524/04.

Meilicke Judgement (C-292/04)

According to a decision in the above case, a Member State may not reserve tax credits to dividends from “home” capital companies.

This case relates to German tax law which dates back to the 1990s, where persons who were fully taxable for income tax purposes in Germany were entitled to a tax credit for dividends from German companies, but not for dividends from companies established in other Member States.

The ECJ held that the German tax legislation restricts the freedom of movement of capital.

A copy of judgement is available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=Rechercher$docrequire=alldocs&numaff=C-292/04&datefs=&datefe=&nomusuel=&domaine=&mots=&resmax=100.

Rewe Zentralfinanz (Case C-347/04)

The Court held that German legislation which allows a deduction in computing taxable profits for write-downs to the value of shareholdings in a subsidiary constitutes a restriction on freedom of establishment because writedowns in resident and non-resident subsidiaries are treated differently.

This is typical of recent ECJ cases where the decision is almost a foregone conclusion. While Ireland does not have similar legislative provisions, the case makes for interesting reading.

In summary, the German Law on income tax (Einkommensteuergesetz) provides that a parent company established in Germany may deduct from its taxable profits the losses it has incurred in relation to write-downs to the book value of shareholdings in its subsidiaries established in Germany.

Conversely, losses of the same kind stemming from shareholdings in subsidiaries established in another Member State are deductible only where those subsidiaries subsequently generate positive income of the same kind or if they carry on an activity of a commercial nature.

The German legislation constitutes a restriction on freedom of establishment because it discourages the creation of subsidiaries in other Member States. As in recent ECJ cases, the Court also considered whether the restriction was justified and in this case, it ruled that there was no justification.

A copy of the judgement is available at http://curia.europa.eu/jurisp/cgi-bin/form.pl?lang=EN&Submit=rechercher&numaff=C-347/04.