On May 12, 2016 the Advocate General (AG) Juliane Kokott of the Court of Justice of the European Union (CJEU) rendered her opinion on the questions referred in the Masco Denmark ApS and Damixa ApS v Skatteministeriet case (C-593/14).
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On May 12, 2016 the Advocate General (AG) Juliane Kokott of the Court of Justice of the European Union (CJEU) rendered her opinion on the questions referred in the Masco Denmark ApS and Damixa ApS v Skatteministeriet case (C-593/14). The case concerns Danish rules, which allow for a tax exemption on interest income if the corresponding interest deduction is denied due to thin capitalization rules, but in effect only if the debtor company is resident in Denmark. The AG concluded that this difference in treatment did not constitute a restriction on the freedom of establishment. Furthermore, even if the difference in treatment was found to constitute a restriction, the AG held that the restriction could be justified based on the balanced allocation of taxing rights as well as the coherence of the tax system.
Under Danish corporate tax rules, interest income is tax exempt at the level of a resident creditor company if the corresponding interest deduction at the level of a resident debtor company is disallowed due to domestic Danish thin capitalization regulations. The income is however not exempt when the related-party debtor is resident in another Member State and the interest deduction is disallowed under that relevant Member State’s rules on thin capitalization.
The AG concluded that there is no restriction on the freedom of establishment. The difference in treatment resulted from the exercise in parallel by two Member States of their fiscal sovereignty, and was therefore protected by the principle of autonomy.
It remains to be seen if the Court will agree with how the AG applies the principle of autonomy and the potential justifications, in particular as regards the balanced allocation of taxing rights under the EU Interest Royalty Directive, as it is questionable to what extent this directive actually supports this argument. In particular, the CJEU decision may shed light on how the principle of autonomy relates to case-law under the Manninen-doctrine.
Should you have any queries, please do not hesitate to contact KPMG’s EU Tax Centre, or, as appropriate, your local KPMG tax advisor.