TaxCorporate TaxECJ sends thin cap cases back to UK courts

ECJ sends thin cap cases back to UK courts

ECJ says UK rules limit freedom of establishment, but should apply to wholly articifial tax set ups

The European Court of
Justice
has sent the multimillion-pound thin cap case back to the
UK courts, where it will be decided when the UK’s thin cap
anti-avoidance rules should apply.

In a decision that closely followed the the advocate general’s opinion on the
case, the ECJ said that the UK anti-avoidance rules should not apply where a
company could show that shifting debt between subsidiaries was done for
commercial purposes. In wholly artificial arrangements the rules could apply.

It would be left to the UK courts to decide when arrangements were
artificial.

‘In order to be justified, those rules must allow the companies concerned to
produce evidence as to the commercial reasons for entering into the
transaction,’ the ECJ said.

Jonathan Bridges, from
KPMG’s EU law team, said
the judgment would see ‘further activity’ in the UK courts and also raised
questions about the recently introduced rules for transfer pricing between UK
companies.

The thin cap case was brought by test claimants Lafarge, Volvo, Pepsi and
Caterpillar, who challenged rules put in place to prevent companies with foreign
subsidiaries from shifting large amounts of debt to the UK in order to maximise
profits in low-tax jurisdictions.

Further reading:

Read
the full judgment

ECJ to rule on thin cap case

Taxpayers win partial victory in thin cap case

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