ECJ imposes ‘commercial’ debt limit

ECJ imposes 'commercial' debt limit

ECJ delivers verdict on thin cap case, with important ramifications for pan-European companies

Companies planning to slash their tax bills by shifting debt to the UK will
have to show that such transactions are strictly commercial, following the
European Court of Justice decision on the thin cap GLO.

In its ruling on the case, brought by test claimants Lafarge, Volvo, Pepsi
and Caterpillar challenging anti-avoidance rules preventing companies from
shifting large amounts of debt to the UK, the ECJ said the UK rules could only
apply if the tax arrangements were not commercially driven.

‘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.

The ECJ referred the case back to the UK courts, where the criteria for what
qualifies as a commercially driven transaction will have to be determined.

In a boost for the UK government, which at one stage feared the GLO could
cost it 300m euros (£205m), the ECJ also introduced a limitation on the number
of companies its judgment would apply too.

The court said that because the thin cap case was brought under the EU
freedom of establishment rules, enshrined in article 43 of the EU treaty, other
articles, such as article 56 on the movement of capital, should not apply to the
case.

Including article 56 would have opened the case to companies outside the EU,
but the decision to cut out such claimants from the thin cap challenge will
limit the impact on the Treasury.

‘Although this is a technical point, it is an important one. The Court will
not tolerate cases challenging the same rules on the basis of various EU
principles. It also means that the scope of today’s ruling is limited to
situations where both the parent and the subsidiary are based in the EU’ said
Jonathan Bridges, of KPMG’s EU law team.

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