ECJ to rule on thin cap case tomorrow

The European Court of
will tomorrow decide whether the UK’s anti-avoidance
measures on intra-company debt are legitimate under European law.

The case, brought by test claimants Lafarge, Volvo,
Pepsi and Caterpillar,
could cost the Uk millions of pounds in tax revenues. This would occur if the
ECJ rules against the measures it has 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.

The advocate general’s opinion preceding the ECJ ruling said the UK’s tax
regime treated UK resident subsidiaries of non-UK resident companies differently
from those of UK resident parents in a way that involved a fiscal disadvantage,
and this might be incompatible with the freedom of establishment.

He added, however, that thin capitalisation legislation can be a
proportionate anti-abuse measure and indicated what features a regime needs to
have to satisfy the requirement of proportionality. He thought that the UK rules
generally met this requirement and ‘by and large’ complied with relevant EU law.

Ashley Greenbank, a partner at law firm
, said a key feature of the judgment would be whether the ECJ places
temporal limitation on its judgment.

‘The UK has asked the Court to place a temporal limitation on its judgment,’
said Greenbank. ‘The advocate general thinks this is unnecessary. In recent
cases, the ECJ has not been persuaded to limit its judgment in this way and may
well decline to do so again.’

Further reading:

ECJ set to rule on thin-cap test case

European law: Sweet victory

Taxpayers win partial victory in thin cap case

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