1. European and International Tax Law
Case: Thin Cap Group Litigation C-524/04
Christian Näkki k90408

2. ParentCo
ParentCo
75%
75% 2 3
75%
Branch
Loan
75%
75%
Loan
Loan
”Borrowers”
75%
75%
Loan
Loan
ParentCo
ParentCo
75% 1
75%

3. Facts
UK Income and Corporation Taxes Act:
Interest payments between same group of companies (control 75% or more) non- deductible for amounts not considered ”arm´s lenght”
Not applicable were payor/payee of interest both liable to UK corporate tax (transfer pricing rules amended in 2004 to include purely domestic situations)
Not applicable if governed by a Double Tax Convention (DTC)
Claimants were refused interest deductions in borrowing subsidiaries
Case before the national court to seek restitution and/or compensation for the tax disadvantages suffered
Main question to the ECJ: Is such legislation contrary to Art. 43, 49 or 56 EC in the depicted situations 1,2 and 3?

4. Proceedings in the ECJ:
Legislation targeted at relations within a group of companies:
Primarily affects the freedom of establishment (Art. 43 EC)
Any restrictions on freedom to provide services (49 EC) or free movement of capital (56 EC) are unavoidable consequenses of any restrictions on freedom of establishment
Is there a restriction on freedom of establishment?
Legislation in force between 1995 and 2004 mainly imposed restrictions on loans granted by non-resident parent companies
Provided documents do not show that legislation + DTCs offsets the tax tax disadvantages of denied interest deductions with an equal tax advantage in the loan giving companys home State
It is enough that the legal provisions are capable of restricting freedom of establishment;no actual effect on company choices regarding establishment in a member State required
Case should be evaluated in light of Art. 43 EC only!
A restriction on freedom of establishment exists

5. Justification Restriction of 43 EC YES
Overriding public interest?
Cohesion of tax system
Direct link between tax levy & advantage (DTC)
No evidence of link
Preventing tax avoidance
Specific objective to prevent artificial arrangements
YES
Proportionate if:
Taxpayer allowed to provide evidence of commercial justification
Applied only to interest over ”arm´s lenght”

6. Outcome 1
UK tax legislation is restrictive on freedom of establishment in
unless grounds for justifications can be proved
No bearing on application of UK tax laws in
43 EC only applies to Community situations
US parent
Loan giving companies dont have influence via ownership in borrowers (are not the parent company of)
49 & 56 EC don´t apply because case to be evaluated in light of 43 EC only
Classifications of claims etc. to be decided by the national courts. 2 3
&

7. NATIONAL LEGISLATION AGAINST Art. 43 EC, unless justifications not met
ParentCo
ParentCo
75%
75%
Loan
Branch 2
NO EFFECT ON NATIONAL LEGISLATION (freedom of establishment only applies to parent companies in Member States) 3
75%
75%
75%
Loan
Loan
NATIONAL LEGISLATION AGAINST Art. 43 EC, unless justifications not met
75%
75%
Loan
Loan
ParentCo
ParentCo
75%
75% 1

8. Risks & opprtunities
Still for the national courts to decide if the breach of Community law has been
Serious enough
Linked by causality to damages suffered
Have the claimants done enough to limit damages
Opportunity to arrange future corporate structures (lender-borrower) in line with the rulings
Easier to identify possible ”hot-spots” in current financing structures
Uncertainty of outcomes on a concrete level remains