Another welcome move from the European Court of Justice

Posted on

The European Court of Justice (ECJ) has ruled on the UK's 'thin capitalisation' tax rules. These attempt to restrict the amount of interest deducted on intra-group loans paid by UK subsidiaries to their overseas parents. This is necessary because the UK has especially generous tax deduction rules in this area, which is part of its appeal to the private equity market.

As Forbes has noted the ECJ has said:

A national measure restricting freedom of establishment may be justified where it specifically targets wholly artificial arrangements, which do not reflect economic reality, with a view to escaping the tax normally due.

This is the crux of the decision. As was also decided with Cadbury Schweppes, what the ECJ is saying is that tax relief is not available if an artificial arrangement has been put in place purely to secure a tax benefit. The deal has to be commercial.

This is incredibly welcome. Slowly but surely the spirit of the law is being built into ECJ decision making, and slowly and surely we are moving to the point where we will have de facto even if not de jure a general anti-avoidance principle in operation. Of course, I'd prefer it to be backed by legislation. But all moves in that direction are welcome. We've now taken another one.


Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:

You can subscribe to this blog's daily email here.

And if you would like to support this blog you can, here: