CJEU – Recent Developments in Direct Taxation 2022

Daniel S. Smit/Eric C.C.M. Kemmeren

1. Introduction

It is generally recognised that companies belonging to the same multinational group can finance their activities in two ways: through debt or equity. In virtually all Member States, interest payments on debt are generally tax deductible – as opposed to dividend payments on equity, which are not – although both interest and the normal return on equity are usual forms of remuneration for supplying the funds to finance a company’s capital. It is generally recognised that the choice as to how to finance business activities within a group of companies can be significantly influenced by this different tax treatment between debt and equity, resulting in excessive debt finance. Notably, as concerns interest expenses incurred on loans between companies belonging to the same group, this may easily occur since shareholder-creditors are in a position different from that of unrelated creditors. This is because the shareholder-lender participates in full in the revenue in the case of a profit, whereas he is in a position to claim a refund of the debt in the case of a loss. S. 90A regular lender, on the other hand, never reaps the full upside potential...