Non-Discrimination in European and Tax Treaty Law

I. S. 512Introduction

One of the basic rules of the debtor-creditor relationship is as following: “If a debtor owes thousand dollars it is the debtor’s problem how to repay it but if the debtor owes a million it already becomes a problem of the creditor”. However, the situation changes if the debtor and the creditor are enterprises of the same group of companies, especially if the creditor is a resident of a country with a lower rate of income tax than the country of the debtor. In this case even a loan of million may be a sweetheart deal and at the same time a benefit for both the debtor and creditor: a loan may become an instrument for shifting profits which allows a significant reduction in the overall tax burden for the group to be obtained.

Nevertheless, the state of debtor may be very reluctant to admit such a kind of tax planning as it significantly reduces its tax base. In order to prevent the sort of financial structures which are aimed solely at reducing the overall tax burden of the group many countries have introduced “thin capitalization” rules which in the end may mean that the whole transaction becomes problematic for both the creditor and the debtor.

Thin capitalization rule...