Case C-524/04

Test Claimants in the Thin Cap Group Litigation

v

Commissioners of Inland Revenue

Reference for a preliminary ruling from the High Court of Justice of England and Wales, Chancery Division

‛Freedom of establishment — Free movement of capital — Corporation tax — Loan interest paid to a related company resident in another Member State or in a non-member country — Interest treated as a distribution — Cohesion of the tax system — Tax avoidance’

Opinion of Advocate General Geelhoed delivered on 29 June 2006   I-2112

Judgment of the Court (Grand Chamber), 13 March 2007   I-2157

Summary of the Judgment

1. Freedom of movement for persons — Freedom of establishment — Provisions of the Treaty — Scope

   (Arts 43 EC, 49 EC and 56 EC)

2. Freedom of movement for persons — Freedom of establishment

   (Art 43 EC)

3. Freedom of movement for persons — Freedom of establishment — Tax legislation

   (Art 43 EC)

4. Freedom of movement for persons — Freedom of establishment — Provisions of the Treaty — Scope

   (Arts 43 EC and 48 EC)

5. Community law — Rights conferred on individuals — Infringement by a Member State — Obligation to make good damage caused to individuals

   (Art 43 EC)

6. Community law — Rights conferred on individuals — Infringement by a Member State — Obligation to make good damage caused to individuals

1.  Legislation which is targeted only at relations within a group of companies, primarily affects freedom of establishment and should, accordingly, be considered in the light of Article 43 EC. If it were to be accepted that that legislation has restrictive effects on the freedom to provide services and the free movement of capital, such effects must be seen as an unavoidable consequence of any restriction on freedom of establishment and do not justify an independent examination of that legislation in the light of Articles 49 EC and 56 EC.

   (see paras 33, 34, 101)

2.  The mere fact that a resident company is granted a loan by a related company which is established in another Member State cannot be the basis of a general presumption of abusive practices and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty. However, a national measure restricting freedom of establishment may be justified on the ground of prevention of abusive practices where it specifically targets wholly artificial arrangements which do not reflect economic reality and are designed to circumvent the legislation of the Member State concerned and, in particular, to escape the tax normally due on the profits generated by activities carried out on national territory.

   (see paras 72-74)

3.  Article 43 EC precludes legislation of a Member State which restricts the ability of a resident company to deduct, for tax purposes, interest on loan finance granted by a direct or indirect parent company which is resident in another Member State or by a company which is resident in another Member State and is controlled by such a parent company, without imposing that restriction on a resident company which has been granted loan finance by a company which is also resident, unless, first, that legislation provides for a consideration of objective and verifiable elements which make it possible to identify the existence of a purely artificial arrangement, entered into for tax reasons alone, to be established and allows taxpayers to produce, if appropriate and without being subject to undue administrative constraints, evidence as to the commercial justification for the transaction in question and, secondly, where it is established that such an arrangement exists, such legislation treats that interest as a distribution only in so far as it exceeds what would have been agreed upon at arms length.

   Such a difference in treatment between resident subsidiaries which is based on the place where their parent company has its seat constitutes a restriction on freedom of establishment, since it makes it less attractive for companies established in other Member States to exercise freedom of establishment and they may, in consequence, refrain from acquiring, creating or maintaining a subsidiary in the Member State which adopts that measure.

   (see paras 61, 92, operative part 1)

4.  Article 43 EC has no bearing on legislation of a Member State which restricts the ability of a resident company to deduct, for tax purposes, interest paid on loan finance granted by a non-resident company where that legislation applies to a situation in which a resident company is granted a loan by a company which is resident in another Member State or in a non-member country and which does not itself control the borrowing company and where each of those companies is controlled, directly or indirectly, by a common parent company which is resident in a non-member country.

   Where, in such a situation, the Member State which has adopted that legislation treats interest paid by the borrowing company as a distribution, that measure affects freedom of establishment, not as regards the lending company, but only as regards the parent company which enjoys a level of control over each of the other companies concerned allowing it to influence the funding decisions of those companies. In so far as that related company is not established in a Member State for the purposes of Article 48 EC, Article 43 EC is not applicable.

   (see paras 99, 102, operative part 2)

5.  In the absence of Community legislation, it is for the domestic legal system of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights which individuals derive from Community law, including the classification of claims brought by injured parties before national courts and tribunals. Those courts and tribunals are, however, obliged to ensure that individuals have an effective legal remedy enabling them to obtain reimbursement of the tax unlawfully levied on them and the amounts paid to that Member State or withheld by it directly against that tax.

   As regards other loss or damage which a person may have sustained by reason of a breach of Community law for which a Member State is liable, the latter is under a duty to make reparation for the loss or damage caused to individuals under the conditions set out in the case-law of the Court, namely that the rule of law infringed must be intended to confer rights on individuals, that the breach must be sufficiently serious, and that there must be a direct causal link between the breach of the obligation resting on the State and the loss or damage sustained by the injured parties, but that does not preclude the State from being liable under less restrictive conditions, where national law so provides.

   Subject to the right of reparation which flows directly from Community law where those conditions laid down in the case-law are satisfied, it is on the basis of the rules of national law on liability that the State must make reparation for the consequences of the loss and damage caused, provided that the conditions for reparation of loss and damage laid down by national law are not less favourable than those relating to similar domestic claims and are not so framed as to make it, in practice, impossible or excessively difficult to obtain reparation.

   Where it is established that the legislation of a Member State constitutes an obstacle to freedom of establishment prohibited by Article 43 EC, the national court may, in order to establish the recoverable losses, determine whether the injured parties have shown reasonable diligence in order to avoid those losses or to limit their extent and whether, in particular, they availed themselves in time of all legal remedies available to them. However, the application of the provisions relating to freedom of establishment would be rendered impossible or excessively difficult if claims for restitution or compensation based on infringement of those provisions were rejected or reduced solely because the companies concerned had not applied to the tax authorities to be allowed to pay interest on loans granted by a non-resident parent company without that interest being treated as a distribution when, in the circumstances at issue, national law, combined, where appropriate, with the relevant provisions of the double taxation conventions, provided for such treatment to apply.

   (see paras 115, 123, 126, 128, operative part 3)

6.  In order to determine whether a breach of Community law is sufficiently serious such as to incur the liability of a Member State to make reparation for the loss and damage caused to claimants, it is necessary to take account of all the factors which characterise the situation brought before the national court. Those factors include, in particular, the clarity and precision of the rule infringed, whether the infringement and the damage caused were intentional or involuntary, whether any error of law was excusable or inexcusable, and the fact that the position taken by a Community institution may have contributed to the adoption or maintenance of national measures or practices contrary to Community law.

   On any view, a breach of Community law will clearly be sufficiently serious if it has persisted despite a judgment finding the infringement in question to be established, or a preliminary ruling or settled case-law of the Court on the matter from which it is clear that the conduct in question constituted an infringement.

   In a field such as direct taxation, the national court must take into account the fact that the consequences arising from the freedoms of movement guaranteed by the Treaty have been only gradually made clear, in particular by the principles identified by the Courts case-law.

   (see paras 119-121)