On May 12, 2016 the Advocate General (AG) of the Court of Justice of the European Union (CJEU) rendered her opinion on the questions referred in the Masco Denmark and Damixa case (C-593/14). The case concerns Danish rules which allow for a tax exemption on interest income if the corresponding interest deduction is denied due to thin capitalization rules, but in effect only if the debtor company is resident in Denmark. The AG concluded that this difference in treatment did not constitute a restriction on the freedom of establishment. Furthermore, even if the difference in treatment was found to constitute a restriction, the AG held that the restriction could be justified based on the balanced allocation of taxing rights as well the coherence of the tax system.


Under Danish corporate tax rules, interest income is tax exempt at the level of a resident creditor company if the corresponding interest deduction at the level of a resident debtor company is disallowed due to domestic Danish thin capitalization regulations. The income is however not exempt when the related-party debtor is resident in another Member State and the interest deduction is disallowed under that relevant Member State’s rules on thin capitalization.

In the case at hand, the creditor Damixa ApS was resident in Denmark with a wholly-owned subsidiary in Germany, Damixa Armaturen GmbH. A loan was granted to the subsidiary and the interest income taxed at the level of Damixa ApS. For the years 2005 and 2006, the interest income was however reclassified to dividend payments in Germany and consequently non-deductible for German tax purposes, as the subsidiary was considered thinly capitalized.

Damixa argued that the interest income would have been exempt if the subsidiary was resident in Denmark instead of Germany and that the rules accordingly infringed the EU freedom of establishment principle. On December 19, 2015 the Danish court dealing with the case referred the question of whether this difference in treatment infringed the EU freedom of establishment to the CJEU.

The AG opinion

The AG concluded that there is no restriction on the freedom of establishment. The difference in treatment resulted from the exercise in parallel by two Member States of their fiscal sovereignty, and was therefore protected by the principle of autonomy.

The AG referred to the established principle and related case-law to the effect that the fundamental freedoms do not obligate a Member State when applying its tax rules to take into consideration the tax treatment in a different Member State. A discrimination that only arises due to the combined effect of two Member States’ tax laws, cannot be attributed to either Member State as a restriction on any of the fundamental freedoms.

In the present case, the AG considered that without the German thin capitalization rules there would have been no difference in treatment between a purely national situation and a cross-border situation. If Denmark would be required to exempt interest income based on whether the other Member State limited the debtor’s deductible interest, this would be in breach of the principle of autonomy.

But even if the difference in treatment was found to constitute a restriction, the AG concluded that the measure would not infringe EU law as it could be justified. Firstly, it could be justified on the basis of the balanced allocation of the taxing rights between Member States, and secondly under the principle of coherence of the tax system on the basis that there is a direct link between the advantage of the exemption and the disadvantage of the limitation of interest deductibility.

Practical relevance for The Netherlands

It remains to be seen if the CJEU will agree with how the AG applies the principle of autonomy and the potential justifications, in particular the CJEU decision may shed light on how the principle of autonomy relates to previous case-law of the CJEU. But even if the Court of Justice would not follow the AG, the practical consequences for the Netherlands seem rather limited.

As we see it, there would potentially be only one Dutch measure which would then be vulnerable. By virtue of a letter of 14 June 2007, the State Secretary of Finance granted that interest payments received on certain types of loans which already existed before 1 January 2007 qualify for the participation exemption for corporate income tax purposes. This concerns the limitation of deduction of interest paid on a loan with no fixed maturity or a maturity of more than 10 years if such loans were obtained from a related company at an interest rate which is substantially lower than that which would have been agreed between unrelated parties. The participation exemption is granted only as far as such interest is paid by a group company resident in the Netherlands. Consequently, similar interest paid by a foreign group company would not be exempted. Further to the Opinion, this disadvantage would, however, not infringe EU law.

Meijburg & Co would be pleased to help you should you have any queries on this subject.

Meijburg & Co
May 2016

Click here to download the memorandum in pdf format.