Tax neutrality of corporate financing: a European Law perspective

• Author: E. Traversa - D. Modonesi
• Position: Professor of Tax Law at the Université Catholique de Louvain-la-Neuve. - PhD student at the European School of Fiscal Studies - University of Bologna and at the Université Catholique de Louvain-la-Neuve.
• Pages: 1-27

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Ta x n eutrality of corpor ate fina ncing: a European La w

pe rspective

E. Tr aversa a nd D. Mod one si1

1. Pr e face. The tax regim e o f corpor ate fin a ncing betw e en national

an ti-abu se measures a nd in terna tion al do uble t axation

Corpor ate financing can be conducted primar ily via t he allocation of own

capital or via debt cont ract s wit h t hir d subj ects (ind ependent financial

instit utions or f in an cing com panies wit hin t he sam e m u lt inational g roup) .

The national tax provisions applicable to dividends and int erest are

gen er ally dif ferent. Therefore, one cou ld wonder w het her European law

tends to favour one of these two form s of corporat e financing or if on the

contrary, it is n eutral towards t hem .

The ex istence of different tax r egim es for interest s an d dividends at the

lev el of a sin gle m em ber state can have a twofold effect. On one hand,

ther e could be a disproportion of the t ax treat m ent of int erest compared to

dividends. This sit uat ion could have t he effect of st im ulating companies to

increase t he financing via debts stock s only because of t ax convenience

(thin capit alization) . Th er efor e, this phenomenon is gener ally relat ed to th e

creat ion of anti-abuse provisions at t h e national state level. On th e ot her

hand, a potentially different tax tr eatment can have an impact at an

international level due t o the lack of coordination between nat ional tax

system s. Thus, double taxation cou ld take place (or, m ore r ar ely, a double

non- t ax ation).

Further m ore, it is necessar y t o ver if y w hether and w it hin which lim it s the

introduction of such anti-abuse m easu res and the phenomena of double

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1 Edoardo Traversa is Professor of Tax Law at the Université Cat holique de Louv ain -la-

Neuve. Diego Modonesi is PhD st udent at t he Eur opean Sch ool of Fiscal St udies – University

of Bolog na an d at th e Uni versit é Cath oliqu e de Louv ain- la-N euve.

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taxation are admissible in European law , especially considering the

judgements of the European Cou rt of Just ice ( ECJ).

At t he sam e tim e, t his analysis w ill verify whether the judgm ents of t he ECJ

also allow t he identification of a pr efer en ce for one of the t wo m et hods of

com pany corpor at e financin g ( equity or ow n capital) at a European level,

that indirect ly influence t he choices of t ax legislat ors at the m em ber st ate

lev el.

Such an analysis will also consider the im pact of the lim ited, but st ill

exist ing, EU secondary legislation in the area of dir ect taxat ion2, as it is

interpret ed b y t he ECJ.

2. National re gim es o f ( in) dedu ct ibility of divid ends a nd int e r est .

Com pa riso n

As h ig hlig hted, ther e ar e ob vious disparities of treat m ent in t he regime

applicable t o t hese two cat eg or ies of income. Prim a facie interest is

def in able at an internal lev el as w ell as an international level as

remunerat ion of debt capital. It is usually considered as a dedu ct ible cost in

the calculation of t he base of in come tax paid to the st ate in which t he

com pany receiving the loan is est ablished. On on e hand the payer is

exem pted from t he taxat ion related t o t he amount paid as interest and can

furth er ded uct it from th e tax base. On t he ot her hand, this is

count erbalanced by the f act that t he beneficiary of t he interest s will be

taxed. Nevertheless, at the n at ional level rest rict ions and lim itations on t he

deductibility of interest may exist especially vis- à- v is t he tax avoidance

schemes related t o t he pay m ent of int erest t o debtors established in

count r ies with a lower taxat ion 3. In Europe, it is necessary to verify the

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2 The subject of in direct t axes is a r esponsibi lity of member stat es in t he respect of t he

Euro pea n law . For exam ple, see ECJ 11 Aug ust 19 95 , case C-80 / 94 , Wielockx , Racc. p. I-

2493, point 16; ECJ 6 Jun e 2000, case C-35/98 , Ver kooij en , po int 32 ; ECJ 4 March 2 00 4,

case C-3 34/ 0 2, Comm ission vs. France, Racc. pag. I-2 229, point 21; ECJ 15 July 2004, case

C-315 / 02 , Len z, point 19 , as well as ECJ 7 Sept em ber 2004, case C- 319/ 02 , Manninen ,

point 19. See J. Malh erbe, Ph. Malh erbe, I . Richelle and E. Tr av ersa, Direct taxation in t he

case- law of the Europ ean Cour t of Just ice, Brux elles, Lar cier, 200 8, p. 3 22.

3 See Ano uc van den Berg v an Sapar oea , Opt im izing t he int er est deduct io n ru les – A

nev er -end ing story , Eur opean Tax at ion, January 2009 p. 3, and Ch ri stian Dorenk am p, T he

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