(C-397/09) regarding the add-back - Ernst & Young T Magazine

Issue 167 / May 2011
EU tax alert
Advocate General’s Opinion in the Scheuten
Solar Technology case (C-397/09) regarding
the add-back of interests provision in the
German municipal trade tax law
On 12 May 2011, Advocate General (AG) Sharpston delivered her Opinion
in the Scheuten Solar Technology (Scheuten) case, which concerns the
add-back of 50% of the interests of long-term liabilities for German trade
tax purposes. As the payment of interests from a German subsidiary to its
100% parent company in the Netherlands leads to an additional amount of
trade tax, it was questioned whether this provision was at odds with the EU
Interests and Royalties Directive (IRD).
However, in her Opinion, AG Sharpston reached the conclusion that
the IRD does not preclude a provision under which loan interest paid by
a company located in one Member State to an associated company of
another Member State is added to the basis of assessment to the trade tax
for the former company.
Argument of Scheuten and assessment
of AG Sharpston
Scheuten argued that the effect of the IRD
is to remove any charge to tax whatsoever
upon interest payments made by the payer
of interest. The effect of the national rule
in question is, however, equivalent to the
imposition of a charge to tax, since 50% of
the interests is included in Scheuten’s basis
of assessment to tax.
This argument was rejected by
AG Sharpston who stated that the
exemption of Art. 1 IRD is not triggered by
a determination of the basis of assessment
to tax but by a charge to tax. There would
be nothing further in the wording of the
IRD to suggest that the legislature wished
to introduce rules concerning the basis of
assessment to tax. As the relevant national
rule refers to the determination of the basis
of assessment to tax, and does not establish
a charge to tax, the present matter falls
outside the scope of the IRD.
In this context, Scheuten’s argument
regarding the wording and workings of
the IRD did also not convince the AG.
Scheuten argued that the wording of the
IRD concerning the scope of effected taxes
is much more comprehensive than the
wording of the Parent-Subsidiary Directive
(PSD). Therefore, the add-back of interest
could also be covered by Art. 1 para 1
IRD, which includes “any taxes imposed
on those payments in that State, whether
by deduction at source or by assessment”
while Art. 5 para 1 PSD restricts its effect
on withholding taxes (“Profits which a
subsidiary distributed to its parent company
shall […] be exempt from withholding tax”).

AG Sharpston, however, held the view that the words “or by assessment” simply refer
to a particular mechanism for establishing a tax liability. From these words, it cannot be
concluded that the IRD is concerned with the basis of assessment of the company paying
the interest. Thus, the difference in terminology between the IRD and the PSD does not
lead to the conclusion that both the beneficial owner and the payer of the interest fall
within the scope of the exemption in Art. 1 IRD. According to AG Sharpston, the IRD only
refers to the beneficial owner of the interest and not to the payer of the interest or to
whether the interests are tax deductible from the debtor’s basis of assessment to tax.
Further, Scheuten argued that an economic double taxation takes place and the economic
double taxation is covered by the IRD. In this context, Scheuten referred to the justifications
of the Directive. As these point out the needs of a Single European Market, not only the
juridical double taxation but also the economic double taxation is necessarily covered by
the IRD.
In the case at hand, an economic double taxation takes place, because one economic
process (payment of interests) is taxed in two countries (Germany: trade tax, Netherlands:
corporate income tax) in the same period of time. Therefore, Scheuten argues that the
add-back of interests for trade tax purposes effects an economic double taxation that is
covered by the Directive.
That view was not shared by AG Sharpston. In her Opinion, she stated that the IRD only
covers the juridical double taxation. In contrast to the PSD, which is clearly concerned with
economic double taxation, the IRD recognizes that the same person (the beneficial owner)
is potentially subject to a charge to tax twice in respect of the same income, in the source
tax by withholding tax or by assessment and again in the beneficial owner’s home state.
Since the beneficial owner is the only person that might suffer double taxation, the IRD is
concerned solely with juridical double taxation.
How Ernst & Young can help
Ernst & Young has a network of EU tax subject matter professionals in each Member State
and has experience in advising on a broad range of tax issues.
2
Dr. Klaus von Brocke
Tel: +49 89 14331 12287
klaus.von.brocke@de.ey.com
Dr. Anja Küntscher
Tel: +40 201 2421 24408
anja.kuentscher@de.ey.com
EU tax alert
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