ECJ Ruling in the Argenta Spaarbank case, 26th of October 2017 (Interpretation of the Parent Subsidiary Directive)


Written on 19 December 2017

EN / ES

The Argenta Spaarbank case relates to the Parent Subsidiary Directive in connection with the limitation to the deductibility of interest payments related to the acquisition of holdings in subsidiaries. The European Court of Justice, in a ruling dated 26th of October 2017 (the Argenta Spaarbank NV case), considers that a Member State’s rules providing for a general limitation on the deductibility of interest related to dividend distributions protected under the Parent-Subsidiary Directive infringe EU law.

In its ruling, the European Court of Justice (“ECJ“) reviews the compatibility of a Belgian rule, which conditioned the domestic dividend withholding exemption, on the basis of the transposition of the Parent-Subsidiary Directive, with a generic limitation over the tax deductibility of financial expenses.

The controversy, to which the ruling puts an end, arose as a result of an audit which the Belgian Tax Authorities carried out with respect to the Corporate Income Tax relating to years 2000 and 2001 of the financial entity Argenta Spaarbank BV. As a result of such audit, the Tax Authorities rejected the tax deductibility of certain financial expenses on the basis of domestic provisions which were supposed to be a direct transposition of Directive EEC/90/434 (the Parent-Subsidiary Directive – currently Directive 2011/96).

More specifically, applicable Belgian domestic law did not allow for the deductibility of interest up to an amount equivalent to dividends received and eligible for exemption under the Parent-Subsidiary Regime. This limitation applied regardless of whether such interests, the deductibility of which was barred, were in fact connected to the financing of the acquisition of the holdings which gave rise to the exempt dividend.

The Belgian Tax Authorities considered that the limitation imposed under domestic provisions was lawful. Thus, although article 4.1 of the Directive imposes on Member States the duty to establish a mechanism of exemption or deduction so as to achieve tax neutrality in cross-border dividend distributions from EU Subsidiaries to their EU Parents, article 4.2 allows Member States to limit the deductibility of expenses connected to these exempt dividends.

Argenta Spaarbank BV appealed the tax assessment issued by the Belgian Authorities to the First Instance Tribunal of Antwerp. The Tribunal ordered a stay in the proceedings and requested a preliminary ruling to the ECJ to assess the compatibility of the Belgian provisions with the Parent Subsidiary Directive.

In its ruling, the ECJ declares as follows:

  • The ECJ concludes that article 4.2 of the Directive does not permit EU Member States to implement a generic rule disallowing the deductibility of financial expenses related to financing arrangements between a Parent and its Subsidiaries in an amount equivalent to the income generated by its holding in such Subsidiary. Any other interpretation of article 4.2 would be contrary to the objectives and the purpose of the Parent-Subsidiary Directive.
  • The ECJ also makes clear that the possibility afforded to Member States, under article 4.2 of the Directive, to limit the deductibility of expenses connected to the exempt dividends should be construed as exceptional and must be restrictively interpreted. Thus, such limitation would apply only to prevent instances of possible “double-dipping” (i.e. dividend exemption coupled with deduction of expenses connected with such income). National rules providing for generic limitations to interest deductibility, the scope of which would exceed the fiscal symmetry required to neutralise such double dips, would not be admissible under the Parent Subsidiary Directive.
  • The ECJ rejects the position of the Belgian Tax Authorities, justifying the compatibility of the national rule on the basis of the general anti-abuse provision established in the Directive and whereby Member States may enact the necessary rules to prevent fraud or abuse.

In light of the above ruling from the ECJ, we understand that Spanish domestic provisions limiting financial expense deductibility, as provided for in the Spanish Corporate Income Tax Act (articles 15 and 16), should be considered prima facie compatible with the Parent Subsidiary Directive. Such measures do not exclude, as a general rule, the deductibility of interest connected to the acquisition of holdings and allow for the deduction of interest in such cases, provided the taxpayer can prove the existence of valid business motives.

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