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Interest on loan from associated company

National laws must allow a parent company in one EU state to deduct interest on a loan taken out to finance a subsidiary in another member state. The European Court so ruled on 22 February 2018.

The case concerned a company incorporated in the Netherlands and part of a Swedish group that also included an Italian company. To purchase shares in the Italian company, another company was established in Italy to which a loan of €237,312,000 was made from a Swedish company in the group.

Under Dutch law, interest on loans taken out with a related entity was not tax-deductible if the loan related to a capital contribution, such as purchasing shares in a related entity. The company claimed that it could have deducted loan interest if it had been able to form a single tax entity with the Italian company, a right reserved under Dutch law to resident companies.

The Court found that this contravened EU law.

X BV and another company v Staatssecretaris van Financien [2018] All ER (D) 44 (Mar). Cases C-398/16 and C-399/16 [18.04]