On 12 May 2016, the opinion of Advocate General (AG) Kokott of the Court of Justice of the European Union (CJEU) was published concerning Denmark's interest income exemption rules. The rules provide for an exemption for a Danish creditor on interest income that has not been allowed as a deduction for the debtor due to Danish thin cap rules, but do not provide an exemption for the creditor if the debtor was not allowed a deduction based on the thin cap rules of another EU Member State.
The case involved Damixa ApS, a Danish resident, and Damixa Armaturen GmbH, its wholly owned German subsidiary. For the 2005 and 2006 tax years, interest payments on a loan from Damixa Denmark to Damixa Germany were recharacterized as dividend payments under Germany's thin cap rules. As a result, the payments were not deductible for Damixa Germany, but the income for Damixa Denmark was still subject to tax in Denmark. Damixa Denmark argued that the Danish rules restricted Damixa's freedom of establishment, because had the subsidiary been resident in Denmark, the interest income would have been exempt. Denmark's Western Appeals Court referred the case to the CJEU on 19 December 2014.
In the opinion, the AG found that Denmark's interest exemption rules do not constitute a restriction on the freedom of establishment. Furthermore, if the rules did constitute a restriction, it must then be determined if the less favorable treatment was justified. In this case, it could be justified due to the fact the disallowance of the deduction was under foreign tax rules, and not under Denmark's corporate tax regime. In particular, the tax treatment can be justified on the basis of preserving the allocation of taxing powers between Member States, and on the basis of safeguarding the cohesion of the tax system of a Member State.
Click the following link for the full AG opinion (French language - English not yet available at time of writing).