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A collection of the brief insights throughout January 2021 of the type provided on an ad hoc basis in our Latest digital tax byte update.

26 January 2021

A new opinion by the Court of Justice of the EU (CJEU aka ECJ) may signal a legal problem for the EU in implementing a future Pillar Two agreement. In the 20 January  opinion in Lexel AB (C-484/19), the CJEU determined that Sweden’s interest deduction denial rules for cross-border intra-group loan payments (where the loan has a main purpose of achieving a tax advantage) infringed EU rights around freedom of establishment (as our EUDTG newsalert of 21 January 2021 summarises). 

The court’s conclusion is consistent with other precedent (EurowingsSIAT, etc.) that there is a breach in the freedom of establishment where (i) there is a difference in treatment between cross-border and domestic situations, and (ii) the difference cannot be justified, such as where the claim of preventing tax avoidance doesn’t address only wholly artificial arrangements. CJEU jurisprudence recognizes that simply because there is a tax motivation doesn't make the arrangement wholly artificial.

Thinking about this in relation to Pillar Two, the fact that the proposed rules, particularly the under taxed payments rule (UTPR) only apply in a cross-border situation is likely to give rise to restrictions that perhaps cannot be defended by the usual justifications around tax avoidance prevention. In particular, having a substance-based carve-out still seems insufficient to limit the rule to wholly artificial arrangements.