{ "attribution": { "source": "legal.exploreworldai.com", "canonical": "https://legal.exploreworldai.com/api/public/v1/judgment-text?id=eu:c-524-04", "cite_as": "NovaCopilot, legal.exploreworldai.com (https://legal.exploreworldai.com/api/public/v1/judgment-text?id=eu:c-524-04)", "license": "https://legal.exploreworldai.com/revision", "version": "legal-2026-10-13", "fingerprint": "ewai:eu:a03983", "proof": "sha256:930794da057498c92bcc9f498706e6e377a481a1348e5f5bc8d4f9ae059824aa", "jurisdiction": "eu", "lang": "en", "publisher": "NovaCopilot by ExploreWorld Legal", "terms": "https://legal.exploreworldai.com/om" }, "brand_source": "Source: NovaCopilot", "item": { "schema_version": "1.0.0", "id": "eu:c-524-04", "jurisdiction": "eu", "lang": "en", "brand_source": "Source: NovaCopilot", "brand": { "product": "NovaCopilot", "platform": "ExploreWorldAI", "infrastructure": "ExploreWorld Legal", "infrastructure_url": "legal.exploreworldai.com", "legal_entity": "Valkiv Ventures AB", "permanent_url": "https://legal.exploreworldai.com/novacopilot", "source": "Source: NovaCopilot", "powered_by": "Powered by NovaCopilot", "license": "https://legal.exploreworldai.com/licensvillkor" }, "sections": [ { "title": "JUDGMENT OF THE COURT (Grand Chamber)", "paragraphs": [] }, { "title": "13 March 2007 ( * )", "paragraphs": [ "para_3", "para_4", "para_5" ] }, { "title": "Test Claimants in the Thin Cap Group Litigation", "paragraphs": [ "para_7", "para_8", "para_9", "para_10", "para_11", "para_12", "para_13", "para_14", "para_15", "para_16", "para_17", "para_18", "para_19", "para_20", "para_21" ] }, { "title": "Judgment", "paragraphs": [ "para_23", "para_24" ] }, { "title": "National legal framework", "paragraphs": [ "para_26" ] }, { "title": "The national provisions prior to the amendments made in 1995", "paragraphs": [ "para_28", "para_29", "para_30", "para_31", "para_32", "para_33" ] }, { "title": "The amendments made to the legislation in 1995", "paragraphs": [ "para_35", "para_36", "para_37" ] }, { "title": "The amendments made to the legislation in 1998", "paragraphs": [ "para_39", "para_40", "para_41" ] }, { "title": "The main proceedings and the questions referred for a preliminary ruling", "paragraphs": [ "para_43", "para_44", "para_45", "para_46", "para_47", "para_48", "para_49", "para_50" ] }, { "title": "2. What difference, if any, does it make to the answer to Question 1:", "paragraphs": [ "para_52", "para_53", "para_54", "para_55", "para_56", "para_57", "para_58", "para_59", "para_60", "para_61", "para_62", "para_63", "para_64", "para_65", "para_66", "para_67", "para_68", "para_69", "para_70", "para_71", "para_72", "para_73", "para_74", "para_75" ] }, { "title": "(c) must some other conditions be met?", "paragraphs": [ "para_77", "para_78", "para_79", "para_80" ] }, { "title": "The questions referred for a preliminary ruling", "paragraphs": [] }, { "title": "Questions 1 and 3", "paragraphs": [ "para_83", "para_84", "para_85" ] }, { "title": "The freedoms of movement which apply", "paragraphs": [ "para_87", "para_88", "para_89", "para_90", "para_91", "para_92", "para_93", "para_94", "para_95", "para_96" ] }, { "title": "Whether there is a restriction on freedom of establishment", "paragraphs": [ "para_98", "para_99", "para_100", "para_101", "para_102", "para_103", "para_104", "para_105", "para_106", "para_107", "para_108", "para_109", "para_110", "para_111", "para_112", "para_113", "para_114", "para_115", "para_116", "para_117", "para_118", "para_119", "para_120", "para_121", "para_122", "para_123", "para_124", "para_125" ] }, { "title": "The justification for the restriction on freedom of establishment", "paragraphs": [ "para_127", "para_128", "para_129", "para_130", "para_131", "para_132", "para_133", "para_134", "para_135", "para_136", "para_137", "para_138", "para_139", "para_140", "para_141", "para_142", "para_143", "para_144", "para_145", "para_146", "para_147", "para_148", "para_149", "para_150", "para_151", "para_152", "para_153", "para_154", "para_155", "para_156", "para_157" ] }, { "title": "Question 2", "paragraphs": [ "para_159", "para_160", "para_161", "para_162", "para_163", "para_164", "para_165", "para_166", "para_167", "para_168", "para_169", "para_170", "para_171", "para_172" ] }, { "title": "Question 4", "paragraphs": [ "para_174", "para_175", "para_176" ] }, { "title": "Questions 5 to 10", "paragraphs": [ "para_178", "para_179", "para_180", "para_181", "para_182", "para_183", "para_184", "para_185", "para_186", "para_187", "para_188", "para_189", "para_190", "para_191", "para_192", "para_193", "para_194", "para_195", "para_196", "para_197", "para_198", "para_199" ] }, { "title": "128 The answer to Questions 5 to 10 must therefore be as follows:", "paragraphs": [ "para_201", "para_202" ] }, { "title": "The application for a limitation on the temporal effects of the judgment", "paragraphs": [ "para_204", "para_205", "para_206", "para_207", "para_208" ] }, { "title": "Costs", "paragraphs": [ "para_210" ] }, { "title": "On those grounds, the Court (Grand Chamber) hereby rules:", "paragraphs": [ "para_212", "para_213", "para_214", "para_215", "para_216", "para_217" ] } ], "paragraphs": [ { "text": "JUDGMENT OF THE COURT (Grand Chamber)", "paragraph_id": "para_1" }, { "text": "13 March 2007 ( * )", "paragraph_id": "para_2" }, { "text": "(Freedom of establishment – Free movement of capital – Corporation tax – Loan interest paid to a related company resident in another Member State or in a non-member country – Interest treated as a distribution – Cohesion of the tax system – Tax avoidance)", "paragraph_id": "para_3" }, { "text": "In Case C-524/04,", "paragraph_id": "para_4" }, { "text": "REFERENCE for a preliminary ruling under Article 234 EC from the High Court of Justice of England and Wales, Chancery Division\n (United Kingdom), made by decision of 21 December 2004, received at the Court on 31 December 2004, in the proceedings", "paragraph_id": "para_5" }, { "text": "Test Claimants in the Thin Cap Group Litigation", "paragraph_id": "para_6" }, { "text": "v", "paragraph_id": "para_7" }, { "text": "Commissioners of Inland Revenue,", "paragraph_id": "para_8" }, { "text": "THE COURT (Grand Chamber),", "paragraph_id": "para_9" }, { "text": "composed of V. Skouris, President, P. Jann, C.W.A. Timmermans, A. Rosas, K. Lenaerts (Rapporteur), P. Kūris and E. Juhász,\n Presidents of Chambers, J.N. Cunha Rodrigues, R. Silva de Lapuerta, K. Schiemann, J. Makarczyk, G. Arestis and A. Borg Barthet,\n Judges,", "paragraph_id": "para_10" }, { "text": "Advocate General: L.A. Geelhoed,", "paragraph_id": "para_11" }, { "text": "Registrar: L. Hewlett, Principal Administrator,", "paragraph_id": "para_12" }, { "text": "having regard to the written procedure and further to the hearing on 31 January 2006,", "paragraph_id": "para_13" }, { "text": "after considering the observations submitted on behalf of:", "paragraph_id": "para_14" }, { "text": "– Test Claimants in the Thin Cap Group Litigation, by G. Aaronson QC, P. Farmer and D. Cavender, Barristers,", "paragraph_id": "para_15" }, { "text": "– the United Kingdom Government, by C. Jackson and C. Gibbs, acting as Agents, and by D. Anderson QC, D. Ewart and S. Stevens,\n Barristers,", "paragraph_id": "para_16" }, { "text": "– the German Government, by M. Lumma and U. Forsthoff, acting as Agents,", "paragraph_id": "para_17" }, { "text": "– the Netherlands Government, by D.J.M. de Grave, acting as Agent,", "paragraph_id": "para_18" }, { "text": "– the Commission of the European Communities, by R. Lyal, acting as Agent,", "paragraph_id": "para_19" }, { "text": "after hearing the Opinion of the Advocate General at the sitting on 29 June 2006,", "paragraph_id": "para_20" }, { "text": "gives the following", "paragraph_id": "para_21" }, { "text": "Judgment", "paragraph_id": "para_22" }, { "text": "1 This reference for a preliminary ruling concerns the interpretation of Articles 43 EC and 49 EC, together with Articles 56\n EC to 58 EC.", "paragraph_id": "para_23" }, { "text": "2 The reference has been made in proceedings between groups of companies (‘the claimants in the main proceedings’) and the Commissioners\n of Inland Revenue concerning the tax treatment of interest paid by United Kingdom-resident companies in respect of loans granted\n by a company belonging to the same group (‘the related company’) which is not resident in that Member State.", "paragraph_id": "para_24" }, { "text": "National legal framework", "paragraph_id": "para_25" }, { "text": "3 The relevant provisions of the legislation in force in the United Kingdom are contained in the Income and Corporation Taxes\n Act 1988 (‘ICTA’), initially in the version which applied prior to 1995 and, subsequently, in the version as amended, in particular,\n by the Finance Act 1995 and the Finance Act 1998.", "paragraph_id": "para_26" }, { "text": "The national provisions prior to the amendments made in 1995", "paragraph_id": "para_27" }, { "text": "4 Under section 209(2)(d) of ICTA, any interest paid by a United Kingdom-resident company on a loan was treated as a distribution\n of profits by that company to the extent that the interest represented more than a reasonable commercial return on the loan.\n That rule applied both when the loan was gr …", "paragraph_id": "para_28" }, { "text": "5 In addition, under section 209(2)(e)(iv) and (v) of ICTA, any interest paid by a United Kingdom-resident company to a non-resident\n company belonging to the same group of companies, other than interest already treated as such under section 209(2)(d), was\n treated as a ‘distribution’, even where th …", "paragraph_id": "para_29" }, { "text": "6 However, under section 788(3) of ICTA, the national provisions referred to above did not apply where a double taxation convention\n (‘DTC’) was in place which prevented the application of those rules and thus ensured that, subject to certain conditions,\n the interest was allowed as a deduction for …", "paragraph_id": "para_30" }, { "text": "7 Under the first category of DTCs, such as those concluded with the Federal Republic of Germany, the Kingdom of Spain, the\n Grand Duchy of Luxembourg, the Republic of Austria and Japan, interest is deductible if, taking into account the amount of\n the loan in question, the amount of the interest corresponds to what would have been agreed at arm’s length between the parties\n or between the parties and a third party.", "paragraph_id": "para_31" }, { "text": "8 The second category of DTCs, such as those concluded with the French Republic, Ireland, the Italian Republic, the Kingdom\n of the Netherlands, the United States of America and the Swiss Confederation, involves a more general enquiry into whether\n the amount of the interest exceeds, for any reason, …", "paragraph_id": "para_32" }, { "text": "9 Section 808A of ICTA, which was inserted by section 52 of the Finance (No 2) Act 1992, and applies to interest paid after\n 14 May 1992, provides that account is to be taken, as regards the second category of DTC, of all factors, including whether,\n had the relationship been one at arm’s length, the loan would have been made at all, and, if so, how much would have been\n lent and the rate of interest which would have been agreed upon.", "paragraph_id": "para_33" }, { "text": "The amendments made to the legislation in 1995", "paragraph_id": "para_34" }, { "text": "10 Under the Finance Act 1995, which has effect generally in relation to interest paid after 28 November 1994, section 209(2)(d)\n of ICTA remained unaltered. However, section 209(2)(e)(iv) and (v) were replaced by section 209(2)(da), under which interest\n paid between members of the same group of co …", "paragraph_id": "para_35" }, { "text": "11 However, under section 212(1) and (3) of ICTA, as amended, section 209(2)(da) does not apply if the payer and the payee of\n the interest are both liable to corporation tax in the United Kingdom.", "paragraph_id": "para_36" }, { "text": "12 Section 209(2)(da) of ICTA was amplified by section 209(8A) to (8F). Section 209(8B) of ICTA specifies the criteria to be\n used in determining whether interest payments are to be treated as distributions. Section 209(8A), in conjunction with section\n 209(8D) to (8F) of ICTA, determines the extent to which companies can be grouped together for the purposes of assessing the\n level of their borrowing on a consolidated basis.", "paragraph_id": "para_37" }, { "text": "The amendments made to the legislation in 1998", "paragraph_id": "para_38" }, { "text": "13 Schedule 28AA, added to ICTA by the Finance Act 1998, lays down rules on transfer pricing, which also apply to interest payments\n between companies. Transactions between two companies under common control are subject to those rules if the terms under which\n they were entered into differ from what …", "paragraph_id": "para_39" }, { "text": "14 Until those rules were amended in 2004, no potential advantage for one of the companies concerned was deemed to arise under\n that legislation where the other party to the transaction was also liable to tax in the United Kingdom and certain other conditions\n were satisfied.", "paragraph_id": "para_40" }, { "text": "15 In 2004, those rules were amended so as to apply where both parties to the transaction are liable to tax in the United Kingdom.", "paragraph_id": "para_41" }, { "text": "The main proceedings and the questions referred for a preliminary ruling", "paragraph_id": "para_42" }, { "text": "16 The main proceedings are part of a group litigation concerning the rules on thin capitalisation (‘Thin Cap Group Litigation’),\n consisting of a number of claims for restitution and/or compensation brought by groups of companies against the Commissioners\n of Inland Revenue in the High Court of Justice of England and Wales, Chancery Division, following the judgment in Case C‑324/00\n Lankhorst-Hohorst [2002] ECR I‑11779.", "paragraph_id": "para_43" }, { "text": "17 Each of the cases selected by the national court as test cases for the purposes of the present reference for a preliminary\n ruling involves a United Kingdom-resident company which is at least 75% owned, directly or indirectly, by a non-resident parent\n company and has been granted a loan either by that parent company or by another non-resident company which is at least 75%\n owned, directly or indirectly, by that parent company.", "paragraph_id": "para_44" }, { "text": "18 The test cases involve, first, loans granted to a United Kingdom-resident company by a company established in another Member\n State, each of the companies belonging to the same group of companies, the ultimate parent company of which is also established\n in that other State. That applies to some …", "paragraph_id": "para_45" }, { "text": "19 Secondly, some of the test cases involve a United Kingdom-resident company which belongs to a group of companies headed by\n a parent company established in a non-member country, namely the United States of America, and which was granted a loan by\n another company in the same group which is, for i …", "paragraph_id": "para_46" }, { "text": "20 According to the order for reference, some of the claimant companies converted part of those loans to equity in order to prevent\n the interest payments under the loans being re-characterised as a distribution under the legislation in force in the United\n Kingdom. Some of the claimant companies ha …", "paragraph_id": "para_47" }, { "text": "21 Following the judgment in Lankhorst-Hohorst , the claimants in the main proceedings brought claims for restitution and/or compensation for the consequential tax disadvantages\n which they claim to have suffered as a result of the application of the United Kingdom legislation, which include, in par …", "paragraph_id": "para_48" }, { "text": "22 In those circumstances, the High Court of Justice of England and Wales, Chancery Division, decided to stay the proceedings\n and to refer the following questions to the Court for a preliminary ruling:", "paragraph_id": "para_49" }, { "text": "‘1. Is it contrary to Articles 43 [EC], 49 [EC] or 56 EC for a Member State (“the State of the borrowing company”) to keep in\n force and apply provisions such as those in sections 209, 212 and schedule 28AA of [ICTA] (“the national provisions”) which\n impose restrictions upon the ability of a compan …", "paragraph_id": "para_50" }, { "text": "2. What difference, if any, does it make to the answer to Question 1:", "paragraph_id": "para_51" }, { "text": "(a) if the loan finance is provided not by the parent company of the borrowing company but by another company (“the lending company”)\n in the same company group sharing a common direct or indirect parent company with the borrowing company and both that common\n parent and the lending company are resident in Member States other than the State of the borrowing company?", "paragraph_id": "para_52" }, { "text": "(b) if the lending company is resident in a Member State other than that of the borrowing company but all common direct or indirect\n parent companies of the borrowing company and the lending company are resident in a third country?", "paragraph_id": "para_53" }, { "text": "(c) if all the common direct or indirect parent companies of the lending company and the borrowing company are resident in third\n countries and the lending company is resident in a Member State other than that of the borrowing company, but advances the\n loan finance to the borrowing company from a branch of the lending company situated in a third country?", "paragraph_id": "para_54" }, { "text": "(d) if the lending company and all the common direct or indirect parent companies of the lending company and the borrowing company\n are resident in third countries?", "paragraph_id": "para_55" }, { "text": "3. Would it make any difference to the answers to Questions 1 and 2 if it could be shown that the borrowing constituted an abuse\n of rights or was part of an artificial arrangement designed to circumvent the tax law of the Member State of the borrowing\n company? If so, what guidance does the Court of Justice think it appropriate to provide as to what constitutes such an abuse\n or artificial arrangement in the context of cases such as the present?", "paragraph_id": "para_56" }, { "text": "4. If there is a restriction on the movement of capital between Member States and third countries within Article 56 EC, did that\n restriction exist on 31 December 1993 for the purposes of Article 57 EC?", "paragraph_id": "para_57" }, { "text": "5. In the event that any of the matters referred to in Questions 1 or 2 are contrary to Articles 43 [EC], 49 [EC] or 56 EC, then\n in circumstances where the borrowing company, or other companies in the borrowing company’s group (“the Claimants”) make the\n following claims:", "paragraph_id": "para_58" }, { "text": "(a) a claim for the repayment of the additional corporation tax paid by the borrowing company as a result of the disallowance,\n as a deduction against its profits chargeable to corporation tax, of interest paid to the lending company, where those interest\n payments would have been regarded as allowable deductions from the borrowing company’s profits if the lending company had\n also been resident in the State of the borrowing company;", "paragraph_id": "para_59" }, { "text": "(b) a claim for repayment of the additional corporation tax paid by the borrowing company where the full amount of interest on\n the loan has actually been paid to the lending company but the claim for a deduction in respect of that interest has been\n reduced because of the national provisions or the tax authority’s application of them;", "paragraph_id": "para_60" }, { "text": "(c) a claim for the repayment of the additional corporation tax paid by the borrowing company where the amount of interest on\n loans from the lending company, allowable as a deduction against the borrowing company’s profits, has been reduced because\n equity capital has been subscribed rather than loan capital, or has been substituted for existing loan capital, because of\n the national provisions or the tax authority’s application of them;", "paragraph_id": "para_61" }, { "text": "(d) a claim for the repayment of the additional corporation tax paid by the borrowing company where the interest on loans from\n the lending company allowable as a deduction against the borrowing company’s profits has been reduced by reducing the rate\n of interest chargeable on the loan (or making the loan interest free) as a result of the national provisions or the tax authority’s\n application of them;", "paragraph_id": "para_62" }, { "text": "(e) a claim for restitution or compensation in respect of losses, or other tax reliefs or credits, of the borrowing company (or\n which were surrendered to the borrowing company by other companies in the borrowing company’s group which were also resident\n in the State of the borrowing company) used b …", "paragraph_id": "para_63" }, { "text": "(f) a claim for repayment of unutilised advance corporation tax paid by the borrowing company upon interest payments to the lending\n company which were re-characterised as distributions;", "paragraph_id": "para_64" }, { "text": "(g) a claim for restitution or compensation in respect of amounts of advance corporation tax paid in the circumstances referred\n to in paragraph (f) above but which were subsequently set off against the borrowing company’s corporation tax liabilities;", "paragraph_id": "para_65" }, { "text": "(h) a claim for compensation for costs and expenses incurred by the Claimants in complying with the national provisions and the\n Revenue authority’s application of them;", "paragraph_id": "para_66" }, { "text": "(i) a claim for restitution or compensation for the loss of return upon loan capital invested as equity (or converted to equity)\n in the circumstances described in (c); and", "paragraph_id": "para_67" }, { "text": "(j) a claim for restitution or compensation for any tax liability incurred by the lending company in its State of residence upon\n the deemed or imputed receipt of interest from the borrowing company which was re-characterised as a distribution under the\n national provisions referred to in Question 1,", "paragraph_id": "para_68" }, { "text": "are such claims to be regarded, for the purposes of Community law, as:", "paragraph_id": "para_69" }, { "text": "– claims for restitution or repayment of sums unduly levied which arise as a consequence of, and adjunct to, the breach of the\n abovementioned Community provisions; or", "paragraph_id": "para_70" }, { "text": "– claims for compensation or damages; or", "paragraph_id": "para_71" }, { "text": "– claims for payment of an amount representing a benefit unduly denied?", "paragraph_id": "para_72" }, { "text": "6. In the event that the answer to any part of Question 5 is that the claims are claims for payment of an amount representing\n a benefit unduly denied:", "paragraph_id": "para_73" }, { "text": "(a) are such claims a consequence of, and an adjunct to, the right conferred by the abovementioned Community provisions; or", "paragraph_id": "para_74" }, { "text": "(b) must all or some of the conditions for recovery laid down in Joined Cases C-46/93 and C-48/93 Brasserie du Pêcheur and Factortame [[1996] ECR I-1029] be satisfied; or", "paragraph_id": "para_75" }, { "text": "(c) must some other conditions be met?", "paragraph_id": "para_76" }, { "text": "7. Does it make any difference whether as a matter of domestic law the claims referred to in Question 6 are brought as restitutionary\n claims or are brought or have to be brought as claims for damages?", "paragraph_id": "para_77" }, { "text": "8. What guidance, if any, does the Court of Justice think it appropriate to provide in the present cases as to which circumstances\n the national court ought to take into consideration when it comes to determine whether there is a sufficiently serious breach\n within the meaning of the judgment in [ B …", "paragraph_id": "para_78" }, { "text": "9. As a matter of principle, can there be a direct causal link (within the meaning of the judgment in [ Brasserie du Pêcheur and Factortame ]) between any breach of Articles 43 [EC], 49 [EC] and 56 EC and losses falling into the categories identified in Question\n 5(a)-(h) that are claimed to flow fr …", "paragraph_id": "para_79" }, { "text": "10. In determining the loss or damage for which reparation may be granted, is it open to the national court to have regard to\n the question of whether injured persons showed reasonable diligence in order to avoid or limit their loss, in particular by\n availing themselves of legal remedies which coul …", "paragraph_id": "para_80" }, { "text": "The questions referred for a preliminary ruling", "paragraph_id": "para_81" }, { "text": "Questions 1 and 3", "paragraph_id": "para_82" }, { "text": "23 By Question 1, the national court essentially asks whether Articles 43 EC, 49 EC or 56 EC preclude legislation of a Member\n State which restricts the ability of a resident company to deduct, for tax purposes, interest paid on loan finance granted\n by a direct or indirect parent company which is r …", "paragraph_id": "para_83" }, { "text": "24 This question should be considered together with Question 3, by which the national court essentially asks whether the answer\n to Question 1 would differ if it can be shown that the borrowing constitutes an abuse of rights or is part of an artificial\n arrangement designed to circumvent the tax law of the Member State in which the borrowing company is resident.", "paragraph_id": "para_84" }, { "text": "25 It should be noted at the outset that, although direct taxation falls within their competence, the Member States must none\n the less exercise that competence consistently with Community law (see, inter alia, Joined Cases C-397/98 and C‑410/98 Metallgesellschaft and Others [2001] ECR I-1727, paragraph 37; Case C-446/03 Marks & Spencer [2005] ECR I-10837, paragraph 29; and Case C‑374/04 Test Claimants in Class IV of the ACT Group Litigation [2006] ECR I‑0000, paragraph 36).", "paragraph_id": "para_85" }, { "text": "The freedoms of movement which apply", "paragraph_id": "para_86" }, { "text": "26 In so far as the national court seeks a ruling from the Court on the interpretation both of Article 43 EC relating to freedom\n of establishment and of Article 49 EC relating to the freedom to provide services, together with Article 56 EC relating to\n the free movement of capital, it is necessary to determine whether national legislation, such as the legislation at issue\n in the main proceedings, is capable of coming within the scope of those freedoms.", "paragraph_id": "para_87" }, { "text": "27 In accordance with settled case-law, national provisions which apply to holdings by nationals of the Member State concerned\n in the capital of a company established in another Member State, giving them definite influence on the company’s decisions\n and allowing them to determine its activities, c …", "paragraph_id": "para_88" }, { "text": "28 In the present case, as the Advocate General noted in points 33 and 34 of his Opinion, the national provisions at issue providing\n for the re‑characterisation as a distribution of interest paid by a resident company (‘the borrowing company’) in respect\n of a loan granted by a non-resident company …", "paragraph_id": "para_89" }, { "text": "29 In the first place, in the case of the legislation in force prior to the amendments made in 1998, the relevant provisions\n of ICTA applied to loans granted by a non-resident company to a resident subsidiary of which the former company owned 75%\n of the capital or where each of the companies was a 75% subsidiary of a third company.", "paragraph_id": "para_90" }, { "text": "30 In the second place, in the case of the amendments made in 1998, the legislation at issue applies only where the two companies\n in question are subject to common control in the sense that one of them participates directly or indirectly in the management,\n control or capital or the other company concerned or a third party participates directly or indirectly in the management,\n control or capital of both the other companies concerned.", "paragraph_id": "para_91" }, { "text": "31 As the Commission of the European Communities has pointed out, legislation such as the legislation at issue in the main proceedings,\n which is directed against thin capitalisation of resident companies by a related non-resident company, concerns only situations\n in which the latter company enjoys …", "paragraph_id": "para_92" }, { "text": "32 Moreover, the order for reference shows that the cases selected as test cases in the proceedings before the national court\n involve United Kingdom-resident subsidiaries which are at least 75% owned, directly or indirectly, by a non-resident parent\n company or by another non‑resident company which is also at least 75% owned, directly or indirectly, by that parent company.", "paragraph_id": "para_93" }, { "text": "33 Legislation such as the legislation at issue in the main proceedings, which is targeted only at relations within a group of\n companies, primarily affects freedom of establishment and should, accordingly, be considered in the light of Article 43 EC\n (see, to that effect, Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 32, and Case C-446/04 Test Claimants in the FII Group Litigation [2006] ECR I‑0000, paragraph 118).", "paragraph_id": "para_94" }, { "text": "34 If, as submitted by the claimants in the main proceedings, it were to be accepted that that legislation has restrictive effects\n on the freedom to provide services and the free movement of capital, such effects must be seen as an unavoidable consequence\n of any restriction on freedom of establish …", "paragraph_id": "para_95" }, { "text": "35 The questions referred should therefore be answered in the light of Article 43 EC alone.", "paragraph_id": "para_96" }, { "text": "Whether there is a restriction on freedom of establishment", "paragraph_id": "para_97" }, { "text": "36 Freedom of establishment, which Article 43 EC grants to Community nationals and which includes the right to take up and pursue\n activities as self-employed persons and to set up and manage undertakings, under the conditions laid down for its own nationals\n by the law of the Member State where suc …", "paragraph_id": "para_98" }, { "text": "37 In the case of companies, their registered office for the purposes of Article 48 EC serves, in the same way as nationality\n in the case of individuals, as the connecting factor with the legal system of a State. Acceptance of the proposition that\n the Member State in which a subsidiary seeks to es …", "paragraph_id": "para_99" }, { "text": "38 In the present case, the national provisions regarding thin capitalisation provide that, in some circumstances, interest paid\n by a company to another company belonging to the same group in respect of a loan granted by the latter is to be treated as\n a distribution, thereby prohibiting the borrowing company from deducting the interest paid from its taxable profits.", "paragraph_id": "para_100" }, { "text": "39 The documents before the Court show that the fact that interest paid to a related company is treated as a distribution is\n capable of increasing the liability of the borrowing company to tax, not only because taxable profits cannot be reduced by\n the amount of the interest paid, but also because, by treating that interest as a distribution, that company may be liable\n to advance corporation tax when that transaction takes place.", "paragraph_id": "para_101" }, { "text": "40 It must be held that the national provisions relating to thin capitalisation give rise to a difference in treatment between\n resident borrowing companies according to whether or not the related lending company is established in the United Kingdom.", "paragraph_id": "para_102" }, { "text": "41 As regards, first, the national legislation which was in force until 1995, it is true that interest paid by a resident company\n was, in principle, treated as a distribution to the extent to which it represented more than a reasonable commercial return\n on the loan in question, whether or not the …", "paragraph_id": "para_103" }, { "text": "42 With regard, secondly, to the national legislation as in force between 1995 and 1998, the provision which treated interest\n paid by one company to another belonging to the same group of companies as a distribution to the extent to which that interest\n exceeded the amount that would have been paid …", "paragraph_id": "para_104" }, { "text": "43 Similarly, under the legislation in force between 1998 and 2004, interest paid between companies in the same group was governed\n by the rules on transfer pricing when it was payable pursuant to a transaction entered into on terms which differed from what\n they would have been if those companies h …", "paragraph_id": "para_105" }, { "text": "44 In so far as a company is liable to tax in the United Kingdom if it is resident in that Member State or carries on an economic\n activity there through a branch or agency, the provisions in force between 1995 and 2004 primarily imposed restrictions on\n loans granted by non-resident parent companies.", "paragraph_id": "para_106" }, { "text": "45 It follows that, even prior to 1995 and, in any case, between 1995 and 2004, when interest was paid by a resident company\n in respect of a loan granted by a related non-resident company, the tax position of the former company was less advantageous\n than that of a resident borrowing company which had been granted a loan by a related resident company.", "paragraph_id": "para_107" }, { "text": "46 As regards the compatibility of that difference in treatment with the Treaty provisions relating to freedom of establishment,\n the German and United Kingdom Governments submit, in the first place, that those provisions do not apply to a national rule\n which is concerned only with exercising fiscal competence, as allocated in accordance with internationally-recognised principles\n in the DTCs concluded by the United Kingdom.", "paragraph_id": "para_108" }, { "text": "47 Those Governments refer in that regard to the principle that States may allocate profits of companies belonging to the same\n group on the basis of the ‘arm’s‑length’ principle or ‘arm’s-length comparison’ laid down, in particular, in Article 9 of\n the Model Tax Convention on Income and Capital of …", "paragraph_id": "para_109" }, { "text": "48 As regards the implementation of that principle, the United Kingdom Government states that most of the DTCs which that Member\n State has concluded contain a provision permitting the respective competent authorities to agree a compensating adjustment,\n whereby any increase in taxable profits in the State of the borrowing company is matched by a corresponding reduction in taxable\n profits in the State in which the lending company is established.", "paragraph_id": "para_110" }, { "text": "49 It must be pointed out in that regard that, in the absence of any unifying or harmonising Community measures, Member States\n retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly\n with a view to eliminating double taxation (Case …", "paragraph_id": "para_111" }, { "text": "50 However, the national provisions at issue in the main proceedings are not based on a mere allocation of powers between the\n United Kingdom and the countries with which it has concluded DTCs.", "paragraph_id": "para_112" }, { "text": "51 Although, prior to the amendments to the legislation made in 1995, those national provisions stipulated that, save where there\n was a term to the contrary effect in a DTC, interest paid by a resident company in respect of a loan granted by a related\n non-resident company was to be treated as a di …", "paragraph_id": "para_113" }, { "text": "52 Rather than seeking to avoid the double taxation of profits arising in the United Kingdom, those provisions reflected the\n choice made by that Member State to organise its tax system in such a way as to prevent those profits from being untaxed in\n that State through a system of thin capitalisatio …", "paragraph_id": "para_114" }, { "text": "53 Moreover, even if, in some cases, the application of the provisions at issue in the main proceedings did no more than implement\n criteria laid down in DTCs, the fact remains that, in exercising the powers of taxation allocated under them, the Member States\n are obliged to comply with the rules of …", "paragraph_id": "para_115" }, { "text": "54 As regards, lastly, the fact that, under the provisions of a DTC, an increase in taxable profits resulting from a re-characterisation\n of interest may be matched by a corresponding reduction in taxable profits in the State in which the lending company is resident,\n it is true that, since the tax …", "paragraph_id": "para_116" }, { "text": "55 However, the documents before the Court do not show that where, under the legislation in force in the United Kingdom, interest\n paid by a resident company to a related non-resident company falls to be treated as a distribution, the application of that\n national legislation coupled with the releva …", "paragraph_id": "para_117" }, { "text": "56 Even if it were to be accepted that a tax advantage granted in the State in which the lending company is resident might be\n capable of offsetting the charge to tax arising for the borrowing company from the application of the legislation of the State\n in which it is resident, the documents before …", "paragraph_id": "para_118" }, { "text": "57 In the second place, the United Kingdom Government argues that the difference in treatment arising under the legislation at\n issue in the main proceedings does not constitute a direct and certain obstacle to the exercise of freedom of establishment,\n since it has neither the object nor the effect of making it less attractive for companies established in other Member States\n to exercise freedom of establishment in the United Kingdom.", "paragraph_id": "para_119" }, { "text": "58 According to that Government and the German Government, rather than giving rise to discrimination, the legislation in force\n in the United Kingdom merely distinguishes between situations which are not comparable. Those Governments state that it is\n only in a multinational context that a group of …", "paragraph_id": "para_120" }, { "text": "59 In that regard, it must be held, first, that the difference in treatment to which the subsidiaries of non-resident parent\n companies are, by virtue of legislation such as the legislation at issue in the main proceedings, subjected in comparison\n with subsidiaries of resident parent companies is c …", "paragraph_id": "para_121" }, { "text": "60 It is true that, within a group of companies, the risk that the financing of a subsidiary will be structured in such a way\n that profits are transferred to a State where they are subject to a lower rate of tax does not normally arise if all of the\n companies in question are subject, in the same M …", "paragraph_id": "para_122" }, { "text": "61 Secondly, it must be held that a difference in treatment between resident subsidiaries which is based on the place where their\n parent company has its seat constitutes a restriction on freedom of establishment, since it makes it less attractive for companies\n established in other Member States to …", "paragraph_id": "para_123" }, { "text": "62 Contrary to what the United Kingdom Government submits, in order for such legislation to be considered to be a restriction\n on freedom of establishment, it is sufficient that it be capable of restricting the exercise of that freedom in a Member State\n by companies established in another Member St …", "paragraph_id": "para_124" }, { "text": "63 It follows that the difference in treatment which applies to resident borrowing companies by virtue of the national provisions\n relating to thin capitalisation at issue in the main proceedings on the basis of the registered office of the related lending\n company constitutes a restriction on freedom of establishment.", "paragraph_id": "para_125" }, { "text": "The justification for the restriction on freedom of establishment", "paragraph_id": "para_126" }, { "text": "64 Such a restriction is permissible only if it is justified by overriding reasons of public interest. It is further necessary,\n in such a case, that its application be appropriate to ensuring the attainment of the objective in question and not go beyond\n what is necessary to attain it ( Marks & Spencer , paragraph 35, and Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 47).", "paragraph_id": "para_127" }, { "text": "65 The United Kingdom Government, supported by the German Government, argues that the national provisions at issue in the main\n proceedings are justified by both the need to ensure the cohesion of the national tax system and that of preventing tax avoidance.\n According to the United Kingdom Government, the true position is that these are two aspects of the same objective, which is\n to ensure fair and coherent tax treatment.", "paragraph_id": "para_128" }, { "text": "– The need to ensure the cohesion of the national tax system", "paragraph_id": "para_129" }, { "text": "66 As regards, in the first place, the need to ensure the cohesion of the national tax system, the United Kingdom Government\n submits that, by ensuring that ‘covert’ dividend payments are taxed once only, in the appropriate tax jurisdiction, the national\n legislation guarantees, through the DTCs tha …", "paragraph_id": "para_130" }, { "text": "67 The German Government adds that, where the borrowing company and the lending company are resident in the same Member State,\n the tax advantage to which an interest payment gives rise, that is to say, the deduction of that payment from the taxable\n profits of the borrowing company, is always offse …", "paragraph_id": "para_131" }, { "text": "68 In that respect, it should be pointed out that, in paragraphs 28 and 21 respectively of the judgments in Case C-204/90 Bachmann [1992] ECR I-249 and Case C‑300/90 Commission v Belgium [1992] ECR I-305, the Court recognised that the need to maintain the cohesion of a tax system can justify a restr …", "paragraph_id": "para_132" }, { "text": "69 As was stated in paragraphs 55 and 56 of this judgment, even if it were to be accepted that a tax advantage granted in the\n State in which the lending company is resident might be capable of offsetting the charge to tax arising for the borrowing\n company from the application of the legislation of …", "paragraph_id": "para_133" }, { "text": "70 In those circumstances, the restriction on freedom of establishment constituted by the national provisions at issue in the\n main proceedings cannot therefore be justified by the need to ensure the cohesion of the tax system.", "paragraph_id": "para_134" }, { "text": "– The grounds based on the fight against abusive practices", "paragraph_id": "para_135" }, { "text": "71 As regards, in the second place, the issues relating to the fight against tax avoidance, the United Kingdom Government states\n that, unlike the German legislation at issue in Lankhorst-Hohorst , the national provisions relating to thin capitalisation are targeted at a particular form of tax avoid …", "paragraph_id": "para_136" }, { "text": "72 It must be pointed out that, according to established case-law, a national measure restricting freedom of establishment may\n be justified where it specifically targets wholly artificial arrangements designed to circumvent the legislation of the Member\n State concerned (see, to that effect, Case C-264/96 ICI [1998] ECR I‑4695, paragraph 26; Lankhorst‑Hohorst , paragraph 37; Marks & Spencer , paragraph 57; and Cadbury Schweppes and Cadbury Schweppes Overseas , paragraph 51).", "paragraph_id": "para_137" }, { "text": "73 The mere fact that a resident company is granted a loan by a related company which is established in another Member State\n cannot be the basis of a general presumption of abusive practices and justify a measure which compromises the exercise of\n a fundamental freedom guaranteed by the Treaty (see …", "paragraph_id": "para_138" }, { "text": "74 In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices,\n the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements\n which do not reflect economic reality, wi …", "paragraph_id": "para_139" }, { "text": "75 Like the practices referred to in paragraph 49 of the judgment in Marks & Spencer , which involved arranging transfers of losses incurred within a group of companies to companies established in the Member\n States which applied the highest rates of taxation and in which the tax value of those loss …", "paragraph_id": "para_140" }, { "text": "76 As the United Kingdom Government observes, national legislation such as the legislation at issue in the main proceedings is\n targeted at the practice of thin capitalisation, under which a group of companies will seek to reduce the taxation of profits\n made by one of its subsidiaries by electing t …", "paragraph_id": "para_141" }, { "text": "77 By providing that that interest is to be treated as a distribution, such legislation is able to prevent practices the sole\n purpose of which is to avoid the tax that would normally be payable on profits generated by activities undertaken in the national\n territory. It follows that such legislation is an appropriate means of attaining the objective underlying its adoption.", "paragraph_id": "para_142" }, { "text": "78 It remains necessary to determine whether or not that legislation goes beyond what is necessary to attain that objective.", "paragraph_id": "para_143" }, { "text": "79 As the Court held in paragraph 37 of its judgment in Lankhorst‑Hohorst , that requirement is not met by national legislation which does not have the specific purpose of preventing wholly artificial\n arrangements designed to circumvent that legislation, but applies generally to any situation in which the parent company has\n its seat, for whatever reason, in another Member State.", "paragraph_id": "para_144" }, { "text": "80 By contrast, legislation of a Member State may be justified by the need to combat abusive practices where it provides that\n interest paid by a resident subsidiary to a non-resident parent company is to be treated as a distribution only if, and in\n so far as, it exceeds what those companies would have agreed upon on an arm’s-length basis, that is to say, the commercial\n terms which those parties would have accepted if they had not formed part of the same group of companies.", "paragraph_id": "para_145" }, { "text": "81 The fact that a resident company has been granted a loan by a non‑resident company on terms which do not correspond to those\n which would have been agreed upon at arm’s length constitutes, for the Member State in which the borrowing company is resident,\n an objective element which can be independ …", "paragraph_id": "para_146" }, { "text": "82 As the Advocate General stated at point 67 of his Opinion, national legislation which provides for a consideration of objective\n and verifiable elements in order to determine whether a transaction represents a purely artificial arrangement, entered into\n for tax reasons alone, is to be considered …", "paragraph_id": "para_147" }, { "text": "83 In order for such legislation to remain compatible with the principle of proportionality, it is necessary, in the second place,\n that, where the consideration of those elements leads to the conclusion that the transaction in question represents a purely\n artificial arrangement without any underly …", "paragraph_id": "para_148" }, { "text": "84 In the present case, the documents before the Court show that, prior to the amendments made in 1995, the legislation in force\n in the United Kingdom provided that interest paid by a resident subsidiary in respect of a loan granted by a non-resident\n parent company was treated, in its entirety, as …", "paragraph_id": "para_149" }, { "text": "85 However, those documents also show that that legislation did not apply in cases involving a DTC which prevented the application\n of those rules and thus ensured that the interest in question was allowed as a deduction for tax purposes, provided that the\n rate of interest did not exceed what would …", "paragraph_id": "para_150" }, { "text": "86 Whilst a tax regime such as the regime which arises, in cases to which they apply, under the DTCs concluded by the United\n Kingdom appears initially to be based on a consideration of objective and verifiable elements which make it possible to determine\n whether a purely artificial arrangement, en …", "paragraph_id": "para_151" }, { "text": "87 The same applies to the national provisions in force after the legislative amendments introduced in 1995 and 1998. It is a\n matter of agreement that, under those provisions, it is only interest which exceeds what would be paid on an arm’s-length\n basis that falls to be re‑characterised as a distr …", "paragraph_id": "para_152" }, { "text": "88 Contrary to what the Commission submits, where a Member State treats all or part of the interest paid by a resident company\n to a non‑resident company belonging to the same group of companies as a distribution, after having determined that a purely\n artificial arrangement, designed to circumvent …", "paragraph_id": "para_153" }, { "text": "89 In so far as, in such a case, the Member State in which the former company is resident may lawfully treat interest paid by\n that company as a distribution of profits, it is not, in principle, for that State to ensure that profits distributed to a\n non-resident shareholder company are not subject to a series of charges to tax (see, to that effect, Test Claimants in Class IV of the ACT Group Litigation , paragraphs 59 and 60).", "paragraph_id": "para_154" }, { "text": "90 It is only where a Member State decides to exercise its powers of taxation not only, as regards resident subsidiaries, in\n relation to profits made in that State but also, as regards non-resident companies receiving distributions, in relation to\n the income which the latter receive from those sub …", "paragraph_id": "para_155" }, { "text": "91 Furthermore, as was noted in paragraph 49 of this judgment, in the absence of any unifying or harmonising Community measures,\n Member States retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation,\n particularly with a view to eliminating double taxation.", "paragraph_id": "para_156" }, { "text": "92 The answer to Questions 1 and 3 must therefore be that Article 43 EC precludes legislation of a Member State which restricts\n the ability of a resident company to deduct, for tax purposes, interest on loan finance granted by a direct or indirect parent\n company which is resident in another Member …", "paragraph_id": "para_157" }, { "text": "Question 2", "paragraph_id": "para_158" }, { "text": "93 By Question 2, the national court essentially asks whether the answer to Question 1 would be different if the loan finance\n was provided to a resident company, not by a parent company which is resident in another Member State, but:", "paragraph_id": "para_159" }, { "text": "– by another company belonging to the same group of companies, where that company and the parent company of that group are resident\n in another Member State;", "paragraph_id": "para_160" }, { "text": "– by another company belonging to the same group of companies which is resident in another Member State, where the common parent\n companies of the borrowing company and the lending company are resident in a non-member country; or", "paragraph_id": "para_161" }, { "text": "– by another company belonging to the same group of companies which is resident in another Member State but provides the loan\n through a branch situated in a non-member country, where the common parent companies of the borrowing company and the lending\n company are resident in a non-member country; or", "paragraph_id": "para_162" }, { "text": "– by another company belonging to the same group of companies which is, together with the common parent companies of the borrowing\n company and the lending company, resident in a non‑member country.", "paragraph_id": "para_163" }, { "text": "94 In that regard, it must be noted, first of all, that, as was stated in paragraph 61 of this judgment, national legislation\n such as the legislation at issue in the main proceedings which, in treating interest paid by a resident subsidiary to a parent\n company as a distribution, applies a differen …", "paragraph_id": "para_164" }, { "text": "95 It follows that legislation of this kind constitutes a restriction on freedom of establishment which is prohibited, in principle,\n by Article 43 EC, both where a resident borrowing company is granted a loan by a company which is established in another Member\n State and has a direct or indirect ho …", "paragraph_id": "para_165" }, { "text": "96 The answer given to Question 1 therefore also applies to the situation referred to in the first indent to Question 2.", "paragraph_id": "para_166" }, { "text": "97 As regards the situations referred to in the second, third and fourth indents to Question 2, it must be noted, as was stated\n in paragraph 36 of this judgment, that Article 43 EC, read in conjunction with Article 48 EC, entails, for companies or firms\n formed in accordance with the law of a Membe …", "paragraph_id": "para_167" }, { "text": "98 Article 43 EC has accordingly no bearing on the application of national legislation such as the legislation at issue in the\n main proceedings to a situation in which a resident company is granted a loan by a company which is resident in another Member\n State and which does not itself have a contr …", "paragraph_id": "para_168" }, { "text": "99 Where, in such a situation, the Member State which has adopted that legislation treats interest paid by the borrowing company\n as a distribution, that measure affects freedom of establishment, not as regards the lending company, but only as regards\n the parent company which enjoys a level of cont …", "paragraph_id": "para_169" }, { "text": "100 For the same reasons, Article 43 EC has no bearing on the application of that legislation to a situation in which both the\n lending company and the common parent company are resident in a non-member country, nor does it have any bearing on a situation\n in which a lending company which is residen …", "paragraph_id": "para_170" }, { "text": "101 As regards the other provisions of the Treaty relied on by the claimants in the main proceedings, it must be pointed out that,\n as was stated in paragraphs 33 and 34 of this judgment, legislation such as the legislation at issue in the main proceedings,\n which is targeted only at relations withi …", "paragraph_id": "para_171" }, { "text": "102 The answer to Question 2 must therefore be that Article 43 EC has no bearing on legislation of a Member State, such as the\n legislation referred to in Question 1, where that legislation applies to a situation in which a resident company is granted\n a loan by a company which is resident in anothe …", "paragraph_id": "para_172" }, { "text": "Question 4", "paragraph_id": "para_173" }, { "text": "103 By Question 4, the national court essentially asks whether, if legislation such as the legislation at issue in the main proceedings\n were to constitute a restriction on the free movement of capital between Member States and non-member countries within the\n terms of Article 56 EC, such a restriction falls to be treated as existing on 31 December 1993 for the purposes of Article\n 57(1) EC.", "paragraph_id": "para_174" }, { "text": "104 It must be stated at the outset, as is clear from paragraphs 33, 34 and 101 of this judgment, that legislation such as the\n legislation at issue in the main proceedings must be examined in the light of Article 43 EC and not Article 56 EC.", "paragraph_id": "para_175" }, { "text": "105 It is therefore unnecessary to reply to Question 4.", "paragraph_id": "para_176" }, { "text": "Questions 5 to 10", "paragraph_id": "para_177" }, { "text": "106 By Questions 5 to 10, which should be considered together, the national court essentially asks whether, in the event that\n the national measures referred to in the preceding questions are incompatible with Community law, claims such as those brought\n by the claimants in the main proceedings in o …", "paragraph_id": "para_178" }, { "text": "107 As regards the application of the conditions under which a Member State is liable to make reparation for the loss and damage\n caused to claimants as a result of an infringement of Community law, the national court asks the Court to provide guidance\n as to the need for a sufficiently serious breach of that law and the need for a causal link between the breach of the obligation\n imposed on the Member State and the loss and damage suffered by the injured parties.", "paragraph_id": "para_179" }, { "text": "108 Lastly, the national court asks whether, in determining the losses which are to be reimbursed or in respect of which compensation\n is to be provided, it is appropriate to have regard to the question whether the injured parties showed reasonable diligence\n in order to avoid their loss, in particular in bringing actions before the courts.", "paragraph_id": "para_180" }, { "text": "109 It must be stated in that regard that it is not for the Court to assign a legal classification to the actions brought before\n the national court by the claimants in the main proceedings. In the circumstances, it is for the latter to specify the nature\n and basis of their actions (whether they ar …", "paragraph_id": "para_181" }, { "text": "110 However, the fact remains that, according to well-established case-law, the right to a refund of charges levied in a Member\n State in breach of the rules of Community law is the consequence and complement of the rights conferred on individuals by\n Community provisions as interpreted by the Court …", "paragraph_id": "para_182" }, { "text": "111 In the absence of Community rules on the refund of national charges levied though not due, it is for the domestic legal system\n of each Member State to designate the courts and tribunals having jurisdiction and to lay down the detailed procedural rules\n governing actions for safeguarding rights …", "paragraph_id": "para_183" }, { "text": "112 In addition, where a Member State has levied charges in breach of the rules of Community law, individuals are entitled to\n reimbursement not only of the tax unduly levied but also of the amounts paid to that State or retained by it which relate\n directly to that tax. As the Court held in paragra …", "paragraph_id": "para_184" }, { "text": "113 However, contrary to what the claimants in the main proceedings contend, neither the reliefs or other tax advantages waived\n by a resident company in order to be able to offset in full a tax levied unlawfully against an amount due in respect of another\n tax, nor the loss and damage suffered by s …", "paragraph_id": "para_185" }, { "text": "114 That being the case, it is for the national court to determine whether the expenditure referred to in the preceding paragraph\n represents, in the case of the companies concerned, financial losses suffered by reason of a breach of Community law for which\n the Member State in question is responsible.", "paragraph_id": "para_186" }, { "text": "115 While it has not gone so far as to rule out the possibility of a State being liable in less restrictive conditions on the\n basis of national law, the Court has held that there are three conditions under which a Member State will be liable to make\n reparation for loss and damage caused to individ …", "paragraph_id": "para_187" }, { "text": "116 It is, in principle, for the national courts to apply the criteria for establishing the liability of Member States for damage\n caused to individuals by breaches of Community law, in accordance with the guidelines laid down by the Court for the application\n of those criteria ( Test Claimants in the FII Group Litigation , paragraph 210 and the case-law cited there).", "paragraph_id": "para_188" }, { "text": "117 In the main proceedings, the first condition is plainly satisfied as regards Article 43 EC. That provision confers rights\n on individuals (see Brasserie du Pêcheur and Factortame , paragraphs 23 and 54, and Test Claimants in the FII Group Litigation , paragraph 211).", "paragraph_id": "para_189" }, { "text": "118 As regards the second condition, it should be pointed out, first, that a breach of Community law will be sufficiently serious\n where, in the exercise of its legislative power, a Member State has manifestly and gravely disregarded the limits on its discretion.\n Secondly, where, at the time when i …", "paragraph_id": "para_190" }, { "text": "119 In order to determine whether a breach of Community law is sufficiently serious, it is necessary to take account of all the\n factors which characterise the situation brought before the national court. Those factors include, in particular, the clarity\n and precision of the rule infringed, whether …", "paragraph_id": "para_191" }, { "text": "120 On any view, a breach of Community law will clearly be sufficiently serious if it has persisted despite a judgment finding\n the infringement in question to be established, or a preliminary ruling or settled case-law of the Court on the matter from\n which it is clear that the conduct in question constituted an infringement ( Test Claimants in the FII Group Litigation , paragraph 214 and the case-law cited there).", "paragraph_id": "para_192" }, { "text": "121 In the present case, in order to determine whether a breach of Article 43 EC committed by the Member State concerned was sufficiently\n serious, the national court must take into account the fact that, in a field such as direct taxation, the consequences arising\n from the freedoms of movement gua …", "paragraph_id": "para_193" }, { "text": "122 As regards the third condition, namely the requirement for a causal link between the breach of the obligation resting on the\n State and the loss or damage sustained by the injured parties, it is for the national court to assess whether the loss and\n damage claimed flows sufficiently directly from the breach of Community law to render the State liable to make it good ( Test Claimants in the FII Group Litigation , paragraph 218 and the case-law cited there).", "paragraph_id": "para_194" }, { "text": "123 Subject to the right of reparation which flows directly from Community law where those conditions are satisfied, it is on\n the basis of the rules of national law on liability that the State must make reparation for the consequences of the loss and\n damage caused, provided that the conditions for …", "paragraph_id": "para_195" }, { "text": "124 It should be made clear that, in order to determine the loss or damage for which reparation may be granted, the national court\n may inquire whether the injured person showed reasonable diligence in order to avoid the loss or damage or limit its extent\n and whether, in particular, he availed himself in time of all the legal remedies available to him ( Brasserie du Pêcheur and Factortame , paragraph 84).", "paragraph_id": "para_196" }, { "text": "125 In that regard, the Court held in paragraph 106 of the judgment in Metallgesellschaft and Others , with respect to tax legislation which did not afford the possibility of benefiting from the group taxation regime to resident\n subsidiaries of non-resident parent companies, that the exercise of ri …", "paragraph_id": "para_197" }, { "text": "126 Similarly, the application of the provisions relating to freedom of establishment would be rendered impossible or excessively\n difficult if claims for restitution or compensation based on infringement of those provisions were rejected or reduced solely\n because the companies concerned had not ap …", "paragraph_id": "para_198" }, { "text": "127 It is for the national court to determine whether, should it be established that the national legislation at issue in the\n main proceedings, combined, where appropriate, with the relevant provisions of the DTCs, did not satisfy the conditions set\n out in paragraph 92 of this judgment and thus co …", "paragraph_id": "para_199" }, { "text": "128 The answer to Questions 5 to 10 must therefore be as follows:", "paragraph_id": "para_200" }, { "text": "– In the absence of Community legislation, it is for the domestic legal system of each Member State to designate the courts\n and tribunals having jurisdiction and to lay down the detailed procedural rules governing actions for safeguarding rights\n which individuals derive from Community law, includi …", "paragraph_id": "para_201" }, { "text": "– Where it is established that the legislation of a Member State constitutes an obstacle to freedom of establishment prohibited\n by Article 43 EC, the national court may, in order to establish the recoverable losses, determine whether the injured parties\n have shown reasonable diligence in order to …", "paragraph_id": "para_202" }, { "text": "The application for a limitation on the temporal effects of the judgment", "paragraph_id": "para_203" }, { "text": "129 At the hearing, the United Kingdom Government requested the Court, if it were to interpret Community law as precluding national\n legislation such as the legislation at issue in the main proceedings, to limit the temporal effects of its judgment, even\n as regards legal proceedings brought before the date on which this judgment is delivered. That Government estimates the cost\n of an interpretation of Community law which is unfavourable to it at EUR 300 million.", "paragraph_id": "para_204" }, { "text": "130 It is clear that the United Kingdom Government has not, in the present case, stated the basis on which it reaches its estimate\n of the costs of the effects of this judgment, nor even whether that amount relates only to the financial consequences arising\n under the main proceedings or also to those which would flow from this judgment in other cases.", "paragraph_id": "para_205" }, { "text": "131 In addition, the amount put forward by that Government proceeds on the hypothesis that the answers given by the Court would,\n in their entirety, be those proposed by the claimants in the main proceedings, which, however, it is for the national court\n to determine.", "paragraph_id": "para_206" }, { "text": "132 In those circumstances, the Court does not have sufficient information before it to consider the application made by the United\n Kingdom Government.", "paragraph_id": "para_207" }, { "text": "133 It is therefore not appropriate to limit the temporal effects of the present judgment.", "paragraph_id": "para_208" }, { "text": "Costs", "paragraph_id": "para_209" }, { "text": "134 Since these proceedings are, for the parties to the main proceedings, a step in the actions pending before the national court,\n the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs\n of those parties, are not recoverable.", "paragraph_id": "para_210" }, { "text": "On those grounds, the Court (Grand Chamber) hereby rules:", "paragraph_id": "para_211" }, { "text": "1. Article 43 EC precludes legislation of a Member State which restricts the ability of a resident company to deduct, for tax\n purposes, interest on loan finance granted by a direct or indirect parent company which is resident in another Member State\n or by a company which is resident in another Mem …", "paragraph_id": "para_212" }, { "text": "2. Article 43 EC has no bearing on legislation of a Member State, such as the legislation referred to in Question 1, where that\n legislation applies to a situation in which a resident company is granted a loan by a company which is resident in another\n Member State or in a non-member country and whi …", "paragraph_id": "para_213" }, { "text": "3. 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