The BFH recently referred a case to the European Court of Justice (ECJ) to determine whether German law is compatible with the EC Interest and Royalties Directive for the years from 2004 (see also GTLN 6/2007 and 4/2008). The case involves the 50% trade tax add-back of long-term interest expenses that was in effect until the end of 2007 (as from 2008, 25% of all interest expense must be added back).
The Interest and Royalties Directive exempts interest and royalty payments between associated companies from “any taxes imposed” in the source state. However, EU Member States may opt not to apply the Directive when the debtor and creditor have not been associated companies for an uninterrupted period of at least two years. In the first instance, the lower tax court ruled against the taxpayer on this basis given that Member States have an option not to provide the benefits of the Directive during this period.
Taxpayers should seek to keep assessments open until the ECJ issues its decision. A decision in favor of the taxpayer is likely to also be relevant for cases under the rules that came into effect in 2008.
