Tom O’Shea: Portugal Loses Thin Cap Case Before the ECJ

Tom O’Shea has just published an inpiring paper on the ECJ Jugement of 3 October 2013, Itelcar (C-282/12): “Portugal Loses Thin Cap Case Before the ECJ”, Tax Notes Int’l, May 5, 2014, p. 451

As EmberTom summarises it:  “the European Court of Justice held that Portuguese thin capitalization rules were contrary to article 56 of the EC Treaty (free movement of capital) when the lending company established in a non-EU state does not have a shareholding in the borrowing company and the rules at issue presume that the overall debt owed by the borrowing company forms part of an arrangement designed to avoid the tax normally payable or when they do not make it possible, from the outset, to determine their scope with sufficient precision” (p. 451).

Tom highlights, inter alia, that “in Itelcar, the principle of legal certainty is used by the Court to defeat the argument of the Portuguese government that the rules in question only applied, in practice, to situations when there was a direct or indirect shareholding in place, which gave the lending company a definite influence over the financing decision of the borrowing company. The Court explained that:

the rules in question do not make it possible, at the outset, to determine their scope with sufficient precision. Accordingly, they do not meet the requirements of legal certainty, in accordance with which rules of law must be clear, precise and predictable as regards their effects, especially where they may have unfavourable consequences for individuals and companies. As it is, rules which do not meet the requirements of the principle of legal certainty cannot be considered to be proportionate to the objectives pursued” (p. 455).

Many thanks, dear Tom for this valuable contribution. I will only add that Spanish thin capitalisation rules have been replaced by severe restrictions to interest deductibility. The new rules do no discriminate between residents and not-residents buy present new problems from the viewpoint of the ability to pay principles. From a constitutional point of view the new restrictions should also respect the principle of legal certainty.

Pedro M. Herrera

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