The EC has decided to open an in-depth investigation into whether Luxembourg may have granted illegal state aid to the Huhatmäki group. Because the structure under review can be replicated in exactly the same form in the Netherlands, and in fact has been widely used for many years, the question arises whether the same claim may be expected against the Netherlands. 

The situation in the Huhtamäki case can be summarized as follows. Huhtamäki, a multinational engaged in the packaging industry headquartered in Finland, had set up a Luxembourg finance company, Huhtalux. Huhtalux borrowed money on an interest free basis from Huhtamäki Ireland Limited, an Irish affiliate. The proceeds of the borrowing were lent to Huhtamäki's US group on an interest bearing basis. Huthalux received interest that was taxable in Luxembourg, but it was allowed to claim a deduction for deemed interest expense incurred on the interest free loan from Huhtamäki Ireland Limited for Luxembourg tax purposes. 

Effectively Huhtalux was taxed on a small margin only in Luxembourg. Ireland did not tax the imputed interest. The Luxembourg tax treatment was confirmed in a number of tax rulings issued by the Luxembourg tax authorities. The EC has taken the preliminary view that this arrangement gives rise to illegal state aid. The Luxembourg corporate income tax system is the reference system, according to the EC. That system seeks to tax companies on profits realized for commercial accounting purposes. Allowing an imputed interest deduction is a deviation from the reference system, because the result thereof is that less than the commercial profits of a company are taxed. For reasons not further elaborated on in this blog, the EC is of the view that there is no justification for the derogation.

If Huhtalux were established in the Netherlands, the tax treatment would be exactly the same, i.e., as a result of an imputed interest deduction, Huthalux would be taxed in the Netherlands only on a small margin and the imputed interest would not be taxed in Ireland. A ruling could be obtained to confirm this result, but such a ruling is not necessary. Hence, the question arises whether the EC could assert that the Netherlands grants state aid in these situations based on the argument that granting a deduction for imputed interest is a deviation from the reference system. 

When comparing the Luxembourg corporate income tax system to the Dutch system, there is an important difference. In the Netherlands, corporate taxpayers are taxed on all the profits realized over the lifetime of the company, so-called total profits ('totaalwinst'). Unlike in Luxembourg, the concept of total profit is not tied to commercial accounting profit. Total profit has to be determined by eliminating the effects that shareholder relationships may have had on the profits a company makes. Adjustments so made are considered informal capital contributions or disguised dividend distributions, as the case may be. This doctrine is based on a line of Dutch Supreme Court decisions which originates from the 1950's. It has been codified since 2002, but that has not changed the fundamental principle. 

There is no discretion for the Dutch tax authorities (or the taxpayer) in making these adjustments and it is clear that adjustments can be made upward and downward, that they apply in domestic and cross border situations and within corporate groups as well as between companies and their individual shareholders. So, unlike the situation in Luxembourg, it seems difficult to claim that the adjustments in the Netherlands are deviations from the reference system; the adjustments are an integral part of the reference system. So no risk of illegal state aid for structures involving interest free loans in the Netherlands? 

Like in Luxembourg, the end result is still that a deduction can be claimed for imputed interest that is not taxed in the hands of the creditor. It would be hard to justify that the same end result would lead to different conclusions as to whether illegal state aid has been granted. To establish illegal state aid in the Netherlands, however, the EC's approach has to be different from the approach taken in Luxembourg. The EC would have to claim that the Dutch case law on which the adjustments are based represent a deviation from the reference system, or that the tax system as such gives rise to illegal state aid. For example, because it allows a deduction for an imputed expense regardless whether there is a pick up elsewhere and that this is a feature that is predominantly used by multinationals (an approach similar to the decision in the Gibraltar case). In addition, the question arises whether in the Dutch context the state aid would qualify as existing aid given that it originates from the 1950's. 

The Huhtamäki case is only in the investigative phase, so we may not know for some time whether granting a deduction for imputed interest expense represents state aid at all. Meanwhile, the use of structures with interest free loans in the Netherlands may disappear for other reasons: the Netherlands will no longer give rulings for these structures as of 1 July 2019 if the imputed interest is not taxed elsewhere and the Dutch government has announced a study whether downward adjustments should be allowed in the future only if the deemed expense is taxed elsewhere.