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Hornbach-Baumarkt v Finanzamt Landau

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In Hornbach-Baumarkt v Finanzamt Landau (Case C-382/16) (31 May 2018), the CJEU found that a German provision allowing the German tax authorities to deem a taxable charge for the giving of a guarantee was not in breach of art 54 (freedom of establishment) of the Treaty on the Functioning of the European Union (TFEU).

Hornbach was a German company which operated do-it-yourself (DIY) and building materials shops in Europe. It held an indirect shareholding of 100% in two Dutch companies. These subsidiaries required bank loans to continue their business operations and to finance the planned construction of a DIY store and garden centre. The granting of the loans was conditional on the provision of comfort letters containing a guarantee statement from Hornbach, which Hornbach provided.

Taking the view that unrelated third parties, in the same or similar circumstances, would have paid consideration for the guarantees, the German tax authorities decided that the income of Hornbach had to be increased by an amount corresponding to a deemed remuneration. Hornbach contended that the relevant provision of German law, on which the tax authorities relied, was contrary to TFEU art 54 as no such charge would have existed if the guarantee had been given for a company resident in Germany.

The CJEU accepted that this difference in treatment constituted a restriction on the freedom of establishment. However, it found that it was justified by public interest and the need to maintain a ‘balanced allocation of the power to tax’. It added that it had previously held that allowing companies resident in a member state to transfer their profits, in the form of unusual or gratuitous advantages, to companies established in other member states could undermine the balanced allocation of the power to tax between the member states. The court concluded that the relevant German provision enabled Germany to exercise its power of taxation in relation to activities carried on in its territory.

The court observed, however, that the loans were necessary for the business of the Dutch subsidiaries in which Hornbach was an indirect shareholder; and that Hornbach therefore may have had an economic interest in the financial success of the subsidiaries, which explained the fact that it received no consideration for the guarantees. This was for the domestic courts to decide.

Read the decision.

Why it matters: Although the CJEU found that a company, acting at arm’s length, would have charged for the giving of the guarantees, it was prepared to accept that a parent company may have a vested interest in the success of its subsidiary, which could explain the absence of remuneration. Applying this decision in practice may prove problematic. How will tax authorities across Europe measure the extent to which favourable terms agreed between a parent and its subsidiary are justified by the economic interest of the parent company?

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