Targeted interest deduction limitation rules post-Lexel

Sammanfattning: The need for targeted interest deduction rules is far from over. Most recently targeted interest deduction limitation rules have been presented in the proposal for a Directive implementing OECD Pillar Two in the EU, as well as in the proposal for a Directive on debt-equity bias reduction allowance. In Lexel, the Court of Justice of the European Union struck down the Swedish targeted interest deduction legislation of 2013 regarding loans between associated companies. The Court considered the legislation to constitute an unjustifiable restriction of the freedom of establishment. In essence, the Court stated that only wholly artificial arrangements could be the object of the targeted interest deduction rules. After Lexel, the question that arises is whether targeted interest deduction rules, with the aim to combat tax base erosion, have any future, or must Member States only rely on the application of anti-abuse rules? The outcome in the Lexel case seems to differ from previous case law. Although the Court found the German legislation in Lankhorst-Hohorst not to be justified, the legislation in Thin Cap, SIAT, and Masco Denmark was considered justified, if not proportionate. As this thesis explains, the reason for the Court's judgment in Lexel may lie in the sudden change in the legal facts and arguments presented by the Swedish tax authorities during the proceedings. Therefore, the thesis argues that the SIAT judgment remains intact, meaning that Member States may impose targeted interest deduction rules, which even require taxpayers to prove the right to deduction, as long as the applied rules meet the principle of legality, and are thus proportional in the eye of the Court.