Lankhorst-Hohorst decision
With the Lankhorst-Hohorst decision , the European Court of Justice declared the German rules on shareholder external financing of the 1996 Corporate Income Tax Act to be incompatible with the EC Treaty .
Facts and subject of dispute
Lankhorst-Hohorst GmbH, a limited liability company with headquarters in Germany had, from its sole shareholder of Lankhorst-Hohorst BV (Netherlands), in December 1996, a loan received. This loan fulfilled the requirements of the then applicable § 8a Corporation Tax Act (KStG) 1996, so the interest payments were treated as hidden profit distributions , they did not reduce the tax profit of Lankhorst-Hohorst GmbH in Germany.
Lankhorst-Hohorst GmbH brought an action against this treatment of the loan before the Finance Court in Münster , which had doubts about the compatibility of the German regulation with European law, and therefore in a preliminary ruling the European Court of Justice to clarify the compatibility of the regulation of § 8a KStG 1996 with the freedom of establishment requested according to Art. 43 EGV.
The decision of the European Court of Justice
With judgment of December 12, 2002 (case C-324/00) Lankhorst-Hohorst , the ECJ decided that a regulation such as § 8a KStG 1996, which means that interest payments to non-residents in Germany could be treated worse than otherwise comparable interest payments to residents are not compatible with the freedom of establishment. The decisive factor was that an interest payment that a German GmbH would have paid to a German parent company in an otherwise identical situation would not have been classified as a hidden profit distribution and would have reduced the profit of the GmbH.
Different justification attempts, such as the submission of the German, Danish, British and European Commission that such a regulation combats tax avoidance , since an interest payment to a domestic parent company is subject to tax in Germany, only a payment to non-residents is not , the ECJ rejected.
Effects of the judgment
The judgment led to the inapplicability of § 8a KStG 1996 for intra-European cases. Since many other European countries have similar regulations in their tax laws, not only Germany but also the other countries are potentially affected by this ruling.
With effect from January 1, 2004, Germany changed Section 8a of the Corporation Tax Act on shareholder external financing . Hardly any tax change in recent years has met with such extensive criticism from the specialist literature. The extension of the scope of application of the regulation to domestic shareholders, which is considered to be absolutely necessary, increases the number of financings affected dramatically and central legal consequences have not been clarified for a long time. However, the extent to which the new version is compatible with European law is still controversial.
