EU advocate general opinion addresses withholding tax on unpaid interest

By Stoycho Dulevski, Senior Associate (Tax) at Kolev, Angelov & Miteva Law Firm, and Assistant Professor in Tax law at the University of National and World Economy, Bulgaria

On 30 September, Advocate General Rantos delivered his opinion regarding the assessment of withholding tax on unpaid interest in Case С-257/20 Vivacom Telecom Bulgaria.

The opinion is intriguing as it focuses on the case law of the EU Court of Justice regarding tax avoidance, the arm’s length principle, the possible discrimination between domestic and foreign legal entities, the domestic procedure for reimbursement of withholding tax and the abuse of law.

It will be interesting to see whether the EU Court of Justice follows the views shared in the Advocate General opinion in its judgement.

Background

Vivacom Telecom Bulgaria, as a borrower, entered into an agreement for a convertible interest-free loan with its own shareholder, InterV Investment, with a 60-year maturity period. According to the agreement, the repayment obligation would be waived if at any time the loan is converted into an in-kind contribution in Vivacom equity.

The Bulgarian tax administration initiated a tax audit and determined that the loan had not been converted into equity, and it had neither been repaid nor had interest been paid. Therefore, the tax administration applied article 16, paragraph 2, item 3 of the Bulgarian Corporate Income Tax Act, which deals with tax evasion from a corporate tax perspective.

Through the audit, the tax authority assessed withholding tax to InterV Investment on the interest that had not been paid. The tax administration determined the market interest rate on the loan to calculate unpaid interest.

Advocate General opinion

Тhe Advocate General came to several conclusions.

Article 5, paragraph 4 and article 12, letter ‘b’ TEU, as well as article 47 of the Charter of the Fundamental Rights of the EU must be interpreted as not applying for the interpretation of article 16, paragraph 2, item 3 of the Corporate Income Tax Act, as the latter provision does not constitute an application of EU law.

Article 4 of Council Directive 2003/49/EC must be interpreted as not requiring interest payments such as those in article 4, paragraph 1, letter ‘d’ thereof to be classified as a profit distribution under article 5 of Council Directive 2011/96/EU.

Council Directive 2011/96 must be interpreted as not applying to a withholding tax on fictitious interest income on an interest-free loan provided by the parent company to its subsidiary.

Article 49 TFEU and article 63, paragraphs 1 and 2 TFEU must be interpreted as not precluding, in principle, national legislation, which, by application of the “arm’s length principle” and with an aim to fight tax avoidance, provides a withholding tax on fictitious interest, which a resident subsidiary, having received an interest-free loan granted by its foreign parent company, was required to pay to the latter on market conditions. This is the case provided that the national tax provisions regarding tax adjustment are based on an individual assessment of the transaction in question, ensuring the taxable person the option to provide proof of economic considerations which may have influenced such person to conclude the transaction in question.

Council Directive 2008/7/EC must be interpreted as not precluding a withholding tax as at issue in the present case.

—Stoycho Dulevski is a Senior Associate (Tax) at Kolev, Angelov & Miteva Law Firm, and  Assistant Professor in Tax law at the University of National and World Economy, Bulgaria.