SCHEUTEN SOLAR TECHNOLOGY GmbH Restrictions on the Deduction of Interest

1. SCHEUTEN SOLAR TECHNOLOGY GmbH Restrictions on the Deduction of Interest under the Interest and Royalty Directive Dr. J.H.M. Arts

2. FACTS (1) • SCHEUTEN SOLAR TECHNOLOGY GmbH (D) IS A SUBSIDIARY OF SCHEUTEN (NL) • SCHEUTEN OWNS ALL SST’S SHARES SINCE AUGUST 8, 2003 • SST HAS RECEIVED LOANS FROM SCHEUTEN BETWEEN AUGUST 8, 2003 AND DECEMBER 1, 2004 TO AN AMOUNT IN TOTAL OF € 5,180,000 • THE INTEREST RATE IS 5%

3. FACTS (2) • IN 2004, SST PAID INTEREST ON THE LOANS RECEIVED FROM SCHEUTEN, TO AN AMOUNT IN TOTAL OF €154,584 • THE INTEREST PAID, WAS FULLY DEDUCTIBLE FOR THE GERMAN CORPORATION TAX (KÖRPERSCHAFTSTEUER)

4. DISPUTE GEWERBESTEUER 2004 • DISPUTE BEFORE THE GERMAN TAX COURT: IS IT ALLOWED TO INCLUDE PART OF THE INTEREST PAID BY SST TO SCHEUTEN, IN THE TAX BASE OF THE GERMAN TRADE TAX (GEWERBESTEUER) IN 2004?

5. GEWERBESTEUER • GEWERBESTEUER (TRADE TAX) IS A COMMUNAL TAX • IN 2004 TRADE TAX IS LEVIED ON THE BASIS OF THE PROFIT AMOUNT FOR INCOME OR CORPORATION TAX PURPOSES WITH SEVERAL CORRECTIONS • A MAJOR CORRECTION IS THE INCLUSION OF ONE HALF OF DEDUCTED INTEREST PAID ON LONG TERM DEBTS • FOR SST THIS RESULTED IN EFFECT IN A NON-DEDUCTIBILITY OF ONE HALF OF THE INTEREST PAID TO SCHEUTEN (€77,292) FOR TRADE TAX PURPOSES

6. VIOLATION OFTHE INTEREST AND ROYALTY DIRECTIVE? • BEFORE THE GERMAN TAX COURT, SST DISPUTED THE INCLUSION OF THE INTEREST IN THE TRADE TAX BASE ONLY ON THE BASIS OF THE INTEREST AND ROYALTY DIRECTIVE • SST ARGUED THAT THE INCLUSION WAS A VIOLATION OF THE DIRECTIVE

7. INTEREST AND ROYALTY DIRECTIVE (1) • THE INTEREST AND ROYALTY DIRECTIVE OUGHT TO BE IMPLEMENTED BY THE EU MEMBER STATES IN NATIONAL LAW BEFORE 2004 • THE DIRECTIVE FORBIDS ANY TAXATION ON INTEREST AND ROYALTY PAYMENTS BETWEEN ASSOCIATED COMPANIES IN THE STATE OF SOURCE • SST AND SCHEUTEN ARE ASSOCIATED COMPANIES WITHIN THE MEANING OF THE DIRECTIVE • INCLUSION OF PART OF THE INTEREST PAID BY SST TO SCHEUTEN, IN THE TRADE TAX BASE COULD THEREFORE BE A VIOLATION OF THE DIRECTIVE, IF IT IS REGARDED AS A FORBIDDEN TAXATION WITHIN THE MEANING OF THE DIRECTIVE

8. INTEREST AND ROYALTY DIRECTIVE (2) • EU MEMBER STATES ARE ALLOWED TO APPLY THE DIRECTIVE IN INDIVIDUAL CASES ONLY AFTER A HOLDING PERIOD OF TWO YEARS • IN THE CASE OF SST THE TWO YEARS HOLDING PERIOD WAS NOT YET FULFILLED • THEREFORE GERMANY COULD STILL BE ALLOWED TO INCLUDE THE INTEREST PAID BY SST TO SCHEUTEN IN THE TRADE TAX BASE IN 2004

9. PRELIMINARY QUESTIONS BY BFH BUNDESFINANZHOF (GERMAN FEDERAL TAX COURT) RAISED THE FOLLOWING PRELIMINARY QUESTIONS TO THE ECJ: • IS AN INCLUSION OF INTEREST PAID BY A COMPANY OF ONE MEMBER STATE TO AN ASSOCIATED COMPANY OF ANOTHER MEMBER STATE, IN THE TRADE TAX BASE PROHIBITED BY THE INTEREST AND ROYALTY DIRECTIVE? • IF SO, IS A MEMBER STATE ALLOWED TO DISALLOW APPLICATION OF THE DIRECTIVE WITHIN THE TWO YEARS HOLDING PERIOD WITH A DIRECT APPEAL ON THE DIRECTIVE?

10. QUESTION 1: ARGUMENTS (1) THE INTEREST AND ROYALTY DIRECTIVE PROHIBITS ANY TAXATION ON INTEREST AND ROYALTY PAYMENTS WHETHER BY DEDUCTION AT SOURCE OR BY ASSESSMENT: • IS AN INCLUSION IN A TAXABLE BASE (OR A NON-DEDUCTIBILITY) • A TAX IMPOSED ON SUCH PAYMENTS • BY ASSESSMENT?

11. QUESTION 1: ARGUMENTS (2) • IF SO, IS SUCH AN INCLUSION ALLOWED FOR REASONS OF PREVENTING FRAUD OR ABUSE? • IN A GENERAL PROVISION? • IN CASE OF A GENERAL PROVISION, DO MEMBER STATES ALWAYS HAVE TO ALLOW THE POSSIBILITY OF PROOF OF THE ABSENCE OF FRAUD OR ABUSE? • ARE ONLY CASE TO CASE TESTS ON THE EXISTENCE OF FRAUD OR ABUSE ALLOWED?

12. QUESTION 2: ARGUMENTS • HOW MUST ARTICLE 1, PARAGRAPH 10, INTEREST AND ROYALTY DIRECTIVE BE READ? • THE PROVISION ALLOWS MEMBER STATES TO DISALLOW THE BENEFITS OF THE DIRECTIVE, IF DEBTOR AND CREDITOR ARE NOT ASSOCIATED FOR AN UNINTERRUPTED PERIOD OF AT LEAST TWO YEARS • MUST THE OPTION EXPLICITLY BE IMPLEMENTED IN NATIONAL LAW TO BE APPLICABLE? • OR IS IT A GENERAL ALLOWANCE FOR MEMBER STATES THAT CAN BE CALLED UPON IN ANY CASE CONFLICTING WITH THE DIRECTIVE, BEFORE THE END OF THE TWO YEARS PERIOD?

13. PROVISIONS THAT MAY BE AFFECTED(EXAMPLES FROM THE NETHERLANDS) • HYBRID LOANS (ART. 10-1-d VPB) EXEMPTION ARTICLE 4 INTEREST AND ROYALTY DIRECTIVE APPLICABLE? • PREVENTION OF TAX BASE EROSION THROUGH LOANS BETWEEN ASSOCIATED PARTIES (ART. 10a VPB) ART. 5 DIRECTIVE APPLICABLE? • PREVENTION OF DEDUCTION OF NOT REALLY OWED INTEREST (ART. 10b VPB) • THIN CAPITALISATION RULES (ART. 10d VPB)