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CJEU issues key rulings on tax avoidance and beneficial ownership

Thursday, 21 March, 2019

Last month, the Court of Justice of the European Union (CJEU) issued a series of important judgments dealing with tax avoidance and beneficial ownership in the context of the EU Parent-Subsidiary Directive (PSD) and the Interest and Royalties Directive (IRD).

The rulings dealt with tax disputes in Denmark, where the tax administration had taken the view that certain corporate taxpayers were avoiding Danish withholding tax through the use of intermediary holding companies. These intermediaries were controlled by entities that otherwise would not have access to the directives' benefits.

Several of the cases thus turned on the exact meaning of 'beneficial ownership' in the IRD. Exemption from withholding tax on cross-border interest and royalty payments under the IRD is restricted to the ultimate beneficial owner of the payments, which is not always clear if intermediaries are used to claim the exemption.

In the Danmark cases, the CJEU held that the beneficial owner of an interest payment must be interpreted as the entity that actually benefits from the interest paid to it and has the power to freely determine the use to be given to that income received.

The court was also called on to interpret the phrase 'artificial arrangements' in the context of tax avoidance strategies. It decided that the 'artificial' description applies where the principal objective, or one of the principal objectives, is to obtain a tax advantage, rather than being 'wholly' or 'purely' artificial.

This, says Loyens & Loeff, is a broadening of the EU definition of tax avoidance, implying that companies using such arrangements can be denied the double taxation protection clauses of the PSD and IRD. In the case in point, the artificiality lay in the fact that the company receiving the interest or dividends passed all, or almost all, of it on very soon after its receipt, to entities that were not entitled to the directives' benefits.

However, the 'purely artificial' criterion remains the relevant criterion when assessing if a transaction is fraudulent or abusive.

In a further significant ruling, the court declared that EU Member States should apply a general anti-abuse principle in order to refuse the benefits of the directives, even in the absence of anti-abuse provisions in national law or tax treaties. This is especially useful for EU Member States that have not implemented domestic anti-abuse rules as prescribed by the PSD.