This recent Advocate General (“AG”) opinion looks at the concept of beneficial ownership in several areas. The interest cases examined are covered by the EU Interest and Royalties Directive (2003/49/EC) which is designed to eliminate withholding taxes on cross-border interest payments within a group by abolishing withholding taxes on interest payments arising in an EU member source state.

The dividend cases are covered by the EU Parent Subsidiary Directive (90/435/EEC), the objective of which is to exempt dividends and other profit distributions paid by subsidiaries to their parents from withholding taxes, etc.

The opinion of the AG, if representative of the Court of Justice of the European Union’s (“CJEU”) final ruling, could have far reaching consequences for many companies who place reliance on the two aforementioned directives to eliminate withholding taxes when making cross border payments of dividends, royalties and interest.

Background

AG Kokott of the CJEU recently released her opinion in four cases dealing with the interpretation of the beneficial ownership concept where the Interest Royalty Directive applies (C-115/16, C-118/16, C-119/19, and C-299/16) and in two cases where the Parent-Subsidiary Directive applies (C-116/16 and C-117/16).

The overall issue in the cases is whether Danish companies should have withheld tax in connection with interest and dividend payments to their parent companies, which are resident in other EU member states. The Danish tax authority’s view is that the parent companies in question are so-called conduit companies because the amounts received have been passed on to other group entities in tax haven countries.

The parent companies are therefore not the beneficial owners of the dividends or interest received, and the Danish subsidiaries should consequently have withheld tax at source in connection with such payments. The number of cases is substantial, and the values involved are in the billions.

Many of the cases are pending before the two Danish high courts, which have referred 6 representative cases to the CJEU for preliminary rulings on the interpretation of EU law. In particular, the questions raised concern the interpretation of the Parent-Subsidiary Directive and the Interest and Royalties Directive and their implementation into Danish law in addition to the right to freedom of establishment in the Article 49 of the Treaty on the Functioning of the EU.

Opinion

The AG stated that the concept of beneficial owner must be interpreted under EU law autonomously and independently of the OECD Model Tax Convention. Under EU law, the decisive criterion to establish beneficial ownership is whether the recipient receives the payments for its own benefit rather than as a trustee.

The OECD Model Tax Convention and its commentaries have no binding effect on the interpretation of EU legislation. If this was otherwise, OECD member countries would be able to decide on the interpretation of an EU directive.

The AG further added that a Member State that does not wish to recognise a company resident in a different Member State to which interest was paid as the beneficial owner of the interest must, in principle, state whom it considers to be the beneficial owner to assume that abuse exists.

This is necessary to determine whether a more favourable tax result is achieved as a result of the arrangement qualified as abusive. In particular, in cross-border cases, the taxable person may have an enhanced duty to assist.

The AG pointed out that under the Parent-Subsidiary Directive, the beneficial owner requirement is not relevant as that Directive does not refer to the concept of beneficial ownership. Hence, a parent company resident in another Member State receiving dividends from its Danish subsidiary can benefit from the directive if both the parent and the subsidiary are taxed in their respective jurisdictions.

Regarding the notion of abuse that is common to both directives, the AG stated that abuse must be determined from an overall examination of the facts of the case, which is for the national court to conduct.

A wholly artificial arrangement that does not reflect economic reality or the essential aim of which is to avoid tax that would otherwise be payable based on the purpose of the law may constitute abuse under tax law.

Therefore, tax authorities must demonstrate that an appropriate arrangement would have given rise to a tax liability, while the taxable person must demonstrate that there are important, non-fiscal reasons for the arrangement chosen.

The AG concluded also that an abuse may be assumed to exist where the corporate structure chosen is designed to take advantage of a lack of information exchange between the States involved to prevent the effective taxation of interest or dividends recipients.

The AG affirmed that a Member State cannot rely on a provision contained in a directive if it has not transposed it. In fact, a directive cannot itself impose obligations upon individuals.

The AG also added that neither Paragraph 2(2)(d) of the Danish law on corporation tax, nor a double tax treaty provision (like article 10 or 11 of the OECD Model Convention) are sufficient to be deemed to be a transposition of a provision of a directive.

The AG concluded that a different treatment of national and foreign interest or dividends recipients cannot be deemed. In reality they are subject of different taxation arrangements (levying of corporate tax versus application of withholding tax) and thus these situations are not comparable in the context of the important of comparability.

Even if they were deemed to be comparable, a restriction on the freedom of establishment would be justified based on CJEU case-law as long as the liability for tax at source of the interest or dividend recipient resident abroad is no higher than the liability for corporation tax of a national interest or dividend recipient.

The role of the AG is to propose an independent legal solution. It is important to note that the CJEU is not obligated to follow the opinion delivered by the AG. However, even though the opinion is not binding on the CJEU, it has an impact on the decision in many cases.

The next step in these cases is for the CJEU to deliver its final judgment which is expected to take place sometime in the autumn of 2018.

The full opinion is available from: – https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A62016CC0115