In these cases, an appellate court from Denmark asked the European Union Court of Justice (“EUCJ“) for several preliminary rulings in relation to the application to interest and dividend payments between related companies of the withholding exemptions provided for under the Parent-Subsidiary Directive and the Interest Royalty Directive. In the cases reviewed by the Court, Danish companies were making interest and dividend payments to intermediate holding or finance companies resident in the European Union (e.g. Luxemburg or Cyprus). Such entities, in turn, were held by entities resident outside the EU (e.g. Bermuda or Cayman Islands) and therefore not themselves entitled to the benefits of such directives.
The Danish entities making the corresponding payments considered that such dividends and interest should be exempt from Danish withholding tax, by virtue of the EU Directives. The Danish Tax Authorities, however, took the view that such payments could not benefit from withholding exemptions, on the basis of the following:
- As regards dividends, the anti-abuse clause included in the Parent-Subsidiary Directive should apply since the ultimate recipients of the dividends were non EU-resident entities; and
- In the case of interest, the Tax Authorities also alleged that the recipient entities were not the beneficial owners of such interest payments.
The beneficial ownership concept in EU law
In relation to the interpretation of this concept within the framework of the Interest and Royalty Directive, the EUCJ held that the terms “beneficial owner” concern not a formally identified recipient but rather the entity which benefits economically from the interest received and accordingly has the power freely to determine the use to which it is put.
It is important moreover to underscore that the Court considered that the OCDE principles and materials were relevant in the in the interpretation of beneficial ownership. In this context, beneficial owner cannot refer to concepts of national law that vary in scope and the interpretation of these terms must be dynamic. Therefore, future changes to OECD commentaries may also be taken into account to interpret these terms of the Interest and Royalty Directive.
EU principle of anti-avoidance
The facts in the cases at hand were particular in that Denmark has not enacted its own anti-abuse provisions in national law. In their request for preliminary rulings to the EUCJ, the Danish tribunal asked whether it could rely on the anti-abuse clause of the Parent-Subsidiary Directive or whether domestic anti-abuse rules were necessary.
The Court held that such domestic rules were not necessary and that Member States could rely on the general legal principle that EU law cannot be relied on for abusive or fraudulent ends. The Court also provided guidance on when an arrangement may be held to amount to an abuse of rights: for instance, should the funds be passed on wholly or partially shortly after they are received; should the recipient entity lack substance… In this context, the Court stressed that there needed to be a real business activity in the intermediate jurisdiction. Indication of an artificial arrangement may also be found in the various contracts existing between the companies involved in the financial transactions, where such contract result in intragroup flows of funds.
The EUCJ pronouncements in these Danish cases imply important changes in the interpretation of EU tax principles. Thus, the Court expressly allows for the interpretation of EU principles in accordance with OECD criteria. Although originally limited to the concept of beneficial ownership, this principle could apply in other instances and ultimately as a general interpretation rule.
Moreover, the Court also recognises that there is a general overarching EU anti-abuse principle that can be directly invoked by Member States. Member States may rely on this general principle even in cases where a Directive (such as the Parent-Subsidiary Directive) includes a specific anti-abuse clause and the Member State concerned has not transposed such clause.
It will be important to determine how Member States will apply this general EU principle in conjunction with their own domestic rules. The future development of these principles should be closely monitored.