Limitations on dividend withholding tax exemption under the Parent-Subsidiary Directive

Written on 24 Oct 2017

National provisions automatically denying the benefits of the Parent-Subsidiary Directive in cases where the ultimate shareholder of the EU parent is a non-EU company fall foul of EU law. The ruling issued by the European Court of Justice on the 7th of September 2017 (the Eqiom case) will have undeniable consequences for the interpretation of domestic anti-abuse rules limiting the Parent-Subsidiary withholding exemption.

In the case at hand, the Court examined French provisions transposing Directive 90/435/EEC (the “Parent-Subsidiary Directive“), in particular the French provisions limiting application of the parent-subsidiary exemption. It is worth noting that the Parent-Subsidiary Directive specifically contains language to allow the application of domestic or agreement-based provisions “required for the prevention of fraud and abuse”.

Under French law, the Parent-Subsidiary withholding exemption would not apply where the Parent company receiving the dividends is ultimately controlled directly or indirectly by one or more residents of non-EU Member States, unless proof is provided that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of the withholding exemption. This provision will undoubtedly sound familiar to Spanish taxpayers, since the corresponding Spanish domestic anti-abuse provision is couched in essentially similar terms.

The facts of the case date back to 2005 and 2006. During these years, Eqiom, a French company, distributed dividends to its sole shareholder, Enka, resident in Luxembourg. Enka, in turn, was more than 99% owned by a Cypriot company, itself wholly controlled by a Swiss company. French Tax Authorities denied the application of the Parent-Subsidiary withholding exemption on the basis of the anti-abuse provision. The taxpayer questioned the compatibility of such provision with EU law and the case was referred to the European Court for a preliminary ruling.

The Court issued a strong reminder that, since the provisions of the Parent-Subsidiary Directive contained a clear limitation of the taxing rights of Member States, Member States were not entitled to unilaterally introduce restrictive measures subjecting the withholding exemption to conditions. Therefore and insofar as the Directive does allow for the application of domestic anti-abuse provisions, such domestic anti-abuse rules must be interpreted strictly and need to be oriented to preventing fraud and abuse. The wording of the Directive in this context is clear: it allows solely the application of provisions “required” for this purpose of preventing fraud or abuse. The issue would then be to determine whether domestic provisions, such as the French ones, would satisfy this requirement of necessity.

In its ruling, the Court states that a general presumption of fraud and abuse would not be in accordance with EU law. Thus, in order to determine whether an operation pursues an objective of fraud and abuse, the national tax authorities may not simply apply predetermined general criteria. Further actions are required from national tax authorities, such as individual examinations of the whole operation at issue, in order to determine whether fraud or abuse has indeed taken place. “The imposition of a general tax measure automatically excluding certain categories of taxpayers from the tax advantage, without the tax authorities being obliged to provide even prima facie evidence of fraud and abuse, would go further than is necessary for preventing fraud and abuse” (parr. 32).

It was evident for the Court that the mere fact that a company residing in the EU is directly or indirectly controlled by residents of third States does not, in itself, indicate the existence of fraud and abuse. Moreover, such company would be subject to tax in its Member State of residence. The French provision under review, therefore, introduced a general presumption of fraud and abuse and as such is not compatible with EU law.

The ruling, therefore, has a direct impact on the configuration of the French anti-abuse provisions and of any other national provisions with similar language – Spanish provisions, as mentioned, being one such example. The European Court of Justice is clear: Tax Authorities are required to provide evidence of abuse specific to each case and may not rely on general presumptions which should then be dispelled by the taxpayer.