Beneficial Ownership Limitations must target only artificial arrangements

September 28, 2017


Eqiom & Enka v Ministre des Finances C-6/16

France introduced legislation which provided that the withholding tax exemption in the Parent Subsidiary Directive (“PSD”) does not apply where the distributed dividends are received by a legal person controlled directly or indirectly by a resident outside the EU unless the purpose of the chain of interests is not to take advantage of the exemption. France therefore subjected dividends from Eqiom to withholding tax on the basis that Eqiom was directly or indirectly controlled by a Swiss company.

France attempted to justify the legislation under the fraud and abuse exception in the PSD. However, the CJEU held that the fraud and abuse exception had to be interpreted strictly. The specific objective of legislation must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the purpose of which is unduly to obtain a tax advantage. 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 a purely artificial arrangement which does not reflect economic reality.

Further the French law was a restriction on freedom of establishment because the condition on the exemption to withholding tax only applied to non-resident parents. The Court considered that this difference in treatment is likely to dissuade a non-resident parent company from exercising an activity in France through a subsidiary and is therefore an impediment to freedom of establishment. This restriction could not be justified by the objective of combating fraud and tax evasion because this justification has the same scope as the fraud and abuse exception in the PSD.


This article appears in the JHA September 2017 Tax Newsletter, which also features:

  1. The draft Finance Bill (No.2) – Partial Closure Notices
  2. First ever GAAR Advisory Panel Opinion
  3. The Trustees of the BT Pension Scheme C-628/15: Tax Credits for Exempt Taxpayers
  4. Trustees of the P Panayi Accumulation & Maintenance Settlements: Exit Charge on Trust Migration
  5. Cussens & Others C-251/16: Abuse of Rights

You can download the whole newsletter as a PDF: September 2017 – Newsletter