Advocate General (AG) Kokott has issued her Opinions on the interpretation of the beneficial owner concept in two sets of circumstances: under the Interest and Royalties Directive (IRD) (Joined Cases C-115/16, C-118/16 and C-119/16 N Luxembourg 1, X Denmark and C Danmark I, and C-299/16 Z Denmark) and under the Parent-Subsidiary Directive (PSD) (Joined Cases C-116/16 and C-117/16 T Danmark and Y Denmark).
The IRD cases involved Danish companies being given loans from and paying interest to companies based in other EU member states and ultimately owned by entities resident in third countries. Under the IRD, withholding tax is not chargeable on interest payments arising in an EU member state, so long as the beneficial owner of the payment is based in another member state. The PSD cases involved the payment of dividends from a Danish company to a company in another member state which was ultimately owned by a third country-based entity. Under the PSD, dividends from subsidiaries to parent companies are not subject to withholding tax, and there is no beneficial ownership requirement as with the IRD. In all cases the Danish tax authorities refused to grant an exemption from Danish withholding tax on the interest and dividend payments to the non-Danish, EU parent company. The Danish tax authorities interpreted the IRD and the PSD as meaning that the non-Danish, EU company in receipt of the income was a conduit and not the beneficial owner of the payment.
In the IRD cases, the AG took the view that the non-Danish, EU company receiving the interest was, in principle, the beneficial owner, as it was the entity entitled in law to demand payment of the interest. However, that company would not the beneficial owner where it was not acting in its own name and on its own account, but instead as a trustee for a third party. The AG listed some relevant aspects for the national court to consider when determining the existence or otherwise of a trust relationship. A refinancing agreement with another party on similar terms as the present case was not of itself conclusive of a trust. By contrast, arrangements such as identical refinancing interest rates and received interest rates, or the absence of costs for the parent company could indicate the existence of a trust.
With regard to the PSD cases, AG Kokott confirmed that the exemption to withholding tax under this Directive was not subject to a condition of beneficial ownership. Consequently, the next question was whether there was an abuse under EU law, namely a wholly artificial arrangement to escape national tax normally due on profits. The AG’s view was that a determination of abuse was a matter for the national court on the facts. In itself, the existence of a parent company in another member state so as to profit from that state’s tax legislation was not abusive, but abuse may exist if that company did not have the structure to achieve its purposes and generate an income.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
