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:
This judgment relates to the proceedings between Volkswagen AG and the Finance Directorate of the Slovak Republic. The dispute arose after a partial refusal by the Finance Directorate of the Slovak Republic of an application for a refundof value added tax (‘VAT’), charged several years after the initial delivery of the supplied goods to Volkswagen AG.
The Slovak government argued that the 5 year limitation period (Law No 511/1992 on Tax Administration, ‘The Tax Code’), starting from the date of delivery of the goods, had already expired when the application for deduction was made on 1 July 2011.
The legal context asks whether the fixing of the starting date of the five year limitation period is compatible with EU law on the common system of value added tax. While current EU law on the common system of value added tax holds that the ‘right to deduct’ (Article 167 of Directive 2006/112) is an integral part of the VAT scheme, the ‘right to deduct’ is also subject to substantive requirements or conditions (judgment of 19 October 2017, Paper Consult, C-101/16, paragraph 38).
The CJEU found that EU law must be interpreted to preclude national legislation of a Member State in circumstances, such as the main proceedings, when the exercise of the right to claim a refund expired before the VAT tax was charged and an application for a refund was submitted.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
The new Directive aims to amend Directive 2011/16/EU, which concerns administrative cooperation in the field of taxation. The proposed legislation places an obligation on intermediaries to report on potentially aggressive tax planning arrangements.
While the existing tax instruments at EU level do not contain explicit provisions requiring Member States to exchange information in the case of tax avoidance and/or evasion schemes, DAC contains a general obligation for the national tax authorities to spontaneously communicate information to the other tax authorities within the EU.
The new reporting requirements have an effective date of 1 July 2020, with EU Member States obliged to exchange information every three months after that. The first exchange will take place by 31 October 2020.
This article appears in the JHA March 2018 Tax Newsletter, which also features:
The US District Court for the Eastern District of New York has recently ordered a real-estate developer to pay an extraordinary sum of damages (totalling $6.75 million) to a group of artists to compensate them for destroying a large number of graffiti art on the 5Pointz building in Queens, New York City (see decision of 12 February 2018 here).
5Pointz, originally a largely dilapidated former factory in a crime infested neighbourhood of NYC, has been owned by Jerry Walkoff since the 1970s. After being approached by street artists for permission to paint on the outer walls of the building, granting such permission and putting Jonathan Cohen, a famous street artist, in charge, 5Pointz soon became a major attraction drawing thousands of visitors and being used in movies, on television and music videos.
All this came to an abrupt end when the graffiti art was whitewashed by Mr Walkoff following the denial of a preliminary injunction for the prevention of a planned demolition of 5Pointz, but before the court had made a final decision.
The artists went on to request damages for the demolition of their graffiti art on the basis that Mr Walkoff had acted contrary to the Visual Artists Rights Act (VARA) which grants some moral rights to artists (such as rights of attribution and integrity).
The court considered the artists’ right of integrity, whereby the artist can prevent the destruction of a work of visual art when it is of recognised stature or is prejudicial to the artist’s honor or reputation. The court had no problem in finding that 45 of the 49 works had recognised stature and commented that “even under the most restrictive of evidentiary standards almost all of the plaintiffs’ works easily qualify as works of recognized stature.” The key evidence accepted by the court included the testimony of an expert art appraiser, Renee Vara; as well as of Jonathan Cohen himself, described by the court as “one of the world’s most accomplished aerosol artists.”
The main contention of Mr Walkoff was that street art works are ephemeral and that VARA should not afford protection to temporary works. This was however rejected by the court who found that, although VARA does not directly address the issue, it resolves the tension between building owners’ rights and the artist’s rights, thus protecting temporary works. Section 113 of VARA provides protection in two circumstances when a protected work of art has been integrated into a building: (i) when the artwork cannot be removed from the building (in this case the artist may sue to prevent the destruction of the work unless he waived this right) and (ii) when the artwork can be removed, so contemplating that the work can be temporary.
In the latter case, VARA gives the opportunity to the artist to save the work upon receipt of a 90 days’ written notice from the building owner. If the artist fails to remove within the 90 days or if the owner could not notify the artist after making good effort, the artist’s VARA rights are deemed waived and the owner may destroy them without consequences. No such notice was given by Mr Walkoff in this case.
The Court therefore went on to find that the artists’ works were legally protected under VARA and that Mr Wilkoff willfully broke the law in destroying 5Pointz before having the Court’s permit and failing to give the 90 days’ notice to the artists to remove their works provided by VARA. The size of the award represented a total of statutory damages for the individual works concerned awarded at the maximum level. One of the strongest factors behind the award of damages at the maximum level was Mr Walkoff’s attitude and the audacity of the destruction. In contrast the artists were seen to have “conducted themselves with dignity, maturity, respect, and at all times within the law”.
The decision, although on its face a triumph for street artists, could leave real estate owners reluctant to allow artists to use their buildings for the creation of such art.
Advocate General (“AG”) Wathelet of the CJEU has issued his Opinion in C-685/16 EV v Finanzamt Lippstadt. The AG found that the German participation exemption regime applicable to company dividends originating in non-EU countries was incompatible with the free movement of capital. Non-EU dividends had to comply with stricter requirements than German dividends in order to qualify for the exemption, even though the two types of dividends were objectively comparable. This difference in treatment amounted to a restriction on the free movement of capital which could not be justified on grounds of overriding public interest, such as combating tax avoidance or ensuring the effectiveness of fiscal controls.
This article appears in the JHA February 2018 Tax Newsletter, which also features:
R (De Silva & Anor) v Commissioners for HMRC [2017] UKSC 74 involved an HMRC enquiry into two taxpayers’ partnership affairs. The taxpayers had sought relief for loss incurred in a later year by carrying it back to an earlier year. The taxpayers claimed that HMRC could only conduct an enquiry under Schedule 1A to the Taxes Management Act 1970 (“TMA”), which covers claims not included in the return, and under that provision the statutory limit for carrying out the enquiry had lapsed.
The Supreme Court dismissed the appeal. It held that under other provisions in the TMA, HMRC was entitled to enquire into anything contained or required to be contained in the tax return, including the carry-back claims contained in the later year’s tax returns, and therefore HMRC was not required to launch an enquiry under Schedule 1A to challenge the claims. De Silva was soon applied by the High Court in B Knibbs and others v HMRC [2018] EWHC 13 (7 February 2018).
This article appears in the JHA February 2018 Tax Newsletter, which also features:
C-504/16 and C-613/16 Deister Holding and Juhler Holding
The cases concerned the German Anti-Treaty shopping provision. Both cases concern non-resident holding companies receiving dividends from a German subsidiary and in both cases the holding company received a profit distribution from the German subsidiary, on which dividend WHT was levied. The companies sought a refund of the tax withheld. The German tax authorities denied the request on the basis of the German Anti-Treaty Shopping rules. The holding companies challenged the assessments.
The CJEU firstly concluded that both cases fall within the scope of the Parent-Subsidiary Directive (PSD), which in principle prohibits the levying of WHTs on profit distributions paid to foreign parent companies. According to Article 1(2) of the PSD, Member States are only allowed to deviate from that rule to prevent tax evasion and abuse. The Court stated that only provisions whose specific objective is to prevent artificial structures deviating from economic reality and targeting unjustified tax advantages fall within the scope of the exception in the Directive. The Court concluded that the German rules in question, which generally exclude a special group of taxpayers from the application of the PSD, create a general and irrefutable presumption of abuse and therefore go beyond what is necessary to prevent tax evasion and abuse. In this respect, the Court emphasized that a group’s special shareholding structure does not in itself indicate the existence
of a wholly artificial arrangement. Consequently, the Court ruled that the disputed German provisions are not in line with the PSD.
The CJEU further observed that it is only where a resident subsidiary distributes profits to a non-resident parent company that the WHT exemption is subject to certain conditions and concluded that this difference in treatment is liable to deter a non-resident parent company from exercising an economic activity in Germany and therefore constitutes a restriction to the freedom of establishment, which cannot be justified.
This article appears in the JHA January 2018 Tax Newsletter, which also features:
AG Opinion in Bevola case C-650/16
Twelve years after the judgment in Marks & Spencer, the CJEU is once more called upon to give a decision on a dispute which has arisen in relation to company taxation. In this case, the national court asked the CJEU whether, in conditions equivalent to those in Marks & Spencer, the freedom of establishment precludes a national provision pursuant to which a Danish company may not deduct the losses of a PE situated in another Member State, unless it opts into the ‘international joint taxation’ scheme.
The case involves Bevola, a company registered in Denmark and is a subsidiary and sub-subsidiary of other Danish companies and which held subsidiaries and PEs in a number of Member States, such as Finland. The Finish PE ceased trading and relief could not be claimed in Finland for its losses and Bevola applied to deduct those losses from its taxable income for the purposes of Danish corporation tax. The Danish tax authorities refused on the ground that revenue or expenditure attributable to a PE situated in a foreign country cannot be included in the tax base, unless the company had opted for the international joint taxation scheme. Bevola appealed.
The AG left it to the national courts to assess whether the Finish losses in this case were definitive and concentrated on two other aspects of the case that were not analysed in the judgment in Marks & Spencer. First, the losses which Bevola sought to deduct in Denmark did not come from a subsidiary but from a non-resident PE in Denmark. Second, the Danish tax system did not absolutely preclude the deduction of those losses, and allowed it if a resident company opts for the international joint taxation scheme.
The AG concluded that that legislation was not compatible with the freedom of establishment. The fact that the parent company may opt into an ‘international joint taxation scheme’, which requires it to group together, for the purposes of the same tax, all its subsidiaries and all its PEs situated outside Denmark for a period of 10 years, is not proportionate and is incompatible with EU law.
This article appears in the JHA January 2018 Tax Newsletter, which also features:
C-382/16 Hornbach-Baumarkt
The German tax authorities carried out a tax assessment on Hornbach and found that the free of charge comfort letters the company sent to banks and creditors, containing a guarantee for the benefit of its foreign subsidiaries from which it did not receive any remuneration, had not been granted on arm’s length terms, thereby increasing Hornbach’s business tax. Hornbach challenged the assessment before the referring court, arguing that German legislation providing for the adjustment of taxation of transactions between related companies to reflect arm’s length terms violates the EU Treaty provisions on freedom of establishment. The referring court asked whether the relevant rule under German law is compatible with the EU Treaty provisions on freedom of establishment, but more specifically, whether a Member State can prevent companies from shifting profits out of its jurisdiction by requiring income to be declared on the basis of ‘arm’s length conditions’? And can it impose such a requirement only in relation to cross-border transactions and not domestic ones without falling foul of the Treaty rules on freedom of establishment?
The Advocate General answered yes to both questions and concluded that the German transfer pricing legislation did not violate the EU concept of freedom of establishment, and even if it were a restriction on the freedom of establishment it was justified on the basis of the preservation of the balanced allocation of powers. The Advocate General also considered the discrimination approach and the restriction approach when analysing situations of alleged infringement of freedom of establishment in the area of direct taxation, and invited the CJEU to articulate which approach applies and said that he favours the discrimination approach. If the CJEU adopts the discrimination approach, then the analysis should stop at the stage of comparability.
This article appears in the JHA December 2017 Tax Newsletter, which also features:
Under Belgian interest limitation rules, a deduction of interest payments is disallowed where the taxpayer receives exempt dividends from shares held by the company for less than a year. The question for the CJEU was whether the Belgian rules are compatible with the Parent-Subsidiary Directive (PSD).
In this case, the CJEU departed from the Advocate General’s Opinion and held that the Belgian provision was not compatible with Art 4(2) PSD, which grants Member States the right to deny the deduction of costs relating to holdings in a subsidiary established in another Member States. The CJEU argued that Art 4(2) PSD must be interpreted strictly. Therefore, Art 4(2) PSD must be interpreted as allowing Member States to only prevent a parent company from benefitting from a double tax advantage. CJEU decided that Article 4(2) of the PSD must be interpreted as precluding a provision of domestic law pursuant to which interest paid by a parent company under a loan is not deductible from the taxable profits of that parent company up to an amount equal to that of the dividends, which already benefit from tax deductibility, that are received from the holdings of that parent company in the capital of its subsidiary companies that have been held for a period of less than one year, even if such interest does not relate to the financing of such holdings.
With regard to the second preliminary question referred, relating to former Art 1(2) PSD, which allows Member States to refuse to grant the benefits of the Directive for reasons of preventing tax evasion and abuse, the CJEU points out that the provision reflects the general principle of EU law that any abuse of right is prohibited and that EU law cannot be relied on for abusive or fraudulent ends. But unlike the AG, the CJEU decided that Member States cannot enact anti-abuse measures that go beyond the specific anti-avoidance rule provided for in Art 4(2).
This article appears in the JHA November 2017 Tax Newsletter, which also features:
