Source: http://kluwertaxblog.com/2019/03/13/three-observations-on-the-danish-beneficial-ownership-cases/?print=print
Timestamp: 2019-04-24 20:06:06+00:00

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the Court’s reading of an effective subject-to-tax clause into the definition of a “company” laid down in the Interest-Royalties-Directive (IRD).
The Court found that a specific domestic or agreement-based implementation of anti-abuse provisions is not necessary because the tax authorities may rely on the general principle that EU law cannot be relied on for abuse of fraudulent ends do deny benefits (paras 95-120 C-115/16 and paras 68-92 C-116/16). This finding is not only an unwelcome surprise, it also rests on a weak doctrinal foundation and may only be explained on account of the specificities of Danish legislation.
“a Member State which has failed to transpose the provisions of a directive into national law cannot rely, as against Community citizens, upon limitations that might have been laid down on the basis of those provisions”.
So, if the legislator of Member State decides not to implement rules permitted by a directive’s anti-abuse reservation such as Art 1(2) in the pre-2015 PSD or Art 5 in the IRD, can the tax administration and courts nevertheless rely on an unwritten, general EU principle to counter perceived abuse? One may be inclined to answer that questions resoundingly to the negative: The Court’s precedence in Kofoed has made it (seemingly) clear that national tax authorities are precluded from relying directly, against a taxpayer, on the anti-abuse reservation of Art 15 of the Merger Directive (unless there is some way to interpret Danish law to that effect).[fn]Indeed, the Court in Kofoed noted that through the mechanism of “consistent interpretation” EU law could indirectly apply to the detriment of the taxpayer if “there is, in Danish law, a provision or general principle prohibiting abuse of rights or other provisions on tax evasion or tax avoidance which might be interpreted in accordance with (Art 15 of the Merger Directive) and thereby justify taxation of the exchange of shares in question”. See ECJ, 5 July 2007, Case C-321/05, Kofoed, EU:C:2007:408, para. 46; see also Opinion AG Kokott, 8 February 2007, Case C-321/05, Kofoed, EU:C:2007:86, paras 63-65.[/fn] AG Kokott also added that recourse to “any existing general principle of [EU] law prohibiting the misuse of law” would be barred, as Art 15 is a concrete expression of such principle.[fn]See Opinion AG Kokott, 8 February 2007, Case C-321/05, Kofoed, EU:C:2007:86, para. 67, and Opinion AG Kokott, 16 July 2009, Case C-352/08, Zwijnenburg, EU:C:2009:483, para. 62.[/fn] Even after Cussens (C-251/16), this was also the prevailing position in literature,[fn]See, e.g., A. Garcia Prats et al, “EU Report”, in: IFA (Hrsg), Seeking anti-avoidance measures of general nature and scope – GAAR and other rules, CDFI Vol. 103a (2018), Chapter 3.2.1; see also, e.g., W. Schön, “Rechtsmissbrauch und Europäisches Steuerrecht”, in: P. Kirchhof and H. Nieskens (eds.), Festschrift für Wolfram Reiß zum 65. Geburtstag (Otto Schmidt, 2008) 571 (574); L. De Broe, International Tax Planning and Prevention of Abuse (IBFD, 2008) 1029 et seq.[/fn] and of AG Kokott in the cases at hand.
“Nevertheless, even if it were to transpire, in the main proceedings, that national law does not contain rules which may be interpreted in compliance with [Art 1(2) of Directive 90/435 or Art 5 of Directive 2003/49], this — notwithstanding what the Court held in the judgment of 5 July 2007, Kofoed (C 321/05, EU:C:2007:408) — could not be taken to mean that the national authorities and courts would be prevented from refusing to grant the advantage derived from the right of exemption provided for in [Art 4 of Directive 90/435 or Art 1(1) of Directive 2003/49] in the event of fraud or abuse of rights” (para. 117 of C-115/16 and para. 89 of C-116/16).
So far so good. It certainly means that taxpayers cannot rely on the direct effect of tax directives abusively even in the absence of a domestic anti-abuse provision or principle.
On the condition of beneficial ownership, the Court deviated from AG Kokott’s analysis and concluded that the OECD materials are “relevant when interpreting the [IRD]” (para. 90 of C-115/16). While this may not be entirely surprising given the context of the IRD’s adoption and the use of the OECD model’s terminology, the Court did not explain how their “being relevant” is going to influence the outcome when applying the IRD to a concrete case and why the most current version of the OECD guidance should be used to interpret a directive that was proposed in 1998 and adopted in 2003. Given the more specific explanations and conditions found in the IRD that differ from the wording of the OECD model tax convention, this raises both methodological and substantive questions.
For instance, the Court’s starting point that the term ‘beneficial owner’ “cannot refer to concepts of national law which vary in scope” (para. 84) appears to be undermined by the condition in Article 1(5)(b) IRD according to which a PE is treated as the beneficial owner only if it is subject to income tax on relevant payment. In the case of a PE the concept would thus seem to vary explicitly with national tax rules. One may counter this by arguing that the situation of a PE is special: it can never actually be the beneficial owner, but is, as Article 1(5) IRD makes plain, only treated as such. However, as the Court invoked that same provision in order to explain the meaning of “company of a Member State” (para. 152 of C-115/16; see also section 3) below), it does not appear to see it as a particularity for PEs. Does this mean that taxation in the residence State of the recipient is to be considered a requirement for beneficial ownership? That would certainly appear to be the result of the Court’s judgment, but is clearly not derived from OECD guidance. While the latter makes it clear that a dividend (or interest) recipient needs to be considered the owner for tax purposes of that payment by its State of residence in order to qualify as beneficial owner (e.g. OECD Commentary para 12.2 on Article 10), actual taxation there is clearly not a condition.
As Jonathan Schwarz noted, the concepts of beneficial ownership and abuse of law are intertwined in the Court’s analysis. This may not seem surprising at first, considering the indubitable purpose of the beneficial ownership concept to avoid and abusive reliance on a tax treaty in specific circumstances. Yet the key to this is that the concept merely aims at avoiding specific types of abuses. As AG Kokott pointed out in her Opinion (para. 60 of C-115/16), the concerns addressed by that concept and the beneficial ownership concept are fundamentally different. The Court also appears to recognize the difference between both concepts at certain stages of its analysis, making it clear that denial of a benefit based on a lack of beneficial ownership does not require tax authorities to prove abuse of law (para. 138 of C-115/16; para. 111 of C-116/16).
The situation differs between the PSD and the IRD, however. Since the former does not contain an explicit beneficial ownership requirement, the CJEU appears to mangle a purposive interpretation of the PSD’s scope with its general anti-abuse provision in order to deny the directive’s benefits to companies that are not beneficial owners in cases C-116/16 and others. At the same time, it explicitly refuses to respond to the national court’s question regarding the interpretation of the beneficial ownership concept (para. 94 of C-116/16).
By contrast, in applying the IRD, the Court appears to keep the two concepts more clearly separate in cases C-115/16 and others. There, the CJEU did attempt to answer the question what precisely beneficial ownership entails, but confined itself to the statement that it is an economic concept denoting the “entity which benefits economically from the interest received and accordingly has the power freely to determine the use to which it is put” (para. 89 and 122 of C-115/16). In its subsequent analysis regarding the constituent elements of abuse of rights, the CJEU refers to the situation of a recipient company that does not “in substance” have the right to use and enjoy sum it received even “without being bound by … a contractual or legal obligation [to pass it on to a third party]” (para. 132 of C-115/16). This ostensibly goes beyond the OECD Commentary’s guidance on beneficial ownership, which confines the denial of treaty benefits to situations where such contractual or legal obligation exists (OECD Commentary para. 12.4 on Article 10). However, the context of the Court’s inquiry suggests that it did not interpret the concept of beneficial ownership in this context; it explored the concept of artificial arrangements. As a result, this may be best understood as clarifying the relationship between beneficial ownership and the abuse of law: an entity may be the beneficial owner (as interpreted in conformity, most likely, with the OECD material), yet still be denied the directive’s benefits due to the artificiality of the legal structure.
III. Does being a “company of a Member State” require its income being subject-to-tax?
Both the PSD and the IRD only apply to a “company of a Member State”. To be such qualified “company of a Member State”, a three prong-test has to be met, the third prong of which requires that the company is “subject to” on the Member States’ corporate taxes “without […] being exempt” (Art 2(a)(iii) and Art 3(a)(iii), respectively). This criterion is intensely discussed in literature,[fn]For a recent overview see, e.g., P. Arginelli, “The Subject-to-Tax Requirement in the EU Parent-Subsidiary Directive (2011/96)”, 57 ET 2017, 334 (340).[/fn] and case law also provides some guidance: While the directives’ wording might suggest that we have to focus on whether the company as a taxable person is, in principle, “subject to” a domestic corporate tax (and not, e.g., a personally exempt charity or foundation), the Court seems to understand the second prong of the test (“without […] being exempt”) as referring to the treatment of the company’s income.
The Court has, for example, held a company to be “exempt” within the meaning of Art 2(a)(iii) of the PSD where (1) its income was fully exempt from corporate taxation (and only subject to a subscription tax under the local tax regime for investment funds),[fn]ECJ, 18 June 2009, Case C-303/07, Aberdeen Property Fininvest Alpha Oy, EU:C:2009:377, para. 27.[/fn] or (2) where it “is entitled […] to a zero rate of taxation for all its profits, provided that all those profits are distributed to its shareholders”.[fn]ECJ, 8 March 2017, Case C-448/15, Wereldhave, EU:C:2017:180, para. 40.[/fn] So while a “zero rate” seems to disqualify a company from the benefits of the directive, a reduced rate would not.[fn]See, e.g., Opinion AG Kokott, 1 March 2018, C-118/16, X Denmark, EU:C:2018:146, para. 96.[/fn] The outcome is less clear in situations where a company enjoys exemption for certain items of income but not for others. Assume, for example, that a company’s dividend income and capital gains are exempt, but its interest and royalty income is taxed at normal rates.
In conclusion, the Court’s judgments in the Danish Beneficial Ownership cases bring a lot of new and unexpected developments in three separate areas: (1) The Court appears to extend the direct application of directives to the taxpayer’s detriment in cases of abuse to the field of direct taxation; (2) the Court wades into the interpretation of the term beneficial owner in international tax law, seemingly importing OECD guidance into EU law, while keeping the precise relationship to artificial arrangements somewhat unclear; (3) the Court adopts a surprisingly literal interpretation of the ‘subject to tax’ requirement in the PSD and IRD, thus breaking a long-standing impasse at the level of the EU legislature. All three developments are important and, considering the fact that the judgments were rendered by the CJEU’s Grand Chamber, are likely to be here to stay. Nevertheless, all three will require further elaboration. The next stages of this “voyage of discovery” are probably not far away.

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