Source: http://kluwertaxblog.com/2019/03/18/foreseeing-the-impact-of-x-gmbh-case-c-13517-i-understanding-the-ppt-standard-under-cjeu-case-law/
Timestamp: 2019-04-24 20:05:44+00:00

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After deciding about the standstill clause in Article 64(1) of the Treaty on the Functioning of the European Union (TFEU),1)The CJEU concluded that the standstill clause cannot be applied to the German CFC rules in question, because they were substantially amended after 31 December 1993. Its applicability, however, would be permissible if an application of these CFC rules was deferred in accordance with national law, so that, despite their entry into force, they were not applicable to cross-border movements of capital that are covered by Article 64(1) TFEU. the CJEU moved to the examination of the compatibility of German CFC rules with the fundamental freedoms. In that respect, the CJEU first stated that the objective of the German CFC rules corresponds, in essence, to the overriding reasons in the public interest, in particular, to the prevention of an unacceptable tax avoidance. The next step was thus to analyse the proportionality of such rules in achieving that purpose, i.e. whether the German rules are suitable for securing the attainment of the objective which it pursues – the prevention of an unacceptable tax avoidance, and does not go beyond what is necessary in order to attain it. This is where the most important part of the judgment starts.
The features different than those indicated in the judgment in Cadbury Schweppes case and the AG’s opinion on it can be relevant, but the CJEU has been silent on them and therefore they must be found beyond the analysed judgment on the German CFC rules in a careful manner. In that regard, of particular importance can be the recent judgments of the CJEU in N Luxembourg 1 (Case C-115/16) and other joined cases (C‑118/16, C‑119/16, C‑299/16), on 26 February 2019 regarding the abuse of EU directives, in which the CJEU provided with several features of a group of companies which may be regarded as being an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law. Those features broadly refer to the setting up of complex financial transactions which include the grant of intragroup loans. In that respect, of high importance is the existence a conduit entity interposed in the structure of the group between the company that pays interest (or other payments) and the entity which is its beneficial owner in order to avoid taxation on the payment. If all or almost all of the aforesaid payment is, very soon after its receipt, passed on by the conduit company that has received it to entities which do not fulfil the conditions for the application of tax exemption under EU law (here: Interest & Royalties Directive), this implies the abuse. By contrast, if the payment would have been exempt had it been paid directly to the company having its seat in a third State, that the aim of the group’s structure could be considered as being unconnected with any abuse – this resembles the Derivative Benefits Test under the LOB clause in Article 7(11) of the MLI.3)See B. Kuźniacki, “The Limitation on the Benefits (LOB) Rule in BEPS Action 6/MLI: Ineffective Overreaction of Mind–Numbing Complexity – Part 2”, 46 Intertax 2018, Issue 2, sec. 2.2. It is noteworthy that those features of WAA focus not only on the existence (or the absence of) a genuine economic activity carried out by a foreign company, but also on the artificiality (or the absence of it) of the transactions between domestic and foreign company (or any other entity).
It seems that the CJEU effectively brings the PPT as incorporated in Art. 7(1) MLI and in Art. 29(9) 2017 OECD MC4)The phrase “one of its primary objectives” used by the CJEU could be used interchangeably with the phrase “one of the principal purposes” used under the PPT. within the domain of prevention of tax avoidance under the primary EU law in respect of relations between Member States and third countries, while still keeping its WAA’s mantra to be valid only among Members States. This poses a question whether the CJEU has introduced a new algorithm of an unacceptable tax avoidance with the use of companies from third countries. The new algorithm seemingly allows to prevent not only WAAs aimed solely to avoid taxation, but also arrangements with one of their primary purposes to avoid taxation. Consequently, the significance of the PPT standard in prevention of tax avoidance becomes huge: it does not only encompass 87 countries and jurisdictions under the MLI (treaty abuse standard), but also all Member States in respect of their relations to third countries, as covered by free movement of capital (the EU abuse standard towards third countries). One may pose the question whether the PPT standard will soon effectively replace the WAA standard in respect of direct taxation cases between Member States under the concept of abuse of EU primary law (it is quite evident that it has already taken place under the EU secondary law, e.g. N Luxembourg 1 (Case C-115/16) and other joined cases (C‑118/16, C‑119/16, C‑299/16), on 26 February 2019).
The closer look at the CJEU’s case law in tax avoidance cases shows that the most important overall future determining the existence of abuse of EU law under the PPT standard is the absence of or the insufficient degree of economic substance. Importantly, the degree of substance matters in respect of the entities in question and the transactions conducted by them. If, under given circumstances, the economic substance is very low and the tax advantage is significant, one may assume the existence of abuse according to the PPT standard. This is linked to the magnitude of the anticipated tax advantage which may arise from a taxpayer’s arrangement or transaction in comparison to their anticipated non-tax advantage – a feature typical for tax avoidance.5)See Ch. Evans, “Containing Tax Avoidance: Anti-Avoidance Strategies”, in G.J. Head & R. Krever eds., Reform in the 21st Century: A Volume in Memory of Richard Musgrave (Tax Series on International Taxation 34; Kluwer Law International, 2009), pp. 536-537. Still, how to understand the phrase “principal purpose” and “one of its principal purposes” under the CJEU’s case law is not clear. In order to make it more clear, the OECD and foreign case law guideline may be of assistance. This will be the topic of the next part of this contribution.
1. ↑ The CJEU concluded that the standstill clause cannot be applied to the German CFC rules in question, because they were substantially amended after 31 December 1993. Its applicability, however, would be permissible if an application of these CFC rules was deferred in accordance with national law, so that, despite their entry into force, they were not applicable to cross-border movements of capital that are covered by Article 64(1) TFEU.
2. ↑ See C-282/12, paragraph 37; C-524/04, paragraph 82; C‑318/10, paragraph 50; C-264/96, paragraphs 24 and 26; C-324/00, paragraphs 32 and 37; C-9/02, paragraphs 48 and 50; C-446/03, paragraphs 34 and 57 and C-196/04, paragraphs 46 and 57.
3. ↑ See B. Kuźniacki, “The Limitation on the Benefits (LOB) Rule in BEPS Action 6/MLI: Ineffective Overreaction of Mind–Numbing Complexity – Part 2”, 46 Intertax 2018, Issue 2, sec. 2.2.
4. ↑ The phrase “one of its primary objectives” used by the CJEU could be used interchangeably with the phrase “one of the principal purposes” used under the PPT.
5. ↑ See Ch. Evans, “Containing Tax Avoidance: Anti-Avoidance Strategies”, in G.J. Head & R. Krever eds., Reform in the 21st Century: A Volume in Memory of Richard Musgrave (Tax Series on International Taxation 34; Kluwer Law International, 2009), pp. 536-537.

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