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CJEU judgements on the withholding exemption regarding the Parent-Subsidiary and Interest and Royalties Directives


On 26 February 2019, the Court of Justice of the European Union (“CJEU”) published two judgments (joined cases C‑116/16 and C‑117/16, and joined Cases C‑115/16, C‑118/16, C‑119/16 and C‑299/16) analysing the potential consequences of applying anti-abuse provisions, such as those relating to the beneficial owner, set out under the Parent-Subsidiary Directive and the Interest and Royalties Directive, respectively.

1. Beneficial owner and the existence of a legal basis enabling a Member State to refuse to grant the exemption:

The CJEU has indicated that the concept of “beneficial owner” within the meaning of Interest and Royalties Directive, must be interpreted as designating an entity which actually benefits from the interests received. This criterion is confirmed by Article 1(4) of the Interest and Royalties Directive, and enforces this reference to the economic reality, by stating that a company shall be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary (i.e. as an agent, trustee or authorised signatory, for another person). Moreover, the CJEU has indicated that the OECD Model Tax Convention and the subsequent amendments of the Model and of their commentaries are relevant when interpreting the Interest and Royalties Directive.
Regarding the Parent-Subsidiary Directive, as per the CJEU judgment, where the “beneficial owner” of dividends is a tax resident of a third State, the exemption can be refused without any need of evidencing the existence of a fraud or an abuse of rights.
Moreover, it is stated that the absence of domestic anti-abuse provisions does not impair the national authorities' obligation to refuse to grant rights provided by the Directives, where they are invoked for fraudulent or abusive ends.

2. The constituent elements of any abuse of rights and the conditions for proving it:

The CJEU ruled that the proof of an abusive practice requires, (i) a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved, and (ii) a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down.
Based on the foregoing, the Court provides several examples of the aforementioned objective and subjective circumstances which presence could lead to the existence of an abuse of rights. Among others, (i) companies which are not operationally and/or economically active, (ii) arrangements under which dividends, very soon after being received, are passed on to entities which do not fulfil the conditions for the Parent-Subsidiary Directive, (iii) arrangements under intragroup agreements which give rise to flows of funds where there is an inability to have economic use of the dividends received, (iv) companies which simultaneously pay dividends upon the entry into force of major new tax legislation, and (v) the setting up of complex financial transactions and the granting of intragroup loans.
Specifically, regarding an interest payment, the Court has established that the existence of a double tax treaty between the Member State in which the interest arises and the third State in which the beneficial owner of that interest has its tax residency, does not exclude by itself the existence an abuse of rights.
Moreover, both judgments rule that the domestic tax authorities are not obliged to expressly identify the beneficial owner entities, in order to refuse the application of the exemptions set forth under EU law, but to prove that the alleged beneficial owner is an instrumental entity.


Portrait of Diego de Miguel
Diego de Miguel