Setting up a holding company in a jurisdiction other than that of the target company is a common strategy that can offer financial, legal, and contractual benefits. Under this approach, the ultimate investor must merely ensure the neutrality of the holding chain. This approach was addressed by the OECD in its base erosion and profit-shifting project and will be tackled by the European Union in an upcoming set of measures mainly contained in the EU anti-tax avoidance directive.
In the EU context, companies will be considered established in an EU member state if they participate economically in a member state on a stable and continuing basis. According to the case law of the Court of Justice of the European Union,1 a company’s physical presence in a member state will be assessed with reference to the extent of its premises, staff, and equipment.
If the company’s physical presence is considered insufficient, the company may be considered part of a wholly artificial arrangement. The general antiabuse rule recently introduced in the EU parent-subsidiary directive (Directive 2015/121/EU) defines an artificial arrangement as an arrangement not put in place "for valid commercial reasons which reflect economic reality." No guidelines have been released on how to apply and construe the new GAAR, however.
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