The Court of Justice of the European Union rules in favour of the Danish Ministry of Taxation in several decisive cases concerning the concept of “beneficial owner”.
On 26 February 2019, the Court of Justice of the European Union ruled in several decisive cases concerning the concept of “beneficial owner”.
The facts of the cases
The cases concern the question of whether Danish companies distributing dividend or paying interest to parent companies located in other EU countries should have withheld tax at source, or whether the payments are exempt from tax according to the rules in the parent-subsidiary directive or the interest & royalties’ directive respectively.
The Danish Ministry of Taxation believes that the dividend or interest recipients are not the beneficial owners of the income, as these companies located within the EU are merely conduit companies through which, the income has been transferred to tax havens.
Consequently, it is the opinion of the Danish Ministry of Taxation that the Danish dividend distributing or interest paying companies should have withheld tax at source, and they are liable to pay the missing withholding taxes.
This is disputed by the companies.
The rulings of the Court of Justice of the European Union
The Court of Justice of the European Union ruled that a general anti-abuse principle exists in EU law, obligating the EU member states to refuse concessions under EU law in cases of abuse - even if there are no national or agreement-based provisions on abuse.
Consequently, it must be determined whether abuse exists in the cases at hand.
According to the rulings of the Court of Justice of the European Union, abuse is determined based on both objective and subjective circumstances.
The objective element relates to the arrangement being established to obtain improper tax advantages under the directive, whereas the subjective element relates to achieving this as being one of the main purposes of the arrangement.
Whether abuse of EU law exists in the cases in question must be determined by the Danish national courts. However, the Court of Justice of the European Union has contributed several circumstances that would indicate abuse.
- when dividend tax is avoided by establishing a conduit company,
- when dividend or interest is passed on immediately after receipt to individuals or companies outside the application of the directive, or
- when changes in national tax legislation timewise is closely connected to introduction of complex financial transactions or provision of inter-group loan(s).
It is now up to the Danish national courts to determine, whether the specific arrangements in each case constitute abuse and can be disregarded for tax purposes.
The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.