The EU court has issued landmark decisions on Member State power to deny tax benefits. Based on the decisions, Member States should deny tax relief provided in directives that companies exploit to advance abusive or fraudulent agendas, even in the absence of domestic law combating such abuse, according to the EU’s highest court.
The decisions issued by EU court covers six Danish cases for the parent-subsidiary directive joined under Denmark v. T Danmark, C-116/16 (CJEU 2019) and the interest and royalties’ directive, joined under N Luxembourg 1 v. Denmark, C-115/16 (CJEU 2019).
The two decisions released by the EU court are related to Danish tax authorities’ decisions to withheld tax on the dividend and interest payments because the beneficial owners of the entities ultimately were non-EU entities. The tax authorities took issue with a series of multilayered company structures through which Danish companies made interest or dividend payments to entities established in other EU member states.
In response to the fact, both judgments note that Denmark did not implement any statutory measure to counter tax abuse until 2015. However, the CJEU held that the absence of domestic or agreement-based anti-abuse provisions does not relieve member states from their obligation to fight fraudulent or abusive practices in connection with the two directives.
As one of the judgments related to Parent-Subsidiary Directive, the CJEU ruled that tax exemption on dividend payment should not be granted to the extent the arrangement is abusive.
Further, the CJEU explained the objective and subjective elements to indicate a potential abusive practice. According to CJEU through its decision, a group of companies 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.
In the abusive case, the court reiterated that the Directive contains an anti-abuse provision, allowing the EU Member States to deny the benefits of the Parent-Subsidiary Directive in such case. Therefore, EU Member States could deny the benefits of the Parent-Subsidiary Directive regardless of the absence of domestic anti-abuse provision.
Regarding the interest and royalties’ directive, the CJEU noted that the tax exemption for interest payments is limited to the entities that actually benefit from the interest payments and have the authority to dictate their use.
Referring to the joined cases number C-116/16 (CJEU 2019), the judge reiterated that the interpretation of “beneficial owner” aligns with article 1(4) of the directive, which provides that an EU company is considered the beneficial owner if it receives interest or royalty payments “for its own benefit and not as an intermediary,”.
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