Application of beneficial ownership concept under the EU Directives

The four cases (C-299/16, C-115/16, C-118/16 and C-119/16) all involve back to back financing transactions and the two joined cases (C-116/16 and C-117/16) both concern dividend distributions made by a Danish resident company to an intermediary holding company resident in the EU.

In all cases in question, the Danish company requested an exemption of the Danish withholding tax levied on the payments made to the EU company based respectively on the Interest and Royalties Directive and on the Parent-Subsidiary Directive. The Danish tax authorities denied the exemption, arguing that the company receiving the income was a conduit structure and could not be considered as the beneficial owner of the payment.

The questions addressed to the European Court of Justice were whether Denmark may deny the benefits of the EU Directives and impose withholding tax and how the OECD’s Commentaries on the Model Tax Convention should be applied in this respect.

In the respective opinion Advocate General pointed out that under the Parent-Subsidiary Directive the beneficial owner requirement is not relevant. In fact, the Parent-Subsidiary Directive does not refer to the concept of beneficial ownership and this is in line with its aims. In this regard, the only limitation foreseen is the potential application of domestic or agreement-based anti-abuse provisions. The Advocate General further affirmed that a Member State cannot rely on a provision contained in a directive if it has not transposed it.

Based on the definition provided in the Interest and Royalties Directive, the Advocate General first argues that the holding company receiving the interest income should be considered as the beneficial owner, unless it is not acting in its own name and on its own account, pursuant to a trust relationship. In this respect, a refinancing agreement would not, according to the Advocate General, be sufficient to assume that such a relationship exists.

In published opinion the concept of abuse in EU law was also discussed, concluding that it is up to the national courts to determine if the corporate structures involved were abusive based on the available facts and circumstances.

Further, the Advocate General stated that the concept of beneficial owner must be interpreted under EU law autonomously and independently of OECD Model Tax Convention for purposes of the Interest Royalty Directive and Parent-Subsidiary Directive.

The Advocate General’s opinion does not represent the European Court of Justice’s final decision which may differ from the published opinion.