Some recent decisions of the CJEU (Eqiom, C-6/16 of 7 September 2017, and Deister Holding and Juhler Holding, joint cases C-504/16 and C-613/16 of 20 December 2017) and the conclusions of AG Kokott[1]Who also drafted the conclusions in Eqiom. delivered on 1 March 2018 in the six Danish “Beneficial Ownership Cases” (cases C-115/16, C-116/16, C-117/16, C-118/16, C-119/16 and C-299/16) shed a new light on the possibility for EU holding companies to claim the protection of EU tax Directives and fundamental freedoms.

The principles stated by the Court and by AG Kokott go well beyond the (per se quite crucial) tax regime of intra-EU dividends or interest covered, respectively, by the Parent-Subsidiary Directive (the “PSD”) and the Interest-Royalties Directive (the “IRD”). As a matter of fact, those decisions and conclusions offer some crucial guidance in relation to the application of the “beneficial ownership” test and the much debated “abuse of law” concept.

In particular, with reference to the PSD, in Eqiom and in Deister the CJEU held that:

  • Art. 1, para. 2, of the PSD (applicable ratione temporis which stated that the PSD “shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse”) must be interpreted strictly, as it constitutes a derogation from the rules established by the directive, and therefore it solely allows the application of provisions that are actually ‘required’ for the purpose of preventing tax frauds or abuse;
  • EU holding companies cannot be denied the application of the tax exemptions provided for by the Directive as a mere effect of legal presumptions;
  • The nature and tax status of the shareholders of EU holding companies is irrelevant for the purpose of benefiting from the Directive or EU fundamental freedoms (indeed, no “LOB” clause is included in the Directive). In particular, the fact that the shareholders of the holding are non-EU entities, who would not be entitled to benefit from the PSD, does not in itself indicate that the entity is an artificial arrangement; and
  • The mere holding activity cannot per se indicate the existence of a wholly artificial arrangement, which may lead to denying the protection of the Directive and the fundamental freedoms to the holding company. The fact that such activity is not considered to constitute an economic activity for VAT purposes is irrelevant for income tax purposes.

In other words, a passive holding company (which does not carry on an economic activity for VAT purposes) is not per se a wholly artificial arrangement. On the contrary, such company has in principle the right to fully enjoy the Directive and the EU fundamental freedoms.[2]A line of interpretation somehow similar to that of the CJEU was recently followed by the Italian Supreme Court in its decision in case 27113/2016, with reference to the application of the Italian … Continue reading

Further guidance can be drawn by the conclusions of AG Kokott on the Beneficial Ownership Cases. Four of those cases addressed the IRD, while the remaining two dealt with the PSD. In all cases, dividends or interest where paid by a Danish subsidiary to a Luxembourg or Cypriot holding company, ultimately controlled by a private equity fund or a non-EU company.

Interestingly enough, in all the cases related to the IRD, AG Kokott started her analysis by pointing out that “the angry political mood concerning the tax practices of certain multinational groups” makes it difficult to draw a dividing line between the taxpayers freedom to arrange their affairs in a tax efficient manner and the need to prevent abuse of law, as “not every action by an individual to reduce their tax should be open to a verdict of abuse”.

AG Kokott first of all examined to what extent the exemption regulated by the PSD and the IRD can be denied to a holding company on the grounds that it cannot be qualified as the beneficial owner of payments.

In relation to the PSD, the conclusions of AG Kokott are quite unambiguous: the “beneficial ownership” test is simply not applicable to the PSD, in which the expression “beneficial owner” is never mentioned. Indeed, for the purpose of preventing economic and legal double taxation on profit distributions, “it is irrelevant whether the dividends recipient is also the ‘beneficial owner’ of the dividends”.

The analysis is more articulated for the IRD, which specifically includes a beneficial ownership test. In this respect, AG Kokott concludes that:

  • the concept of beneficial owner must be interpreted under EU law autonomously and independently of the definitions offered in the OECD treaty models and commentaries;
  • the beneficial owner of interest payments is, as a rule, the recipient, i.e. the person entitled under civil law to demand payment of the interest;
  • however, by way of exception to the above rule, the recipient is not the beneficial owner for the purpose of the IRD if it has set up an open or hidden trust for the benefit of the actual beneficial owner; and
  • a mere back-to-back arrangement (through which the recipient refinances its exposure) is not sufficient to assume that a trust relationship exists. However, a hidden trust can be deemed to exist if, due to the back-to-back arrangement, the recipient does not make any minimal margin and it is not exposed to any default risk (which is entirely borne by a third party).

Therefore, the IRD regime can be denied to a holding company, due to lack of the beneficial ownership element, only under very specific and limited circumstances.

However, even if one were to conclude that, in a specific case, the exemptions regulated by the PSD and the IRD cannot be denied to a holding company by reason of a breach of the beneficial ownership test (due to the fact that such test simply does not apply to the PSD, or because the holding satisfies the relevant requisites), the principle of prohibition of abuse of law should still be considered. In fact, the CJEU has always made it clear that the application of a rule of EU law cannot be extended to cover abusive practices by economic operators.

In her conclusions, AG Kokott dwells into the concept of abuse in EU law, analysing the definition offered by the ATAD1 Directive and the case law of the CJEU. In a nutshell, AG Kokott identifies two “mutually contingent elements”: (a) fully artificial arrangements, and (b) the circumvention of tax laws through non-genuine arrangements.

In the opinion of AG Kokott, a fully artificial arrangement can be assumed only if the company is merely “a fictitious establishment in the form of a ‘letterbox’ company”. Indeed, in case C-115/16 AG Kokott concluded that a holding company with very limited running costs (less than EUR 200,000 per year, mostly for lawyers and accountants) and an almost in-existent structure could not be defined a merely artificial arrangement. The same AG Kokott, in her conclusions in Eqiom, stated that a mere holding company is not a merely artificial arrangement if: (a) its bodies have the actual authority to make decisions, (b) it is sufficiently endowed with financial means, and (c) it bears some commercial risk.

However, in AG Kokott’s view, an arrangement which is not “purely artificial” can still represent an abuse of EU law, if it is put in place with the essential aim of obtaining a tax advantage.

In this respect, AG Kokott specifies that:

  • the fact that either the registered office or real head office of a company was established in accordance with the legislation of a Member State for the purpose of enjoying the benefit of more favorable legislation does not, in itself, constitute abuse. Apart from in the case of a wholly artificial arrangement that does not reflect economic reality, Union citizens cannot be deprived of the possibility of relying on the provisions of the Treaty because they have sought to profit from tax advantages in force in a Member State other than their State of residence; and
  • a withholding tax is a tax levied on the recipient of the interest and it is simply a particular taxation technique, rather than a type of tax, intended essentially to secure (minimum) taxation of the interest recipient. Therefore, a transaction is abusive if it allows to avoid the taxation of the interest in the State of the recipient.

In light of the foregoing, AG Kokott concluded that no abuse of law could be envisaged in the interposition of the Luxembourg or Cypriot entities, either in relation to the circumstance that the interest was actually subject in Luxembourg to a minimal taxation (as the deductibility of the interest on the back-to-back arrangement was recognized),[3]Opinion of AG Kokott delivered on 1 March 2018 in case C-115/16, CJEU, para. 84: “Any such actual minimal taxation or non-taxation is a consequence of the tax autonomy of each State. If fiscal … Continue reading or that Cyprus does not apply any withholding tax on dividends distributed to non-EU shareholders.

Rather, a risk of abuse could derive if the entity controlling the Luxembourg holding company were located in a country not granting an adequate exchange of information with the State of residence of the ultimate interest recipient. What matters, in AG Kokott’s view, is that the transaction does not jeopardize the possibility of a correct taxation of the income in the State of the recipient.[4]Opinion of AG Kokott delivered on 1 March 2018 in case C-115/16, CJEU, para. 89: “Any such complaint of abuse might, in turn, be invalidated if the capital funds provide the relevant tax … Continue reading

The decisions of the CJEU on the six Danish “beneficial ownership cases” are expected to be published in the next few weeks. If the CJEU were to confirm AG Kokott’s analysis, those decisions would not only provide an essential guidance on the application of the “beneficial ownership” test in EU law, but they would also offer fundamental indications, in addition to the decisions in Eqiom and in Deister/Juhler, in order to distinguish when an “intermediate” holding company is a legitimate tool and when, on the contrary, the interposition of a holding represents an abusive arrangement.

In particular, extremely important, in consideration of the principles of legal certainty and legitimate expectation, are the clarifications given to the concept of “fully artificial arrangement”, whose interpretation has always been quite debated between taxpayers and tax administrations,[5]Such concept, frequently mentioned by the CJEU since Cadbury Schweppes, has also been introduced in some domestic tax provisions (e.g. Art. 167, para. 8-ter, of the Italian income tax code), whose … Continue reading as well as to the relevance of an actual exchange of tax information among tax administrations (and, specifically, with the State of the recipient), in order to ascertain the possible abusive nature of a transaction.


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  1. Thank you Cristiano, your comments are very interesting. We are all looking forward to the judgment of the CJEU in these crucial Danish cases.

    In my opinion, if Kokott’s opinion were accepted by the CJEU, it could have a great effect in how the GAAR in ATAD/PSD should be interpreted in relation to the concept of abuse (given that, as of today, no clear guidance exists on this relationship and on whether the concept remains within its previous boundaries or it has been extended). Based on the current case law of the CJUE, the standard for abuse has been linked to the concept of wholly artificial agreements that do not reflect economic reality and whose purpose is unduly to obtain a tax advantage. However, note that Kokott affirms (paragraphs 64, 67 and 68 in C-115/16, mentioned also in your post) that a wholly artificial agreement which ultimately exists on paper is not the only case where abuse can exist, because there can be also an abuse in arrangements that exist in commercial life if they are put in place with the essential aim of obtaining a tax advantage. I see two standards for abuse, not only one.

    As to the question on whether the concept of abuse that comprises the GAAR in ATAD/PSD is a continuation of the previous case-law standard (so a wholly artificial agreement would be the standard to identify a non-genuine arrangement to be added to the subjective test – intention to unduly obtain a tax advantage) or the concept of abuse is broader in this new GAAR, Kokott seems to follow the second approach by not requiring a wholly artificial agreement. We will see if the CJUE does the same. I think that the CJUE will still require the objective and subjective elements to identify an abuse, and how this objective element is interpreted from hereon on its link to the wholly artificial concept would be a key point. On this, Kokott’s reference to ATAD “is not for free” and her view is pretty straightforward: the fact that an arrangement reflects economic reality (i.e., it is not a wholly artificial agreement) does not preclude the existence of abuse.

    The issue is crucial for the concept of abuse, but also for other purposes: the fulfillment of the “main benefit test” in Directive 2018/822 (report of cross-border arrangements) only requires that a taxpayer has entered into an arrangement because the obtaining of a tax advantage is what he/she may reasonably expect to derive from it. Therefore, following Kokott’s view that an arrangement that exists in commercial life can still be abusive because of the aim of the taxpayer, I wonder whether the fulfillment of this main benefit test would imply automatically the existence of abuse. In other words: whether the person who reports a cross-border arrangement in a case where the fulfillment of this test is necessary would be accepting that such an arrangement is abusive. On top of that, the job of the tax auditor is simple. Pretty scary.

  2. Thanks Diego for your comments and very interesting inputs.
    I think that the positive element in A.G. Konott’s opinion is that she has tried to define more clearly what an artificial arrangement is and she has specified that a company that actually “exists” is not an artificial arrangement. Thus, a mere holding company is not necessarily abusive (considering also Eqiom and Deister).
    It is true that maintaining that an abuse can exist even when there is no artificial arrangement, as the aim of obtaining an undue tax saving can be per se sufficient to identify an abuse, may create room for further uncertainty. Also in this respect (I’m trying to be optimistic) AG Kokott’s opinion may give some guidance in understanding when a saving is “undue” (and in narrowing this otherwise potentially vague concept): not any type of tax planning is abusive, as a “quid pluris” is necessary for that, like the purpose of “hiding” an income exploiting the gaps (more and more narrow every day) in the exchange of information among tax authorities.

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