European Union: CJEU Ruled On The Application Of The Beneficial Ownership Concept

The judgment of the Court of Justice of the European Union (CJEU) on February 26, 2019, in the "Danish Beneficial Ownership Cases", can be perceived as a landmark on the interpretation of the Beneficial Ownership concept under the Interest and Royalties Directive (IRD) and the Parent-Subsidiary Directive (PSD).

Following the refusals of the Danish tax Authorities to grant the exemption from the Danish Withholding Tax (WHT) levied on the payments of interest and dividends, the taxpayers appealed these refusals before the Danish Courts.

The CJEU was asked to clarify whether Denmark may deny the benefits of the EU Directives and impose WHT on interest payments and dividend distribution on the grounds of the non-applicability of the Beneficial Ownership concept under the IRD and PSD.

Interest and Royalty Directive

Court cases Luxembourg 1 (C-115/16), X Denmark (C-118/16), C Denmark (C-119/16) and Z Denmark (C-299/16) jointly refer to intragroup financing activities (back to back loans) where the Danish resident subsidiaries were indirectly financed by their non-resident parent companies through a series of loans initially granted to holding companies resident in another EU member State acting as intermediary holding companies.

These intermediary EU holding companies were regarded by the Danish Tax Authority as not being the beneficial owners of that interest and, accordingly, as incapable of being entitled to the exemption from any taxes that is provided for by IRD.


  • The Danish companies received financing by other entities in EU however these EU entities were held directly or indirectly by non-EU entities or persons.
  • These EU entities had zero or minimum substance (i.e. 1-2 part time employees).
  • Interest income received by the EU entities from the Danish companies was not taxed or paid a very small amount of tax in their jurisdiction.
  • Interest paid by the Danish companies was all or almost all transferred to the non-EU entities or persons.
  • The only or main activity of the EU Entities was the provision of the loans to these Danish companies.

Court decision

  • The exemption of Interest payment under IRD is restricted solely to the beneficial owner of such interest income.
  • Beneficial owner is the entity that economically benefits and has the freedom to use and enjoy the interest income.
  • OECD Model Tax Conversion and the commentaries are relevant for interpreting the concept of the beneficial owner.
  • The facts of each case should be examined in order to establish whether abusive practices are present, and in particular whether economic operators have carried out purely formal or artificial transactions devoid of any economic and commercial justification, with the essential aim of benefiting from an improper advantage.
  • Denmark has to deny abusive practises as a general principle and deny benefit of an EU directive in such cases even in the absence of domestic or other anti-abuse provisions.

Analysing the above it can be concluded that in order for the benefit of the EU Directive to be granted, it is required that the EU Company receiving the interest and/or royalty payments to be the beneficial owner of the income. The CJEU aligns the EU Concept of the Beneficial Ownership with the interpretation given by the OECD Model Tax Convention.

When examining a cross-border structure under the IRD, the beneficial owner of the income is not the entity which formally identified as the recipient on a legal basis. Beneficial owner is the entity that actually benefits from the interest and/or royalty has the power freely to determine its use.

The Court noted that Denmark has to deny the benefit of an EU Directive in the event where fraudulent circumstances identified.

The fact that the group of companies structured in such a way that the recipient of the interest paid must pass that interest on to a third company thus resulting to no or an insignificant taxable profit then it acts as a conduit company, can be considered as an artificial arrangement with a purpose to benefit from the EU rules and this is an indication of abuse.

Parent subsidiary directive

The two joined Danish cases, N T Danmark (C-116/16) and Y Denmark (C-117/16), refer to dividend distribution from a Danish resident company to an intermediate holding company resident in another EU member State.


  • The Danish companies were held by other entities in EU however these EU entities were held directly or indirectly by non-EU persons.
  • These EU entities had zero or minimum substance.
  • Dividend income received by the EU entities from the Danish companies was exempted from tax locally.
  • Dividend paid by the Danish companies was all or almost all transferred from the EU entities (shareholders) to the non-EU persons.
  • The only or main activity of the EU Entities was the holding of these Danish companies

Court decision

The Court concluded that in this case, denying the benefit of the EU Directive is the outcome of the application of the general principle of the EU Law providing for the prohibition of abusive practices (combination of a deliberate abortion of the purpose of the EU Directives and artificial arrangements in place with purpose to obtain tax advantages).

Following a similar reasoning to that in the IRD as to the indication of abuse in the existence of a conduit company, the Court noted that is for the referring courts to assess if the transactions under examination are abusive or not and provided additional guidance in that respect.


The Court's judgement in the Danish Beneficial Ownership cases will definitely bring innovations in international taxation. The need to conduct transactions with an adequate level of economic substance is of paramount importance.

In the light of the CJEU's decision, taxpayers should take all the relevant measures to comply with the new requirements so as to ensure that the beneficial ownership requirements when it comes to the application of the PS and IR Directives are fully adhered to.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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