On 26 February 2019 the Grand Chamber of the Court of Justice of the European Union ("CJEU") rendered 2 judgments regarding the non-application of the Parent Subsidiary Directive (Council Directive 90/435/EEC – "PSD") and the Interest and Royalties Directive (Council Directive 2003/49/EC – "IRD") in case of fraud or abuse, even in the absence of any domestic anti-abuse legislation
In this context, the judgements provide useful guidance on the concepts of abuse and beneficial ownership.
Abuse concept
According to the CJEU, it is settled case-law that there is, in EU law, a general legal principle that EU law cannot be relied on for abusive or fraudulent ends. Accordingly, a taxpayer cannot enjoy a right or advantage arising from EU law where the transaction at issue is purely artificial economically and is designed to circumvent the application of the legislation of the Member State concerned. The proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of such rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it.
Beneficial owner concept
The CJEU pointed out that the concept of "beneficial owner
of the interest" in the IRD cannot refer to concepts of
national law that vary in scope.
The concept must be interpreted as designating an entity which
actually benefits from the interest that is paid to it. The IRD
confirms this reference to economic reality by stating that a
company of a Member State is to be treated as the beneficial owner
of interest or royalties only if it receives those payments for its
own benefit and not as an intermediary, such as an agent, trustee
or authorised signatory, for some other person. The term
"beneficial owner "concerns not a formally identified
recipient but rather the entity which benefits economically from
the interest received and accordingly has the power to freely
determine the use to which it is put. Only an entity established in
the EU can be a beneficial owner of interest for the purposes of
the IRD and may then be entitled to the exemption provided for
therein. In addition the CJEU confirmed that the IRD draws upon
Article 11 of the OECD 1996 Model Tax Convention and pursues the
same objective, namely avoiding international double taxation.
Please click on the following link to read our in-depth analysis of these cases.
2019.02.28 - Luxembourg N...pdf - 718.21 KB
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