The Danish cases: What is decided ? The judgements in a nutshell

1. Bruno da Silva University of Amsterdam / Amsterdam Centre for Tax Law Loyens & Loeff The Danishcases:What is decided? The judgements in a nutshell Amsterdam, 25 June 2019

2. The facts • Use of intermediate holding companies via multi-tiered corporate structures with ultimate owner resident in third countries • Those structures allowed to minimize the tax burden in the form of a final liability for withholding tax on interest payments or dividend distributions within the group • Minimum or not income left at the level of the intermediate holding companies

4. The dispute • Danish tax authorities challenged the application of IRD and PSD withholding tax exemption based on: • Recipient of the income is not the beneficial owner • Mere conduit companies • At the time of the facts no rule targeting abuse under Danish domestic law

5. Main issues in the cases Deny IRD/PSD benefits absent domestic or treaty based anti-avoidance rules Interpretation of the concept of “beneficial ownership” under EU law [no BO requirement in the PSD] Constituent elements of an abuse of rights and burden of proof when assessing abuse and the conditions for proving it

6. Deny IRD/PSD benefits absent domestic or treaty based anti-avoidance rules

7. Invoking Principles of EU Law Gap-filling function Passes MS failure to comply with a Directive Principle of legal certainty and legitimate expectations

8. The CJEU 102. The general principleof abusive practices must be relief on against a person [...] even in the absence of provision of national law providing for such refusal 105. Furthermore, whilst Article 5(2) of Directive 2003/49 provides that Member States may, in the event of evasion, avoidance or abuse, withdraw the benefits of the directive or refuse to apply it, that provision likewise cannot be interpreted as excluding the application of theprinciple of EU law that abusive practicesare prohibited, since the application of that principle is not— as the provisions of the directive are — subject to a requirement of transposition

9. Kofoed (C-321/05) 41. In that regard, it should be borne in mind that, according to Articles 10 EC and 249 EC, each of the Member States to which a directive is addressed is obliged to adopt, within the framework of its national legal system, all the measures necessary to ensure that the directive is fully effective, in accordance with the objective that it pursues 42. Moreover, the principle of legal certainty precludes directives from being able by themselves to create obligations for individuals. Directives cannot therefore be relied upon per se by the Member State as against individuals. 44. [...] the requirement of a directive-compliant interpretation cannot reach the point where a directive, by itself and without national implementing legislation, may create obligations for individuals [...]

10. Kofoed (C-321/05) • Kofoed message: • MS are obliged to give effect to the (true) objective of Directive in case its provisions are open to abuse; • Abusive practices are prohibited and may be invoked against taxpayers but as long as they are part of MS’ national law.

11. Cussens (C-251/16) 28      Whilst the Court held, in paragraphs 70 and 71 of the judgment in Halifax, that the principle that abusive practices are prohibited also applies to the sphere of VAT, pointing out that preventing possible tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive, it does not follow that the application of that principle in that sphere is subject to a requirement of transposition, as the provisions of the Sixth Directive are. 33      Therefore, the principle that abusive practices are prohibited may be relied on against a taxable person to refuse him, inter alia, the right to exemption from VAT, even in the absence of provisions of national law providing for such refusal

12. Kofoed v Cussens 38. [...] of that judgment that the Court ruled not on the conditions for application of the principle that abusive practices are prohibited, but on the conditions for application of a specific provision contained in a directive and enabling the Member States to refuse the exemption provided for by that directive where the transaction concerned has tax evasion or tax avoidance as its principal objective or as one of its principal objectives. Whilst, in paragraph 48 of that judgment, the Court placed emphasis on the existence of national rules relating to abuse of rights, tax evasion or tax avoidance that are capable of being interpreted in accordance with the aforesaid provision, that case-law concerns that provision of secondary legislationand is therefore not applicable to the general principle that abusive practices are prohibited.

13. AG Kokott Opinion 103. A simple direct application of Article 5 of Directive 2003/49 to the claimant’s detrimentwould be denied to the Danish authorities, also for reasons of legal certainty. For example, a Member State cannot hold an individual to the provision of a directive that it has not transposed. It is settled case-law that a directive cannot of itself impose obligations upon an individual, i.e. the directive cannot be invoked as such against him. A Member State that did so would itself be guilty of ‘abusive conduct’, first, by not transposing a directive addressed to it (even though it could) and, second, by relying on a provision to prevent abuse enacted in a directive which it had not transposed.

14. AG Kokott Opinion 104. Nor could the competent authorities in the main proceedings rely directly against the individual on the general principle of EU law that abuse of rights is prohibited. At least in cases falling within the scope of Directive 2003/49, such a principle has been given specific effect in Article 5(2)of the directive and has been expressed in a concrete manner. If it were to be permitted, in addition, to have direct recourse to a general principle of law which in terms of content is much less clear and precise, there would be a danger that the harmonisation objective of Directive 2003/49 and of all other directives containing specific provisions to prevent abuse (such as Article 6 of Directive 2016/1164) would be undermined. Moreover, such an approach would undermine the prohibition, already mentioned, on directly applying non-transposed provisions of directives to the detriment of individuals.

15. Kofoed v Danish cases 119. Accordingly, since, as has been noted in paragraph 96 above, abusive or fraudulent acts cannot found a right provided for by EU law, the refusal of an advantage under a directive, in this instance Directive 2003/49, does not amount to imposing an obligation on the individual concerned under that directive, but is merely the consequence of the finding that the objective conditions required for obtaining the advantage sought, prescribed by the directive as regards that right, are met only formally

16. Outcome 111. Thus, in the light of the general principle of EU law that abusive practices are prohibited and of the need to ensure observance of that principle when EU law is implemented, the absence of domestic or agreement-based anti-abuse provisions does not affect the national authorities’ obligation to refuse to grant entitlement to rights provided for by Directive 2003/49 where they are invoked for fraudulent or abusive ends. • Mandatory application! • MS must apply general principle of EU law on abuse of rights!

17. Interpretation of the concept of “beneficial ownership”under EU law

18. Relevance of the Commentary Relevance of the OECD MTC anditsCommentary (as updated) • AG Sharpston in Scheuten Solar case: “[…] I recall that the Commission’s proposal for Directive 2003/49 was influenced by the OECD Model Tax Convention” • 1998: Commission Proposal: the term interest and royalties is based on Article 11 and 12 of the OECD Model Tax Convention

19. Meaning of Beneficial Ownership • The term ‘beneficial owner’ is 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. • Use of language of Commentary in the context of abuse analysis: “right to use and enjoy” the income not “being bound by contractual or legal obligation” [...] • “but also in substance without being bound by such a contractual or legal obligation....” Is the CJEU interpretation going beyond the OECD meaning?

20. Constituent elements of abuse and burden of proof when assessing abuse and the conditions for proving it

21. Abuse Objective requirement: Purpose of the rules has not been achieved Subjectiverequirement: Intentiontoobtain advantage byartificiallycreating the conditionsforobtainingit But… no abuse if no tax advantage: 137. That said, it remains possible, in a situation where the interest would have been exempt had it been paid directly to the company having its seat in a third State, that the aim of the group’s structure is unconnected with any abuse of rights. In such a case, the group cannot be reproached for having chosen such a structure rather than direct payment of the interest to that company.

22. Elements of abuse

23. Burden of proof • Taxpayer must demonstrate that exemption is applicable • Tax authorities of a Member State has to establish existence of elements constituting abuse while taking into account all the relevant factors such as if the payment was not to its beneficial owner • No need to identify who is the beneficial owner but merely if the supposed the beneficial owner is a conduit company which has committed abuse of rights • Identifying beneficial owner may be impossible

24. Deister and Juhler Holding & Eqiom? T Danmark, para. 101. “Thus, it is an indication of the existence of an arrangement intended to obtain improper entitlement to the exemption provided for in Article 5 of Directive 90/435 that all or almost all of the aforesaid dividends are, very soon after their receipt, passed on by the company that has received them to entities which do not fulfil the conditions for the application of Directive 90/435, either because they are not established in any Member State, […]” Eqiom, para. 34. “As the Advocate General stated in points 27 and 28 of her Opinion, the mere fact that a company residing in the European Union is directly or indirectly controlled by residents of third States does not, in itself, indicate the existence of a purely artificial arrangement which does not reflect economic reality and whose purpose is unduly to obtain a tax advantage.”

25. Thank you!bruno.silva@loyensloeff.com Type the footer here