Guidance on determining beneficial ownership

At the beginning of March 2018, the Advocate General of the Court of Justice of the EU (CJEU) published her opinion on the concept of the beneficial owner of income deriving from the payment of dividends and interest, which is covered by Directive 90/435/EEC, on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (the Parent Subsidiary Directive), and Directive 2003/49/EC, on the common system of taxation applicable to interest and royalty payments made between associated companies of different member states (the Interest and Royalties Directive).

In all cases, a Danish company requested an exemption from the Danish withholding tax levied on the payments of dividends/interest in compliance with the above directives. The Danish tax authorities denied the exemption, arguing that the company receiving the income was a conduit structure and could not be considered the beneficial owner of the payment. In connection with this, the Danish courts subsequently also asked the CJEU to clarify whether Denmark may apply the beneficial ownership concept to deny the benefits of the EU directives and requested clarifications on the applicability of the OECD’s Commentaries on the Model Tax Convention or the relevant provisions of individual double taxation treaties between the appropriate states in this respect.

In the case of dividend payments, the Advocate General emphasised that the Parent-Subsidiary Directive does not make the member states’ obligation to exempt dividends from withholding tax conditional upon beneficial ownership. In this regard, the only foreseen limitation is the potential application of domestic anti-abuse provisions covering tax evasion, which, however, must comply with the EU law. The AG goes on to observe that the provisions of the Parent-Subsidiary Directive and the Interest and Royalties Directive must be interpreted under EU law independently of the OECD Commentaries and double taxation treaties, which follow a different approach. In the case of interest payments, the AD is of the opinion that the holding company receiving the interest income should be considered as the beneficial owner if it is acting in its own name and on its own account. According to the AD, it is necessary to assess in this respect whether the entity may dispose of such interest income (especially pay its own expenses) and bear potential losses (e.g. as a result of insolvency). If it is so, a mere contract on “conduit” financing, based on which the entity passes on payments to other group companies, does not automatically constitute the reason for denying the exemption from withholding tax. In both cases, the appropriate member state must always identify the person it deems to be the beneficial owner of the income where the entity receiving the payment is not considered the beneficial owner.

The Advocate General has thus provided certain guidance on how to proceed when interpreting beneficial ownership in compliance with the appropriate EU directives. The AG also noted that the existence of an abuse under EU law should be assessed by local courts that must always assess each case on an individual basis and take into account all specifics. The Advocate General’s opinion does not represent the CJEU’s final decision and may, naturally, differ from the CJEU’s decision.