Guidance on determining beneficial ownership: part two

As discussed in the April 2018 Tax and Legal Update, in all the above cases the Danish resident applied with the tax administrator to exempt dividend/interest payments from withholding tax in compliance with the directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (the Parent Subsidiary Directive) and the directive 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). The Danish tax administrator denied the exemption, arguing that the payment recipient was a conduit structure and could not be considered the beneficial owner of the received dividend/interest. 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 clarification 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 its judgments (C-116/16, C-115/16), the CJEU held that the exemption of interest payments from any taxes set out by the Interest and Royalties Directive is applicable only to the beneficial owners of such interest, who were defined by the court as entities that generate economic benefits from the received interest and may freely determine how these will be utilised. The beneficial owner must receive this income for its own use, i.e. may not act as an intermediary for another person.

Contrary to the Advocate General’s opinion, the CJEU believes that the Model Tax Convention including the commentaries and relevant double taxation treaties can be used to interpret the beneficial ownership pursuant to the Parent Subsidiary Directive and the Interest and Royalties Directive, since the beneficial ownership concept derives from the Model Tax Convention. The member state does not have to identify the beneficial owner of income to be able to deny the beneficial ownership or prove the abuse of right.

According to the CJEU, the abuse of right requires firstly a summary of objective facts indicating that despite meeting legal conditions on a formal level, the objective of the relevant law has not been achieved and, secondly, a subjective element involving the intention to obtain advantage from the EU law. Such facts may, for example, include the existence of conduit structures lacking economic grounds.

In contrast to the Advocate General’s opinion, the CJEU believes that the absence of a local standard regulating the abuse of right is not a key problem, as domestic bodies must apply a general EU law principle, according to which legal entities may not fraudulently or abusively apply EU legal regulations, and also confirms that EU fundamental freedoms cannot be relied upon where the abuse of right or a fraud are involved.