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Cjeu Ruled On The Application Of The Beneficial Ownership Concept
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.
Facts
- 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.
- 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.
- 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