On February 28th 2019, the Grand Chamber of the Court of Justice of the European Union (“ECJ” or “the Court”) handed down a set of two judgments on the meaning of beneficial owner and abuse of rights under EU law.
In six cases (Joined cases C-115/16, N Luxembourg 1, C-118/16 X Denmark, C-119/16 C Danmark I, C-299/16 Z Denmark, and Joined Cases C-116/16 T Danmark and C-117/16 Y Denmark ), the ECJ was asked to clarify the conditions under which an entity may be denied the benefits of the Interest and Royalties Directive (“IRD”) and the Parent Subsidiary Directive (“PSD”).
First, in relation to Article 1(1) and 1(4) of the IRD, the ECJ held that “beneficial owner of the interest” has an autonomous meaning under EU law and must be interpreted as designating “an entity which actually benefits from the interest that is paid to it” or, in other terms, not “the 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”. The Court added that the OECD Model Tax Convention and commentary, including successive changes thereto, are relevant when interpreting the IRD.
Secondly, the ECJ found that, pursuant to the general principle of prohibition of abuse of rights under EU law, the absence of a domestic or agreement based anti-abuse provision does not prevent national authorities from refusing the benefits of the IRD or PSD. By this decision, the Court appears to depart from its previous position (C-321/05 Kofoed) whereby it had held that a Member State could not rely, against its citizens, on the non-transposed anti-abuse provision of a directive (in that case Article 15 of the Merger Directive). In the present proceedings, the Court emphasised that the general prohibition of abuse in EU law applies irrespective of whether the rights and advantages in question find their source in the treaties, in a regulation or in a directive.
Thirdly, the ECJ provided useful indications to assess an abuse of right in conduit company cases. The ECJ held that the use of a conduit company and the fact that the beneficial owner of the income does not meet the requirements of the IRD or PSD are indicia of abuse. Regarding the use of conduit companies in particular, the ECJ noted that the conduit company’s inability to make economic use of the income and its de facto obligation to pass it on are also to be taken into account. Further, the ECJ found that intra-group financial flows by which profits are transferred from one profit making entity to a loss making one is also an indication of artificiality and of abuse.
Finally, the ECJ made some interesting findings in relation to the Luxembourg SICAR (Société d’investissement en capital à risque) regime. The ECJ noted that while the SICAR is subject to corporate income tax, it is in fact exempt from tax. As a result, according to the ECJ, a SICAR may not fulfil the last of the three cumulative conditions set out at Article 3(a) of the IRD (the “subject to tax” condition) and as such may be denied the exemption provided by the Directive. The final determination on this point was left to the referring national court. This position thus confirms the ECJ’s previous findings in C-448/15 Belgische Staat v. Wereldhave Belgium Comm. VA et al., dated March 8th 2017 (Please refer to our May 2017 newsletter for further details).