On December 20th 2017, the Court of Justice of the European Union (“ECJ”) rendered its judgment in the joined cases of Deister Holding AG (Case C-504/16) and Juhler Holding A/S (Case C-613/16) v. Federal Central Tax Office of Germany (Bundeszentralamt für Steuern) concerning the refusal to exempt dividends from withholding tax received by these companies from their German subsidiaries.
In the first case, Deister Holding was the successor in title of Traxx, a Dutch company which held around a quarter of the capital of a German company. Traxx rented an office in the Netherlands which had two employees in 2007 and 2008. Its sole shareholder was a private person residing in Germany. In 2007, the German subsidiary paid dividends to Traxx and levied withholding tax on such dividends.
In the second case, Juhler Holding was a Danish holding company. Juhler Services Limited, a Cyprus company whose sole shareholder is a natural person residing in Singapore, held 100% of the capital in Juhler Holding. Since 2003, Juhler Holding held 100% of the capital in temp-team Personal GmbH, a German company. In July 2011, Juhler Holding which does not have its own office in Denmark, received dividends from its German subsidiary, which were subjected to withholding tax.
Under German domestic Law, the entitlement to exemption or a refund of withholding tax is precluded to a non-resident parent company which is, itself, held by shareholders who would not be entitled to the exemption or refund and:
- there are no economic or other substantial reasons for the involvement of the non-resident parent company, or
- the non-resident parent company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose, or
- the non-resident parent company does not earn more than 10% of its gross income from its own economic activity (there being no such activity, inter alia, if the foreign company earns its gross income from the management of assets).
If one of these conditions is met, the German tax code presumes, without it being possible to rebut such a presumption, that the arrangement is abusive and the exemption or refund is denied.
Although the EU Parent Subsidiary Directive includes a provision which authorises Member States to apply provisions required to prevent fraud and abuse, such provisions should only prevent the creation of a wholly artificial arrangement which does not reflect economic reality.
In its ruling, the ECJ states that the following elements cannot automatically indicate that there is a wholly artificial arrangement:
- a parent company which is held by a person which itself would not be entitled to the withholding tax exemption, or
- the economic activity of a non-resident parent company consists only in the management of its subsidiaries’ assets or its income results only from such management.
The ECJ is of the view that in order to determine whether there is an abuse, a case-by-case analysis is required and legislation, like the German legislation, which introduces specific conditions which would automatically presume that there is an abuse, is not in line with the EU Parent Subsidiary Directive and the EU freedom of establishment.