National courts to interpret milestone EU Danish cases on beneficial ownership and abuse


On 26 February 2019, the Court of Justice of the European Union (CJEU) issued its judgments in the so-called “Danish cases”. The underlying question of these cases was whether dividend and interest payments could be exempt from withholding tax under the EU Parent Subsidiary and Interest & Royalty Directives, when the payments were made from a Danish company to a company resident within the EU and if the payments were fully or partially passed on to an ultimate parent company resident in a third country.

Following these Danish cases, we have noticed a significant increase in tax audits in which the Belgian tax authorities are focusing on withholding tax exemptions on passive income flows (dividend, interest and royalty payments) under the relevant EU directives and alleged tax abuse through the involvement of intermediate entities, lacking beneficial ownership status. We refer to our previous newsflashes in this regard (28 Februari 2019, 26 June 2020).

Also at an international level, more and more attention is being paid to the infamous beneficial ownership concept. We have indeed witnessed some specific case law on this matter (e.g. in France, Spain, Switzerland and the Netherlands) whereby national courts, further to positions taken by the national tax authorities, interpret the CJEU’s judgement in the Danish cases for national tax purposes. Those recently published cases illustrate that the majority of national courts generally tend to follow the tax authorities when applying a broad and more economic interpretation of the concept of beneficial ownership (i.e. substance over form) following the Danish cases (in the context of abuse), to the detriment of the taxpayer. Obviously, as always, the court decisions are heavily dependent on the exact fact pattern and no abstract conclusions should be drawn from the decisions without considering these as well.

On 10 July 2020, following a strike of decisions in favour of the tax authorities, it was the taxpayer that won in a case before the Italian Supreme Court. The specific case concerns an interest payment made by an Italian company to its Luxembourg parent company that has both a holding and financing function. According to the Italian Tax Authorities, the Italian company was not able to claim the withholding tax exemption as provided in the EU Interest & Royalty Directive as the Luxembourg parent company was not the beneficial owner of the interest income received. Reason was that it passed on an almost identical amount of the interest received (i.e. retained a margin of 0,125%) to another group entity only shortly after having received the payment from its Italian subsidiary. The Italian Supreme Court however rejected this argument. In the context of abuse, the Court – by referencing a previous decision regarding dividends – stated that “even a ‘pure’ subholding company can be considered a ‘beneficial owner'” and that a light asset structure (i.e. modest operating receivables, the lack of employees) is not the key point to take into consideration, but rather the business purpose of the subholding company and role played by the company, i.e. whether the company makes independent management decisions (with respect to the income received). The Italian case differs from the other recently published cases as it, although adhering to the Danish cases and therefore applying a more broad and economic approach to the concept of beneficial ownership in the context of abuse, pays more attention to the level of economic substance that can be expected and is required taking into account the specific functions of the company. The latter was also already reflected in the opinion of the Advocate General Kokott delivered to the Danish cases, which was in favour of a more nuanced interpretation and opined that companies with limited activities (such as e.g. asset management companies) are also subject to very minor requirements.

Although the Italian case is clearly in favour of the taxpayer, can be endorsed on the basis of its tax-technical merits and thus could provide taxpayers worldwide with some additional ammunition during discussions with tax authorities, the importance of this case should also not be overestimated. Indeed, national tax authorities, including the Belgian tax authorities, still often use factual elements such as modest operating receivables and lack of employees to take the position that a company is a conduit company lacking beneficial ownership status, irrespective of the actual role of the company. Hence, taxpayers need to stay vigilant for these developments. Multinational groups that have or consider transactions involving (significant) royalty, dividend and/or interest amounts with intermediate companies should be prepared to defend the compliance of their tax positions even where it concerns structures that are not tax driven and/or which are commonly applied; proactively reviewing the sustainability of the tax and legal model and carefully considering future transactions can avoid additional unpleasant cash surprises afterwards. Furthermore, in some jurisdictions, such as Belgium, it is also possible to have up-front certainty on the exemption of withholding tax via an advance decision (ruling) when setting up or modifying a certain structure.