by Davide Anghileri
France violated EU law when it applied a general antiabuse rule to deny a withholding tax exemption for dividends distributed by a resident subsidiary to a company controlled by a resident of a non-EU State, the European Court of Justice (ECJ) has ruled.
The case, Eqiom SAS, previously Holcim France SAS Enka SA v Ministre des finances et des comptes publics (C-6/16), decided September 7, concerns the circumstances in which a member state may refuse — on grounds of preventing tax evasion or abuse — an exemption from withholding tax that would normally be granted on the distribution of dividends by a resident subsidiary to its non-resident parent company by virtue of the EU parent-subsidiary directive.
In particular, the analysis concerns the refusal by the French tax authorities to exempt dividends distributed by a French resident company to its Luxembourg parent company which was, in turn, indirectly controlled by a company resident in Switzerland. The French tax code automatically denies the withholding tax exemption if the taxpayer’s parent is controlled by a non-EU resident and does not prove that the principal purpose behind the structure is not to take advantage of the exemption.
The questions referred to the ECJ addressed in particular whether the French rules were compatible with article 1(2) of the parent-subsidiary directive, which allows the withholding tax exemption to be denied on the grounds of preventing fraud or abuse, or with EU fundamental freedoms.
The court examined the questions together.
Artificial arrangements
The court stated that for national legislation to be regarded as seeking to prevent tax evasion and abuse, its specific objective must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the purpose of which is unduly to obtain a tax advantage.
Despite the general principle of EU law that no one may benefit from the rights stemming from the legal system of the European Union for abusive or fraudulent ends, this principle must nevertheless be interpreted strictly in so far as it constitutes a derogation from the tax rules established by the parent-subsidiary directive, the ECJ said.
Following the 19 January, opinion of the Advocate General, the court affirmed that the mere fact that a company residing in the European Union is directly or indirectly controlled by residents of third States does not, in itself, indicate the existence of a purely artificial arrangement which does not reflect economic reality and whose purpose is unduly to obtain a tax advantage.
The court concluded that a general presumption of fraud and abuse cannot justify either a fiscal measure which compromises the objectives of a directive, or a fiscal measure which prejudices the enjoyment of a fundamental freedom guaranteed by the treaties.
Evidence of fraud and abuse
It is forbidden to deny a tax advantage without the tax authorities being obliged to provide even prima facie evidence of fraud and abuse, as this would go further than is necessary for preventing fraud and abuse, the court said.
Instead, a Member State must carry out an individual examination of the whole operation at issue to determine whether an operation pursues an objective of fraud and abuse, ECJ said.
Further, the ECJ concluded that the objective of combating fraud and tax evasion, invoked by the French Republic, cannot justify an impediment to the freedom of establishment or the violation of the parent-subsidiary directive.
Thus, the ECJ stated that where a subsidiary distributes profits to a resident parent company, also directly or indirectly controlled by one or more residents of third States, that resident parent company may benefit from that exemption without being subject to the condition that that parent company establish that the principal purpose or one of the principal purposes of the chain of interests is not to take advantage of that exemption.
On the contrary, it is solely where a resident subsidiary distributes profits to a non-resident parent company, which is directly or indirectly controlled by one or more residents of third States, that the exemption from withholding tax is subject to such condition.
Davide Anghileri
Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.
Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.
Davide can be reached at [email protected].
Latest posts by Davide Anghileri (see all)
- Swiss government approves new law governing tax treaties - November 11, 2020
- EU states’ compliance with tax avoidance directives assessed in Commission report - August 26, 2020
- Italy clarifies VAT reporting obligations of online marketplaces - June 16, 2020
- EU blacklist: Cayman Islands added with other three jurisdictions - February 18, 2020
- Italy adopts digital services tax, notional interest deduction - January 8, 2020
Be the first to comment