The European Court of Justice (ECJ) on March 6 published a reference for a preliminary ruling in a Danish case (C-682/16) requesting guidance on the interpretation the term “beneficial owner” in the context of the EU interest and royalty directive.
The questions were referred by the Vestre Landsret (Denmark) in the case of BEI ApS v Skatteministeriet (C-682/16).
The interest and royalty directive (Directive 2003/49/EC) is designed to eliminate obstacles to EU trade by abolishing withholding taxes on royalty and interest payments made within a group of companies arising in an EU Member State.
To be exempt from withholding tax, interest and royalties should be paid to the beneficial owner of the payment that is resident in another Member State. Therefore, the exemption cannot be granted if the recipient receives the payments as an intermediary, such as an agent, trustee or authorised signatory, for some other person.
In this context, the Danish Court has asked the ECJ whether the beneficial owner concept must be interpreted only by taking in account the corresponding concept in Article 11 of the OECD 1977 Model Tax Convention and its commentary, or by also having regard to additions to the OECD commentary made after the date of the directive was adopted in 2003.
In particular, the Danish court seeks clarification of the applicably of 2003 OECD commentary additions on conduit companies (paragraph 10.1), and a 2014 addition concerning contractual or legal obligations (paragraph 10.2).
Conduit companies & legal obligations
Assuming the 2003 commentary can be used, must there be an actual channeling of funds for a company to be recharacterized as a conduit company, and if so, is it relevant that a re-payment takes place close in time to the payment of the interest and/or takes place as a payment of interest? the referring court asks.
The Danish court further asks if the following conditions are relevant to the interpretation of the concept of beneficial owner: if equity capital is used for the loan, if the interest in question is entered on the principal (‘rolled up’), if the interest recipient has paid tax on the interest received to the State where the interest payer is resident, if the interest recipient has subsequently made an intra-group transfer to its parent company resident in the same State with a view to adjusting earnings for tax purposes under the prevailing rules in the State in question, if the interest in question is subsequently converted into equity in the borrowing company, and if the interest recipient has had a contractual or legal obligation to pass the interest to another person.
Moreover, the referring court asks what the effect is if the recipient — without having been contractually or legally bound to pass the interest received to another person — is found not to have the ‘full’ right to ‘use and enjoy’ the interest, as referred to in the 2014 commentary.
National provisions
The ECJ is also asked whether a Member State needs to have a specific domestic provision implementing article 5 of the directive to counteract fraud and abuse, or whether national laws containing general provisions or principles counteracting fraud, abuse, and tax evasion can be interpreted in accordance with article 5.
If so, the Danish court asks whether paragraph 2(2)(d) of the Danish law on corporation tax can be deemed to be a specific domestic provision as provided for in article 5 of the directive as it states that the limited tax liability on interest income does not include “interest which is tax-exempt under Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.”
Interest royalty directive and tax treaties
Additionally, the referring court asks the ECJ whether article 5 of the directive covers a conventional domestic law anti-abuse provision – included in a double taxation convention entered into between two Member States and drafted in accordance with the OECD Model Tax Convention and – which provides that taxation of interest is contingent on whether the interest recipient is deemed to be the beneficial owner of the interest.
Duty to research/identify beneficial owner
Finally, ECJ is asked if a member state has to declare, under the interest and royalty directive or article 10 EC, which entity is the beneficial owner when the state considers the recipient of the payment a mere conduit company.
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].
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