EU court issues landmark decision on Member State power to deny tax benefits

By Jian-Cheng Ku & Rhys BaneDLA Piper Nederland N.V.

In a key decision issued February 26, the European Court of Justice (ECJ) has concluded an EU Member State does not need to adopt an anti-abuse provision into law to deny tax benefits granted under either the Parent-Subsidiary Directive or the Interest and Royalty Directive if fraud or abuse is involved.

In joined cases T Danmark (C-116/16) and Y Denmark Aps (C-117/16), the ECJ addressed questions on the interpretation of the Parent-Subsidiary Directive, whereas in joined cases N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark ApS (C-299/16), the ECJ addressed questions on the interpretation of the Interest and Royalty Directive.

Parent-Subsidiary Directive

Pursuant to the Parent-Subsidiary Directive, under certain conditions, EU Member States may not levy withholding taxes on dividends paid to parent companies in other EU Member States.

The EU Member State of the parent company must, in certain circumstances, either apply the credit method (provide a tax credit for the foreign corporate income tax paid) or the exemption method (exempt the inbound dividends from tax) to inbound dividends from other EU Member States.

The Parent-Subsidiary Directive also contains an anti-abuse provision, allowing EU Member States to deny the benefits of the Parent-Subsidiary Directive in the case of fraud or abuse. The Netherlands has implemented this anti-abuse provision in domestic law (in both the Corporate Income Tax Act of 1969 (CITA) and the Dividend Withholding Tax Act of 1965 (DWTA).

In the joined cases T Danmark and Y Denmark Aps, the central question asked was whether a domestic anti-abuse provision is required for the prevention of fraud or abuse, or whether a more general provision can be used.

The ECJ ruled that a more general anti-abuse provision can be invoked by an EU Member State to deny the benefits of the Parent-Subsidiary Directive.

This can even be based on the EU principle of abuse of law (viz. that no domestic anti-abuse provision is necessary).

The ECJ does, however, reiterate its Cadbury Schweppes standard, namely that the transaction at issue must be economically purely artificial and must be designed to circumvent the application of the legislation of the Member State concerned.

Interest and royalty directive

Pursuant to the Interest and Royalty Directive, EU Member States may not levy withholding taxes on interest and royalties paid to companies in other EU Member States insofar the recipient of the interest or royalties is the beneficial owner of the interest or royalties and are taxed in the receiving country.

The ECJ identified three central issues in the joined cases N Luxembourg 1, X Denmark A/S, C Danmark I and Z Denmark ApS, the two most important being:

  • The definition of ‘beneficial owner’ in the Interest and Royalty Directive; and
  • The constituent elements of any abuse of rights and the conditions for proving it.

Beneficial ownership

The ECJ refers to the OECD Model Tax Convention and the commentary thereto for defining beneficial ownership.

As such, if a company is a beneficial owner of the interest pursuant to a tax treaty based on the OECD Model Tax Convention, it is also likely that the company is the beneficial owner of the interest pursuant to the Interest and Royalty Directive.

The ECJ based this on the references made in the documents accompanying the Interest and Royalty Directive proposal.

Anti-abuse provision

The ECJ’s conclusions were exactly the same about the constituent elements of any abuse of rights and the conditions for proving it as described above with respect to the  joined cases T Danmark and Y Denmark Aps as it relates to the Parent-Subsidiary Directive.

Key takeaways

The ECJ judgment in the joined cases T Danmark and Y Denmark Aps and joined cases N Luxembourg 1, X Denmark A/S, C Danmark I and Z Denmark ApS is especially relevant for EU Member States that have not implemented domestic anti-abuse rules prescribed by the the Parent-Subsidiary Directive.

Under the EU abuse of law doctrine, the benefits of the Parent-Subsidiary Directive, being no withholding tax in the Member State of source and a tax credit or tax exemption in the receiving Member State, may be denied by a Member State.

The ‘purely artificial’ criterion introduced by the ECJ in the Cadbury Schweppes case and reiterated in later case law, remains the relevant criterion when assessing if a transaction is fraudulent or abusive.

As the Netherlands has specific domestic anti-abuse provisions in line with the ones in these directives, this opinion should have no direct impact on Dutch taxpayers.

Furthermore, as the Netherlands currently has no withholding taxes on interest and royalties, this ECJ decision as it relates to the definition of beneficial ownership of interest, should have no or limited impact on Dutch taxpayers. 

Jian-Cheng Ku

Jian-Cheng Ku

Attorney at Law / Tax Advisor at DLA Piper Nederland N.V.

Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations, and planning and design of transfer pricing policies.

Jian-Cheng Ku
Rhys Bane

Rhys Bane

Tax Advisor | Junior Associate at DLA Piper Nederland N.V.
Rhys Bane advises clients on Dutch and international (corporate) taxation aspects of international tax planning, corporate restructurings and M&A. He also focuses on tax policy and legislation in the area of Dutch, European and international (corporate) taxation.
Rhys Bane


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2 Comments

  1. Dear both
    Thanks for this very interesting piece. One could perhaps add, that “cadbury Schweppes” is no longer just that as the CJEU confirmed that the notion of abuse relies on two elements, i.e.: (i) the existence of objective circumstances showing that, despite formal compliance with the conditions laid down by the Directives, the purpose pursued by the Directive has not been achieved, and (ii) the intention to obtain an advantage from the Directives by artificially creating the conditions required to obtain it.

    I.e. like insinuated by AG Kokott, it is possible to have something that is not just wholly artificial but still constitutes abuse, which seems to be quite the development as well. So there is both an objective and a subjective element.

    Do you agree, or do you perhaps have any other thought on this?

  2. Dear Susi,

    Thank you for your in-depth response. Our thoughts on this (these are, of course, not yet fully crystallized) is that the CJEU further clarified the position they took in Cadbury Schweppes as it relates to determining when something is artificial. The subjective and objective element you refer to are something we already see in Dutch domestic legislation.

    Evidence of the fact that the CJEU has not abandoned their Cadbury Schweppes line can be found in recent case law (e.g. Deister Holding and Eqiom). Of course, the cases discussed are more recent than Deister and Eqiom and it could be a reasonable position to take that these six cases constitute an implicit shift in the position of the CJEU. Our thoughts, which are, as previously mentioned, not fully crystallized yet, are that the CJEU has at least not explicitly changed their position on determining whether there is fraud/abuse.

    To answer your question: we agree that there may be an implicit shift in position by the CJEU, however, we find it more likely that these decisions should be seen as a clarification of the Cadbury Schweppes doctrine (which has been confirmed in high profile case law at least up to last year).

    Happy to further exchange thoughts on this topic, as our thoughts on it are not yet fully crystallized.

Comments are closed.