On 26 February 2019 the Grand Chamber of the Court of Justice of the European Union (“CJEU”) rendered 2 important judgments regarding the non-application of the Parent Subsidiary Directive1 (“PSD”) and the Interest and Royalties Directive2 (“IRD”) in case of fraud or abuse, even in the absence of any domestic anti-abuse legislation. In this context, the judgements provide useful guidance on the concepts of abuse and beneficial ownership.
In this context, the judgements provide useful guidance on the concepts of abuse and beneficial ownership.
According to the CJEU, it is settled case-law that there is, in EU law, a general legal principle that EU law cannot be relied on for abusive or fraudulent ends. Accordingly, a taxpayer cannot enjoy a right or advantage arising from EU law where the transaction at issue is purely artificial economically and is designed to circumvent the application of the legislation of the Member State concerned. The proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of such rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it.
Beneficial owner concept
The CJEU pointed out that the concept of “beneficial owner of the interest” in the IRD cannot refer to concepts of national law that vary in scope.
The concept must be interpreted as designating an entity which actually benefits from the interest that is paid to it. The IRD confirms this reference to economic reality by stating that a company of a Member State is to be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person. The term “beneficial owner “concerns not a formally identified recipient but rather the entity which benefits economically from the interest received and accordingly has the power to freely determine the use to which it is put. Only an entity established in the EU can be a beneficial owner of interest for the purposes of the IRD and may then be entitled to the exemption provided for therein. In addition the CJEU confirmed that the IRD draws upon Article 11 of the OECD 1996 Model Tax Convention and pursues the same objective, namely avoiding international double taxation.
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