In joined cases N Luxembourg 1 (Case C-115/16), X Denmark (Case C-118/16), C Danmark I (Case C-119/16) and Z Denmark (Case C-299/16) v Skatteministeriet (26 February 2019), the CJEU found that the exemption from withholding tax on payments of interest to a company resident in another member state (Directive 2003/49 on interest and royalty payments) did not apply in circumstances where the recipient companies were mere conduits.
In these four cases, which were heard jointly, a Luxembourg company which had assumed the obligations of a Danish company (Case C‑115/16) and three Danish companies (Cases C‑118/16, C‑119/16 and C‑299/16) contested the refusal by the Danish tax authorities to exempt from withholding tax interest paid to entities established in another member state, on the ground that those entities were not the beneficial owners of the interest and were mere conduit companies.
The CJEU observed that under settled case law, EU law cannot be relied upon for abusive or fraudulent ends. It follows from this principle that a member state should refuse to grant the benefit of EU law provisions where they are relied upon, not with a view to achieving their objectives, but with the aim of benefiting from an advantage in EU law, although the conditions for benefiting from that advantage are fulfilled formally.
The CJEU also rejected the notion that the exemption could only be denied by reference to domestic legislation. The CJEU accepted that Kofoed (Case C-321/05) is authority for the principle that the requirement for legal certainty precludes directives from being able, by themselves, to create obligations for individuals but it noted that the relevant directive provisions did not impose obligations but simply provided advantages, subject to specific conditions.
The court observed that 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 those 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.’ Having observed that it was not for the court to assess the facts, the CJEU noted that an abuse of rights could take place where the beneficial owner of interest transferred by conduit companies is ultimately a company whose seat is in a country with which the member state concerned has concluded a double taxation convention. The court added that the burden of proof could be satisfied without the need to identify the actual owner of the interest.
Finally, the CJEU found that outside situations of fraud or abuse, national legislation which taxes payments of interest between resident companies differently from payments by resident companies to companies resident in other member states is precluded by TFEU art 63.
Why it matters: The case contains the CJEU’s analysis of the constituent elements of an abuse of rights. The question identified by the court was whether ‘economic operators have carried out purely formal or artificial transactions devoid of any economic and commercial justification, with the essential aim of benefiting from an improper advantage’.
In joined cases N Luxembourg 1 (Case C-115/16), X Denmark (Case C-118/16), C Danmark I (Case C-119/16) and Z Denmark (Case C-299/16) v Skatteministeriet (26 February 2019), the CJEU found that the exemption from withholding tax on payments of interest to a company resident in another member state (Directive 2003/49 on interest and royalty payments) did not apply in circumstances where the recipient companies were mere conduits.
In these four cases, which were heard jointly, a Luxembourg company which had assumed the obligations of a Danish company (Case C‑115/16) and three Danish companies (Cases C‑118/16, C‑119/16 and C‑299/16) contested the refusal by the Danish tax authorities to exempt from withholding tax interest paid to entities established in another member state, on the ground that those entities were not the beneficial owners of the interest and were mere conduit companies.
The CJEU observed that under settled case law, EU law cannot be relied upon for abusive or fraudulent ends. It follows from this principle that a member state should refuse to grant the benefit of EU law provisions where they are relied upon, not with a view to achieving their objectives, but with the aim of benefiting from an advantage in EU law, although the conditions for benefiting from that advantage are fulfilled formally.
The CJEU also rejected the notion that the exemption could only be denied by reference to domestic legislation. The CJEU accepted that Kofoed (Case C-321/05) is authority for the principle that the requirement for legal certainty precludes directives from being able, by themselves, to create obligations for individuals but it noted that the relevant directive provisions did not impose obligations but simply provided advantages, subject to specific conditions.
The court observed that 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 those 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.’ Having observed that it was not for the court to assess the facts, the CJEU noted that an abuse of rights could take place where the beneficial owner of interest transferred by conduit companies is ultimately a company whose seat is in a country with which the member state concerned has concluded a double taxation convention. The court added that the burden of proof could be satisfied without the need to identify the actual owner of the interest.
Finally, the CJEU found that outside situations of fraud or abuse, national legislation which taxes payments of interest between resident companies differently from payments by resident companies to companies resident in other member states is precluded by TFEU art 63.
Why it matters: The case contains the CJEU’s analysis of the constituent elements of an abuse of rights. The question identified by the court was whether ‘economic operators have carried out purely formal or artificial transactions devoid of any economic and commercial justification, with the essential aim of benefiting from an improper advantage’.
