Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

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The cases of 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), adresses questions related to the interpretation of the EU Interest and Royalty Directive.

The issue in these cases is withholding taxes levied by the Danish tax authorities in situations where interest payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries.

During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on interest payments to related parties.

The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Interest and Royalty Directive can be denied where fraudulent or abusive tax avoidance is involved.

Quotations from cases C-115/16, C-118/16, C-119/16 and C-299/16:

The concept of ‘beneficial owner of the interest’, within the meaning of Directive 2003/49, must therefore be interpreted as designating an entity which actually benefits from the interest that is paid to it. Article 1(4) of the directive confirms that 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.

It is clear from the development — as set out in paragraphs 4 to 6 above — of the OECD Model Tax Convention and the commentaries relating thereto that the concept of ‘beneficial owner’ excludes conduit companies and must be understood not in a narrow technical sense but as having a meaning that enables double taxation to be avoided and tax evasion and avoidance to be prevented.

Whilst the pursuit by a taxpayer of the tax regime most favourable for him cannot, as such, set up a general presumption of fraud or abuse (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 50; of 29 November 2011, National Grid Indus, C‑371/10, EU:C:2011:785, paragraph 84; and of 24 November 2016, SECIL, C‑464/14, EU:C:2016:896, paragraph 60), the fact remains that such 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 (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 51; of 7 November 2013, K, C‑322/11, EU:C:2013:716, paragraph 61; and of 25 October 2017, Polbud — Wykonawstwo, C‑106/16, EU:C:2017:804, paragraphs 61 to 63)….It is apparent from these factors that it is incumbent upon the national authorities and courts to refuse to grant entitlement to rights provided for by Directive 2003/49 where they are invoked for fraudulent or abusive ends.

In a situation where the system, laid down by Directive 2003/49, of exemption from withholding tax on interest paid by a company resident in a Member State to a company resident in another Member State is not applicable because there is found to be fraud or abuse, within the meaning of Article 5 of that directive, application of the freedoms enshrined in the FEU Treaty cannot be relied on in order to call into question the legislation of the first Member State governing the taxation of that interest.

Outside such a situation, Article 63 TFEU must be interpreted as:

–not precluding, in principle, national legislation under which a resident company which pays interest to a non-resident company is required to withhold tax on that interest at source whilst such an obligation is not owed by that resident company when the company which receives the interest is also a resident company, but as precluding national legislation that prescribes such withholding of tax at source if interest is paid by a resident company to a non-resident company whilst a resident company that receives interest from another resident company is not subject to the obligation to make an advance payment of corporation tax during the first two tax years and is therefore not required to pay corporation tax relating to that interest until a date appreciably later than the date for payment of the tax withheld at source;

–precluding national legislation under which the resident company that owes the obligation to withhold tax at source on interest paid by it to a non-resident company is obliged, if the tax withheld is paid late, to pay default interest at a higher rate than the rate which is applicable in the event of late payment of corporation tax that is charged, inter alia, on interest received by a resident company from another resident company;

–precluding national legislation providing that, where a resident company is subject to an obligation to withhold tax at source on the interest which it pays to a non-resident company, account is not taken of the expenditure in the form of interest, directly related to the lending at issue, which the latter company has incurred whereas, under that national legislation, such expenditure may be deducted by a resident company which receives interest from another resident company for the purpose of establishing its taxable income.

Several cases have been awaiting the decision from the EU Court of Justice and will now be resumed in Danish courts.


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