Favourable judgement for EU holding companies – ECJ limits too general anti-abuse

In a recent decision, the European Court of Justice (“ECJ”) issued a favourable judgement regarding too general anti-abuse legislation for holding companies. For the ECJ, both the treatment of the EU parent company’s shareholders and the nature of the economic activities of the EU parent company – criteria adopted by the German anti-abuse provisions under question – are irrelevant for pre-assessing abuse. This decision could have a major impact on the applicability of anti-abuse provisions and substance requirements for holding companies within the EU, including the Netherlands.

The joined cases Deister Holding AG (C 504/16) and Juhler Holding A/S (C 613/16) regard the German anti-abuse provisions for withholding tax relief for dividends paid by a German company to a parent company resident in another EU member state. According to the ECJ, the German anti-abuse rule is incompatible with EU law. The decisions state that the German anti-abuse rule is not specifically designed to target wholly artificial arrangements and thus undermines the objective pursued by the EU Parent-Subsidiary Directive.

The domestic anti-abuse provision

Dividend payments by a German company to an EU parent company cannot benefit from full or partial relief of WHT under domestic law if the shareholders of the EU parent company would not have been entitled to a refund/exemption if they had earned the income directly from the German company (subjective test), and if one of the following three conditions apply (objective test):

1. There is no economic or other substantial reasons for the involvement of the non-resident parent company. A non-resident parent company is not considered to have its own economic activity in this context, if it earns its gross income from the management of assets or assigns its main business activities to third parties; or
2. The EU company does not earn more than 10% of its entire gross income from its own economic activity; or
3. The EU company does not take part in general economic commerce with a business establishment suitably equipped for its business purpose.

The ECJ decision

The ECJ states that the measures seeking to prevent tax evasion and abuse must be specific to attain the objective of preventing conducts involving the creation of wholly artificial arrangements which do not reflect economic reality, the purpose of which is unduly to obtain a tax advantage. To determine whether an operation pursues an objective of fraud and abuse, the authorities must individually examine the whole operation at issue.

The imposition of a general tax measure automatically excluding certain categories of taxpayers from the tax benefit, as the German anti-abuse legislation, goes further than necessary to prevent fraud and abuse (refer judgment of 7 September 2017, Eqiom and Enka, C‑6/16). What regards the subjective test of the German legislation, “it cannot be inferred from any provision of the Parent-Subsidiary Directive that the tax treatment of persons with holdings in parent companies resident in the European Union or the origin of such persons affects in any way the right of those companies to rely on tax advantages provided for by that directive”.

With regard to the objective test, the ECJ notes the following:

• 1) By subjecting the grant of the exemption to such requirements, without the tax authorities being required to provide prima facie evidence of the absence of economic reasons or of fraud or abuse, the legislation introduces a general presumption of fraud or abuse and thus undermines the objective pursued by the EU Parent-Subsidiary Directive.
• 2) Secondly, where one of the conditions is satisfied, the legislation does not allow the parent company to provide evidence demonstrating the existence of economic reasons, it also establishes an irrebuttable presumption of fraud or abuse.
• 3) Those conditions, whether taken individually or as a whole, cannot per se imply the existence of fraud or abuse.
• 4) The EU Parent-Subsidiary Directive does not contain any requirement as to the nature of the economic activity of companies falling within its scope or the amount of turnover resulting from those companies’ own economic activity.

Regarding substance requirements, the ECJ affirms categorically that “the fact that parent company’s activities consist in the management of its subsidiaries’ assets or that the income of the parent company results only from such management cannot per se indicate the existence of a wholly artificial arrangement without economic reality” .

Finally, the ECJ ruled that a general presumption of fraud and abuse, such as provided by the German anti-abuse, cannot justify either a fiscal measure which compromises the objectives of a Directive or a fiscal measure which prejudices the enjoyment of a fundamental freedom guaranteed by the treaties.

Our comments

From this judgment, it can be derived that anti-abuse legislation should be subject to strict interpretation. Domestic measures that create general presumption of abuse, are likely to be in breach of EU law. Therefore, this might have an impact on the strict interpretation of the Dutch legislation by the tax authorities.

This decision also sheds an important light on substance requirements for holding companies, as the ECJ suggests a new view on the existence of substance requirements for EU holding companies: on a case-by-case the overall situation should be analysed considering economic and organisational characteristics and strategy of the whole group. 

Finally, the decision may give rise to refund claims for WHT that were not relieved in previous distributions as a result of the German anti-abuse provisions.