Beneficial ownership cases
In short the “Beneficial Ownership Cases” concern amongst others dividend distributions made by a Danish resident company to an intermediate holding company resident in the EU. The Danish company requested an exemption from Danish dividend withholding tax based on the PSD. The Danish tax authorities argued that withholding tax was avoided by interposing an EU intermediary company between the distributing entity and the controlling entity that didn’t have access to the benefits of the EU Directives.
Indicators of abuse of EU Law
The CJEU concluded that it is ultimately up to the national courts to assess whether a structure is abusive. Nevertheless, the CJEU provided several parameters in order to assess whether this may be the case.
- The first indication is whether the recipient of the dividend or interest on this income passes shortly after receiving it to entities or persons that are not entitled to the benefits of the PSD.
- Another indication is that the sole activity of the foreign shareholder is to receive dividends or interest and on paying such income to the (ultimate) beneficial owner.
- One should also look at the actual economic activity and economic justification of the structure. In particular one should look at the management of the company, the balance sheet, its cost structure and the staff, premises and equipment it has.
- Also legal arrangements that are in place may further indicate the existence of abuse. This includes arrangements that facilitate fund flows, the financing of transactions and the inability to have economic use of the income.
Responses of the Dutch Ministry of Finance
In response to the CJEU rulings, members of the Dutch parliament raised detailed questions regarding the consequences of the rulings and the Dutch interpretation of ‘abusive structures’. In a letter of 14 June 2019, the Dutch State Secretary of Finance addressed the questions. His responses can be summarized as follows:
- The Netherlands has implemented the general anti-abuse provision of the PSD in both the Dividend Tax Act and the Corporate Income Tax Act. In case of abuse, the Netherlands refuses the exemption of dividend withholding tax. Intermediary holding companies that (i) fulfill a linking function and, (ii) meet certain substance requirements are currently not considered ‘abusive’. Hence, the substance requirements currently function as a safe harbor. On this point the State Secretary deems the Dutch law not in accordance with the CJEU rulings since an intermediary holding company that fulfills the substance requirements may nevertheless be abusive within the meaning of the CJEU judgement. Therefore changes to the Dividend Tax Act and the Corporate Income Tax Act are announced, which will likely apply as of 2020. The Dutch tax authorities will get the possibility to counter-evidence the structure, meaning that meeting the relevant Dutch substance requirements at the level of the intermediary holding company will no longer serve as safe harbor. The announced legislative proposal will be published on Budget Day (this year on 17 September).
- The State Secretary indicated he does not expect that these rulings will lead to more cases of abuse. According to him, there is sufficient overlap between current Dutch substance requirements and the indicators set by the CJEU. The tax authorities will, however, bring obvious cases to the court. For example in situations in which the €100,000 wage costs, which is one of the substance requirements, are disproportionate low given the size of dividends received and paid by an intermediary holding company that fulfills a linking function.
- Next to this, not meeting the relevant substance requirements at the level of the intermediary holding company does not necessarily result in a qualification as ‘abusive’. Taxpayers remain entitled to evidence that the structure reflects economic reality. In this context, the parameters provided by the CJEU may be useful to assess whether a structure is considered ‘abusive’. However, the concept of abuse remains a grey area and is subject to further interpretation by the Dutch courts.
- Tax rulings remain valid until January 2020. The Dutch tax authorities may cancel the ruling afterwards under the condition that, despite meeting the relevant substance requirements, the Dutch tax authorities perceive the structure as ‘abusive’. Taxpayers will be informed by the Dutch authorities pro-actively. But again, the State Secretary does not expect substantially more cases of abuse than in the current situation.
- Finally, the State Secretary indicated that double tax treaties prevail over the Dutch domestic interpretation of the ‘abuse’ concept. As a consequence, if the anti-abuse rules are applicable based on Dutch domestic law, a tax treaty may nevertheless oblige the Netherlands to refrain from taxation provided that such tax treaty does not provide for an anti-abuse rule itself. Most double tax treaties concluded by the Netherlands will – in the near future – contain an anti-abuse rule due to the impact of the Multilateral instrument.
- In the Danish cases the CJEU did not deal with the principle of prohibition of abuse of rights to the exemption of distributed dividends. The State Secretary is still assessing whether changes to the Dutch participation exemption regime are required based on the Danish cases. This question will also be covered in the participation exemption study that will take place later this year.
All in all, according to the State Secretary, the consequences of the CJEU rulings of 26 February are limited for the Netherlands. However, as from 2020, the tax authorities will be given more tools to refuse the dividend withholding tax exemption, in particular in case the taxpayer relies on the substance safe harbor. We will keep you informed on any further developments.