Holding companies and the abuse of the Parent-Subsidiary Directive

The Advocate General addresses the question whether the withholding tax exemption under the Parent-Subsidiary Directive may be denied even where the immediate EU parent company is a genuine company and the beneficial owner of the dividends. The opinion suggests that in the case of a distribution of profits by a subsidiary to its parent company which is the beneficial owner of the dividends, there is – as a rule – no abuse. However, exceptionally, abuse may still exist where the dividend flow forms part of an overall non-genuine arrangement aimed at securing a tax advantage contrary to the Directive’s purpose.

This opinion of the Advocate General confirms and contains several valuable insights for international group structures, such as holding companies.

Background

Ever since the Danish cases (joined cases C-115/16, C-118/16, C-119/16, C-299/16, C-116/16, and C-117/16), the application of withholding tax exemptions under both the Parent-Subsidiary Directive and the Interest & Royalty Directive has been subject to increased scrutiny by national tax authorities.

Not only complex international group structures are targeted, but also simple holding companies.

Within this context, withholding tax exemptions may be denied in cases of tax abuse, but possibly also (however debatable) if the recipient of the dividends, interest or royalties is not the beneficial owner of the income.

There can be abuse within the meaning of the Parent-Subsidiary Directive in case of a non-genuine arrangement which has been put into place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the Directive. An arrangement is not genuine to the extent that it was not put in place for ‘valid commercial reasons’ which reflect economic reality.

The Danish cases essentially indicate that abuse may exist where the company seeking to benefit from the withholding tax exemption cannot be regarded as the beneficial owner of the income received, but merely acts as a conduit company.

However, when assessing international group structures, several important principles derived from the case law of the Court of Justice should also be borne in mind, such as :

• The establishment of a company’s registered office or effective place of management in accordance with the legislation of a Member State, with the aim of benefiting from more favourable legislation, does not in itself constitute abuse.
• Where a taxpayer has a choice between two options, the taxpayer is not obliged to choose the option that leads to the highest taxation; rather, the taxpayer has the right to organise its activities in such a way as to limit the amount of tax payable. Accordingly, a taxpayer is generally free to choose the organisational structures and the terms of a transaction that they consider most appropriate for carrying out their economic activities and reducing their tax burden.
• The fact that a holding company’s activity consists solely of managing assets and that its income arises exclusively from that management does not imply that there is a wholly artificial arrangement devoid of economic reality.

As a result, it is generally concluded that there is no abuse where the company carries out a genuine economic activity and is the beneficial owner of the income received.

Opinion of the AG

In her opinion, the Advocate General emphasises several important principles that are relevant for international holding companies.

As previously stated, a holding company falls outside of the scope of the General Anti-Avoidance Rule of the Parent-Subsidiary Directive if it carries out a genuine economic activity and is the beneficial owner of the income received. The latter by no means precludes that company from subsequently distributing the income received. What is decisive is that the company must genuinely be able to dispose of the income received and must not be under a pre-determined obligation to pass it on.

The Advocate General underlines that it is not possible to infer any non-genuine arrangement (and therefore abuse of the Directive) solely from the fact that the parent company which is the beneficial owner distributes its profits (which include the dividends received) onward. Moreover, the similarity of amounts transferred through the chain or a close timing between receipt and onward payment does not change this opinion.  

Transmission of dividends within a group of companies to the controlling parent company, which ultimately distributes its profits to one or more natural persons, is in fact consistent with a properly operating corporation. It is specifically the purpose of a corporation to generate profits and to distribute them to its shareholders.

The Advocate General nevertheless points out that – even in the given circumstances – there still can be abuse of the Directive where the distribution by the subsidiary to the parent company – which, in isolation, reflects economic reality – is part of an abusive overall plan.

However, such a situation will arise only very exceptionally and must truly be regarded as an exception to the general rule that there is no abuse where the parent company is the beneficial owner of the dividends.

The presence of an abusive overall plan presupposes an examination of all relevant circumstances. That includes circumstances occurring before or after the distribution of profits, possibly in another Member State. This principle was already established in the Nordcurrent Group case (C-228/24).

According to the Advocate General, such an abusive overall plan can only be present if the distribution by the subsidiary to the parent company can be linked to tax evasion, which implies a contravention of the law. In cases where the distribution by the subsidiary to the parent company can only be linked to a potential abuse of national tax law within a Member State, it is for the Member State concerned to combat the abuse on its own tax law, so there is no need for recourse to the EU law.

As an example, reference is made to the case where a subsidiary distributes dividends to its parent company which is the beneficial owner in order to conceal them by means of further transactions through ‘non-cooperative offshore jurisdictions’, with the result that the State of residence of the final beneficiary does not receive any information about the final distribution and is therefore unable to tax it.

So, an abusive overall plan will not be present if the State (or States) in which the final distribution by the group’s parent company to its shareholder takes place is able to tax that distribution in the exercise of its fiscal autonomy (which also can imply a tax exemption). Only if it is deprived of that possibility and taxation of the final distribution, which is otherwise provided for, is frustrated, it would be inappropriate to grant the tax advantage under the Parent-Subsidiary Directive.

Conclusion

Although this opinion of the AG gives us very valuable insights, the Court’s ruling must be awaited before turning them into final conclusions.

However, taking into account also the other case law of the Court of Justice, this opinion nevertheless confirms the position that holding companies remain out of scope of the General Anti-Avoidance Rule of the Parent-Subsidiary Directive, if they carry out a genuine economic activity and are the beneficial owner of the income received. When establishing a holding company, particular attention must therefore – as always – be paid to ensuring sufficient substance, enabling the economic activity to be carried out independently.

The tax department of Andersen in Belgium advises international group structures in this area and assists them in any related tax disputes with the tax authorities.