EU Court Decides On Abuse In Danish Dividend Tax Cases

Introduction

On February 26, 2019, the Court of Justice of the European Union (CJEU) decided on two cases (C-116/16 and C-117/16) referred by the Danish Courts regarding the grant or denial of a dividend withholding tax exemption as provided for by the EU Parent Subsidiary Directive (P/S Directive). (See our alert regarding the interest withholding tax exemption cases C-115/16, C-118/16, C-119/16 and C-299/16 here).

Facts

In case C-116/16, five investment funds incorporated Luxembourg and Danish companies to acquire a target company in Denmark. None of the investment funds were established in a Member State of the European Union or in a country that had concluded a tax treaty with Denmark. In 2011 and 2012, the Danish company distributed significant dividends to its shareholders, among which the Luxembourg company.

In case C-117/16, a US multinational owned a Bermuda company and the Bermuda company incorporated a Danish company in 2000. In May 2005, the Bermuda company incorporated a Cypriot company (with a contributed capital of US$ 2,000) and sold the Danish company to the Cypriot company for €90 million. In September 2005, the Danish company distributed a dividend to its Cypriot parent company of €76 million, which money was used to repay part of the debt owed to the Bermuda company.

Based on the P/S Directive, the Danish companies wanted to distribute dividend to their respective parent companies in Luxembourg and Cyprus free of Danish dividend withholding tax. The Danish tax authorities challenged these claims.

The P/S Directive does not refer to the concept of beneficial owner. The P/S Directive allowed an EU Member State to implement anti-abuse measures in its national law (or in a bilateral tax treaty), but there was no obligation to do so in the relevant years. The Danish tax code did not contain anti-abuse rules with respect to the P/S Directive in the relevant years.

Are domestic anti-abuse rules required to combat abuse?

The Danish Courts wanted to know whether Denmark had to deny the dividend withholding tax exemption, even though it did not implement anti-abuse rules as referred to in the P/S Directive in its domestic law. The CJEU decided that an EU Member State must deny the dividend withholding tax exemption if the exemption is not claimed to achieve the objectives of the EU P/S Directive, but to obtain this benefit by solely meeting the formal conditions. The CJEU recalls that a taxpayer has the right to choose the most...