Opinion of Advocate General Kokott delivered on 1 March 2018.

• Jurisdiction: European Union
• Celex Number: 62016CC0115
• ECLI: ECLI:EU:C:2018:143
• Docket Number: C-299/16,C-119/16,C-118/16,,C-115/16,
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling
• Date: 01 March 2018

Provisional text

OPINION OF ADVOCATE GENERAL

KOKOTT

delivered on 1 March 2018 (1)

Case C‑115/16

N Luxembourg 1

v

Skatteministeriet

(Request for a preliminary ruling from the Østre Landsret (High Court of Eastern Denmark, Denmark))

(Request for a preliminary ruling — Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (Interest and Royalties Directive) — Concept of beneficial owner — Acting in one’s own name on behalf of a third party — Effect of the commentaries on the OECD Model Tax Convention on the interpretation of an EU Directive — Abuse of possible fiscal arrangements — Criteria for abuse through avoidance of tax at source — Abuse by taking advantage of a lack of cross-border information — Direct application of a non-transposed provision of a directive — Interpretation of national provisions for the prevention of abuse in conformity with EU law)

I. Introduction

1. In these proceedings, and in three parallel sets of proceedings, (2) the Court of Justice is required to rule on the conditions under which the beneficial owner of interest under civil law also qualifies as beneficial owner within the meaning of the Interest and Royalties Directive. (3) In order to do so, it will need to clarify whether EU law has also to be interpreted in light of the commentaries on the OECD Model Tax Convention, especially those revised after the adoption of the directive. The question also arises as to how the ban on abuse is defined in EU law and whether it is directly applicable.

2. These questions have been raised in connection with a tax dispute in Denmark; the tax administration’s view is that avoidance of Danish tax at source, via an interpolated ‘controlled’ company established outside the EU, constitutes abuse of the law, as it fundamentally precludes any final liability for tax at source within the corporate structure, even where the interest is ultimately channelled to a capital fund in a third country. If that third country then prevents information on interest payments to investors in the capital funds from reaching their countries of residence, it may be that no tax is ultimately assessed on investors’ income.

3. The above questions ultimately apply to the fundamental conflict between the taxable person’s freedom to arrange his affairs under civil law and the need to prevent arrangements that are valid under civil law but nonetheless abusive under certain circumstances. Even though this problem has existed since the invention of modern tax legislation, it is hard to draw a dividing line between admissible and inadmissible tax-reduction measures. A driver who sells his car following an increase in road tax obviously acts in order to avoid road tax. However, that cannot be construed as an abuse of law, even if his sole reason was to save tax.

4. In light of the angry political mood concerning the tax practices of certain multinational groups, drawing that dividing line is no easy task for the Court of Justice and not every action by an individual to reduce their tax should be open to a verdict of abuse.

II. Legal framework

A. EU law

5. The EU legal framework applicable to this case is Directive 2003/49 and Articles 43, 48 and 56 EC (now Articles 49, 54 and 63 TFEU).

6. Directive 2003/49 states in recitals 1 to 6:

‘(1) In a Single Market having the characteristics of a domestic market, transactions between companies of different Member States should not be subject to less favourable tax conditions than those applicable to the same transactions carried out between companies of the same Member State.

(2) This requirement is not currently met as regards interest and royalty payments; national tax laws coupled, where applicable, with bilateral or multilateral agreements may not always ensure that double taxation is eliminated, and their application often entails burdensome administrative formalities and cash-flow problems for the companies concerned.

(3) It is necessary to ensure that interest and royalty payments are subject to tax once in a Member State.

(4) The abolition of taxation on interest and royalty payments in the Member State where they arise, whether collected by deduction at source or by assessment, is the most appropriate means of eliminating the aforementioned formalities and problems and of ensuring the equality of tax treatment as between national and cross-border transactions; it is particularly necessary to abolish such taxes in respect of such payments made between associated companies of different Member States as well as between permanent establishments of such companies.

(5) The arrangements should only apply to the amount, if any, of interest or royalty payments which would have been agreed by the payer and the beneficial owner in the absence of a special relationship.

(6) It is moreover necessary not to preclude Member States from taking appropriate measures to combat fraud or abuse.’

7. Article 1(1) of Directive 2003/49 is worded as follows:

‘Interest or royalty payments arising in a Member State shall be exempt from any taxes imposed on those payments in that State, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.’

8. Article 1(4) of Directive 2003/49 further states:

‘A company of a Member State shall 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.’

9. Article 1(7) of Directive 2003/49 states:

‘This Article shall apply only if the company which is the payer, or the company whose permanent establishment is treated as the payer, of interest or royalties is an associated company of the company which is the beneficial owner, or whose permanent establishment is treated as the beneficial owner, of that interest or those royalties.’

10. Article 5 of Directive 2003/49 contains the following rule under the heading ‘Fraud and abuse’:

‘(1) This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.

(2) Member States may, in the case of transactions for which the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this Directive or refuse to apply this Directive.’

B. International law

11. The Denmark-Luxembourg Double Taxation Convention (‘the DTC’) of 17 November 1980 provides as follows in Article 11(1) on the distribution of the power to tax interest:

‘Interest arising in a Contracting State and paid to a person resident in another Contracting State can be taxed in that other State only if that person is “the beneficial owner” of the interest.’

12. Under that provision, the source State, in this case Denmark, cannot tax interest paid to a person resident in Luxembourg, if that person is ‘the beneficial owner’ of the interest. The concept ‘beneficial owner’ is not defined in the DTC.

C. Danish law

13. According to the referring court, the legal situation under Danish law in the years at issue in this case is as follows.

14. The Danish Law on corporation tax (hereinafter ‘Corporation Tax Law’ (4)) regulates the limited tax liability of foreign companies for interest credited or paid by Danish companies as follows in Paragraph 2(1)(d):

‘Paragraph 2. Companies, associations etc. within the meaning of Paragraph 1(1) having their registered office abroad are liable for tax inasmuch as they ...

(d) receive interest from national sources in relation to a liability which a [Danish-registered company] or an ... [establishment of a foreign company] ... has towards foreign legal entities which are listed in Paragraph 3B of the Skattekontrollov (Tax Control Law) (controlled liability). … The tax liability does not apply to interest which is not taxed or is subject to reduced taxation under Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States or a double taxation convention with the Faroe Islands, Greenland or the State in which the recipient company etc. is registered. However, that only applies if the paying company and the recipient company are associated within the meaning of that Directive for a continuous period of at least one year, which must include the payment date ...’

15. Ultimately, limited tax liability did not apply in 2007 to the interest paid to a parent company which is not taxed or is subject only to reduced taxation under Directive 2003/49 or a DTC.

16. Where, however, interest channelled outside Denmark is subject to a limited tax liability under Paragraph 2(1)(d) of the Corporation Tax Law, the interest payer is required under Paragraph 65D of the Danish Law on tax at source (5) to withhold the tax at source (‘tax on interest’).

17. The rate was 30% for the 2006 and 2007 tax years and 25% for the 2008 tax year. In the event of late payment of tax withheld at source (where there is limited tax liability), interest is charged on the tax liability (Paragraph 66 B of the Law on tax at source). The default interest is payable by the person required to withhold the tax at source.

18. There were no general provisions of law to prevent abuse in force in Denmark between 2006 and 2008. However, the ‘reality doctrine’ established in case-law requires tax to be assessed on the basis of a specific analysis of the facts. This means, for example, that fictitious and artificial tax arrangements may be disregarded under certain circumstances and tax may be assessed instead based on a substance-over-form approach. It is common ground that the reality doctrine does...