The fight against tax avoidance and profit base erosion has been high on the agenda of international bodies – including the Organisation for Economic Co-operation and Development (OECD) and the European Commission (the Commission), as well as local tax authorities for the last decade. Just looking at an EU-level, we have seen the adoption of several initiatives stemming from its 2016 Anti-Tax Avoidance Package, aimed at preventing aggressive tax planning and creating a level playing field across the EU, supported by the Commission’s efforts to monitor the accurate implementation of the rules and to ensure their enforcement.

The Court of Justice of the EU (CJEU) also plays an important role by interpreting and clarifying EU anti-abuse legislation. The Court’s decisions in the ground-breaking Danish cases[1] (see ETF Issue 396 for details), have shaped the European taxation landscape, both in terms of legislative changes impacting the use of conduit companies for tax purposes and the practice of local tax authorities and local courts. In short, through the Danish cases, the CJEU provided guidance on the interpretation of the concept of abuse under EU law and clarified that, where abuse exists, Member States are required to deny the benefits of an EU Directive even in the absence of domestic or other anti-abuse provisions. The cases also offered guidance on the interpretation of the beneficial owner concept, in particular under the Interest and Royalties Directive.

Against this background, KPMG’s EU Tax Centre launched earlier this year an internal survey across the network of KPMG firms based in Europe (a selection of EU[2] countries, Iceland, Norway, Switzerland and the UK). The aim of the exercise was to help us evaluate whether the Danish cases have had an impact in practice on how Member States approach the subject of abuse and the beneficial ownership concept when applying tax treaties and EU Directives. We were also interested in understanding the variety of wider anti-treaty shopping and anti-tax abuse frameworks applicable at a local level, with a particular focus on withholding tax-related measures. 

In this article we aim to present a few trends that resulted from the responses received, as well as key takeaways for multinationals involved in cross-border activities in the European Union.

Beneficial ownership trends

Responses received highlighted the challenges faced by cross-border investors in the EU having to deal with diverging approaches to beneficial ownership, when determining their withholding tax exposures.

Insight: beneficial ownership relevant in the majority of EU countries, but no consistent interpretation

The detailed responses received highlight that beneficial ownership – or an equivalent concept – is relevant when claiming reduced rates or full relief from withholding tax under a double tax treaty or an EU Directive in the majority of the surveyed countries. Beneficial ownership has a slightly increased importance in the case of interest and royalty payments (over 70 percent of responding countries), when compared against dividends (over 65 percent of responding countries for dividend payment). The difference is explained by the fact that, in the case of dividends, the UK does not levy withholding tax and several countries rely on legal ownership rather than a beneficial ownership test – Greece, Poland, Romania. In the case of Poland, before recent tax law changes, there was some ambiguity on the relevance of beneficial ownership for the application of the Parent Subsidiary Directive (PSD) exemption. Local courts in Poland have nevertheless confirmed that beneficial ownership doesn’t need to be tested when applying the exemption under the PSD, subject to applicable anti-abuse rules.

The graphics below illustrate the importance of the beneficial owner concept across the responding countries.

Beneficial ownership concept - interest/royalties
Beneficial ownership concept - dividends

The interpretation of the beneficial ownership concept and taxpayers’ access to this information, as well as the degree of legal certainty, vary across Europe. As an example, in Belgium, taxpayers need to find guidance from (evolving) jurisprudence and administrative commentaries, while in Iceland the interpretation of the tax authorities is detailed in the application form for double tax treaty relief. Other countries, such as the Netherlands, would rely on the Commentaries to the OECD Model Tax Convention. Germany is another note-worthy example, where the domestic beneficial owner definition is not relevant for double tax treaty or EU Directives withholding tax relief. Instead, Germany applies other strict criteria, including the existence of a ‘material nexus’ between the income and the economic activity of the non-resident recipient.

In terms of domestic approach to beneficial ownership, countries such as Cyprus, Malta, Luxembourg or Romania generally look at beneficial ownership from a contractual perspective, whilst countries such as Germany, Denmark or Slovakia are placed at the other end of the spectrum and take an economic approach (e.g. by following the flow of funds). An interesting example is Poland, which is likely to follow an approach closer to the contractual reality for dividend payments, whereas the economic approach would prevail for interest and royalty payments.

Insight: Inconsistent look-through approach

Generally, in countries applying a beneficial ownership concept, failing to meet this requirement would result in the denial of EU Directive or double tax treaty benefits. In countries such as the Czech Republic, Portugal and Slovakia, an increased punitive withholding tax rate may apply if the beneficial owner is not identified. Denmark also applies an increased withholding tax for dividend payments if the beneficial owner is resident in a jurisdiction included on the EU list of non-cooperative jurisdictions for tax purposes.

A few countries also reported that local tax rules or the local practice are unlikely to allow for a look-through approach when the recipient of the income is deemed to not be the beneficial owner, particularly for exemptions based on EU Directives. This is relevant in situations where the parent of the direct recipient, which is considered not to meet the beneficial ownership requirements, would itself qualify for the same benefits had the payment been made to it directly, either based on an EU Directive or the relevant double tax treaty. In other words, higher-tier group companies that qualify as the (ultimate) beneficial owners of the payment, may have difficulties in claiming withholding tax benefits in the source state, even where they would have benefited from the benefit in the case of a direct investment. This is the case in Romania and Poland, for example, where for EU Directive benefits a direct shareholding is required with respect to that specific payment. Consider the case of a parent entity that has a qualifying direct shareholding in a subsidiary, as well as a separate direct holding in a lower-tier subsidiary. If the sub-subsidiary makes a payment to the subsidiary, but the latter does not meet the beneficial ownership test, the parent would not be able to claim Directive benefits, despite its qualifying holding in the sub-subsidiary, because that holding does not relate to the payment in question (made to the subsidiary rather than to the ultimate parent). In other countries, a look-though approach applies depending on the facts and circumstances of each case. 

Responses received also highlighted that the practice of the local tax authorities and domestic courts on this topic is evolving. For example, in Italy, the taxpayer was historically generally denied a look-through approach when claiming the Interest and Royalties Directive (IRD) exemption. However, two lower courts – most recently in February 2022 (see E-news Issue 154), confirmed that the payment would benefit from the exemption as long as the beneficial owner (the indirect recipient) met the criteria under the IRD. 

Trends in withholding tax specific anti-abuse measures

Around 40 percent of the responding countries reported that their local legislation includes specific anti-abuse measures. These provisions complement the local beneficial ownership requirements – where in place – as well as the local implementation of the general anti-avoidance rules (GAAR) from the Anti-Tax Avoidance Directive, and of the anti-abuse rules in the EU Parent-Subsidiary and Interest and Royalties Directives.

A notable example is Germany which, as explained above, significantly tightened domestic anti-treaty shopping rules in May 2021 and specifically mentioned the Danish cases as one of the triggers for the change.

Three countries reported anti-abuse measures that target the abusive use of EU intermediate companies by non-EU shareholders: France (royalty payments), Portugal (interest and royalty payments) and Spain (dividends). A common feature across the three countries is the presumption of abuse in case of recipients with non-EU shareholders. In these cases, the relevant withholding tax exemption is only available if the recipient is able to demonstrate that the use of an EU intermediate company was not tax-driven, and that there were sound business reasons and economic business motives to set up the structure. France goes one step further and also limits the application of the WHT exemption for royalties when the amounts exceed the arm's length price.

Ireland is another jurisdiction with specific anti-abuse legislation on withholding tax relief. In short, certain interest and royalties withholding tax exemptions do not apply unless the income is subject to tax in the hands of the recipient. Additional tests are in place, including the requirement that the payment is made in the ordinary course of a trade and for bona fide commercial reasons.

An anti-avoidance rule on hidden profit distributions was introduced into Estonian law as of January 1, 2018. Companies that are resident in Estonia must pay income tax on loans issued to shareholders, to other companies at a higher level in the group structure, and to shareholders' other subsidiaries (sister companies) if the circumstances of the transaction indicate that there might be a hidden profit distribution. Circumstances that demonstrate that the loan is a hidden profit distribution are, for example, the absence of an intention or ability to repay the loan. If the repayment term is longer than 48 months, the taxpayer has to prove that it intends to and is able to repay the loan. This amendment applies to qualifying loans granted as of July 1, 2017.

Trends in the approach of the tax authorities

Increased attention placed on the fight against aggressive tax planning at international level also appears to have had an impact on the focus of tax authorities across Europe. Based on their practical experience, approximately 75 percent of respondents to the survey reported either (i) that they perceived an increased focus by local tax authorities on beneficial ownership requirements or (ii) that they expected an increased focus to materialize.

Insight: several tax authorities have started to refer to the Danish cases in their assessments

In addition to Denmark, several other countries have reported cases where the local tax authorities have referred directly to the criteria outlined in the Danish cases when assessing claims for reduced withholding tax rates. 

Trends in the approach of local courts

The Danish cases have also influenced the approach of local tax courts. Seven countries reported that their national courts have referred directly to the Danish cases in their rulings and have assessed beneficial ownership accordingly.

A very recent example is a March ruling from the Supreme Court of Luxembourg (see E-news Issue 154), which held that the beneficial owner (a term that is not defined under Luxembourg tax law) must be the person that actually receives the economic benefit of the dividend income and not the person who merely formally collects the dividend income, without being able to actually use and enjoy it.

In Belgium, the Court of appeal of Ghent (December 1, 2020) referred to the Danish cases when applying the Belgian General Anti-Avoidance Rules to refuse a withholding tax exemption that was claimed based on the PSD.

In France, the French Supreme Administrative Court ruled that the beneficial ownership test included in the national implementation of the Parent-Subsidiary Directive is compatible with the Directive, even if the Directive does not explicitly mention such a test (see E-news Issue 120). Referring to Danish cases, the Court ruled that the status of beneficial owner is a condition under the PSD. Since the Luxembourg parent company was unable to prove ownership of the bank account, the withholding tax exemption on the dividends was refused.

Upcoming initiatives

In parallel with and connected with the beneficial ownership discussion is the issue of substance at the level of intermediate entities (receiving and paying income to / from other group companies). The proposed EU Unshell Directive (also known as “ATAD 3”) is a clear indication of the direction of travel for the EU on substance. The initiative is aimed at fighting the misuse of “shell” entities for the purpose of obtaining tax advantages. The concept of the shell entity is not specifically defined but rather arrived at through an assessment against specific criteria (similar to the use of hallmarks under the EU mandatory disclosure rules). Whilst the proposed Directive is likely to undergo changes as technical discussions and the political debate develop, the proposed concepts are likely to serve as guidance for tax authorities, and potentially also local courts, when analyzing the use of conduit companies for tax purposes. For details of the Unshell proposal, please refer to Euro Tax Flash Issue 464. It is worth noting that the so-called “gateways” proposed for the identification of entities at risk of being misused for tax purposes examine an entity’s status across the previous two tax years. If the Directive is adopted in its current form and, based on the timeline proposed by the Commission (rules to become applicable from January 2024), the type of income flows (whether passive and cross-border) and practices related to outsourcing of day-to-day management and decision making that are currently in place within a group would be relevant for the purpose of the Unshell assessment.

The expectation was that having a harmonized approach to substance requirements would provide clarity and legal certainty to taxpayers operating cross-border in the EU. The draft Directive is however not expected to solve difficulties faced by taxpayers when seeking to comply with the various beneficial ownership requirements and existing anti-conduit rules. This is firstly due to the fact that the proposed Directive does not address the concept of beneficial ownership. Instead, the focus of the proposed Directive is on reporting about the level of substance in an entity by examining a set of gateway criteria and substance indicators. Secondly, the proposed Directive only sets a minimum standard for economic substance and Member States are still free to apply stricter domestic anti-abuse rules when considering the application of EU Directive and double tax treaty benefits. 




1 Joined cases N Luxembourg 1 (C-115/16), X Denmark (C-118/16) and C Danmark 1 (C-119/16) and Z Denmark case (C-299/16) on the Interest and Royalties Directive and joined cases T Danmark (C-116/16) and Y Denmark (C-117/16) on the Parent-Subsidiary Directive

2 The responses received cover 29 countries. Out of the EU Member States, Bulgaria, Latvia and Slovenia were not included in this first stage of the survey.