Danon, R.

Gutmann, D.

Lukkien, M.

Maisto, G.

Malek, B.

Martín Jiménez, A.

English

Serveur académique lausannois

1Kluwer International Tax Blog - 1 / 4 - 03.11.2021Kluwer International Tax BlogThe Prohibition of Abuse of Rights after the ECJ DanishcasesRobert Danon (Tax Policy Center, University of Lausanne; Danon, Lausanne) · Tuesday,May 4th, 2021Analysis of the ECJ judgments, reading by national courts, and impact on tax treatypracticeAuthors:  Robert  Danon,[1]  Daniel  Gutmann,[2]  Margriet  Lukkien,[3]Guglielmo  Maisto,[4]  Adolfo  Martín  Jiménez,[5]  Benjamin  Malek[6]   (Forthcoming: Intertax, vol. 49, 2021, issue 6/7)Since they were delivered in 2019, the judgments of the ECJ in the Danish cases havebeen widely discussed by commentators.  Yet,  the authors feel that the topic nowdeserves  further  scholarly  attention  for  the  following  main  reasons.  First  of  all,national  courts  of  Member  States  (in  particular  Belgium,  France,  Italy,  theNetherlands, and Spain) have recently referred to the indicators of abuse provided bythe ECJ in alleged cases of directive shopping. Moreover, the Federal Supreme Courtof a third country, Switzerland, has also relied on the findings of the ECJ in a caseinvolving the Swiss-EU Agreement partially providing equivalent benefits to those ofthe parent-subsidiary and interest royalty directives. Secondly, the question of thepossible ramifications of the Danish cases  in tax treaty practice (like for examplerecent Spanish decisions have shown) is obvious from both the perspective of theprincipal  purpose  test  (PPT)  and  the  beneficial  ownership  limitation  applying  todividends, interest, and royalties. It is therefore an appropriate time to consider thepractical  and possible  long-term impact  of  the Danish cases  on international  taxpractice. Last but not least, on 3 May 2021, the High Court of Eastern Denmarkdelivered  its  judgments  on  the  “dividend  cases”  which  had  been  referred  for  apreliminary ruling to the ECJ (C-116/17 and C-117/17).Building on a seminar organized in September 2020 by the Tax Policy Center of theUniversity of Lausanne (Switzerland), this forthcoming Intertax article explores theforegoing issues. A comparative approach is adopted whereby the Danish cases arecontrasted not only with EU law and past judgments of the ECJ but also with tax treatylaw  and  practice,  including  the  customary  rules  of  interpretation  of  the  ViennaConvention on the Law of Treaties (VCLT).2Kluwer International Tax Blog - 2 / 4 - 03.11.2021The first part of the article is devoted to a comparison of the origins and effects of theprohibition of abuse of rights under EU and tax treaty law. The authors submit thatthere is a fundamental difference between the EU principle of abuse of rights (insofaras it forms part of EU primary law) and what is described as the inherent prohibitionof abuse under tax treaty law. That latter principle is indeed merely an interpretativetool which remains subject to the limitations imposed by the VCLT. That distinction isparticularly  relevant  with  respect  to  ongoing  disputes  involving  tax  treaties  notcontaining  a  general  anti-avoidance  rule  such  as  the  PPT.  For  tax  treatiesincorporating a PPT (in particular post-BEPS tax treaties), on the other hand, theconvergence of the indicators of abuse provided by the ECJ with the 2017 OECDcommentaries dealing with conduit situations is obvious.The second part of the article engages in a comparative and critical analysis of the so-called two-pronged abuse test under EU and tax treaty law. The authors contrast, inparticular, the evolution of the ECJ’s case law with its findings in the Danish cases aswell with the OECD commentaries and tax treaty practice.  The authors submit thatthe findings of the ECJ in the Danish cases remain clearly rooted in the Emsland-Stärke two-pronged test. Therefore, even if the EU principle of abuse rights sits on topof  secondary  legislation,  such  a  principle  cannot  override  a  directive  provision(including a specific anti-avoidance rule) when it is established that the object andpurpose of such a provision is not defeated. For this reason, the authors insist on thefact the subjective and objective elements of the abuse of rights test must always beconsidered separately and cannot be merged into one. The authors submit that theDanish cases have not affected the settled case law of the ECJ on this point. Stateddifferently,  it  is  one thing to  establish that  the principal  purpose (or  one of  theprincipal purposes) of a corporate structure is to obtain a tax benefit. It must howeveradditionally  always  be  established  that  such  a  structure  defeats  the  object  andpurpose of the provisions of a directive. That conclusion also applies for tax treatypurposes,  in  particular  under  the so-called “guiding principle”  and the PTT.  Thecompatibility of domestic anti-avoidance rules with tax treaties is thus subject to thistwo-pronged test. The Alta Energy case currently pending before the Supreme Courtof Canada is also illustrative of the need to maintain that distinction.[7]  Next, a moreconcrete perspective is taken, and the impact of the indicators of abuse provided bythe ECJ in practice is considered. In this respect, a distinction is drawn betweenwholly artificial /sham arrangements, on the one hand, and real arrangements with taxmotives, on the other hand. Finally, it is quite clear that the finding of an abusivepractice implies that the transaction at stake must be redefined so that benefits thatwould have been applicable in the absence of abuse remain available. The ECJ did notdeal with this latter issue in the Danish cases.  However, this conclusion that wasaffirmed by the ECJ  on numerous occasions  and flows from the EU principle  ofproportionality remains applicable in the framework of direct tax directives. Similarly,nothing prevents a state from proceeding accordingly under a tax treaty even in theabsence of a provision comparable to Article 7(4) MLI.The third part  of  the paper deals  inter  alia  with the relevance of  the beneficialownership  limitation  in  the  PSD (i.e.  whether  it  can  be  regarded as  an  implicitrequirement), the interpretation of this requirement following the additions made inthe 2014 OECD Commentary, and its relationship with the prohibition of abuse ofrights.  It remains unclear whether the findings of the ECJ in the PSD cases should be3Kluwer International Tax Blog - 3 / 4 - 03.11.2021read to mean that beneficial ownership represents an implicit requirement that wouldapply  separately  from  the  abuse  of  rights  principle.  The  French  SupremeAdministrative Court has read the findings of the ECJ in such a way while, on theother hand, the Swiss Federal Supreme Court has left the question open. An equallyimportant question is the level of convergence between the meaning of beneficialownership favoured by the ECJ in the IRD cases and that under the 2014 OECDCommentary. Here we consider recent court decisions which have dealt with the 2014commentaries (in particular in Switzerland) and, on the basis of these decisions, findthat an analysis of beneficial ownership taking into account the existence of a legal orcontractual obligation to pass on the income received derived from the facts will, inmost instances, not be so far apart from an economic interpretation of beneficialownership as favored by the ECJ in the IRD cases. Whether that reading is fully in linewith the interpretation conveyed by the 2014 OECD commentaries will need to beclarified. This question is also important as regards the delineation between beneficialownership and the prohibition of abuse.The authors  conclude that  the Danish cases  undoubtedly  represent  an importantmilestone with respect to the prohibition of abuse of rights not only in EU but also ininternational  tax practice.  In light of  the increased convergence between the EUprinciple of abuse of rights and OECD standards (in particular, the PPT), there is littledoubt that the indicators of abuse provided by the ECJ in conduit situations involvingdividends, interest, and royalties will also have ramifications in post-BEPS tax treatypractice.[1] Professor of Law, Director Tax Policy Center, University of Lausanne, Partner,Danon,  Lausanne,  Chairman  of  the  Permanent  Scientific  Committee  of  theInternational  Fiscal  Association  (IFA).[2] Professor of Law, Université Paris 1 – Panthéon Sorbonne, Partner, CMS FrancisLefebvre Avocats, Paris.[3] Partner, Loyens & Loeff, Amsterdam.[4] Professor of Law, Università Cattolica del Sacro Cuore, Sede di Piacenza, FoundingPartner, Maisto e Associati, Milan.[5] Professor of Tax Law, University of Cádiz. Chairman European Association of TaxLaw Professors (EATLP).[6] Research associate and PhD candidate, Tax Policy Center, University of Lausanne.[7] Supreme Court of Canada, Her Majesty the Queen v. Alta Energy LuxembourgSARL   4Kluwer International Tax Blog - 4 / 4 - 03.11.2021________________________To make sure you do not miss out on regular updates from the Kluwer InternationalTax Blog, please subscribe here.This entry was posted on Tuesday, May 4th, 2021 at 11:20 am and is filed under Abuse ofrights, Beneficial ownership, Denmark, ECJ, Intertax, Principal purpose test, SwitzerlandYou can follow any responses to this entry through the Comments (RSS) feed. You canleave a response, or trackback from your own site.

The Prohibition of Abuse of Rights after the ECJ Danish cases Analysis of the ECJ judgments, reading by national courts, and impact on tax treaty practice

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The Prohibition of Abuse of Rights after the ECJ Danish cases Analysis of the ECJ judgments, reading by national courts, and impact on tax treaty practice

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