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CJEU: Defines Key Definitions for Tax & Beneficial Ownership Purposes

May 10, 2019

Last month, the Court of Justice of the European Union (CJEU) issued a series of important judgments dealing with tax avoidance and beneficial ownership in the context of the EU Parent-Subsidiary Directive (PSD) and the Interest and Royalties Directive (IRD).

The rulings dealt with tax disputes in Denmark, where it came to light that many large corporate taxpayers in the country were avoiding Danish withholding tax (currently charged at a rate of 22% for companies and 27% for individuals) use of subsidiary companies. These subsidiaries were often being controlled by holding companies that otherwise would not be able to benefit from the scheme as proposed by the directive.

Several of the cases raised issues with regards to scenarios within the Directives when withholding tax is fairly exempt or owed. Several definitions were examined and clarified:


In the Interest and Royalties Directive the exact meaning of ‘beneficial ownership’ was discussed. In the Denmark cases, the CJEU held that the beneficial owner of an interest payment must be interpreted as the entity that actually benefits from the interest paid to it and has the power to freely determine the use to be given to that income received.

Exemption from withholding tax on cross-border interest and royalty payments under the Directive is restricted to the ultimate beneficial owner of the payments, which is not always clear if intermediaries are used to claim the exemption.


The court was also called on to interpret the phrase ‘artificial arrangements’ in the context of tax avoidance strategies. It decided that the ‘artificial’ description applies where the principal objective or structure, is used inter alia in order to obtain a tax advantage, as opposed to being ‘entirely’ or ‘purely’ artificial.

This has effectively broadened of the EU definition of tax avoidance, implying that companies using such arrangements can be denied the double taxation protection clauses of the Parent-Subsidiary and Interest and Royalties Directive. In the Denmark cases, the artificiality was found in a loophole whereby the company receiving the interest or shares were passed to entities that were not entitled to the Directives’ advantages.

The ‘purely artificial’ criterion remains the relevant criterion when assessing if a transaction is abusive or fraudulent.

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