The Concept of Beneficial Ownership in the Current Case-law of the Court of Justice of the European Union


Judgments of the Court of Justice of the EU, 26 February 2019, in Joined Cases C‑115/16, C‑118/16, C‑119/16 and C‑299/16, ECLI:EU:C:2019:134 and C‑116/16 and C‑117/16, ECLI:EU:C:2019:135


Todor Todorov[1]


The possible conflict between European Union Law and the Law of individual Member States is a question which has been repeatedly raised in both legal theory and the case-law of national and European courts. The main lines of interpretation could be considered as substantially established with respect to contradictions arising at the level of domestic law, whereas divergent interpretations of common institutions in EU secondary and bilateral international agreements signed by Member States are often likely to generate major difficulties. In two of its judgments of late February 2019, the Court of Justice of the European Union (CJEU) ruled on one of the most important issues arising in the context of Union law and Avoidance of Double Taxation Agreements (DTAs) signed by the parties, namely, the concept of ‘beneficial owner of income’ dealt with under the income tax and exemption regimes under the Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (Directive 90/435 / EEC, known as the Parent-Subsidiary Directive) and Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (Directive 2003/49/ЕО, known as the Interest and Royalties Directive).

The article analyzes two judgments of the Court of Justice of the European Union of 26 February 2019 in cases N Luxembourg 1, X Denmark A/S, C Danmark I and Z Denmark ApS vs. the Danish Ministry of Taxation (Joined Cases C-115/16, C-118/16, C-119/16 and C-229/16), as well as T Denmark and Y Denmark vs. the Danish Ministry of Taxation (Joined Cases C-116/16 and C-117/16) by providing a summary of the facts of the cases, the conclusions presented by the Avocate General in his Opinion, and the Judgement of the Court. The authors states that, il one fundamental question of the cases was to be distinguish, it would be: When dividend and interest payments are made from a Danish company to a company resident within the EU and they are fully or partially passed on to a parent company resident in a third country, are these payments exempt from withholding tax?

The facts of the cases show the example of parent companies resident in an EU Member State (Luxembourg, Cyprus or Sweden) as owners of Danish companies. Furthermore, it is important to highlight that the EU parent companies were all directly or indirectly owned by private-equity funds with unknown residency of the investors or by companies resident in third countries. In this context, EU resident parent companies were paid either dividends or interest by their subsidiaries and it was claimed that, in accordance with the Parent/Subsidiary Directive or the Interest/Royalty Directive, such payments were free of withholding tax. The question of ‘beneficial ownership’ was raised when the Danish tax authorities stated that pursuant to the Interest/Royalty Directive, withholding tax exemptions should not be granted as the recipients in Joined Cases C-116/16 and C-117/16 were not the beneficial owners of the payments. Following the appeal of the cases to the Danish High Court, questions were referred to the CJEU. The referred questions in both sets of cases are the same in nature with the only exception of the question regarding the ‘beneficial ownership of the payments’ which was only asked in Joined Cases C-116/16 and C-117/16.

By its judgments of 26 February 2019 in those cases, the Court resolved the vital question as to the relevance and interpretation of the concept of a beneficial owner under Union law, and in particular in the application of the benefits under Directive 90/435 and Directive 2003/49. Its final conclusion is based entirely on the principles of combating fraud and abuse, in the presence of which all the advantages deriving from Union law should be rejected.

In both proceedings, the question of whether the Member States should establish an explicit provision in national law in accordance with the provisions of the directives at hand providing for the possibility of applying measures to prevent prohibitions and abuses, or whether general principles in this sense of Union and national law were sufficient, was further raised.

Moreover, the Court has given a firm answer to the questions raised, basing it on the broader concept that the fight against fraud and abuse is a long-standing principle recognized in the case-law of the Court, and therefore the taxable persons are not able to rely on the rights deriving from  Union law in case of fraudulent or abusive actions.

Consequently, the Court has upheld the possibility of withholding the exemption from dividends and interest at source under Directive 90/435 and Directive 2003/49 in the presence of fraud or abuse.

[1] Todor Todorov is a partner at Kambourov & Partners Attorneys at Law and Head of the Practice: Tax Law and Administrative Litigation. He is a member of the Sofia Bar Association and the International Bar Association. The opinions expressed are in a personal capacity.