CJEU decision concerning withholding tax refunds and a challenge to broadly drafted anti-abuse provisions

Thu 11 Jan 2018

Background

In the joined cases of Deister Holding AG, formerly Traxx Investments NV (C‑504/16) and Juhler Holding A/S (C‑613/16), concerning the different tax treatment of non-resident EU investors in German companies compared to German resident investors, the CJEU has held that the German tax law in existence before 2012 was contrary to both the EU Parent Subsidiary Directive and EU freedom of establishment principle.

The German rules restricting refunds of withholding taxes to non-German resident investors in certain circumstances were changed with effect from 1 January 2012, so the case may be of interest to those non-German resident investors who suffered from a withholding under the old rules. However, the case is likely to be of wider relevance because of the CJEU’s decision that the anti-abuse provision was too general – and similar provisions in other Member States may thus be susceptible to challenge on similar grounds.

Details

Case C-504/16 concerned a Dutch resident holding company with a sole German resident individual shareholder. The Dutch holding company had a 26.5% interest in a German company from which it received dividends subject to German withholding tax.

Case C-613/16 concerned a Danish resident holding company, which was itself held 100% by a Cypriot company whose sole shareholder was resident in Singapore. The Danish company held 100% of a German resident company providing personnel services, and which paid dividends to the Danish holding company.  The Danish company also had a property portfolio and financially controlled its subsidiaries.  Instead of having its own offices, the Danish holding company used offices and staff of its group companies, while its CEO was also on the Board of many of its subsidiaries’ Boards.

The German withholding tax rules at the time provided for a refund of withholding tax so long as at least a 15% interest in the payer of the dividend has been held for an appropriate period (the relevant time was 2008 when the Parent Subsidiary Directive provided for a 15% holding requirement rather than the current 10%). For foreign holding companies, however, no refund was permitted if either (i) the holding company shareholders would not be entitled to the refund if they had received the dividend directly, or (ii) one of three conditions was met.  The three conditions were:

• There was no economic or other substantial reason for the involvement of the foreign company or
• The foreign company does not earn more than 10% of its gross income from its own economic activity (income from holding assets was not considered economic activity); or
• The foreign company does not take part in general economic commerce with a business establishment suitably equipped for that purpose.

If one of these conditions was present, there was a presumption that an abusive tax practice was present, with no ability to rebut that presumption.

The taxpayers in both the referred cases had been refused a refund of withholding taxes.

The CJEU held that in order to determine whether an operation had an abusive of fraudulent objective, it is not possible to apply pre-determined general criteria. Instead an individual examination of the whole operation must be carried out.  The conclusion was that the German law was incompatible with both the EU Parent Subsidiary Directive and EU freedom of establishment principle.

There is a further German case awaiting a CJEU hearing concerning the German withholding tax rules applicable before 2012, case C-440/17, so there may be further developments in this area.  On 11 December 2017 the European Commission issued a press release on a voluntary code of conduct on withholding taxes.  The code of conduct is aimed at helping Member States reduce costs and simplify procedures for refunds of withholding tax for cross border investors into the EU, whether the investors are from the EU or not.

To discuss the international tax implications of cross border dividend flows, please get in touch with a member of the Mazars international tax team.