Tax authorities in Europe are racing to apply the principles set forth by the European Court of Justice in the Danish conduit cases to tackle abuse, particularly in the area of withholding tax exemptions on cross-border dividends and interest.
Courts in Italy, France, Spain and Switzerland have all referred to the Danish conduit cases in decisions on cases considered abusive by the tax authorities. And the Dutch Supreme Court denied the benefit of the EU Parent-Subsidiary Directive based on the existence of a 'wholly artificial arrangement' in January of this year (see my previous post).
Two recent decisions of the Dutch lower court of Haarlem are further evidence that taxpayers claiming benefits under the EU Parent Subsidiary Directive in the Netherlands are in for tough scrutiny by the Dutch tax authorities (ECLI:NL:RBNHO:2020:5317 and 5318).
Decisions of the lower court of Haarlem
The cases before the lower court of Haarlem involved a Dutch BV ("Feeder BV") which was set up to hold an investment in a Dutch private equity fund by Belgian investors. Dutch investors invested in the fund through a parallel structure. Two of the Belgian investors were Belgian BvbA's (Belgian limited liability companies; "BvbA 1" and "BvbA 2") each of which was ultimately held by Belgian resident individuals belonging to two separate families. BvbA 1 held an interest of 38.71% in Feeder BV. BvbA 2's interest was 24.39%. Feeder BV distributed a dividend to BvBA 1 and BvbA 2.
BvBA 1 and BvbA 2 claimed an exemption from Dutch dividend withholding tax on the basis of article 4, paragraph 2 of the Dutch Dividend Withholding Tax Act 1965 ("DWT"). The Dutch tax authorities took the position that the exemption did not apply, because the interposition of BvbA 1 and BvbA 2 between Feeder BV and the members of the two respective families was considered an artificial structure within the meaning of article 4, paragraph 3, letter c of the DWT.
Citing the principles laid down in the Danish conduit cases and the Dutch Supreme Court decision of January 2020, the lower court of Haarlem first held that the individual members of the family would not have been entitled to the exemption from Dutch dividend withholding tax had they held the shares in Feeder BV directly. Therefore, the court concluded, one of the main purposes for BvbA 1 and BvbA 2 to be interposed was to avoid Dutch dividend withholding tax for the members of the respective families. Because of this, the court held that the interposition of BvbA 1 and BvbA 2 was presumed to be artificial and that this presumption could only be rebutted if BvbA 1 and BvbA 2 could produce evidence that would lead to a different conclusion.
BvbA 1 did not succeed in meeting this burden of proof because it did not own any other assets than the shares in Feeder BV and two old timer cars and it did not have office space or personnel of its own. Therefore, BvbA 1 was denied the exemption from Dutch dividend withholding tax.
BvbA 2, however, argued that it owned shares in more than ten other active companies. With respect to some of these companies, it conducted an active management role. In addition, it had its own offices. BvbA 2 paid significant management fees to its director (EUR 525,000 in 2017), one of the family members, and fees for legal and administrative services performed by the director's spouse (EUR 150,000 in 2017). The director of BvbA 2 performed management roles for several entities in which BvbA 2 held interests and was actively looking for investment opportunities for BvbA 2 in the high tech sector. The Haarlem court concluded that, based on these facts and circumstances, BvbA 2 could not be denied the exemption from Dutch dividend withholding tax. According to the court, BvbA 2 conducted an active business enterprise to which the shares in Feeder BV were attributable. Hence, BvbA 2 was not part of an artificial structure.
Both decisions by the Haarlem court may be appealed.
The decisions of courts in Italy, France, Spain and Switzerland referred to in the first paragraph of this post are the following:
- Italian Supreme Court no. 14756, 10 July 2020
- French Conseil d'État, no. 423809, 5 June 2020
- Spanish Economic Adminsitrative Court, 8 October 2019
- Swiss Supreme Court, 2C_354/2018, 20 April 2020
The Dutch Supreme Court decision of January 2020 has the following reference: ECLI:NL:HR:2020:21.
The two recent decisions of the Dutch lower court of Haarlem are further evidence that taxpayers claiming benefits under the EU Parent Subsidiary Directive in the Netherlands are in for tough scrutiny by the Dutch tax authorities