Across a number of European jurisdictions, relief from withholding tax may be denied where the recipient of a dividend, interest or royalty payment is not also the beneficial owner of the relevant payment. The test for determining whether the recipient qualifies as the beneficial owner seems to differ between jurisdictions. There are, however, also similarities. In general terms, the determination of beneficial ownership will require a detailed examination of the facts in each case as a number of different factors have to be taken into account.
It is the purpose of this overview and the related posts to provide an insight into the ways beneficial ownership is determined in a number of European jurisdictions.
In some jurisdictions, the, tax authorities will base their application of the beneficial ownership test (in particular when considering the availability of a relief or exemption derived from an EU directive) on the criteria developed by the CJEU in Danish conduit cases. These criteria include legal criteria relating to the autonomy of the recipient to decide how to use the sums received, substance criteria looking at the capacity of the company to carry out an activity other than functioning as a mere conduit between the payor and an ultimate beneficiary and the rationale of its interposition, and economic criteria considering whether, when and to what extent the sums received are passed on.
The courts in Spain have clarified that the tax authorities cannot deny the Parent-Subsidiary exemption simply because the ultimate owner is a non-EU investment entity. The Supreme Court and the National Court stated that the Spanish tax authorities would need to prove the existence of an abuse of law in order to apply the anti-abuse provision of the EU directive (see these earlier posts here and here for more information).
The UK applies different beneficial ownership tests in a domestic context and in respect of tax treaties, but the UK tax authority’s guidance suggests that it would normally regard them to give rise to the same result, unless there is evidence of treaty shopping. Also in the Netherlands, the domestic law beneficial owner test arguably differs from the tax treaty beneficial owner test.
Germany has a long and not always glorious history of anti-treaty and directive shopping provisions which, prior to the Danish conduit cases, had come under scrutiny by the CJEU. While the relationship of these decisions to the Danish conduit cases is far from clear, German tax authorities nevertheless consider the Danish cases as confirmation for the relatively harsh German statutory regime.
In addition to the differences in the way in which the beneficial ownership test is applied in Europe, there also seem to be differences across European jurisdictions with respect to the possibility of looking through the recipient to the beneficial owner with a view to applying, for example, a double tax treaty that has been concluded between the payor’s and the beneficial owner’s jurisdiction. This would generally seem a sensible approach, arguably supported by the Commentary on the OECD’s Model Convention, but may give rise to practical difficulties and the posts reveal that, to date, few tax authorities are unequivocally supportive of this approach and case law on the point tends to be limited.