In Eqiom SAS, previously Holcim France SAS Enka SA v Ministre des finances et des comptes publics (Case C-6/16) (19 January 2017), AG Kokott considered that a French rule which denies the benefit of the Parent-Subsidiary Directive, in circumstances where tax abuse is suspected, is in breach of both the directive and EU law principles.
The French tax authorities had relied on a French regulation to refuse to exempt, from withholding tax, the dividends of a company resident in France, paid to its Luxembourg parent company. The Luxembourg resident company was in turn indirectly controlled by a company incorporated in Switzerland, and the appellant had not submitted evidence that the principal purpose behind the structure of the chain of interests was not tax-related (as required by the French regulation).
The issue was therefore whether the French regulation, which addresses a form of abuse known as ‘directive shopping’, is compatible with the Parent-Subsidiary Directive and with the fundamental freedoms. More generally, the CJEU had to decide the circumstances in which a member state may refuse, on grounds of preventing tax evasion, an exemption from withholding tax that would normally be granted for the dividend payments of a resident subsidiary to its non-resident parent company.
The AG noted that the Parent-Subsidiary Directive article 1(2) provides that ‘the directive shall not preclude the application of domestic provisions required for the prevention of fraud or abuse’. It added that article 1(2) reflects the general principle of EU law that any abuse of rights is prohibited.
She therefore pointed out that the denial of the exemption, in circumstances where a chain of ownership is created for tax purposes, is not precluded by the directive. However, the relevant French regulation creates a presumption of abuse in circumstances where the company receiving the dividends is directly or indirectly controlled by persons not resident in the EU. It is then for the beneficiary to provide proof that the chain of interests is not essentially for tax purposes. The AG considered that such an approach goes beyond what is required to prevent tax evasion and is not within the limits of what is permissible under article 1(2).
The AG also thought that the French rule infringes the principle of freedom of establishment. She noted that only distributions of profit to non-resident companies are subject to the evidence requirement. Dividend payments to resident companies are not affected. This makes it less attractive for companies established in other member states to exercise their freedom of establishment. She added that the fact that the shareholders of the relevant company were not resident in the EU was not relevant; the origins of the shareholders of companies do not affect the right of those companies to rely on freedom of establishment.
Finally, the AG observed that the French provision essentially adopted the criterion of an attempt to obtain a tax benefit. However, such a subjective criterion is not sufficient to indicate an artificial arrangement, as defined in the CJEU’s case law.
Why it matters: The AG pointed out that recent efforts to address abusive tax practices at the European and international level highlighted ‘the special relevance of this topic’. She added, however, that: ‘While it is necessary to forcefully counteract evasion, simply for reasons of tax fairness, proportionality must nevertheless always be preserved when doing so.’ Whether the CJEU will follow the opinion of the AG remains to be seen.
In Eqiom SAS, previously Holcim France SAS Enka SA v Ministre des finances et des comptes publics (Case C-6/16) (19 January 2017), AG Kokott considered that a French rule which denies the benefit of the Parent-Subsidiary Directive, in circumstances where tax abuse is suspected, is in breach of both the directive and EU law principles.
The French tax authorities had relied on a French regulation to refuse to exempt, from withholding tax, the dividends of a company resident in France, paid to its Luxembourg parent company. The Luxembourg resident company was in turn indirectly controlled by a company incorporated in Switzerland, and the appellant had not submitted evidence that the principal purpose behind the structure of the chain of interests was not tax-related (as required by the French regulation).
The issue was therefore whether the French regulation, which addresses a form of abuse known as ‘directive shopping’, is compatible with the Parent-Subsidiary Directive and with the fundamental freedoms. More generally, the CJEU had to decide the circumstances in which a member state may refuse, on grounds of preventing tax evasion, an exemption from withholding tax that would normally be granted for the dividend payments of a resident subsidiary to its non-resident parent company.
The AG noted that the Parent-Subsidiary Directive article 1(2) provides that ‘the directive shall not preclude the application of domestic provisions required for the prevention of fraud or abuse’. It added that article 1(2) reflects the general principle of EU law that any abuse of rights is prohibited.
She therefore pointed out that the denial of the exemption, in circumstances where a chain of ownership is created for tax purposes, is not precluded by the directive. However, the relevant French regulation creates a presumption of abuse in circumstances where the company receiving the dividends is directly or indirectly controlled by persons not resident in the EU. It is then for the beneficiary to provide proof that the chain of interests is not essentially for tax purposes. The AG considered that such an approach goes beyond what is required to prevent tax evasion and is not within the limits of what is permissible under article 1(2).
The AG also thought that the French rule infringes the principle of freedom of establishment. She noted that only distributions of profit to non-resident companies are subject to the evidence requirement. Dividend payments to resident companies are not affected. This makes it less attractive for companies established in other member states to exercise their freedom of establishment. She added that the fact that the shareholders of the relevant company were not resident in the EU was not relevant; the origins of the shareholders of companies do not affect the right of those companies to rely on freedom of establishment.
Finally, the AG observed that the French provision essentially adopted the criterion of an attempt to obtain a tax benefit. However, such a subjective criterion is not sufficient to indicate an artificial arrangement, as defined in the CJEU’s case law.
Why it matters: The AG pointed out that recent efforts to address abusive tax practices at the European and international level highlighted ‘the special relevance of this topic’. She added, however, that: ‘While it is necessary to forcefully counteract evasion, simply for reasons of tax fairness, proportionality must nevertheless always be preserved when doing so.’ Whether the CJEU will follow the opinion of the AG remains to be seen.
