The Danish “Beneficial Ownership” Cases

The Danish “Beneficial Ownership” Cases

The Danish “Beneficial Ownership” Cases

15.03.2019 LU law

On 26 February 2019, the Court of Justice of the European Union (CJEU) ruled in Grand Chamber regarding the non-application of the Parent-Subsidiary Directive (PSD)  and of the Interest and Royalties Directive  (IRD) in cases of abuse or pursuant to the beneficial ownership test.  

Among the cases reviewed, one in particular - Case C‑118/16 - may have immediate consequences on the tax structuring of investments made by certain Luxembourg-based investment funds, and on the tax treatment of Luxembourg SICAR (Société d'Investissement en Capital à Risque) in the context of the IRD.

This case involved a group of investment entities established in third countries (PE Funds) who had invested in a Luxembourg SICAR (X SICAR) together. X SICAR held its investment in the Danish parent company of a multinational group (X Denmark A/S) via a Swedish double tier intermediary structure. X Denmark A/S paid interest under a loan to a Swedish company (X Sweden) which made an intra-group transfer to the other Swedish company (Sweden Holding) to allow the latter, in turn, to pay interest to X SICAR on a loan. The profits of X SICAR, were then distributed to the PE Funds. X Sweden and AB X Sweden were members of a Swedish consolidated tax group. The Danish tax authorities ruled that, with regards to interest payments made in 2007, 2008, and 2009, that neither X Sweden nor Sweden Holding, nor X SICAR could be considered the beneficial owner of interest under the IRD. Instead, the Danish tax authorities ruled that the PE Funds should be the beneficial owners and that they should accordingly be considered receiving interest for tax purposes. As a result, the Danish tax authorities denied WHT exemption under the IRD.

Key concepts

The IRD provides for withholding tax (WHT) exemption on interest paid from an EU subsidiary to an EU parent company in the interest of mitigating the risk of juridical double taxation. Pursuant to Article 1(1) of the IRD, “interest or royalty payments arising in a Member State shall be exempt from any taxes imposed on those payments in that State […] provided that the beneficial owner of the interest or royalties is a company of another Member State […]." 1 Pursuant to Article 1(4) of the IRD, a company of a Member State is to be regarded as the beneficial owner of interest only if it receives interest payments for its own benefit and not as an intermediary “such as an agent, trustee or authorized signatory, for some other persons." 2

The term “beneficial owner" was introduced in the OECD Model Tax Convention (OECD MTC) in 1977. The Commentaries on the OECD MTC (1977) only listed a few examples of what is not a beneficial owner: […] the limitation of tax in the State of source is not available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State. 3 The revised Commentaries on the OECD MTC further added that the term is not used in a narrow technical sense and that rather, it should be understood in its context and in the light of the object and purposes of a convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance. 4

A SICAR formed as a share capital company is subject to Luxembourg corporate income tax and municipal business tax at ordinary rates and must file income tax returns. 5 However, the SICAR benefits from an objective exemption in the sense that, despite being subject to tax, specific types of income are exempt from Luxembourg tax if certain conditions are met (e.g. dividends and interest deriving from securities representing risk capital). 6 It is worth noting that the same tax regime applies to the RAIF (Reserved Alternative Investment Fund) that have opted for Article 48 of the Law on Reserved Alternative Investment Funds dated 23 July 2016 (the RAIF Law) which replicates the criteria for the objective exemption under the SICAR regime.

Legal analysis of the CJEU

What is the meaning of the term beneficial owner for the purpose of the IRD? 

For the CJEU, a beneficial owner is an entity that actually economically benefits from the interest and accordingly has the power freely to determine the use to which it is put. In this sense, when examining a cross-border structure under the IRD, the beneficial owner is the entity that truly gains from the interest received as opposed to the entity that is merely the formally identified recipient on a legal basis as an intermediary, such as an agent, trustee, or authorized signatory, on behalf of others.

Furthermore the CJEU clarified that the Commentaries on the OECD MTC, including commentaries that have been added after the adoption of the IRD, are relevant to interpret the concept of beneficial owner as per Article 1(4) of the IRD. Accordingly, the concept of beneficial owner excludes conduit companies and must not be understood in a narrow technical sense but as having a meaning that enables double taxation to be avoided and tax evasion and avoidance to be prevented. 

On one hand, the CJEU aligns the EU concept of beneficial ownership with the OECD definition, which means that taxpayers and tax advisors should rely on OECD works now more than in the past. On the other hand, this understanding deviates from the opinion of the Advocate General who had underlined the non-binding effect of the OECD Commentaries.7

What are the constituent elements of an abuse of rights?

In its ruling, the CJEU elaborated on meaning of abuse of rights in this context. It did so despite noting that the refusal of the IRD WHT exemption is not in any way subject to an abuse of rights to be found when the beneficial owner of interest paid is resident for tax purposes in a third State.

According to the CJEU case law, proof of an abusive practice requires: (i) first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved; and (ii) second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it.

According to the CJEU, the examination of a set of facts is needed to establish whether the constituent elements of an abusive practice are present and, in particular, whether economic operators have carried out purely formal or artificial transactions devoid of any economic or commercial justification, with the essential aim of benefiting from an improper advantage. A group of companies may be regarded as being an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of applicable tax law.

It should further be noted that for the purpose of characterizing an artificial arrangement, the CJEU still refers to structures that would be purely formal, and devoid of any economic or commercial justification.

In this respect it should be understood that the need to conduct the transactions with commercial justification (e.g. regional investment platform 8) and with an adequate level of economic substance is paramount (e.g. material infrastructure and qualified personnel to control the assets, the risks, and carry out key functions).

In the context of the IRD, the CJEU stated that the artificiality of an arrangement can result from the fact that a group of companies is structured in a way that the recipient of the interest paid must itself pass that interest on to a third company that does not fulfil the conditions for the application of the IRD, resulting in an insignificant taxable profit when it acts as a conduit company. Notably, the Court did not refer to the arms' length principle when referring to an “insignificant taxable profit".

Can SICAR benefit from the IRD WHT exemption?

The CJEU also addressed the entitlement to the interest WHT exemption in the event that X SICAR would be regarded as beneficial owner of the interest paid by X Denmark. In this respect, the CJEU ruled that a Luxembourg company with SICAR status cannot be regarded as a “company of a Member State" within the meaning of the IRD and therefore cannot claim the interest WHT exemption under the IRD.

The CJEU stated that the directive has to be interpreted in light of its objective of “ensuring that the interest payments are subject to tax once in a single member State".  Whereas it is not disputed that a SICAR is an entity subject to Luxembourg corporate income tax, the CJEU refused to consider a Luxembourg company SICAR status as being a company of a Member State within the meaning of IRD if the interest received by the SICAR is in fact exempt from corporate income tax in Luxembourg due to such status.

The recent case from the CJEU is somewhat confusing and requires further clarification as to the objective tax exemption from which a SICAR benefits. A commonly accepted clear distinction between subjective (concerning the taxable person) and objective exemption (concerning only certain categories of income) exists in the legal community which is not clear in the ruling. Contrary to a subjective tax exemption whereby the taxpayer is as such exempt from tax or is subject to an exceptional 0% income tax 9 on all types of income, the SICAR only benefits from an objective exemption in respect of income and gains derived from securities representing risk capital (in the same manner as a SOPARFI may benefit from an objective exemption on dividends qualifying from certain qualifying shareholdings). The fact that such a company does not pay taxes in certain fiscal years because it only derives exempt items of income (e.g. dividends or income deriving from risk capital in the case of the SICAR) or is in loss position should not be viewed to transform it into an “exempt" company.10


The judgement is important for Luxembourg investment funds structures financing investments with shareholder debt in EU jurisdictions.

The court has confirmed that the concept of beneficial owner which appears in the bilateral conventions based on the OECD MTC and the successive amendments of the OECD MTC are relevant when interpreting the IRD. The beneficial ownership test for the IRD is a “stand-alone" test that applies without regard to the usual real economic substance aspect and irrespective of any abuse.

On the abuse of rights, the CJEU seems to have departed from the “wholly artificial arrangement" principle 11 to refer to structures that would be artificial, as purely formal and devoid of any economic or commercial justification. The CJEU seem to have lowered the threshold of abuse when compared to previous decisions. Consistent with the new European GAAR under the ATAD 12, transactions must be put into place for valid commercial reasons that reflect economic realty.

For private equity firms using Luxembourg as a regional investment platform 13 , an adequate level of economic substance is paramount (e.g. material infrastructure and qualified personnel to control the assets, the risks, and carry out key functions). Timing, form and decision powers regarding how to use the proceeds of an investment must be carefully assessed. Pre-determined and automatic flow of funds to the ultimate shareholders should be avoided. 

In any case, the CJEU has clarified the concept of beneficial owner and the constituent elements of an abuse of rights, although ultimately it will be up to the referring court in Denmark to establish whether the arrangement is characterised as abusive or artificial at a domestic level in the specific case at hand. The decision of the Østre Landsret should be followed closely.

This article was first published in Agefi Luxembourg on 15 March 2019
  1. Article 1(1) of the IRD.
  2. Article 1(4) of the IRD.
  3. OECD Model Tax Convention on Income and on Capital: Commentary on Article 10 para. 2 (11 Apr. 1977).
  4. OECD Model Tax Convention on Income and on Capital: Commentary on Article 10 (28 Jan. 2003);
  5. See Article 34 (2) of the Law of 15 June 2004 relating to the investment company in risk capital (SICAR)
  6. Circular CSSF 06/241 regarding concept of risk capital under the Law of 15 June 2004 relating to the investment company in risk capital (SICAR).
  7. Opinion of Advocate General Kokott delivered on 1 March 2018, X Denmark A/S (C-118/16) v. Skatteministeriet [Kokott] at para 55.
  8. See OECD "BEPS Action 6 – Discussion Draft on Non-CIV Examples", 6 January 2017.
  9. CJEU, 8 March 2017, Case C-448/15, Belgische Staat v Wereldhave Belgium Comm. VA and Other.
  10. P. Arginelli, The Subject-to-Tax Requirement in the EU Parent-Subsidiary Directive (2011/96), in European Taxation, 2017, 8, p.336.
  11. CJEU, 12 September 2006, Case C-196/04, Cadbury Schweppes and Cadbury Schweppes Overseas; CJUE, C-504/16, 20 December 2017, Deister Holding AG.
  12. Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market.
  13. OECD Public Discussion Draft, “BEPS Action 6 – Discussion Draft on non-CIV examples" published on January 6, 2017,


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