Case Study – Tax Planning Under EU Law (Part 1)

This contribution summarizes the main points of the discussion on applying EU Parent Subsidiary Directive (PSD) and other tax planning considerations on specific transactions within European Union (EU). It also discusses about anti-abuse provisions and the application of BEPS rules in certain cases.
Company A, a tax resident in Member state X owns the 100% of Company B, and 9% of Company W both tax residents of Member state Y, and the 100% of Company C, resident in Member state Z. All Member States apply the exemption method, and Member State Y has 0% for domestic profit distributions. All Companies are qualified for all tax directives and are register in the Member states who are tax resident.

Question 1

Assume that no additional shares can be acquired, how can the application of the PSD for distributions by Company W, in state Y be achieved?

In order the Parent Subsidiary Directive (PSD) to be applicable, the parent company (A) must directly holds at least 10% of the shares in the subsidiary (W) for more than one year.

Since “A” holds only the 9% of the shares of W and therefore the PSD conditions are not met any distributable profit from W to A would be subject to Withholding Tax (15% under the OECD DTT).

A possible restructuring of the group would be consider in order 0% on distributable profits from W to A to be achieved.

If the holding of shares of W transferred to B instead of A then under the domestic legislation of state Y, 0% WHT would be applicable to the distributable profits from W to B. Thereafter any profits of B would be distributed to A which under the PSD no WHT would be applied.

Question 2

Are there any anti-abuse concerns?

In the absence of harmonized rules, the ECJ plays a key role in balancing the interests of the Member States in the regulation of direct tax matters. According to the case law of the European Court of Justice (ECJ) Member states are not allowed to perform any abusive transactions. The court in several law cases has defined that abuse of EU Law must be established on the basis of (a) the Objective circumstances from which it appears that the objective purpose of EU Law is violated and (b) the subjective abuse intention.

The court has used this text in Emsland-Starke (Case C-110/99) the Halifax (Case C-255/02), commission Vs Greece (Case C-178/05) and Cadbury Schweppes (Case C-196/04).

Under the Abuse-subjective test if the principal or one of the principal objectives of a transaction is to obtain tax advantage, then the transaction can be considered as abusive.

In order to be able to elaborate the above statement and defined it weather our restructuring is abusive or not we need to explain what tax advantage means and when a transaction can be considered as abusive. Tax advantage can be defined either as Tax evasion which is an Unlawful attempt to minimize tax liability or Tax avoidance which is a practice of using legal means to pay the least amount of tax possible. Tax Planning though can be tax strategies designed to prevent a tax liability from arising. Tax planning does not contravene either the letter or the spirit of law which this can be base of consider the above mentioned restructuring as not abusive.

According to the UK Finance Act 2013.

“Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions.”

The GAAR proposed by the European Commission in December 2012 uses the following definition:

“An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit.”

In the Cadbury Schweppes case a UK resident Company had decided to establish subsidiaries in the International Financial Services Centre (IFSC) in Ireland to take advantage of the favourable 10% tax regime, that fact did not “in itself constitute abuse”.

In the Emsland-Starke case, in parag. 53 the court stated that in order a transaction to be considered as abusive, it requires, a subjective element consisting in the intention to obtain an advantage from the community rules by creating artificially the conditions laid down for obtaining it.

If in the Cadbury Schweppes case the ECJ has decided that the artificial arrangements would play an essential role to define a transaction as abusive. The incorporation of subsidiaries to more favourable jurisdiction did not in itself constitute abuse, in my opinion the same objections would be applicable and in this case which the restructuring did not affect the operations of the Company.

In our case the main purpose of the transaction was to obtain more favourable tax treatment but that treatment was not contrary to the object and purpose of the tax laws. The restructuring could not considered as an artificial arrangement since nothing would actually change both in the day to day operations of the Company or in the shareholding, since the shares would belong to the same Company but instead direct, indirect. The Company will not make direct use of any EU directive, therefore I would considered the restructuring as not abusive.

Tax Planning Partner:

Costas Savva
T: +357 22 875 720