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beneficial owner in the field of IRD after Danish cases

Adv LLM thesis

submitted by

Xiaoyu Guo

in fulfilment of the requirements of the

'Advanced Master of Laws in International Tax Law'

degree at the University of Amsterdam

supervised by

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PERSONAL STATEMENT

Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:

1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself

without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that in case of such a violation professional organizations in my home country and in countries where I may work as a tax professional, are informed of this violation.

2. I hereby authorize the University of Amsterdam and IBFD to place my thesis, of which I retain the

copy-right, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format.

3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in

a footnote to the article’s title or to the author’s name:

“This article is based on the Adv LLM thesis the author submitted in fulfilment of the require-ments of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam.”

4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any

other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.

signature:

name: Xiaoyu Guo

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Table of Contents

Table of Contents ... III

List of Abbreviations used ... V

Executive Summary ... VI

Main Findings ... VII

1.

Introduction ... 1

1.1. Background ... 1

1.2. Motivation and Objectives ... 2

1.3. Research questions ... 3

1.4. Delimitation of the study ... 3

1.5. Research methodology ... 4

2.

The Danish beneficial ownership cases ... 5

2.1. Introduction of the joint Danish cases ... 5

2.1.1. Facts of the case ... 5

2.1.2. Questions raised by the Danish Court ... 6

2.2. Opinions from the Advocate General ... 7

2.2.1. The concept of the beneficial owner under the IRD ... 7

2.2.2. The relevance of the OECD MTC to interpret the beneficial owner in the EU law ... 8

2.2.3. Reliance on Article 5 of the IRD ... 8

2.3. Decisions of the European Court of Justice ... 9

2.3.1. The concept of the beneficial owner under the IRD ... 9

2.3.2. The relevance of the OECD MTC to interpret the beneficial owner in the EU law ... 9

2.3.3. Reliance on Article 5 of the IRD ... 10

2.4. Comparison and summary ... 11

3.

Interpretation of the BO in the Interest and Royalty Directive (2003/49) ... 13

3.1. General sources and methods used to interpret the EU law definition ... 13

3.1.1. Interpretation of primary law ... 13

3.1.2. Interpretation of secondary law ... 14

3.2. The content of the Interest and Royalty Directive ... 14

3.2.1. The objectives of the Interest and Royalty Directive ... 14

3.2.2. The content of the Interest and Royalty Directive ... 14

3.2.2.1. Definition of the beneficial owner ... 15

3.2.2.2. The anti-avoidance provisions ... 16

3.2.3. The history of the Interest and Royalty Directive ... 16

3.3. The beneficial owner concept in the Interest and Royalty Directive (2003/49) ... 18

3.3.1. The methods used by the ECJ to reach conclusions regarding the BO concept ... 18

3.3.2. The relevance of the OECD MTC for interpreting the EU definition beneficial owner 19 3.3.2.1. Systematic interpretation ... 19

3.3.2.2. Historical interpretation ... 19

3.3.2.3. Literal interpretation ... 20

3.3.2.4. Teleological interpretation ... 21

3.3.3. Sources should be used as aids for interpretation ... 22

3.3.3.1. Only the OECD MTC Commentary as it stood when the IRD was adopted . 22 3.3.3.2. Subsequent amendments of the OECD MTC Commentary ... 23

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3.4.1. Opinions from the Advocate General ... 23

3.4.2. Indication of the European Court of Justice ... 24

3.4.3. Should we read the BO requirement in the PSD? ... 25

3.4.3.1. The arguments of scholars ... 25

3.4.3.2. The recent rulings in France and Switzerland ... 26

3.5. Conclusions ... 29

4.

The beneficial owner and anti-abuse rules ... 31

4.1. The abuse of rights and the beneficial owner ... 31

4.1.1. The relationship between the abuse of rights and the beneficial owner ... 31

4.1.2. Prohibition of abuse of rights as a general principle of the EU law ... 32

4.1.3. The outcome of the prohibition of abuse of rights as a general principle of EU law ... 33

4.2. Issues related to the conduit companies ... 34

4.2.1. The features of “conduit companies” in an artificial arrangement ... 35

4.2.2. The outcomes of finding an interposed conduit company ... 36

4.2.2.1. The conduit company doesn’t qualify as a BO without abuse ... 36

4.2.2.2. The arrangement with a conduit company is abusive ... 36

4.3. Conclusions ... 38

5.

Will there be new amendments to the IRD in the future? ... 39

5.1. How should we use the interpretation from the OECD Model Commentary? ... 39

5.1.1. OECD and non-OECD countries of the EU ... 39

5.1.2. Directly use or based on the OECD MTC Commentary ... 40

5.2. Should we introduce a new definition of the beneficial owner into the IRD? ... 41

5.2.1. The need to introduce a new definition of the BO in the IRD ... 41

5.2.2. What will be the new definition? ... 41

5.3. Or shall we delete the BO concept in the IRD and amend the IRD with a GAAR? ... 42

5.4. Conclusions ... 42

6.

Conclusions ... 44

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List of Abbreviations used

(alphabetical list of abbreviations used in the Thesis)

AG Advocate General

Art., Arts. Article, Articles

ATAD Anti-Tax Avoidance Directive (2016/1164)

AIA-A CH-EU Agreement of October 26, 2004 between the Swiss Confederation and the European Union on the automatic exchange of information about financial accounts to promote tax honesty in international matters, former title: "Agreement of October 26, 2004 between the Swiss Confederation and the European Community on arrangements equivalent to those laid down in Council Directive 2003/48/EC in the area of taxation of savings in-come"

BO Beneficial Ownership

C-, T- Court Case Number

CJEU Court of Justice of the European Union

EU European Union

ECJ European Court of Justice

GAAR General Anti-Abuse Rule

IRD Interest and Royalty Directive (2003/49)

LoB Limitation on Benefits

MS Member States

OECD MTC OECD Model Tax Convention

PSD Parent-Subsidiary Directive (2011/96)

PE Permanent Establishment

PPT Principal Purpose Test

PECs Preferred Equity Certificates

TFEU Treaty on the Functioning of the European Union

TEU Treaty on European Union

TEC Treaty establishing the European Community

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Executive Summary

On 26 February 2019, the European Court of Justice (ECJ) made outstanding judgments regarding the joint Danish Cases, which are popularly known as the “Danish beneficial ownership cases”. The rulings provided by the ECJ are far beyond expectation and breakthrough, which may constitute a milestone in the new development of the EU law in the future. The decisions and analysis of the ECJ contain many issues such as the abusive behaviour in EU direct tax law, the interpretation of the beneficial owner con-cept, etc. Since the judgments significantly deviate from the views of Advocate General (AG) Kokott and overruled the previous case law (the Kofoed doctrine, C-321/05), heated discussions as regards the im-pact and correctness of the judgments among scholars have been raised.

The main purpose of this thesis is to scrutinize reliance of the ECJ on the OECD MTC and its Commen-tary when interpreting the beneficial owner (BO) in the Interest and Royalty Directive (2003/49) (IRD) in order to assess any need for amendments. Following that, the paper also tries to assess whether the ECJ is correct to read the BO requirement in the Parent-Subsidiary Directive (2011/96). In addition, the thesis is going to analyse the potential impact on the relationship between the BO requirement and anti-abuse rules in the EU law in order to check is it necessary to keep the BO concept and introduce a General Anti-Abuse Rule (GAAR) into the IRD.

To achieve the purposes, the paper gives a brief introduction of a representative case and compares the opinions of AG and decisions of the ECJ, in order to bring in the main research questions. Further, the thesis has analysed the relevance of the OECD Model Tax Convention (OECD MTC) and its Commentary for interpretation of the BO in the IRD and the sources could be used as aids for such interpretation based on the general methods for interpreting the EU law definition. Besides, reviews of AG’s opinion, scholars’ views and a recent French case regarding the implicit read of the BO in the PSD by the ECJ have been conducted to critique the indication of the ECJ on this respect. Following that, the thesis demonstrates the distinction and overlap between the BO and abuse of rights, as well as the issues related to the conduit companies. Moreover, an attempt has been made to propose the new amendments of the IRD in the fu-ture.

It has been concluded that the OECD MTC is relevant for the interpretation of the BO in the IRD and the amendments up to 2017 could be used as the sources for such interpretation. However, the implicit read of the BO requirement in the PSD is inappropriate and goes beyond what is necessary. Further, the BO and abuse of rights are two distinct concepts, though there is overlap between them. Since the principle of prohibition of abuse of rights could be settled as a general principle of the EU law system, the problems of legal certainty and effectiveness of the anti-abuse rules in the directives are raised. Last but not least, there could be new amendments proposed by the author concerning the new definition of the BO in the IRD and provisions providing the reservations of competence for Member States to freely introduce meth-ods to prevent abuse of the IRD could be removed.

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Main Findings

First of all, in chapter 2, after summarizing and comparing opinions from the AG and decisions of the ECJ, it is important to note that they are far from an agreement on the following aspects: a) The AG prefers a person with a civil-law claim to the interest in his own name regarding the interpretation of the BO in the IRD, while the ECJ emphasizes the economic reality. b) The AG concludes the OECD MTC is irrelevant for interpretation of the BO concept in the IRD, instead, it must be interpreted autonomously under EU law. However, the ECJ not only confirms the relevance of the OECD MTC but also uses a dynamic approach for the interpretation. c) The AG stresses that without transposition of Article 5 of the IRD into the domes-tic law, the MS cannot rely on it to deny directive benefits. On the contrary, the ECJ sets the general prin-ciple of prohibition of abuse of rights which allows the MS to fight abuse without transposition of the di-rective provisions into national law.

Furthermore, in chapter 3, the key findings are that the ECJ has conducted measures including grammat-ical, purposive and historical methods to reach its conclusion concerning the interpretation of the BO in the IRD. However, why it prefers an “economic reality” meaning seems ambiguous and its historical inter-pretation also seems not quite clear and convincing. It can be observed that the ECJ is intended to define the BO by looking for interpretative aids beyond borders and has the tendency to refer to international tax practices. After detailed analysis through systematic, historical, literal and teleological interpretation meth-ods, the author finds the OECD MTC and its Commentary are relevant for interpreting the BO in the IRD. Besides, the AG thinks the “dividend recipient” in the PSD should not be read as “beneficial owner” used in the IRD, but the ECJ seems taking the opposite approach. However, even the French Council follows the ECJ’s approach to this aspect, lots of scholars hold the view that this is incorrect. And another recent case ruled by the Swiss Federal Court doesn’t fully follow the guidance of the ECJ, instead of interpreting the “right to use” as a standalone condition to deny benefits, it stresses more on the abusive practice of the taxpayer.

Additionally, chapter 4 highlights that the abuse of rights and the BO are distinct on the one hand, these two definitions have an overlap under the situation where the receiver of the interest payments is benefi-cial owner whilst the whole arrangement is abusive on the other hand. The ECJ’s decision on the principle of prohibition of abuse of rights overruled the Kofoed doctrine and subsequently brings the issues of legal certainty, the effectiveness of the anti-abuse provisions in the IRD and elimination of the GAAR type pro-visions in the direct tax directives such as the one in the PSD. Further, the ECJ’s guidance on the fea-tures of the artificially interposed conduit companies which is relatively rough but much stricter. However, the precise meaning of “insignificant profit” of the conduit company, “simultaneity” and “closeness” in time need to be further clarified.

Last but not least, the main findings in chapter 5 are that there are still six of the EU MS which are not members of the OECD at the moment, and it will be unfair and lack of democracy for these countries to directly rely on the OECD MTCs and the Commentaries. And in order to provide more legal certainty and unify the BO definition in the Community which could promote the effectiveness of the Directive, a refined definition of the BO could be introduced to amend the IRD in the future. The author also finds another option suggested by some scholars is to delete the BO concept and introduce a GAAR in the IRD.

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1. Introduction

1.1. Background

As stated in the preamble of the Interest and Royalty Directive (2003/49) (IRD), due to economic inte-gration, in the European Union (EU) Single Market, the tax system cannot treat transactions between enterprises in common market less favourable than when they choose to trade in the same Member State (MS).1 As an important tax on capital, taxation on interest and royalty payments should be free from double taxation in order to promote and realize the free movement of capital in the Single Market, which is in line with Article 63 of the Treaty on the Functioning of European Union (TFEU):

(1) “Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.” (2) “Within the framework of the provisions set out in this Chapter, all restrictions on payments be-tween Member States and bebe-tween Member States and third countries shall be prohibited.”2

In order to solve the potential double taxation caused by lack of bilateral or multilateral agreements within MS and avoid administration burden as well as cash-flow issues of companies,3 further to real-ize the harmonization of taxation on interest and royalty payments among MS, the Interest and Royal-ty Directive (2003/49) was issued on 3rd July 2003. However, the beneficial owner (BO) concept identi-fied in paragraphs 4 and 5 of Article 1 doesn’t have a clear meaning and definition. According to the report of EU Council, the definition and criteria for identification of beneficial owner are quite different among MS where some MS use the definition in Article 1(4) with modifications, some just rely on do-mestic law concept, etc. This leads to a situation where the criteria in one MS is not recognized in another MS, correspondingly result in different treatments to reliefs for companies, which may do harm to interests of both taxpayers and MS.4 What’s more, this is also one of the obstacles for the applica-tion of the EU law in a uniform level.

The abovementioned issue was faced by the High Court of Eastern Denmark, taking into account other difficulties on the interpretation related to the beneficial owner and anti-abuse provisions, the Court brought those questions before the European Court of Justice (ECJ) seeking for a preliminary ruling and a clear answer. The joint cases (the so-called “Danish Beneficial Ownership Cases”) includ-ing two cases regardinclud-ing the Parent-Subsidiary Directive (2011/96) (PSD)5 which are Skatteministeriet v. T Danmark (C-116/16) and Skatteministeriet v. Y Denmark (C-117/16)6 as well as another four cas-es concerning the Intercas-est and Royalty Directive (2003/49) which are N Luxembourg I v. Skatteminis-teriet 115/16), X Denmark A/S v. SkatteminisSkatteminis-teriet 118/16), C Danmark I v. SkatteminisSkatteminis-teriet (C-119/16) and Z Denmark v. Skatteministeriet (C-299/16)7. The ECJ made decisions in 2019 on collec-1 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and

royalty payments made between associated companies of different Member States, OJ L157 (2003), EU law IBFD, preamble consideration 1.

2 Treaty on the Functioning of the European Union, OJ C 115 (2008), Article 63, EU law IBFD.

3 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and

royalty payments made between associated companies of different Member States, OJ L157 (2003), EU law IBFD, preamble consideration 2.

4 Report from the Commission to the Council in Accordance with Article 8 of Council Directive 2003/49/EC on a

Common System of Taxation Applicable to Interest and Royalty Payments Made between Associated Companies of Different Member States, COM (2009) 179 final, Commission of the European Communities, pp.3-4. See at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009DC0179&from=HR.

5 Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case

of parent companies and subsidiaries of different Member States, OJ L 345 (2011), EU law IBFD.

6 DK: ECJ, 26 Feb. 2019, Joined Cases C-116/16 and C-117/16, Skatteministeriet v. T Danmark, Case Law

IBFD.

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tive cases and explained it clearly that the BO concept in the OECD Model Tax Convention and Commentary (the OECD MTC) is relevant to the interpretation of the BO definition in the EU law. The decision made by the ECJ about EU law interpretation is quite unusual and beyond expectation, this will be not only a great significance to EU law interpretation but also to tax sovereignty of the MS as well as interests of EU and non-EU taxpayers, therefore, the potential impact it may have is worth thinking deeply about.

In addition, EU case law occupies a very important position in the EU law and is mainly developed by the ECJ which has the highest level of interpretation on the EU law in order to make sure that all the MS observe and interpret EU law without differentiations.8 Thus, the judgment made by the ECJ on “Danish Beneficial Ownership Cases” will form a crucial precedent constraint in the future, affecting the determination of tax benefits for cross-border interest and royalty payments. Undoubtedly, the impact of the decisions is considerable for EU and non-EU companies as well as the Member States. On the one hand, it may provide more legal certainty to protect taxpayers’ rights, but also comes up with challenges for non-EU companies that have an organization structure of holding companies or intermediaries in the EU Member States. On the other hand, it provides guidance on anti-abuse provi-sions which is beneficial for MS to protect taxing rights and tax revenue, however, the lack of specific instructions and steps may also cause problems of legal uncertainty.

Keeping in mind earlier points, decision of the ECJ on the interpretation of the BO concept in the IRD is pretty unusual which makes reference of the OECD MTC. It should be noted that the EU law is an independent legal system and it is self-citation9, therefore its interpretation should not rely on any other documents which are not in the scope of EU law system, particularly, the OECD MTC is not legal doc-uments and binding any MS. Furthermore, the member states of OECD and EU are not the completely same countries, by reference of the OECD MTC to interpret EU concept may constitute discrimination or side effect for the non-OECD EU Member States because in this way the OECD countries may have an influence on interpretation of EU Directives10. Thus, here comes to a question that should the OECD MTC be relevant for the interpretation of the BO concept in EU Directives? This is also one of the research questions containing in this paper. If the answer to the above question is affirmative, there could be an impact on the application of the BO concept and the relationship between the OECD MTC and EU Directives. Furthermore, the definition of BO is kind of anti-abuse provision which entitles tax benefits only to the payments made to beneficial owner in the OECD MTC, so now the relationship between the BO concept in the IRD and the anti-abuse provisions such as the General Anti-Abuse Rule (GAAR) in the EU law and potential impact of ECJ’s decisions are also worthy of thinking.

Understanding the importance and impact of ECJ’s decisions, for answering the research questions raised, this thesis is going to scrutinize reliance of the ECJ and MS on the OECD MTC when interpret-ing the BO requirement in the IRD in order to assess any need for amendment. In addition to this, it will also analyse the potential impact on the relationship between the BO concept and anti-abuse rules in the EU law.

1.2. Motivation and Objectives

The motivation behind this thesis starts from the case study of a series of “Danish Beneficial Owner-ship Cases” which are the latest and very important cases ruled by the ECJ regarding the

interpreta-Others v. Skatteministeriet, Case Law IBFD.

8 https://e-justice.europa.eu/content_eu_case_law-12-en.do.

9 Hannes Rösler, ‘‘Interpretation of EU Law’, in J. Basedow, K. J. Hopt, & R. Zimmermann (eds.), The Max

Planck Encyclopaedia of European Private Law (Oxford: Oxford University Press, 2012), p.979.

10 Opinion of Advocate General Kokott delivered on 1 March 2018 Case C-115/16 N Luxembourg 1 v

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tion of the beneficial owner and anti-abuse provisions in the scope of the EU law. In a study of those cases, it is important to have a comprehensive understanding of the opinions of Advocate General (AG) and decisions of the ECJ. The ECJ’s decisions are of great importance for the interpretation of EU Directives, have brought a lot of academic discussions which are quite interesting. Besides, the potential impact it has is also considerable for companies outside the EU to arrange an investment structure through the EU Member States. Therefore, researching on the relevance of the OECD MTC on the interpretation of EU law definition, the influences it may have on the IRD and relationship of the BO and anti-abuse rules like the GAAR is important which links these topics in a systematic way. The main objective of the paper is to analyse the potential impact on ECJ’s decisions that makes ref-erence to the OECD MTC to interpret beneficial owner in the Interest and Royalty Directive (2003/49). The sub-objectives of the thesis are as follows: question and answer whether the OECD MTC and its Commentary are relevant for interpreting the BO concept in the EU law; if the answer is yes, study on the question that should only the OECD Model and Commentary as it stood when the IRD was adopt-ed be relevant or also the subsequent amendments of the Commentary must be taken into account; analyse and think should we read in the BO condition in the PSD; consider the relation of the BO and abuse of rights; therefore, analyse and discuss could there be new amendments of a new definition of the BO in the IRD in this regard or delete the BO requirement and introduce a General Anti-Abuse Rules (GAAR) in the IRD.

1.3. Research questions

The main research question that is going to be addressed in this study is:

What will be the potential impact of the OECD Model and Commentary on the interpretation of the beneficial ownership concept in the field of Interest and Royalty Directive (2003/49)?

And the sub-questions of this thesis will be as following:

- Is the OECD Model and Commentary relevant for interpreting the EU law definition bene-ficial owner?

- Which sources should be used as aids for interpretation? - Should we read in the BO requirement in the PSD?

- What is the relationship between the beneficial owner requirement and the abuse of rights?

- Will there be new amendments of the EU Directive in the future?

- Should we use the interpretation from the OECD Model and Commentary or introduce a completely new definition into the IRD of the BO? Or should we delete the BO concept and introduce a GAAR in the IRD?

1.4. Delimitation of the study

This thesis starts from an analysis of beneficial owner issues in the joint Danish cases which only fo-cuses on specific related cases containing opinions of Advocate General and decisions of the Europe-an Court of Justice. The concepts covered in this research are under the EU law or the OECD Model Convention and Commentary. What’s more, analysis in this paper is based on the EU treaties and directives, official documents of the OECD and current literature specialized in this area.

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1.5. Research methodology

The main aim of this paper is to critique reliance of the European Court of Justice and Member States on the OECD MTC when interpreting beneficial owner requirement in the IRD in order to assess the need for further amendments. Therefore, in order to conduct qualitative research and provide answers to the research questions listed above, I have collected and went through various sources of bibliog-raphy related to the topic including official documents such as the Interest and Royalty Directive (2003/49), Parent-Subsidiary Directive (2011/96), Anti-tax Avoidance Directive (2016) and the OECD Model Tax Convention and Commentary (1977, 1996, 2003, 2014, 2017). Further, this thesis is also based on findings and analysis from books, articles, other academic researches and lectures that are relevant. Additionally, an introduction of a case study of joint Danish cases contains opinions of Advo-cate General Kokott and decisions made by the ECJ as well as other case laws regarding the interpre-tation of EU law definitions and anti-abuse provisions.

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2. The Danish beneficial ownership cases

The whole analysis and research of this thesis will then begin with an introduction of the Danish bene-ficial ownership cases in this chapter which is important for understanding the topic and research questions. The first section briefly describes the content of the cases and picks up a representative case N Luxembourg I v. Skatteministeriet (C115-16) for a detailed analysis that is necessary to under-stand and relevant to research questions. The second part of this chapter consists of comparison and analysis of opinions from the AG and decisions of the ECJ. The third section mainly reviews and summarizes different views of previous researches, in the meanwhile points out the remaining issues related to this study that are not solved, following with a short summary on findings of this chapter.

2.1. Introduction of the joint Danish cases

From the mid-2000s, numerous capital funds or partnerships in the third countries (non-EU countries) have acquired or established companies in Denmark. At the same time, there has always been an EU parent company established and held by those third-country parties in another MS such as Luxemburg, Sweden and Cyprus) in between the funds or partnerships and the Danish companies. By means of this structure and a series of financing transactions, the interest or dividends payments from Danish companies pass the middle EU parent company, finally fill in the pockets of investors of third-country funds or partnerships. Through this structure and transactions involved, the corporate income tax paid in Denmark has been significantly reduced, however, this also drew the attention of Danish tax author-ity which conducted investigation later. After being presented in Danish Court, the Court found itself was faced with many issues that made it very difficult and unclear to come up with a decision, thus they brought the cases and problems to the ECJ asking for answers. Finally, on 26 February 2019, the ECJ issued two decisions on “interest cases” and “dividend cases” respectively, however, the discus-sions and debates on related topics have never been stopped.

Following a brief introduction of the joint Danish cases in the first chapter, we have noticed that the six cases brought before the ECJ including four cases in respect of interest payments and another two concerning dividend payments. The following section will conduct a discussion with a representative interest payments case C115-16.

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The capital funds located in the third state outside EU, and have set up N Denmark, C Luxembourg and A Luxembourg Holding in respective countries with the aim of purchasing the company T Den-mark. Within this structure, A Luxembourg was the EU parent company. This acquisition was financed by a special type of convertible loan (preferred equity certificates, PECs) granted by the funds directly to N Denmark. N Denmark used the money to purchase around 80% of the share capital of T Den-mark, at the same time, it also had to pay corresponding interests generated by the convertible loan to the funds.11

In April 2006, the funds transferred the loans to A Luxembourg Holding and immediately on the same day later, transferred them to C Luxembourg. Along with a series of transactions, interest-bearing loan contracts have been signed with similar interest rate. Therefore, N Denmark made interest payments on the loan to C Luxembourg, and then C Luxembourg to A Luxembourg, finally to the funds in the third country. It’s clear under the arrangement, interests paid by N Denmark went through C Luxem-bourg and A LuxemLuxem-bourg Holding to the funds.12

Because N Denmark, C Luxembourg and A Luxembourg are set up within the EU Member States which are Denmark and Luxembourg, the Interest and Royalty Directive (2003/49) that requires an abolition of source taxation on interest and royalty payments is applicable provided certain require-ments are met such as the beneficial owner requirement. In addition to this, the Article 11(1) of double taxation convention between Luxembourg and Denmark indicates no source taxation on interest pay-ments provided beneficial owner condition is met.13 It should also be noted that the residence state of investors signed the tax treaty with Denmark and treats the funds as transparent.

2.1.2. Questions raised by the Danish Court

The High Court of Eastern Denmark came up with several questions for the ECJ, those are related in the context of this thesis include14:

1) According to Article 1(1), Article 1(4) and Article 3 of the IRD, in the context of this case, is the C Luxembourg be interpreted as a beneficial owner?

2) Is beneficial owner concept in Article 11 of the OECD 1977 Model Tax Convention relevant for interpreting this concept in IRD?

3) If the OECD MTC is relevant, should the interpretation be limited only in the OECD Model Tax Convention 1977 version, or should the interpretation use a dynamic approach to incorporate later amendments in 2003 regarding “conduit companies” and in 2014 regarding “contractual or legal obligations”?

4) Is the beneficial owner requirement in tax treaties entered into by two MS an agreement-based provision for the prevention of fraud or abuse under Article 5 of the IRD?

5) If it is necessary for MS to rely on Article 5 of the IRD to implement domestic anti-abuse provi-sions and can domestic general anti-abuse rules be interpreted in accordance with Article 5 of the IRD?

It is clear that the focus of these questions first is the interpretation of the beneficial owner concept under the IRD and relevance of the OECD MTC with its later amendments. Second is the application of the beneficial owner requirement as an anti-abuse provision under the IRD and the implementation 11 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraphs 30-33.

12 Ibid., paragraphs 34-40. 13 Ibid., paragraphs 16-18. 14 Ibid., paragraph 45.

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of the general anti-abuse rule of the EU law when the Member States don’t have corresponding rules to fight against fraud and abuse.

2.2. Opinions from the Advocate General

Advocate General Kokott has issued her opinions separately on each referring case, considering the beneficial owner requirement is not introduced in the dividend cases regarding the PSD, she doesn’t mention issues in respective of beneficial owner concept in those cases. Except for the interpretation of the beneficial owner concept, her conclusions on other questions such as anti-abuse rules are sub-stantially the same. Under this section, the author will mainly analyse findings of the AG in the context of the abovementioned case that are related to the topic of this thesis.

2.2.1. The concept of the beneficial owner under the IRD

Firstly, only the interest recipient could be the beneficial owner. The beneficial owner should be a per-son with a civil-law claim to the interest in his own name.15 That means if the person has the right to demand payments of interest in a loan contract under civil law, it can be regarded as the beneficial owner in the context of the IRD. The AG also mentioned related interpretation in previous case law Scheuten Solar Technology (C-397/09) to display her view.

Secondly, in line with Article 1(4) of the IRD, intermediaries such as agent, trustee or authorised signa-tory who receives payments for some other person’s benefit instead of themselves cannot be qualified as a beneficial owner. In other words, the beneficial owner is the person who has right to claim interest payments and at the same time for its own benefit.16

In a nutshell, the first condition that a person with a civil-law claim comes from interpretation in case law17 which hasn’t been written in the context of the IRD and the second one is explicitly given in Arti-cle 1(4) of the IRD, therefore the opinions are quite reasonable and in line with EU law interpretation on this respect. When it comes to the facts of this case, it will be the question that if C Luxembourg or further A Luxembourg Holding qualified as a beneficial owner. In fact, after those financial transactions, it is C Luxembourg who owns PECs and has right to collect interest payments arising from PECs, but whether for its own benefit or for some other person’s benefit needs to be clarified, thus the third point comes.

Thirdly, a factual test of “hidden trust”. AG gave her opinions and guidance on whether there is a trust behind financial transactions which qualifies the trustor (the funds in third states or A Luxembourg) as beneficial rather than trustee (C Luxembourg). According to her view, a refinancing agreement with a third party involving similar terms and at a similar time doesn’t matter, even there is a special relation-ship between these parties like the parties in this case will not affect the identification of a hiding trust and beneficial owner.18 This seems beneficial and fair for taxpayers to some extent from the author’s perspective, because there could be some business, strategy or financing reasons to conclude these agreements or arrange such group structure. However, what really matters is first, the equal refinanc-ing interest rate and receivrefinanc-ing interest rate in the respective contract. Second, the interests paid by Luxembourg companies were not met out of interests received, and the interest had to be passed alone or in full. Third, the default risk is borne solely by capital funds rather than Luxembourg compa-15 Opinion of Advocate General Kokott delivered on 1 March 2018 Case C-115/16 N Luxembourg 1 v

Skatteministeriet. EU:C:2018:143, paragraph 37.

16 Ibid., paragraph 38.

17 Scheuten Solar Technology (C-397/09), EU:C:2011:499, paragraph 27.

18 Opinion of Advocate General Kokott delivered on 1 March 2018 Case C-115/16 N Luxembourg 1 v

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nies.19 In the author’s view, the first criteria may be easy to check and find by looking at the contracts between parties. But the second and the third one are not very easy or practical to prove, since com-panies may convert or use some reasonable business or financing transactions to eliminate the effects. 2.2.2. The relevance of the OECD MTC to interpret the beneficial owner in the EU law

AG didn’t give much detailed and comprehensive analysis or discussions on this issue. On the one hand, she emphasized the OECD MTCs are not legally binding and just recommendations to its mem-ber states. The OECD Model Commentaries and amendments could not have a direct effect on the interpretation of EU Directive even provisions are the same, because this may result in influences from the OECD to EU legislation. On the other hand, she also confirmed from several case laws that it could be appropriated for the MS to use guidance from international tax practice reflected in commen-taries of the OECD MTC. What’s more, the OECD MTC could have some interpretative value in the EU law only when the directive at issue got guidance or inspirations from the OECD MTC that is avail-able at the time in both history and wording. In her conclusion, the OECD MTC is not relevant for in-terpretation of the beneficial owner concept in the IRD, instead, it must be interpreted autonomously under the EU law.20

Obviously, the AG has some contradictory of her views on this issue and didn’t give a deeper analysis. Although she acknowledges that the OECD MTC itself does have interpretative value on the EU law provided the respective directive (in this context should be IRD) was guided by the OECD MTC in history and wording. She didn’t conduct a further discussion on the history and wording of the IRD and didn’t specify how the specific wording or concepts drafted in the directive were influenced by the OECD MTC. For instance, in EU Commission’s proposal on the IRD (1998) 67 final, it was explicitly written that definitions of the terms “interest” and “royalties” were based on Article 11 and Article 12 respectively in the 1996 OECD MTC.21 In this context, the OECD MTC must be relevant for interpreta-tion of EU law definiinterpreta-tions. However, AG simply came to the conclusion that the OECD MTC or its sub-sequent amendments are irrelevant given the reason that OECD countries may alter the interpretation of EU law if they are relevant, which is less reasonable and need to be discussed more from the au-thor’s perspective.

2.2.3. Reliance on Article 5 of the IRD

Regarding the reliance on Article 5 of the IRD, the AG holds the view that the Member States could not directly rely on Article 5 of the IRD to deny tax benefits entitled to taxpayers if such provisions are not transposed into domestic law of a MS. However, the general anti-abuse rules and principle that abusive practices should not must be tolerated in domestic law can be applied under Article 5 of the IRD. While in Danish cases mentioned before, there are no specific rules transposing Article 5 of the IRD or general anti-abuse rules in Danish domestic law.22 That means the Danish tax authority cannot deny tax relief that taxpayers claimed. This is a reasonable conclusion since the EU Directive doesn’t have a vertical direct effect, without transposing the provisions of directives into domestic law, MS cannot do harm to the benefits of taxpayers due to their own mistakes.

What’s more, the AG also confirmed the general principle of the EU law that abuse of rights is prohib-ited could not be directly relied on. The reasons she provided are first, the content of this general prin-ciple is not clear without a precise meaning. Second, directly relying on it would undermine the har-19 Ibid., paragraph 45.

20 Ibid., paragraphs 49-55.

21 Commission of the European Communities, Proposal for a Council Directive on a common system of taxation

applicable to interest and royalty payments made between assocaited companies of different Member States, COM (1998) 67 final, OJ C 123, p.6.

22 Opinion of Advocate General Kokott delivered on 1 March 2018 Case C-115/16 N Luxembourg 1 v

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monization objective of the IRD and other directives which have specific anti-abuse rules such as Anti-Tax Avoidance Directive (2016/1164) (ATAD).23 Besides, the AG also stated that although previous VAT case laws allowed the Member States to rely on the general principle to fight abuse, it is not the same situation in Danish cases because these cases are related to direct tax not VAT. The author also agrees on reasons given by the AG that direct reliance on the general principle of the EU law may cause numerous problems which lead to legal uncertainty, coordination problems between general principle and existing directives. But what if this unwritten principle is developed much clearer and has a definite meaning in the future, or the ECJ gives clear guidance on its application without too many doubts and uncertainty, maybe we will change our mind that the general principle is also directly relia-ble.

2.3. Decisions of the European Court of Justice

Turning to the discussion of decisions of the ECJ, it is obvious that the ECJ has totally different or opposite view regarding issues mentioned in the previous section, even though the ECJ has also made reference to EU case laws, articles in the IRD and the OECD MTC. Since the ECJ has the high-est level of interpretation of the EU law and the EU case law decided by the ECJ will form a significant precedent effect, the decisions of the ECJ on joint Danish cases will promote great development in the field of interpretation of the beneficial owner concept and application of anti-abuse provisions under the EU law. The following sub-sections will focus on certain issues concerning the research questions of the paper and are corresponding to the opinions of the AG.

2.3.1. The concept of the beneficial owner under the IRD

First of all, the ECJ makes it clear that the MS domestic law is irrelevant for the interpretation of the BO concept in the scope of the IRD since many MS have their own definition of beneficial owner in domestic law which indicates different meaning from country to country, while other MS do not have this concept in their domestic law.24

What’s more, the ECJ emphasizes that a beneficial owner of the interest payments should be the one who actually benefits from the received interests, which is in line with Article 1(4) of the IRD as an economic reality. Further, after comparing different expressions of the beneficial owner concept in various countries, it comes to a conclusion that the beneficial owner means the entity which is an eco-nomic beneficiary of the interest payments that therefore under the disposal of the entity.25

It should be noted that the ECJ pays more attention to the economic reality and stresses the beneficial owner should not be determined by its form. And it doesn’t mention “the person with civil-law claim” which is the focus of the AG. However, the ECJ doesn’t provide enough reasons for using economic reality as criteria to identify a beneficial owner.

2.3.2. The relevance of the OECD MTC to interpret the beneficial owner in the EU law

ECJ has confirmed in its decision that the OECD MTC and its subsequent amendments in 2003 and 2014 are relevant for the interpretation of the BO in the IRD. To reach such a conclusion, the ECJ has mentioned the history of the IRD. As the basis of the IRD, EU Commission’s proposal on the IRD (1998) 67 final incorporated definitions and guidance of Article 11 of the OECD MTC 1996. The ECJ also states that the tax relief entitled by the IRD is still applicable even the interest recipient in a Mem-ber State who is not the beneficial owner, provided the recipient transfers the interest to the beneficial 23 Ibid., paragraph 104.

24 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraphs 84 and 89. 25 Ibid., paragraph 89.

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owner who qualifies all the conditions laid down by the IRD,26 which is in accordance with the OECD MTC (2017).27

From an analysis of the ECJ, it indicates that the ECJ doesn’t put much effort on explaining the rela-tionship between the OECD MTC and the IRD, also hasn’t given a clear reason why a dynamic ap-proach should be taken to tackle with the problem of interpretation of the BO. From an understanding of the author, the OECD MTC is relevant for interpretation of some definitions in the IRD according to EU Commission’s proposal on IRD (1998) 67 final such as the definitions of “interest” and “royalties”, but the proposal doesn’t state explicitly that the beneficial owner concept is also in line with the OECD MTC. The ECJ just refers to the proposal but doesn’t provide any further discussion on how the guid-ance from the OECD MTC regarding the beneficial owner is reflected in the IRD. Thus, there is a question that, if such guidance or inspiration could not be found, it may be inappropriate to say the OECD MTC is relevant.

2.3.3. Reliance on Article 5 of the IRD

Firstly, the ECJ emphasizes with a series of settled EU case laws28 that “there is a general legal prin-ciple that EU law cannot be relied on for abusive or fraudulent ends”.29 Individuals must comply with this general principle and the application of EU legislation cannot cover transactions with the aim to obtain benefits provided by EU law via wrong or fraud ways.30

Further, from this general principle, MS must (emphasis added) deny benefits provided by the EU law provisions when they are used to obtain benefits instead of realizing the objectives of the rules, even the formal conditions for getting the advantages are met.31 To illustrate its view, the ECJ makes refer-ence to EU case laws on different aspects that are not direct tax area including completion of customs formalities,32 free movement of goods,33 freedom to provide services,34 public service contract,35 free movement of establishment,36 company law,37 social security,38 and value-added tax (VAT)39, etc.

26 Ibid., paragraphs 90-94.

27 CFE ECJ Task Force, ‘Confédération Fiscale Européenne - Opinion Statement ECJ-TF 2/2019 on the ECJ

Decisions of 26 February 2019 in N Luxembourg I et Al. (Joined Cases 115/16, 118/16, 119/16 and C-299/16) and T Danmark et Al. (Joined Cases C-116/16 and C-117/17), concerning the “Beneficial Ownership” requirement and the Anti-Abuse Principle in the company tax Directives’, 59 European Taxation 10 (2019), pp.487-502, at p.498, 500.

28 Judgments of 9 March 1999, Centros, C 212/97, EU:C:1999:126, paragraph 24 and the case-law cited; of 21

February 2006, Halifax and Others, C 255/02, EU:C:2006:121, paragraph 68; of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C 196/04, EU:C:2006:544, paragraph 35; of 22 November 2017, Cussens and Others, C 251/16, EU:C:2017:881, paragraph 27; and of 11 July 2018, Commission v Belgium, C 356/15, EU:C:2018:555, paragraph 99.

29 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraph 96.

30 Ibid., paragraph 97. Judgments of 5 July 2007, Kofoed, C 321/05, EU:C:2007:408, paragraph 38; of 22

November 2017, Cussens and Others, C 251/16, EU:C:2017:881, paragraph 27; and of 11 July 2018, Commission v Belgium, C 356/15, EU:C:2018:555, paragraph 99.

31 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraph 98.

32 Judgments of 27 October 1981, Schumacher and Others, 250/80, EU:C:1981:246, paragraph 16, and of 3

March 1993, General Milk Products, C 8/92, EU:C:1993:82, paragraph 21) or export refunds (see, to that effect, judgment of 14 December 2000, Emsland-Stärke, C 110/99, EU:C:2000:695, paragraph 59.

33 Judgment of 10 January 1985, Association des Centres distributeurs Leclerc and Thouars Distribution,

229/83, EU:C:1985:1, paragraph 27.

34 Judgment of 3 February 1993, Veronica Omroep Organisatie, C 148/91, EU:C:1993:45, paragraph 13. 35 Judgment of 11 December 2014, Azienda sanitaria locale n. 5 ‘Spezzino’ and Others, C 113/13,

EU:C:2014:2440, paragraph 62.

36 Judgment of 9 March 1999, Centros, C 212/97, EU:C:1999:126, paragraph 24. 37 Judgment of 23 March 2000, Diamantis, C 373/97, EU:C:2000:150, paragraph 33.

38 Judgments of 2 May 1996, Paletta, C 206/94, EU:C:1996:182, paragraph 24; of 6 February 2018, Altun and

Others, C 359/16, EU:C:2018:63, paragraph 48; and of 11 July 2018, Commission v Belgium, C 356/15, EU:C:2018:555, paragraph 99.

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Therefore, the ECJ comes to a conclusion that this general principle that abusive practices are prohib-ited can be directly relied on by MS even though the provisions in Article 5(1) and (2) of the IRD have not been transposed into their domestic law, since there is no need to transpose the general principle into domestic law of application.40 On the one hand, the ECJ states that “to permit the setting up of financial arrangements whose sole aim is to benefit from the tax advantages resulting from the appli-cation of Directive 2003/49 would not be consistent with such objectives and, on the contrary, would undermine economic cohesion and the effective functioning of the internal market by distorting the conditions of competition.”41 On the other hand, it also spots that the right of taxpayers to pursue a most favourable tax regime in the EU cannot be raised against the general principle if the arrangement is purely artificial economically and aimed at in violation of the legislation of that Member State.42 Although the ECJ has confirmed again that there is a general principle in the EU law that abusive practices are prohibited, it didn’t reply the arguments from the AG that the general principle is not clear and precise enough, and the conclusion from VAT case is not consistent with the situation here in the context of Danish cases.

2.4. Comparison and summary

In the first place, regarding the concept of beneficial owner under the IRD, the AG mentioned more about “person with civil-law claim” and made key emphasis on it while the ECJ paid more attention to the “economic reality” of the beneficial owner. In the view of the AG, if the person has civil-law claim on the interest payments, it can be regarded as a beneficial owner in principle. Although the AG also considered about economic reality, her analysis mainly started from the point that the beneficial owner is a legal form that used to distinguish from an agent, trustee or authorised signatory. When analysing “for its own benefit” and “freely dispose of”, in fact, her suggestion to apply a test for finding whether there is a “hiding trust” according to the Article 1(4) of the IRD, which mainly focuses on the existence of a trustee. Thus, it can be seen that the AG preferred the beneficial owner to be a legal concept. In contrast, the ECJ even didn’t mention the “person with civil-law claim”, it stressed the beneficial owner should be the one who actually economically benefits from the interest payments.

In the second place, the AG and ECJ presented opposite conclusions on the relevance of the OECD MTC for interpreting the BO concept in the IRD. The AG held the view that EU law definition, in this context is the BO, should be interpreted autonomously and independently from the OECD MTC, alt-hough she mentioned the OECD MTC is relevant to interpret EU law definitions under some circum-stances. On the contrary, the ECJ has confirmed that the OECD MTC and its subsequent versions should be related because the IRD was drafted on the basis of Article 11 and 12 of the OECD MTC 1996.

Last but not least, when it comes to the question that whether the MS could rely on the general princi-ple of the EU law that prohibits abusive activities when there is no imprinci-plementation of Article 5 of the IRD in their domestic law, the differences also show between the AG and ECJ. From the side of the AG, Article 5 cannot be directly relied on by MS if it is not transposed into its domestic law, the general principle that prohibits abusive practices cannot be directly relied on either, due to its unclearness and harm for harmonization of objectives of other directives. From the perspective of the ECJ, it confirmed the significant importance of the general principle saying that it could be directly relied on if the MS haven’t implemented provisions of the directive in their domestic law. And this is not an option but an obligation.

40 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraphs 104-105. 41 Ibid., paragraph 107.

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Above all, the AG and ECJ have rational reasons on each issue to support their arguments, but some points are not under a deeper discussion or analysis, such as the contrary wording of the AG on the discussion of relevance of the OECD MTC and unclear analysis of the ECJ on the history of the IRD. Since the opinions of the AG and decisions of the ECJ are the most important sources, the rest parts of this thesis will mainly base on these sources and other literature focuses on this research.

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3. Interpretation of the BO in the Interest and Royalty Directive (2003/49)

This chapter focuses on the interpretation issues of the beneficial owner concept in the field of the Interest and Royalty Directive (2003/49) (IRD), it will start with a review of general sources and meth-ods used to interpret EU law definition to identify possible sources that could be used for interpretation of the BO in the IRD. The second part will give a brief description of the content and history of the IRD regarding the BO and anti-avoidance provisions that are topics of this thesis, which will be useful to understanding the relationship between the IRD and the OECD MTC. Next section will touch the bene-ficial owner concept in the field of the IRD, question the decisions of the ECJ and analyze the rele-vance of the OECD MTC for interpreting the BO in the IRD. The last part mainly talks about the issue that should we read the BO requirement implicitly in the PSD.

3.1. General sources and methods used to interpret the EU law definition

The judicial institution of EU is the Court of Justice of the European Union (CJEU) which consists of two courts: The Court of Justice and the General Court. One of the main objectives of the two courts is to make sure that EU law is interpreted and applied uniformly throughout all Member States.43 The ECJ is an independent and supranational court which is empowered supreme authority to interpret EU law.44

The main methods that the ECJ uses to interpret the EU law include the grammatical, systematic and purposive methods. The fourth historical-political approach, however, is rarely applied. This is because the legislative history published is usually complicated and not always complete. What’s more, it should be noted that the EU law often results from compromises. However, the EU legislature does list recitals which the ECJ employs in its purpose-oriented interpretation.45 For interpretation of EU law, instead of focusing exclusively on the wording of the legislations (linguistic interpretation), particular attention has been paid to the aim and purpose of EU law (teleological interpretation).46

3.1.1. Interpretation of primary law

The ECJ is ready to practice judicial activism regarding interpretation of primary law, which means judges could not only apply and interpret the EU law literally but also make contributions to further develop the law by exceeding the possible literal meaning (judge-made law).47 According to Article 19(1) of the Treaty on European Union (TEU) “The Court of Justice of the European Union shall in-clude the Court of Justice, the General Court and specialized courts. It shall ensure that in the inter-pretation and application of the Treaties the law is observed.”48 The judges of the ECJ play a role of developers of the EU law.

It should be noted that by way of practicing the judicial activism, the ECJ has developed several most important and fundamental legal principles that are not stated explicitly in treaties to consummate the literal primary law system, which include the primacy (ECJ Case 26/62–Van Gend & Loos [1963] ECR 3) and the direct effect of EU law (ECJ Case 6/64–Costa/E.N.E.L. [1964] ECR 1141). Further, the application of fundamental rights in the EU (ECJ Case 29/69–Stauder/Stadt Ulm [1969] ECR 419), the 43 https://curia.europa.eu/jcms/jcms/Jo2_7024/en/.

44 Hannes Rösler, ‘Interpretation of EU Law’, in J. Basedow, K. J. Hopt, & R. Zimmermann (Eds.), The Max

Planck Encyclopaedia of European Private Law (Oxford: Oxford University Press, 2012), p.979.

45 Ibid.

46 Theodor Schilling, ‘Beyond Multilingualism: On Different Approaches to the Handling of Diverging Language

Versions of a Community Law’ 16 European Law Journal 1 (2010), pp.47-66, at p.60.

47 Rösler (n 44), p.980.

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specification of fundamental freedoms (ECJ Case 120/78–Cassis de Dijon [1979] ECR 649), etc.49 3.1.2. Interpretation of secondary law

In practice, the decisions of the ECJ may be sometimes difficult to predict even though there are simi-lar case laws. This is because when the ECJ practices judicial activism, it usually has to balance be-tween effet utile orientation and judicial restraint.50

When dealing with catch-all clauses, it is the ECJ to interpret the general conditions or criteria that are adopted in the directives, in the meanwhile leaving the actual tests or examination to the national courts of Member States. When it comes to implementation by over-compliance, in other words, when Member States transpose the directives into domestic law, there could be situations that it exceeds the minimum harmonization, or it expands the scope of the directives. To answer the question that whether or not to apply a divided interpretation, the ECJ has confirmed that in order to safeguard the interest of the EU, the terms should be interpreted consistently without divergences.51

3.2. The content of the Interest and Royalty Directive

The Council Directive (2003/49/EC) on a Common System of Taxation Applicable to Interest and Roy-alty Payments Made between Associated Companies of Different Member States (known as the Inter-est and Royalty Directive (2003/49)), it was adopted by the Council on 3 June 2003 and has applied since 26 June 2003. Further, it had to be brought into force the laws, regulations and administrative provisions in the EU Member States by 1 January 2004.52 It is one of the measures the EU took to promote and guarantee the internal market to function well without obstacles and the first method the EU adopted to eliminate juridical and economic double-taxation to achieve this goal is through the Parent-Subsidiary Directive (2011/96).53

3.2.1. The objectives of the Interest and Royalty Directive

As stated in the Preamble, the objective of the IRD is to make sure that the taxation on interest and royalty payments made between associated companies in different countries within the EU is not less favorable than within the same Member State, in the meanwhile, eliminating juridical double-taxation generated thereof.54 At the same time, making sure that those payments are taxed at least once in a Member State is necessary, allowing the Member States to take appropriate measures to fight against fraud and abuse. Furthermore, the interest and royalty payments of within a group made cross-border in the EU should not lead to burdensome administrative formalities and cash-flow disadvantages for companies concerned. Considering the objective of the Directive can only be achieved sufficiently or better at Community level rather than by the Member States, measures are taken by the Community are necessary.55

3.2.2. The content of the Interest and Royalty Directive

The Interest and Royalty Directive (2003/49) contains the Preamble and 11 Articles, the content re-garding the beneficial owner and anti-abuse rules are summarized as follows:

49 Rösler (n 44), p.980. 50 Ibid., p.981.

51 Ibid., pp.981-982.

52 Article 7, the Interest and Royalty Directive (2003/49).

53 Ben J.M. Terra and Peter J. Wattel, European Tax Law Volume I - General Topics and Direct Taxation

Student Edition (Alphen aan den Rijn: Wolters Kluwer, 2018), p.197.

54 https://eur-lex.europa.eu/legal-content/EN/LSU/?uri=CELEX:32003L0049. 55 Preamble, the Interest and Royalty Directive (2003/49).

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3.2.2.1. Definition of the beneficial owner

The definition of beneficial owner is provided in Article 1(4) and Article 1(5):

4. “A company of a Member State shall be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person.”56

5. “A permanent establishment shall be treated as the beneficial owner of interest or royalties: (a) if the debt-claim, right or use of information in respect of which interest or royalty

payments arise is effectively connected with that permanent establishment; and (b) if the interest or royalty payments represent income in respect of which that

perma-nent establishment is subject in the Member State in which it is situated to one of the taxes mentioned in Article 3(a)(iii) or in the case of Belgium to the ‘impôt des non-résidents/belasting der niet-verblijfhouqders’ or in the case of Spain to the ‘Impuesto sobre la Renta de no Residentes’ or to a tax which is identical or substantially similar and which is imposed after the date of entry into force of this Directive in addition to, or in place of, those existing taxes.”57

It is clear from the text above that the beneficial owner in the IRD doesn’t have a precisely defined meaning, instead, it indicates two certain types of entities that could be treated as a beneficial owner if they are qualified with several conditions.

1) Companies

The first type is concerning companies, the following conditions “a company of a Member State”, “re-ceives those payments for its own benefits” and “not as an intermediary” should be met as a qualified beneficial owner. “A company of a Member State” is defined in Article 3 of the IRD which is clear that the company should be resident in a Member State according to the tax laws of that state, and it is not the same meaning in the tax treaty concluded with a third state considering to be resident outside the Union. “Receives those payments for its own benefits” suggests that a company which receives the interest or royalty payments could be considered as a beneficial owner only when it economically ben-efits from those payments and has right to freely dispose it.58 “Not as an intermediary” consists the last but not least element, it follows a non-exhaustive list that excludes an agent, trustee or authorised signatory regardless it would be the owner legally. Further, it has been confirmed that the conduit company is out of the scope of beneficial owner under the IRD, and it must be understood not 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.59

2) Permanent Establishments (PEs)

The second type is regarding PEs. First of all, the PE should be within the definition of Article 3(c) that it is “a fixed place of business situated in a Member State through which the business of a company of another Member State is wholly or partly carried on.” Obviously, the PE and its head office company should be both in the Member State to enable the PE qualified as a beneficial owner. Secondly, the beneficial owner may be a PE if the debt-claim, right or use of information is included as assets in the books of the PE or if the asset concerned is otherwise connected with the PE.60 Finally, if a PE of a company of a Member State is treated as the beneficial owner, no other part of the company is treated

56 Article 1(4), ibid. 57 Article 1(5), ibid.

58 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraphs.88-89. 59 Ibid., paragraph 92.

60 Compare to para.31 of the Commentaries to Art.10 and para.24 of the Commentaries to Art.11 and para.20 of

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as a beneficial owner for the purpose of the IRD.61

On the one hand, since the BO concept has various interpretation and meaning in different Member States, its definition under the IRD doesn’t make reference to any domestic law meaning. On the other hand, historically speaking, due to the relationship between the IRD and the OECD MTC, the Com-mentaries of the OECD MTC could be used as sources for interpreting the BO in the IRD.62 Further-more, it is important to note that the BO requirement does not require that the direct recipient of a payment is necessarily the BO of the payment. If the payment is first made to a company that is not the BO, the BO requirement, however, is met if the BO is a qualifying company of a Member State or a qualifying permanent establishment in a Member State.63 This interpretation is in line with Commen-tary of the OECD MTC 2017.

3.2.2.2. The anti-avoidance provisions

The anti-abuse clause is settled by Article 5(1) and Article 5(2):

1. “This Directive shall not preclude the application of domestic or agreement-based provi-sions required for the prevention of fraud or abuse.”64

2. “Member States may, in the case of transactions for which the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this Directive or refuse to apply this Directive.”65

Article 5 of the IRD shows that it not only allows the Member States applying domestic or agreement-based legislations to prevent fraud or abuse, but also indicates that the Member States could withdraw the benefits of the IRD or refuse to apply the IRD when the principal or one of the principal motives of the transactions is tax evasion, tax avoidance or abuse.

However, the taxpayer must have the right to show the corresponding arrangement is settled for busi-ness or commercial reasons rather than tax advantages. Besides, the application of the anti-avoidance provision must also always follow the proportionality principle and should not go beyond what is necessary.

Above all, it is also important to note that any tax benefits entitled by the EU law could be denied ac-cording to the general principle of EU law that prohibits abusive practices irrespective of the anti-avoidance provision of the Directive, if there is similar fraud or abusive situations commerce. This general principle is applicable even if domestic law would not include an express provision allowing denial of the tax benefits.66

3.2.3. The history of the Interest and Royalty Directive

In order to remove barriers and promote the business activities, therefore the economy of the Single Market within the EU, the European Commission has settled guidelines on corporate taxation in the Communication on 20 April 1990.67 Thus, the Commission submitted its first “proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between 61 Article 1(6), the Interest and Royalty Directive (2003/49).

62 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraph 90. 63 Ibid., paragraph 94.

64 Article 5(1), the Interest and Royalty Directive (2003/49). 65 Article 5(2), ibid.

66 N Luxembourg I et al. (C-115/16, C-118/16, C-119/16 and C-299/16), paragraph 79.

67 Commission of the European Communities, Proposal for a Council Directive on a common system of taxation

applicable to interest and royalty payments made between assocaited companies of different Member States, COM (1998) 67 final, OJ C 123, p.2.

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