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TAX PLANNINGINTERNATIONALREVIEWInternational Information for International Business

www.bna.com

JUNE 2018

Austrian Anti-abuseLegislation and EULaw: CompatibilityIssues

Oliver R. HoorATOZ Tax Advisers (Taxand Luxembourg)

Dividends distributed by Austrian companies to EU parentcompanies may under certain conditions benefit from awithholding tax exemption. However, the application of thiswithholding tax exemption may be denied in accordance withAustrian anti-abuse legislation if the EU parent company does notcomply with certain substance requirements.

The EU Parent-Subsidiary Directive (‘‘PSD’’) restrictsEU member states in their right to levy withholdingtax on dividend payments to corporate shareholdersresident in other EU member states. The PSD hasbeen designed to eliminate tax obstacles in the area ofprofit distributions between groups of companies inthe EU by abolishing withholding taxes on paymentsof dividends between associated companies of differ-ent member states and preventing double taxation ofparent companies on the profits of their subsidiaries.

Many EU member states, including Austria, imple-mented severe anti-Directive shopping rules that dis-allow the application of the withholding tax

exemption on dividends if the parent company doesnot fulfil certain substance requirements. However,such anti-abuse legislation has to be consistent withEU Law as interpreted by the Court of Justice of theEuropean Union (‘‘CJEU’’).

In a decision of the CJEU of September 7, 2017, thecourt decided that a French anti-abuse provision(broadly similar to the principal purpose test (‘‘PPT’’)under the 2017 version of the OECD Model Tax Con-vention) aiming at denying the benefits providedunder the PSD was inconsistent with EU Law. On De-cember 20, 2017, the CJEU decided that German anti-abuse legislation targeting PSD and tax treaty

Oliver R. Hoor, TaxPartner, ATOZ TaxAdvisers (TaxandLuxembourg)

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shopping was incompatible with EU Law. Both deci-sions emphasize that in an EU context anti-abuse leg-islation has to be specifically targeted at ‘‘whollyartificial arrangements.’’ On this basis, it is possible toanalyze whether the Austrian anti-abuse legislation iscompatible with EU Law.

Applicable Austrian Tax Law

Dividends distributed by an Austrian company to aforeign parent company are generally subject to Aus-trian withholding tax at a rate of 25 percent (Section93 (1), (1a) of the Austrian Income Tax Law (‘‘AITL’’)).

However, dividends paid by an Austrian company toa parent company that is resident in an EU memberstate benefit from a tax exemption under the domesticimplementation of the PSD if the following conditionsare met (Section 94 No. 2 of the AITL):s the parent company has (directly or indirectly) a

participation of at least 10 percent in the share capi-tal of the Austrian company; and

s such minimum participation is held for an uninter-rupted period of at least one year.

In addition, the tax residency of the EU parent com-pany has to be evidenced through a tax residence cer-tificate that needs to be obtained from the taxauthorities of the residence state of the company nomore than 12 months before the moment of the distri-bution. So far, so good.

The application of the withholding tax exemptionmay, however, be denied in case of abusive directiveshopping. In this regard, Section 94 No. 2 of the AITLprovides that an Austrian company has to levy with-holding tax in case a foreign company does notcomply with certain substance requirements as speci-fied in an Austrian regulation (Section 2 of the Verord-nung des Bundesministers fur Finanzen zurEinbehaltung von Kapitalertragsteuer und deren Erstat-tung bei Mutter—und Tochtergesellschaften im Sinneder Mutter-Tochter-Richtlinie (StF: BGBl. Nr. 56/1995).These requirements are meant to complement theAustrian general anti-abuse rule according to whichan abuse of law may be challenged by the Austrian taxauthorities.

More precisely, the relevant Austrian regulationstates that an abuse of law within the meaning of Sec-tion 22 of the Austrian General Tax Code (Bundes-abgabenordnung) would be the fault of the payingAustrian company unless the latter can provide a writ-ten statement of the parent company in which the fol-lowing confirmations are made:s the parent company performs an activity that is not

limited to mere asset management;

s the parent company has its own employees;

s the parent company has its own premises.

In the absence of such written statement, the divi-dend withholding tax exemption will not be grantedand the parent company has to claim a refund in ac-cordance with the PSD. Otherwise, the Austrian com-pany may be jointly liable for the withholding taxowed by the parent company if the Austrian tax au-thorities can evidence abusive directive shopping.

On the surface, this only means that the methodol-ogy of how the benefits provided under the PSD aregranted shifts from the exemption method to a re-

claim process. However, the non-application of thewithholding tax exemption in accordance with thePSD and the shifting of the burden of proof onto thetaxpayer may already be problematic from an EU Lawperspective. Moreover, when examining the presenceof abuse in the refund process, the Austrian tax au-thorities adhere to the aforementioned substancestandard. Thus, in practice the Austrian tax authori-ties will deny the refund of withholding tax if theparent company does not meet all of these conditions.

Anti-abuse Legislation in an EU Context

Over the years, the CJEU has had to decide manycases related to the application of anti-abuse legisla-tion in an EU context. One major decision was theCadbury Schweppes case in 2006 (Case C-196/04:http://src.bna.com/yXQ) which firmly established the‘‘wholly artificial arrangement’’ doctrine, limiting thescope of anti-abuse legislation in an EU context. How-ever, over the last few years the question has beenraised by many as to whether the CJEU would, in to-day’s political environment, still be as restrictive as inthe past.

Then, in two landmark cases involving Germananti-abuse legislation (Cases C-504/16 and C-613/16,decision of December 20, 2017: http://src.bna.com/yXR; http://src.bna.com/yXS) and a PPT under Frenchtax law (Case C-6/16, decision of September 7, 2017:http://src.bna.com/yXT), the CJEU re-emphasized its‘‘wholly artificial arrangement’’ doctrine. In its deci-sions, the court analyzed the compatibility of anti-abuse legislation with the PSD and the freedom ofestablishment.

Considerations Regarding the Parent-SubsidiaryDirective

According to Article 5 (1) of the PSD, the distributionof profits by a company that is resident in an EUmember state to a parent company that is resident inanother EU member state should be exempt fromwithholding tax. This exemption is meant to avoiddouble taxation, to ensure tax neutrality and to facili-tate the grouping of companies at EU level.

Consequently, the PSD limits the sovereignty of EUmember states regarding the taxation of profits dis-tributed by resident companies to a parent companyresident in another member state. Further, memberstates are not free to unilaterally introduce restrictivemeasures that would subject the right to exemptionfrom withholding tax to various conditions.

Article 1 (2)–(4) of the PSD only allows memberstates to introduce domestic or agreement-based pro-visions required for the prevention of fraud and abuseprovided that these measures are appropriate and donot go beyond what is necessary to achieve that objec-tive. As an exception to the general rule laid down bythe PSD, such measures are subject to a strict inter-pretation.

Considerations Regarding Freedom of Establishment

All measures which prohibit, impede or render less at-tractive the exercise of the freedom of establishmentmust be considered to be restrictions on that freedom.Such restrictions are only permissible if they relate to

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situations which are not objectively comparable, or ifjustified by overriding reasons in the public interestrecognized by EU law.

In these circumstances, it is further necessary thatthe restriction is appropriate for ensuring the attain-ment of the objective that it pursues and that it doesnot go beyond what is necessary to achieve this.

The Wholly Artificial Arrangement Doctrine

According to the CJEU, the objective of combating taxevasion and avoidance, whether it relies on Article 1(2) of the PSD or is a justification for an exception toprimary law (i.e., the freedom of establishment), hasthe same scope. Therefore, anti-abuse provisions haveto be targeted measures aiming specifically at ‘‘whollyartificial arrangements’’ which do not reflect eco-nomic reality and the purpose of which is to undulyobtain a tax advantage.

Thus, tax authorities should not easily consider thepresence of fraud or abuse. Moreover, taxpayers arefree to rely on their EU freedoms when structuring in-vestments, and ‘‘tax jurisdiction shopping’’ is a legiti-mate activity in an internal market, even if the choiceof the jurisdiction is principally based on tax consid-erations.

It is, however, undisputed that member states arefree to protect their tax bases by way of anti-abuserules which are exclusively directed at wholly artificialarrangements. Nevertheless, when assessing the exis-tence of fraud and abuse, tax authorities may not relyon predetermined general criteria. Instead, tax au-thorities have to carry out an individual examinationof the whole operation at issue.

Analyzing the Substance of a Company

An abusive situation does not depend only on the in-tention of the taxpayer to obtain tax benefits (i.e., amotive test) but requires the existence (or absence) ofcertain objective factors, including an ‘‘actual estab-lishment’’ in the host state (for example, premises,staff, facilities and equipment) and the performanceof a ‘‘genuine economic activity.’’ As regards the exis-tence of an actual establishment, the CJEU does notseem to require an extensive level of substance. As arule of thumb, the substance should be appropriatefor the activities performed by the company.

The notion of ‘‘genuine economic activity’’ shouldbe understood in a very broad manner and may in-clude the mere exploitation of assets such as share-holdings, receivables and intangibles for the purposeof deriving what is often described as ‘‘passive’’income. The nature of the activity should not be com-promised if such passive income is principallysourced outside the host state of the entity.

When analyzing the substance of a company, it isnecessary not only to analyze the situation of theentity as such but of the group as a whole. Here, itmay even suffice if a company relies on the staff andpremises of other group companies in the same juris-diction. (As a reaction to the CJEU decision in regardto the German anti-abuse provision, the German Min-istry of Finance released a Circular on April 4, 2018 inwhich it has been clarified that the provision accord-ing to which only the substance at the level of thedirect parent company is to be considered is not appli-

cable any more. Hence, it has been acknowledged thatthe substance of the entire group in the jurisdiction ofthe parent company needs to be taken into consider-ation when assessing potential cases of abuse.)

In addition, no specific ties or connections betweenthe economic activity assigned to the foreign entityand the territory of the host state of that entity can berequired by domestic anti-abuse provisions. There-fore, insofar as the EU internal market is concerned,the mere fact that an intermediary company is‘‘active’’ in conducting the functions and assets allo-cated to it (rather than being a mere letterbox com-pany) should suffice to be out of the scope of domesticanti-abuse legislation or the PPT in tax treaties con-cluded between EU member states.

Anti-abuse legislation should further not establishan irrebuttable presumption of fraud or abuse. In-stead, the taxpayer must have the possibility to pro-vide evidence of the appropriateness of the structure.

The imposition of a general tax measure automati-cally excluding certain categories of taxable personsfrom the tax advantage, without the tax authoritiesbeing required to provide even prima facie evidence offraud and abuse, goes beyond what is necessary toprevent fraud and abuse. Accordingly, as long as theforeign company has appropriate substance, thenature (corporates vs. individuals), origin or tax statusof their shareholder(s) should be irrelevant for the ap-plication of anti-abuse legislation.

From a practical perspective, the setting up of hold-ing and finance companies with an artificially highlevel of equipment, facilities and employees would,however, to a certain extent, be contrary to their eco-nomic nature. The simple presence of a managermonitoring the holding and finance activities of theLuxembourg company may in some cases be consid-ered sufficient to bring substance to the structure and,as such, prevent the structure from being (partially)disregarded due to the application of foreign anti-abuse provisions. A low level of substance is the directconsequence of the specific purpose of a ‘‘pure’’ hold-ing and finance vehicle and should be accepted for taxpurposes.

Analyzing Compatibility Issues

Based on the aforementioned CJEU case law, it is pos-sible to analyze compatibility issues of the Austriananti-abuse legislation with EU Law. The following as-pects are problematic from an EU law perspective.

A Requirement for Employees and Premises

In order to benefit from a withholding tax exemptionon dividends, an EU parent company of an Austriancompany needs to have employees and premises. Thissuggests that a company would need at least two em-ployees in order to benefit from the PSD. Based on ex-perience, the Austrian tax authorities may refuse theapplication of the withholding tax exemption evenwhen a parent company has several employees, albeitthe interpretation of the regulation seems to slightlyvary from one tax office to another. In this regard, theorganizational, economic or other substantial fea-tures of undertakings that are affiliated with the non-resident parent company are not considered.

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These requirements pose comparability issues withEU Law for the following reasons:s First, the substance of a company needs to be ap-

propriate for the activities performed. When a com-pany performs holding and financing activities, themanagement of the company’s asset does not neces-sarily require a lot of substance. Moreover, certainfunctions (for example, accounting or tax compli-ance) may be outsourced to qualified service pro-viders and reviewed by employees or directors ofthe parent company.

s Second, when analyzing the substance of a parentcompany, it is necessary to consider the situation ofthe entire group rather than the situation of theparent company in isolation.

A Requirement for an Activity that Exceeds AssetManagement

According to the Austrian regulation, an EU parentcompany has to perform activities which exceed mereasset management. However, the CJEU made clear inits decisions that asset management is a legitimatebusiness activity which suffices to enjoy the benefits ofthe PSD.

Rules not Targeted to Wholly Artificial Arrangements

When assessing the existence of fraud and abuse, taxauthorities may not rely on predetermined generalcriteria. Instead, tax authorities have to carry out anindividual examination of the whole operation atissue.

The imposition of a general tax measure automati-cally excluding certain categories of taxable personsfrom the tax advantage, without the tax authoritiesbeing required to provide even prima facie evidence offraud and abuse, goes beyond what is necessary toprevent fraud and abuse.

Instead, national legislation must be targeted toprevent conduct involving the creation of ‘‘wholly arti-ficial arrangements’’ which do not reflect economic re-ality and the purpose of which is to unduly obtain atax advantage. Thus, a general presumption of fraudand abuse can justify neither a fiscal measure whichcompromises the objectives of the PSD nor a fiscal

measure which prejudices the enjoyment of a funda-mental freedom guaranteed by the EU Treaty.

To Sum Up

Several EU member states implemented anti-abuselegislation in their domestic tax law which requiresexcessive substance requirements and which is notconsistent with the jurisprudence of the CJEU. TheAustrian anti-abuse rules fall into this category, violat-ing both the PSD and the freedom of establishment. Itis self-evident that the Austrian anti-abuse rules arenot specifically designed to target wholly artificial ar-rangements.

Actually, each of the formatted substance require-ments is problematic from an EU Law perspective: therequirement for a parent company to have employeesand premises as much as the requirement that the ac-tivities performed by the parent company need toexceed mere asset management.

The fact that the economic activity of a nonresidentparent company consists in the management of itssubsidiaries’ assets or that the income of that com-pany results only from such management cannot perse indicate the existence of a wholly artificial arrange-ment which does not reflect economic reality. This ex-cludes not only letterbox companies from the benefitsof the PSD but also holding companies that exist for arange of legitimate commercial reasons.

Planning Points

In light of the above, corporate shareholders residentin EU member states should systematically reclaimwithholding tax levied on dividends paid by Austriansubsidiaries and challenge potential negative deci-sions before the Austrian courts. It is interesting tonote that until today national courts around Europehave not deviated from the wholly artificial arrange-ment doctrine laid down by the CJEU.

Oliver R. Hoor is a Tax Partner (Head of Transfer Pricing and theGerman Desk) with ATOZ Tax Advisers (Taxand Luxembourg).

The author may be contacted at: oliver.hoor@atoz.luThe author wishes to thank Samantha Schmitz (Chief Knowledge

Officer) for her assistance.

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