On 27 February, the Court of Justice of the European Union handed down the long-anticipated decisions in the joint cases of T 116/16 -T Danmark & 117/16 – Y Danmark, concerning the Parent-Subsidiary Directive, and joined cases C 115/16 – N Luxembourg 1, Case C 118/16 – X Denmark, Case C 119/16, C Danmark I and Case C 299/16, Z Denmark, concerning the Interest and Royalty Directive.

The Danish companies in the cases concerned were owned by parent companies in other Member States, who were themselves owned by companies in third countries. Dividends or interest were paid by the Danish companies to the EU parent companies, which the Danish companies argued were either free of withholding tax according to the Parent-Subsidiary Directive or Interest and Royalty Directive. The Danish tax administration disagreed, arguing that given recipients of the dividends/interest were not the beneficial owners of the payments, the exemption should not apply.

Concerning the Interest Directive, the CJEU was accordingly asked to indicate whether the recipient of the interest payment was indeed the beneficial owner and could avail itself of the withholding tax exemption in the directive. In answering the question, the Court looked to the OECD Model Tax Convention for the definition of beneficial ownership, and held that if a company would be deemed to be a beneficial owner under the OECD Convention, i.e. benefited economically, it would be likely that it would be a beneficial owner of interest under the Interest and Royalty Directive.


In respect of the Parent-Subsidiary Directive, the beneficial ownership test was not relevant. However, it mandates that a Member State must apply either the credit method or exemption method to a dividend paid to another Member State, except in the case of fraud or abuse. The Court was accordingly asked whether the anti-abuse provision needsto be enacted in domestic legislation in order for a Member State to invoke this argument. The Court held that a general anti-abuse provision can be relied on by a Member State, based on the EU principle of abuse of law, such that no domestic legislative provision is necessary. However, the Court noted that the Cadbury Schweppes test concerning abuse, i.e. that the transaction is purely artificial and was designed to circumvent the proper application of legislation of the Member State in the case in question, must continue to be met.


This aspect of the judgment will be significant for Member States where no anti-abuse provisions have been implemented into national legislation.