Anti-abuse and the EU Parent-Subsidiary Directive: analysis from the Spanish perspective

On 19 January 2017, the Advocate General of the Court of Justice of the European Union (CJEU) (Ms Juliane Kokott) decided that the French rule transposing the anti-abuse clause of the Parent-Subsidiary Directive was not compatible with EU Law in the case of Eqiom and Enka (C-6/16). The decision of the Court of Justice of the European Union is now eagerly awaited.

The importance of this case is that it will be the first time for the CJEU to rule on the adequacy of the national legislation of a Member State to the anti-abuse clause contained in Article 1(2) of the Parent-Subsidiary Directive, with the consequent repercussions that such judgment may have for the other national regulations of the Member States of the EU, including the Spanish one, as we will analyse in this article.

According to the French rule referred to in the Eqiom and Enka case, the exemption from withholding tax applicable to dividends paid to a legal person resident in the EU does not apply where the distributed dividends are for the benefit of a legal person controlled directly or indirectly by one or more residents of States that are not members of the Union, unless that legal person provides proof that the principal purpose, or one of the principal purposes, of the chain of interests is not to take advantage of the exemption.

Under the French regulation, the very fact that the company receiving the dividends is directly or indirectly controlled by persons not resident in the EU, gives rise to the presumption of an abuse of the exemption from withholding tax. Then, where appropriate, the beneficiary is required to provide proof that the ownership structure is not structured for tax purposes.

The Advocate General decided that such a presumption is not permissible and that there always should be a test of the objective and verifiable facts of the specific case. Therefore, she concluded that the Parent-Subsidiary Directive precludes a provision such as the French one which places the burden of proof on the taxpayer, who has to prove non-fiscal reasons for the structure of the chain of interests, without the Administration being obliged to provide sufficient evidence of the existence of a tax avoidance motive.

Furthermore, the Advocate General also decided that the French provision is contrary to the fundamental freedoms because it entails a restriction on freedom of establishment (since only distributions of profit to non-resident companies are subject to the special proof requirement, whereas dividend payments to resident companies are not affected), which, moreover, is not justified since the French rule was not specifically aimed at wholly artificial arrangements which do not reflect economic reality and whose purpose is to obtain a tax advantage.

This raises questions of whether legislation in other Member States is compatible with EU Law given the similarities between their anti-abuse clauses and the French one.

For example, the Spanish anti-abuse clause has the same structure as the French one, that is to say, it contains, first, a presumption of an abuse of the exemption by the very fact that the majority of the voting rights of the parent company is, directly or indirectly, owned by individuals or legal persons who do not reside in Member States of the EU or in Member States of the European Economic Area with which there is an effective exchange of tax information, and then it allows the taxpayer to rebut such presumption by the corresponding proof.

In fact, the doctrine of the Spanish Supreme Court confirms the above. Thus, in the Ninth Legal Ground of its judgment, dated 21 March 2012, the Supreme Court expressly states that the application of the anti-abuse clause must come into play simply because of the finding that the main parent of the group was resident in the United States (and this without any evidence that the Tax Authorities had found any indications of fraud or tax avoidance) and then the Supreme Court analyses whether the taxpayer sufficiently proved any of the counter exceptions to the exemption that allowed the application of the exemption. Furthermore, in the same judgment, the Supreme Court states that it does not consider the reference for a preliminary ruling to be necessary, on the understanding that Spanish legislation correctly transposes the Parent-Subsidiary Directive.

The Spanish Supreme Court, in another judgment, dated 4 April 2012, follows the same line of interpretation by manifestly stating in its Fourth Legal Ground that, in principle, the parent company receiving the dividends would benefit from the tax benefits conferred by the Directive (referring to the Parent-Subsidiary Directive) because it resides in a Member State of the EU, but since the rights of the entity receiving the dividends belong to an entity which does not reside in a Member State of the EU but in the United States, the recipient entity is excluded from the benefit of the exemption in Spain. Then it clearly and expressly states that the proof that there is a counter exception to the exemption (that is, the evidence that destroys the presumption of an abuse of the exemption) corresponds to whoever wishes to enjoy the benefit, which in this case is the parent company that receives the dividends of Spanish source.

Furthermore, the Spanish Supreme Court again considers, in a judgment dated 22 March 2012, that in order to destroy the presumption of an abuse of the exemption an evidentiary activity imposed on the taxpayer is required.

Therefore, in view of the current wording of the Spanish anti-abuse clause and the interpretation of it by the Spanish Supreme Court, if the CJEU confirms the decision of AG Kokott in Eqiom and Enka, the Spanish rule is also likely to be considered to be contrary to the Parent-Subsidiary Directive because it contains a presumption of an abuse of the exemption that comes into play automatically, imposing on the taxpayer the burden of the proof that could destroy such presumption and without the Tax Authorities being obliged to provide previously sufficient indications of tax avoidance.

This may result in the Spanish legislation being amended to eliminate the presumption. Moreover, we believe that the Spanish anti-abuse clause could be re-drafted in broader and more general terms, in line with the anti-abuse clause of the Parent-Subsidiary Directive, in order to expand the focus of behaviours that can be subject to anti-abuse analysis and, at the same time, reduce the pressure on groups ultimately controlled by investors who do not reside in the EU or in the European Economic Area. Until this legislative change takes place, Spanish judges and courts will have to interpret the current Spanish anti-abuse clause in the light of the imminent judgment of the European Court of Justice in the "Eqiom and Enka" case.

Co-author: Lorena Viñas, Madrid.