1. ACTL Joint Conference GAAR in Tax Law: A Comparative View
EU Experience
Beijing, 13 March 2015 – Carola van den Bruinhorst

2. Trend: “Fair Share” approach is gaining momentum
Apple Amazon
Revenue raising from MNE’s
BEPS reports
Competition for investments
Media and politicians
EU State Aid
Lux Leaks
EU GAAR

3. The most important EU development
Council of the EU agreed to add general-anti abuse rules (GAAR) to the EU Parent Subsidiary Directive (EU PSD).
Target = “It is necessary to ensure that this Directive is not abused by taxpayers who fall within the scope of its application”
Member States should refrain from granting benefits under the EU PSD, if:
arrangements are not ‘genuine’ and
have been put in place to obtain a tax advantage that is not reflecting economic reality.

4. EU Corporate taxation legal framework and hierarchy
No harmonized European corporate taxation regime, 28 tax systems
Corporate taxation falls within the competence of the Member States, however that competence has to be exercised consistently with EU law.
EU PSD was introduced to avoid economic double taxation on dividend distributions between EU member states.

5. The EU PSD
EU PSD provides for tax exemption for EU cross-border dividends.
Purpose: ensure that profits realized from EU cross-border investments are not taxed twice.
Background: Create a level playing field between domestic investors and EU cross border investors.
How? Exemption on domestic dividend withholding and exemption/credit in CIT on dividends distributed to subsidiaries to EU parent companies (>10% shareholdings).

6. Typical use of EU PSD: EU inbound investments
PRC investor
Reduced dividend WHT under the treaty with China, or domestic exemption
EU HoldCo
Dividend, exempted under the EU PSD at both Parent and Subsidiary level.
>10% of the shares
EU OpCo

7. The EU PSD
EU PSD (article 1.2 old), already allowed Member States to impose their domestic rules in order to prevent fraud and abuse.
Several EU countries also included Specific Anti-Abuse Rules (i.e. Spain, Italy, France).
Unilateral EU GAAR in the EU PSD needed?

8. Tax planning, tax avoidance and tax evasion…
Issue of corporate tax planning has become high priority in international politics.
Introduction of a GAAR in the EU PSD is fully in line with the OECD and G20 BEPS initiatives.
Obliges member state to provide minimum level of protection of the EU PSD of being abused.
Question is of course: what is abuse?

9. Blurred line between Tax Evasion and Tax Avoidance
Legal
Freedom versus morality
International planning opportunities
(harmful) tax competition
Illegal: Tax Fraud
Criminal offence
Mounting international exchange of information and coordination

10. Tax planning is allowed under EU Case Law
ECJ in the Halifax Case on a VAT matter: […] taxpayers are in principle free to structure their activitities in a way that limits their exposure to taxes […] ECJ in Cadbury Schweppes Case: […]the fact that a company has been established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse […].

11. Tax abuse following EU Case law
ECJ defines in Cadbury Schweppes (C-196/04) its view on ‘abuse’:
[…] wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned […]
Objective factors to support the evidence:
‘lack of physical existence’ of a company in terms of premises, staff and equipment may support that the incorporation of a subsidiary (or holding company) does not reflect economic reality, that is to say it is not an actual establishment intended to carry on genuine economic activities.
Example of wholly artificial arrangement is a pure ‘letterbox company’.

12. Adopted Main Purpose Test (MPT) within EU PSD
General-anti abuse rules (GAAR) in EU PSD:
2. “Member States shall not grant the benefits of this Directive to an arrangement or a series of arrangements that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage which defeats the object or purpose of this Directive, are not genuine having regard to all relevant facts and circumstances.
An arrangement may comprise more than one step or part.
3. For the purposes of paragraph 2, an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality.”

13. EU GAAR provision GAAR adopted for EU PSD: ‘De minimis’ rule
Subjective and objective elements
No clear guidance on terms used in the GAAR
To be implemented by EU jurisdictions 31 December 2015, at the latest
Similar amendments expected to be included in EU Interest & Royalty Directive!

14. Anything new …
The definition seems roughly in line with wording used in ECJ case law but goes one step further.
It forces countries to implement a GAAR in their domestic legislation.
Many EU Countries already had unilateral GAAR embedded in their national laws and SAARs, with respect to EU PSD application.
Unclarities may arise now jurisdictions may apply domestic GAAR and different interpretation under national law.

15. If GAAR is applied what will be the impact?
PRC Investor
Reduced dividend WHT under the treaty with China, or domestic exemption
EU HoldCo
Participation exemption
EU OpCo may levy statutory WHT rate on dividends, to be reduced by provisions under double tax treaties.
>10% of the shares
EU OpCo

16. Uncertainties Pre-’92 structures affected?
Does it matter whether shareholders are based in EU or in non-EU Countries?
What kind of ‘substance’ is sufficient?
Board activity?
Business?

17. What is an appropriate form and level of substance?
Tax residence
Decision making substance: board of directors, infrastructure, etc.
Shareholders
Beneficial owner / no conduit
Economic substance: capital, outlook on profit
Investment A
Investment B
Investment C
HoldCo
EU GAAR
Business substance: commercial and economic rationale, specific expertise, etc.

18. Conclusion Scope and purpose of the EU PSD:
“[…] ensure that profits realized from EU cross-border investments are not taxed twice.”
vs.
Scope and purpose of the GAAR in the EU PSD:
to prevent from misuses of the Directive and ensuring fairer corporate taxation in the European Union.
Future will tell which one will prevail…

19. Contact details Carola van den Bruinhorst Loyens & Loeff
Hong Kong, Partner, Tax
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