Based on the Parent-Subsidiary Directive (PSD), dividends from EU entities should be exempt from dividend withholding tax provided that these are distributed to other EU entities holding a minimum interest and if there is no abuse. According to older EU case law, the abuse test should be interpreted strictly. More specifically, the European Court of Justice (CJEU) decided in 2006 that if the conditions were met to apply the PSD exemption based on EU law, this exemption should only not be granted if the structure is ‘wholly artificial’.

The domestic implementation of the PSD in the Netherlands provides for a withholding exemption for corporate entities holding at least 5% of the shares in Dutch entities. According to the Dutch implementation of the abuse test (especially the legislative history), there is no abuse if the shareholder of the Dutch entity carries on an active business enterprise. Such shareholder is (amongst others) considered to carry on an active business enterprise if it can be considered a top holding company. Such shareholder is also considered to carry on an active business enterprise if the top holding company is at a higher level in the structure, the direct shareholder of the Dutch entity has ‘relevant substance’ (including EUR 100,000 salary expenses and an own office) and the direct shareholder links the active business enterprise carried on at a higher level in the structure to the business enterprise carried on by the Dutch entity. For real estate investments, it is the question whether and under which circumstances such real estate investment can be considered an active business enterprise. This explanation of abuse goes much further than restricting only ‘wholly artificial’ structures, based on EU case law.

In December 2017, the CJEU decided that the question whether a structure is considered abusive should be assessed on a case by case basis taking into account all relevant factors of the specific case. According to the December 2017 case law, not carrying on a business enterprise does not necessarily constitute abuse. The CJEU also ruled that a fixed set of conditions should not be leading in the abuse analysis. This may entail that requiring ‘relevant substance’ for intermediary shareholders is not allowed under EU law.

In recent case law (February 2019), the CJEU decided that the fact that the recipient of the dividend cannot factually be considered the beneficial owner of that dividend could be an indication of abuse. Other important aspects are (the absence of) actual economic activity and the artificiality of a structure. Factors to determine whether the recipient has actual economic activity include, in particular, the management of the company, its balance sheet, the structure of its costs and the expenditure actually incurred, the staff it employs and the premises and equipment it has. Indications of artificiality may also be derived from the various contracts existing between the companies involved in the financial transactions at issue giving rise to intragroup flows of funds, from the way in which transactions are financed, from the valuation of the intermediary company’s equity and from the inability to have the economic use of the dividends received (not only legally or contractually but also in substance). Although the CJEU provided some guidance, it is not clear under which circumstances a shareholder can exactly be considered the beneficial owner and under which circumstances the absence of beneficial ownership at the level of that shareholder exactly constitutes abuse. We believe all facts and circumstances should be considered in this analysis. We recommend to have your investment structure analysed again, taking into account these important CJEU decisions.