On 26 February 2019, the Court of Justice of the European Union (“CJEU”) issued its decisions in six cases which deal with the interpretation of the Parent-Subsidiary Directive (“PSD”) and the Interest & Royalties Directive (“IRD”).
In the cases, the Danish companies were all owned by a parent company resident in another EU Member State. Dividends and interest were distributed to the EU parent company. However, the direct ownership of the aforementioned companies belongs to companies resident in third countries.
The underlying question for the CJEU was whether dividend and interest payments should be exempt from withholding tax when the payments were made from a Danish company to a company resident within the EU, if the payments were fully or partially passed on to the ultimate parent company resident in a third country.
Moreover, the CJEU proceeded one step further and stated that a group of companies may be regarded as being an artificial arrangement in cases when it is not set up for reasons that reflect the economic reality, when its structure is purely one of form and when its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of applicable tax law.
It is now up to the Danish High Court to provide its final verdict based on the above guidance and interpretation provided by the CJEU. These is no doubt, however, that these judgments will have a significant impact on most international group structures and the flow of funds from EU subsidiaries to parent companies when the ultimate parent is resident in a third country.