On September 7, 2017, the European Court of Justice issued its judgement on case C-6/16 Eqiom/Enka on the compatibility of domestic anti-abuse provisions targeting crossborder profit distributions with European Union Law.
The European Court of Justice (‘ECJ’) has published its decision of September 7, 2017, on case C-6/16 Eqiom SAS (previously Holcim France SAS) and Enka SA vs the Ministry of Finance. The decision established that the French anti-abuse clause that applies to crossborder dividend distributions was incompatible with EU law.
The case brought to the ECJ concerned dividend distributions by French company Holcim (later Eqiom) to its Luxembourg parent, which was controlled indirectly by shareholders resident outside the European Union. The dividend distribution met all requirements for exemption established in Council Directive 90/435/EEC of July 23, 1990, on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (“Parent-Subsidiary Directive).
The question referred to the ECJ was whether the French domestic anti-abuse provision was compatible with the Directive and the fundamental freedoms established in the TFEU. This provision allowed the French authorities to deny the Directive’s benefits if the recipient of the dividends was controlled (directly or indirectly) by taxpayers resident outside the European Union. In these cases, the taxpayer had to prove that the purpose of the chain of corporate interests was not to take advantage of the exemption provided for in the Directive.
The ECJ decision draws heavily from the Opinion of Advocate General Kokott, issued last January. In essence, and to comply with EU law, both the Directive and the fundamental freedoms require that an anti-abuse clause denying the benefits of the Directive has to be targeted at “wholly artificial arrangements.” The fact that a company is controlled by residents outside the European Union is not an indication of a wholly artificial arrangement and cannot be tied to a presumption of abuse.
This decision puts the spotlight on the Spanish anti-abuse clause, found in article 14.1.h) of the Non-Residents Income Tax Act, which applies to crossborder outbound dividend distributions and shares many features with the French provision that the ECJ has struck down.
The Spanish provision establishes that the exemption provided for in the Directive can be denied when the company receiving the dividend is controlled (directly or indirectly) by residents outside the European Union, “unless its [the recipient company’s] incorporation and functioning responds to valid economic motives and substantial business reasons.”
The ECJ’s judgement raises doubts over the future of this Spanish clause and its compatibility with EU law.