Tax litigation (2023)

Tuesday 28 February 2023

Hanna Hordiienko

Binder Grösswang Rechtsanwälte, Vienna

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Tuesday 17 January 2023

Session Chair

Liesl Fichardt Quinn Emanuel Urquhart & Sullivan, London


Benjamin Twardosz Cerha Hempel Rechtsanwälte, Vienna

Bodil Tolstrup Bjornholm Law, Copenhagen

Andrea Silvestri Bonelli Erede Lombardi Pappalardo Studio Legale, Milan

Angel Garcia Ruiz J&A Garrigues, Madrid

Christopher Slade Aird & Berlis, Toronto

Caroline Ciraolo Kostelanetz, Washington, DC


The Chair, Liesl Fichardt, started the panel with a short overview of the topics to be covered and issues to be discussed during the session. The panel provided an overview of the important tax cases in recent months, covering transactions in Austria, Denmark, Italy, Spain, Canada and the United States regarding the issues of cum-ex litigation, beneficial ownership identification, taxation of dividends and exchange of information. Fichardt then proceeded by introducing the panellists.

Panel discussion

Austria: cum-ex Supreme Administrative Court (VwGH) 28.06.2022 Ro 2022/13/0002

Benjamin Twardosz presented a cum-ex case decided in June 2022 in Austria. The case concerned the entitlement to a claim for a refund of dividend withholding tax by a United Arab Emirates (UAE) limited liability company (LLC). The timeline of the case included: (1) resolution of the dividend payment; (2) purchase of shares by the UAE LLC; (3) delivery of shares to the deposit account; (4) dividend payment; (5) sale of shares by the UAE LLC; and (6) application for a refund by the UAE LLC. Twardosz pointed out that, at the relevant time, there was a ruling to the effect that as long as the company acquired beneficial ownership of the shares before the delivery date, such company would be entitled to a refund. However Austrian tax authorities denied a refund and changed their position. On appeal, the Federal Fiscal Court in turn also decided against the appellant based on a slightly different reasoning, which focused on the UAE LLC receiving compensation and not a dividend, and thus not considering it a beneficial owner of the shares.

While upholding the decision, the Supreme Administrative Court resolved that the withholding tax (WHT) refund shall be denied due to the fact that the UAE LLC was not a beneficial owner of the shares on the day of the dividend resolution and therefore, from a tax perspective, could not be considered as the one to receive dividends. In Twardosz’s opinion, such a decision could be questioned as it does not prevent treaty shopping, which is a key issue that the court had not addressed in its decision.

Twardosz also interestingly pointed out that, from a tax litigation perspective, Austrian tax authorities often grant a WHT refund by making a repayment without any formal decision in place. However, the taxpayer cannot be sure whether such a repayment will be challenged in the future.

Denmark: C-116/16 T Denmark and C-117/16 Y Denmark ApS

Bodil Tolstrup continued the discussion by presenting recent Danish cases regarding dividend distribution up the corporate chain (Denmark to Cyprus to Bermuda and then to the US) and beneficial ownership in this regard. Two distribution chains were discussed: Distribution 1 on dividend payments through three companies up to the US parent company, including dividend reinvestment in bonds by the company in Bermuda within five months before the final distribution to the US; and Distribution 2 on dividend payments to Cyprus. The final ruling of the Supreme Court identified Bermuda as a beneficial owner instead of the US, and for Distribution 2, it identified the US.

Tolstrup focused on the overall approach from a Danish perspective regarding substance requirements to identify the true beneficial owner. In her view, the Danish tax authorities seem to look at the money flow and the transaction itself, and to some extent, disregard the issue of the substance of companies along the chain. Tolstrup left the audience with the hanging question of whether an entity without substance that has held the funds for the duration of five months can be called a beneficial owner.

Italy: Supreme Court case No 221454 dated 06 July 2022

Andrea Silvestri focused on recent case law developments in Italy, where the Italian Supreme Court, surprisingly, divided a recent case in favour of the taxpayer. The case under discussion concerned the distribution of dividends from an Italian company to a US mutual fund. The dividends were subject to 15 per cent WHT under the Italy–US double taxation treaty (DTT). The US fund argued that it was entitled to a lower WHT rate of 12.5 per cent under the European Union free movement of capital. The US fund argued that the dividend treatment was discriminatory as the domestic payment of dividends (ie, to an Italian fund) would have been taxed at 12.5 per cent (under legislation in force at the time of the distribution). The Italian Supreme Court upheld the position of the fund, stating that the EU free movement of capital is also applicable regarding non-EU-based investors.

Silvestri viewed this judgment as solid ground for potential further court proceedings, especially involving private equity structures. Based on 2021 domestic legislation, dividends/capital gains realised by an EU qualified investment fund are exempt from Italian taxation. Thus, considering the Supreme Court judgment, the said rule may be extended to non-EU private equity funds (ie, the Parent-Subsidiary Directive may be applied to non-EU funds).

Spain: Cassation appeal No 5309/2020 date 21 July 2022, and Cassation appeals No 4762/2020 and 5693/2020 dated 26 July 2022

Angel Garcia Ruiz continued the session with the presentation of three recent Spanish cases concerning the deductibility of certain borrowing costs in respect of loans under Spanish corporate income tax.

One of the cases concerned a Spanish subsidiary that, due to lack of liquidity, received a loan from its parent company in the Netherlands to finance the distribution of dividends to its shareholders. The Spanish tax authorities concluded that the borrowing costs should be considered non-deductible as the loan was not used to finance the ordinary activity of the company but solely for the purpose of funding the distribution of dividends, that is, for the shareholder’s benefit. Thus, it had to be classified as ‘expenses for equity remuneration or a gift’.

The Supreme Court emphasised that the transaction itself was not identified by the Spanish tax authorities as fraudulent or performed to obtain a tax advantage, thus the borrowing costs could not be classified as the cost of equity due to their nature and the finance costs could not be considered a gift because they were obtained for consideration. Addressing the unrestricted reserves instead of a loan was ruled to be irrelevant as it involves a decision concerning the management of the company’s economic resources.

In his view, the Spanish tax authorities’ interpretation of the beneficial owner doctrine has become very important, including for the private equity sector, which is now under increased pressure. Therefore, it is important to pay attention to ongoing tax audits to understand the trends and interpretations used by tax authorities.

Canada: Levett v Canada, 2022 FCA 117

Christopher Slade highlighted recent developments regarding the exchange of information. The issue was illustrated in a recent Canadian case in which the taxpayer tried to block an information request issued by the Canada Revenue Agency (CRA) to the Swiss tax authorities regarding information on bank accounts held in Swiss banks. The taxpayer challenged the request, stating that the CRA failed to exhaust all reasonable domestic means prior to requesting the information from Switzerland.

The Federal Court dismissed all the concerns raised by the plaintiff and focused on the primary objective of the exchange of information under Article 25 of the DTT, namely, to prevent tax evasion and avoidance. It held that the word ‘reasonable’ strongly suggested some measure of discretion on the part of the authorities to use the available methods, but did not mean that they had to engage all possible measures.

Slade noted that the case relates more to administrative law rather than tax law and emphasised that the attempts to block the requests for information had little prospect of success. One should pay attention to the multijurisdictional level of such cases (within both countries involved), the wide discretionary powers given to tax authorities and the reluctance of courts to narrowly construe exchange of information provisions in bilateral treaties.

US: Puri v US, Zhang v US, Rabassa v US, US v Agrama and US v Ohnstad

Caroline Ciraolo continued the topic of exchange of information by presenting several recent US cases concerning different challenges faced when not only sending but also receiving requests for information from different jurisdictions. A certain procedure is enforced in the US when the Internal Revenue Service (IRS) receives an information request that includes the enforcement of a summons that taxpayers may ask to quash or challenge. Ciraolo emphasised that the relevant tax treaty provision (namely Article 25) does not require either country to carry out measures contrary to its own law or administrative practices, or to supply information that would disclose trade secrets or other information that would be contrary to public policy.

By describing recent US cases, Ciraolo highlighted the following grounds of challenge: the company was not notified of the request; the other country used a civil treaty request for a criminal investigation (whereas in the US, this would violate constitutional rights); the abusive purpose of the request; the existence of a political challenge; and the unlawful disclosure of trade secrets.

In general, in her view, the US tends to respond to information requests on a quid pro quo basis; however, requests must also comply with administrative procedures, and have legitimate objectives and purpose.

Conclusion and final remarks

The session ended with remarks from each of the panellists regarding the cases presented during the session, as well as a short overview of the current situation with tax authorities in their respective countries. All speakers agreed that, currently, tax authorities are more aggressive, sophisticated and increasingly focused on foreign or cross-border transactions.

Twardosz compared the Austrian case to the case from Denmark and emphasised the issue of beneficial ownership. Tolstrup pointed out that, in Denmark, transfer pricing cases are receiving more attention from the tax authorities. Ruiz confirmed the aggressive approach of tax authorities in Spain and highlighted the lack of certainty within existing tax regulations. Slade emphasised the importance of timing regarding information exchange challenges. Ciraolo highlighted that the US tax authorities pay more attention to transactions and are also increasingly focused on criminal prosecutions.

However, Silvestri pointed out that he sees a less aggressive approach on the part of the Italian tax authorities compared to previous years. Fichardt provided a final summary of the discussion and emphasised that the tax future is likely to entail more challenges for tax specialists given the ever-changing tax landscape around the globe.