Updates on EU measures and developments

Tuesday 17 May 2022

Antonietta Alfano

Maisto e Associati, Rome


Report on a session at the 11th Annual IBA Finance & Capital Markets Tax Virtual Conference

Friday 4 March 2022

Session Chair

Margriet Lukkien Loyens & Loeff, Amsterdam


Annabelle Bailleul-Mirabaud CMS Francis Lefebvre Avocats, Paris

Francesco Capitta Facchini Rossi Michelutti, Milan

Daniel Garabedian Arteo, Brussels

Florian Lechner Jones Day, Frankfurt

Susanne Schreiber Baer & Karrer, Zürich

Jonathan Woodall Travers Smith, London


The panel discussed a selection of European Union measures and developments, starting with the United Kingdom experience after Brexit, then discussing the recent European Commission proposal for a Directive regarding shell entities, of 22 December 2021 (COM (2021) 565 final (‘the Proposal’)), which is expected to be implemented by June 2023 with effect from 1 January 2024, and finally some case studies on withholding tax challenges.

UK tax arena post-Brexit

Jonathan Woodall highlighted some of the implications of Brexit for the UK tax rules in light of the fact that the United Kingdom is for the most part no longer constrained by EU law.

Woodall emphasised that VAT rules could be potentially impacted by Brexit since the UK is generally no longer obliged to apply EU VAT rules. However, no major legislative changes (such as introducing new categories of zero-rated or exempt supplies) have occurred in this respect to date, and it is unlikely that major changes will occur due to the need to maintain/increase tax revenues. After Brexit, the UK qualifies as a ‘third country’ in relation to the EU for VAT purposes, giving rise to changes to place of supply rules for intangible services (such as legal, accounting, banking and insurance services) made to non-business customers in the EU and input VAT recovery rules for supplies of ‘specified services’ (such as certain exempt financial insurance services).

Woodall also pointed out that after Brexit neither the UK nor remaining EU Member States (‘MS’ or ‘MSs’) are bound by EU tax directives. This means, for instance, that to eliminate/reduce withholding tax on dividends/interest/royalties, UK taxpayers rely on available Double Tax Treaties (‘DTT’ or ‘DTTs’) and on domestic exemptions.

Woodall stated that the UK has disapplied certain obligations that, but for Brexit, it would have been obliged to implement under the EU DAC6 Directive (ie, the Directive that introduced a new mandatory automatic exchange of information in relation to potentially aggressive cross-border arrangements), that go beyond the Organisation for Economic Co-operation and Development’s (OECD’s) mandatory disclosure rule.

Woodall reported other measures not directly linked to Brexit, aimed at attracting investments in the UK, such as the review of the UK funds regime and the asset holding company regime (to enter into force in April 2022).

EU proposal for a directive on shell entities

Annabelle Bailleul-Mirabaud presented the discussion on the Proposal, which should introduce reporting obligations for certain EU entities receiving cross-border passive income. In particular, the Proposal defines minimum substance criteria, first setting out three cumulative conditions (‘Gateways’), to be assessed over the two years preceding the one being assessed, to identify EU entities subject to reporting requirements. These are (1) more than 75 per cent of the entity’s income comes from passive income (eg, dividends, interest, royalties, capital gains, etc); (2) the entity is engaged in cross-border activity, and (3) the entity has outsourced (even to related entities, as per the Proposal’s Preamble) the administration of day-to-day operations and decision-making in relation to significant functions.

The entity (meeting all three Gateway criteria and not benefitting from a carve-out) shall report in its annual tax return (and provide supportive evidence in relation to) the indicators of minimum substance for tax purposes, that is: (1) premises available for its exclusive use; (2) at least one active bank account in the EU; and (3) at least one qualified director tax resident in the same EU MS of the entity (or nearby that EU MS), who is able to regularly take decisions on the activity generating passive income, and who is not an employee or a director of an unrelated enterprise, or the majority of its full-time equivalent employees are tax residents in the same EU MS of the entity (or nearby) and are skilled to perform the activity generating passive income. Entities failing to meet all substance indicators would be deemed to be ‘shell entities’ and, unless able to rebut this presumption, would be denied certain tax benefits otherwise available based on DTTs and EU directives.

Bailleul-Mirabaud also provided an overview as to the entities that are out of scope (carve-outs).


Daniel Garabedian stated that the general view in the Belgian tax community is that the implementation of the Proposal will probably not add much in substance to the current situation. Undoubtedly, it would enhance visibility and traceability, allowing Tax Authorities (‘TAs’) to identify new cases and support ongoing ones, regarding withholding tax claims on outbound passive income.


Francesco Capitta reported the attitude of the Italian TAs with respect to the economic substance of foreign holding companies, denying treaty benefits or denying the application of the exemption from Italian withholding tax on outbound payments under the Parent Subsidiary Directive (‘PSD’) and the Interest and Royalties Directive (‘IRD’).

Capitta highlighted two main points regarding the Proposal: the presumption of minimum substance does not exclude that the Italian TAs may still view the entity as a shell under the Italian domestic General Anti-Abuse Rule (GAAR) (based on the explanatory report of the Proposal) and on the other hand even if a company has substance, its structure could be challenged under the beneficial ownership requirement.


Florian Lechner stated that Germany introduced from 2022 the Steueroasen-Abwehrgesetz (the 'Tax Haven Defence Act'), providing a set of measures for dealings with non-cooperative countries (ie, on the EU blacklist), with some measures substantially aligned to the Proposal, such as the imposition of additional withholding taxes or the denial of DDTs benefits. This regulation, regarding as it does countries that are nowadays not particularly relevant in international tax planning, might be used as a door opener to include more countries and extended beyond the scope of the Proposal.

The UK

Woodall stated that the Proposal might make on one hand the UK more attractive as a holding company jurisdiction (also thanks to the new asset holding company regime), and, on the other hand, for the existing EU structures, it might incentivise holding companies to ‘double down’ on their EU structures and move substance there from the UK.


Susanne Schreiber stated that Switzerland does not need to implement the Proposal. However, Switzerland has a long-standing practice established by the TAs with respect to the (non-) acceptance of offshore companies, for example, as beneficiaries of services, for tax purposes. Despite the lack of controlled foreign corporation (CFC) rules, offshore subsidiaries (in non DTT-countries) can be scrutinised in structures such as those streaming financing income to such subsidiaries and repatriating it via dividends.

With respect to shell entities in DTT/EU countries as a shareholder, the Swiss dividend withholding tax will only be refunded if certain substance requirements are met and the shareholder is the beneficial owner.

The Netherlands

Margriet Lukkien stated that the Dutch Government appreciated the Proposal; they published a document in February with their comments. They had a few observations (eg, the ambitious implementation timeline).


Bailleul-Mirabaud stated that potentially there will be double taxation issues. Normally, EU MSs of shareholder residence, who will tax the income, will have to allow a tax credit for the tax paid by the shell entity on the income and a tax credit for tax withheld in the source states. This is a point of uncertainty in France and in other EU MSs.

Case studies on withholding tax challenges

Lukkien summarised the main requirements of the Danish cases of the European Court of Justice of 26 February 2019 and in particular the key points established in those cases that some TAs in EU use to attack foreign holding, intellectual property (IP) and financing structures, even for structures where there is some organisational substance, ie, (1) new indications to assess the existence of the abuse; and (2) the economic interpretation of the concept of beneficial ownership under EU law.


Garabedian stated that since the Danish cases Belgian TAs have begun to systematically audit, and often challenge, the withholding exemption on outbound passive income. There are not yet court decisions on this issue in Belgium. Generally, the TAs focus on the question whether the recipient in turn pays the passive income to another group entity, usually refusing to consider substance and the margin of the recipient. Garabedian then gave examples on how far the Belgian TAs currently consider this issue. He mentioned that a side effect of those audits focusing on withholding exemptions is closer scrutiny of Belgian TAs on the deductibility of outbound interest paid ‘indirectly’ to a tax haven.


Bailleul-Mirabaud reported that there were no significant impacts arising from the Danish cases to the extent that French TAs historically used to challenge the dividend withholding tax exemption both under the EU PSD and DTTs, by arguing that the EU holding company does not have its effective place of management in the EU and/or that it is not the beneficial owner of the dividends, even in the absence of a redistribution of dividends. TAs’ challenges are also based on the general anti-abuse provision under PSD and DTTs, where the TAs sustain that the interposition of the EU holding company is artificial (that it lacks business rationale) and that the holding company does not have sufficient substance for its activity. In these cases, TAs apply the domestic rate, with a gross up, plus penalties (in some cases 80 per cent penalties for fraudulent manoeuvres which implies the communication to the public prosecutor if the amount of reassessed withholding tax exceeds €100,000). However, based on recent case law, if the TAs consider that the recipient is not the beneficial owner, but its shareholders are resident in the same country, it seems that TAs may accept to apply the DTT between France and the country of residence of the shareholder. Besides, there is a new provision providing under certain conditions for the possibility to request a partial withholding tax refund to consider actual expenses incurred for the acquisition and retention of the income.


Capitta reported the new regime for EU and European Economic Area (EEA) regulated funds effective from 1 January 2021, based on which eligible funds receiving dividends from Italian companies and capital gains from the sale of shares in Italian companies are fully exempt from Italian taxation. Capitta stated that in case of indirect investments through an intermediate holding company, two arguments in favour of the exemption can be used: (1) the look-through approach to claim that the new exemption applies also in case of indirect investment, based on the official interpretation of the Italian TAs regarding a similar matter; or (2) application of the exemption under the PSD on the basis of the lack of abuse since the investment fund would in any case be entitled to the withholding exemption under the new rule. Furthermore, Capitta reported that this new regime does not apply to investments made by non-EU funds; this exclusion could lead to a possible violation of the principle of the free movement of capital.


Lechner stated that in Germany there are strict domestic anti treaty-shopping provisions regarding withholding tax. This relates mainly to dividends and royalties. Interest on ‘straight’ debt instruments are exempt from withholding tax, but if there is a performance element or conversion right and alike, domestic withholding tax applies. Lechner stated that based on a new rule there is no DTTs or directives relief from withholding tax for a company to the extent its shareholders would not be entitled to similar relief under exactly the same DTT/directive provisions (even if both legal provisions stipulate the same treatment). The new anti-treaty shopping rule would kick in and, as a result, taxpayers must prove that the source of income has material connection with an economic activity of the foreign company. An exemption for listed companies and a new exception based on a principal purpose test are provided in Germany, allowing evidence to be provided that the purpose of establishing the intermediate holding was other than the taxes (including non-German taxes). Uncertainty remains regarding this new rule.


Schreiber stated that in Switzerland there are just general substance requirements. Certainly, it is necessary to have a resident shareholder in the DTT or EU country. As to the beneficial ownership, the detrimental criteria must not be a legal duty to forward dividends. Further, there must not be any treaty abuse. As to the substance, depending on the shareholder, generally one or two of the following criteria must be met: personal, functional or balance sheet substance. Schreiber stated that according to tax avoidance case law and administrative practices in situations where, for instance, a shareholder, without (full) withholding tax refund entitlement, sells a Swiss company, with (1) distributable reserves; and (2) non-business required assets (group level), to a buyer with a better withholding tax situation, the latter would inherit the seller withholding tax burden, since the assumption of the TAs is that a prudent seller would have distributed such funds before the sale, paying withholding tax, and an ordinary buyer would not acquire excess cash.

This scenario has been extended to domestic transactions, where there is a Swiss seller, or a seller with substance in a treaty country, that sells a Swiss company to a Swiss buyer, who is held by a private equity fund, or an offshore company, who would be not itself entitled to a withholding tax exemption if it would itself acquire the Swiss operating company, this could be seen as a withholding tax evasion: the denial of a withholding tax refund would then be between the two Swiss companies (target and buyer). The reasoning of the TAs is that if the private equity fund would have bought the Swiss company, there would be a withholding tax burden and so the benefit that the private equity fund has from interposing the Swiss acquisition company, by creating shareholder loans or capital contribution reserves which are not subject to this withholding tax, is viewed as abusive. Schreiber stated that an argument to avoid this anti-avoidance rule is the justification of the Swiss buyer in the structure, for example, if the financing parties require such buyer and provide substantial financing for the acquisition.


The Proposal’s plan is very ambitious; indeed, it is to be implemented by 30 June 2023 and should come into effect from 1 January 2024. Doubts concerning the deadline for the entry into force of the Proposal have been expressed by some TAs, notably because of the overlapping of several measures under discussion, such as the OECD Two Pillar Solution and several measures taken at EU level simultaneously.

For enterprises – if the Proposal’s plan and its content are confirmed – the Proposal would be immediately effective: entities that meet the Gateways, and which are therefore considered ‘at risk’, will be required to report the minimum substance indicators for tax purposes in the relevant tax return; meaning that for the tax year 2024 the entities will have to assess the Gateways ‘retrospectively’, since they are set by reference to the two tax years preceding the one being assessed (ie, in principle from tax periods 2022 and 2023).