AG opines on scope of anti-Directive shopping rules

The Advocate General (AG) has opined that French tax rules which contained a presumption of abuse where a chain of ownership leads outside the EU were incompatible with the Parent-Subsidiary Directive.

  • Veröffentlicht 26 Januar 2017
  • Geltende Gesetze Frankreich , Europäische Union
  • Thema Steuern > Unternehmen

Advocate General Kokott has opined that French anti-Directive shopping rules were contrary to both the Parent-Subsidiary Directive and the freedom of establishment: Eqiom SAS v Ministre des Finances et des comptes publics (AG, 19 January 2017). By requiring the recipient of dividends to show that the main purpose of a chain of interests under which dividends ultimately benefited a person outside the EU was not to take advantage of the withholding tax exemption, the anti-avoidance rules went further than necessary and were disproportionate. The French tax rules have since been amended to make them compatible with the Directive.

The decision of the ECJ in this case may be relevant not only to the application of the Parent-Subsidiary Directive, but also in the context of wider anti-treaty shopping provisions applied by Member States. Given the recent OECD developments in this area, guidance from the ECJ on the legitimate scope of anti-treaty shopping rules within the EU may be particularly important.


In 2005, Holcim France SA (now Eqiom SAS) made dividend distributions to its parent company, Enka SA, based in Luxembourg. Enka was owned by a company in Cyprus which was in turn controlled by a Swiss company. The French tax authorities denied the benefit of the exemption from withholding tax on the dividend payment, arguing that the situation fell within the exception to exemption set out in Article 119 ter 3 of the French Tax Code. Under this provision, the exemption from dividend withholding tax was denied where the dividends are for the benefit of a person controlled directly or indirectly by persons outside the EU, unless that person provides proof that the principal purpose or one of the principal purposes of the chain of the interests is not to take advantage of the exemption.

The taxpayer argued that the provisions of Article 119 ter 3 contravened the Parent-Subsidiary Directive and were also contrary to the fundamental freedoms and the French courts referred questions on the legitimacy of the exception to the ECJ.

AG opinion: Parent-Subsidiary Directive

The Parent-Subsidiary Directive provides that the Directive does not preclude the application of domestic provisions required for the prevention of fraud or abuse. France argued that the provisions in Article 119 ter 3 fell within the scope of this exception. The Advocate General (AG) disagreed.

Whilst accepting that Article 1(2) does allow anti-avoidance provisions to deny dividend withholding tax exemption under the Parent-Subsidiary Directive, the AG considered that, being an exception, Article 1(2) needs to be interpreted strictly. Nevertheless, the AG was clear that Article 1(2) allowed rules which deny the exemption from withholding tax where the beneficiary company is part of a chain of ownership essentially created only for tax purposes and merely as an attempt to obtain a purely tax related advantage unrelated to economic reality.

However, under the French rules, the fact that the company receiving the dividends was directly or indirectly controlled by persons not resident in the EU gave rise to a presumption of abuse, such that it was then for the recipient to prove that the chain of interests was not tax motivated. The AG considered that such a presumption goes beyond what is permitted by Article 1(2). There must, at least, be an objective reason based on the specific case which gives rise to a reasonable suspicion that the principal purpose of the chain of ownership is abusive. In assuming abuse, without requiring the tax authorities to provide sufficient indications of tax evasion, the French rules were disproportionate and contrary to the provisions of the Parent-Subsidiary Directive.

AG Opinion: fundamental freedoms

The AG also considered the legitimacy of the French rules from the perspective of the fundamental freedoms. This was important since compliance with the fundamental freedoms could require further requirements to justify any anti-abuse provisions, since the Parent-Subsidiary Directive does not exhaustively harmonise this area of law.

Unsurprisingly, the AG considered that the French rule was a restriction on the freedom of establishment. Since the provision only applied to dividend payments to overseas parent companies, it rendered it less attractive for companies established in other Member States to exercise their freedom of establishment in France. Nevertheless, France argued that the restriction on the exemption was justified by the need to prevent tax evasion.

Again, the AG considered that the French rule was neither appropriate nor proportional. By applying a broad presumption of abuse, it was apparent that the French rule was not specifically aimed at abusive arrangements. Again, the AG stressed there must be some objective circumstances showing that, despite formal observance of the conditions for granting exemption, the purpose pursued by freedom of establishment was not engaged. In addition, the rule clearly went beyond what is required to prevent tax evasion and ECJ case law clearly shows that a general presumption of tax evasion cannot without more justify a restrictive tax measure.

As such, the AG considered that the French tax rule was also in breach of the fundamental freedoms.


The decision of the ECJ in this case will be keenly awaited, given the recent developments of the base erosion and profit shifting (BEPS) project to counter treaty shopping arrangements. Whilst recognising that counteracting treaty shopping (including Directive shopping in this context) is important, the AG has stressed the need for any anti-abuse provisions to be proportionate.

Nevertheless, tax authorities may take some comfort from the wider remarks of the AG. In particular, the AG accepted that the nature of the intermediate company may provide support for a Member State to apply anti-treaty shopping provisions, noting that “an artificial arrangement can be assumed if the company is only a fictitious establishment in the form of a letterbox company. But even where there is a physical presence, one might conclude, in light of the financial and staffing set-up, that the arrangement is artificial. In this regard, what appears to be relevant is, for instance, the actual authority of the company organs to take decisions, to what extent the company is endowed with own financial means and whether any commercial risk exists.”

As such, whilst a general presumption that any chain of ownership leading to a non-EU Member State (or in the context of wider treaty shopping, non-Treaty partner) is not a legitimate way to counter avoidance, the extent to which the Member State concerned needs to provide objective evidence that a chain is artificial, before requiring rebuttal by the companies concerned, may not be overly onerous in practice.

However, the direct implications on the French Tax Code of the final decision of the ECJ in this case will be limited. Article 119 ter 3 was amended by the Amended Finance Law for 2015, with effect from 01 January 2016, to bring it into line with the anti-abuse rule of the Parent-Subsidiary Directive by translating that provision directly in the French Tax Code. This new version of Article 119 ter 3 is now applicable to all structures existing before 01 January 2016.

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