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Application of the concept of beneficial ownership; Exemption from dividends

Our previous posts related to the exemptions at origin of the interests of loans between international group companies remarked that the concept of the effective beneficiary is essential.

The same applies to exemption of dividend distributions in a group of companies from different EU countries. Besides the rest of requirements for the application of this regulation, defined in the European parent-subsidiary directive (click here in Spanish), this directive does not explicitly contemplate the concept of beneficial owner and does not refer to it. In fact, Article 5 just states:

"The profits distributed by a subsidiary to its parent company shall be exempt from withholding tax at origin".

However, both double taxation conventions and the European Union's own court of justice do take this into consideration, at least for practical purposes in an implicit way. In some rulings the application of the benefits of the directive is rejected when the beneficial owner is supposed to reside in a third state outside the Union, even though the parent-subsidiary directive itself does not indicate anything in this aspect.

In fact, it makes sense to think that a directive that is designed to encourage capital movements within the European Union and to equate the dividend exemptions provided for in national legislation (as in Spain in Article 21 of the Corporate Income Tax Act) to the whole of Europe, if the part that "enjoys" those dividends is actually a resident of a third country, the part should not benefit from the possible advantages of the regulations. Sometimes problems of this kind can arise even without being a third country. For example, if we talk about certain territories such as Gibraltar (there is a ruling of 2 April 2020 where the Court of Justice of the European Union leaves out of the Directive a company incorporated in this area).

Distributed benefits

Although it is also true that - on the other hand - the norm only talks about distributed benefits and nothing else. Therefore, when considering an international group structure for tax purposes, it is recommendable to be clear about the dividend policy. Also whether or not this policy can lead to interpretations by the different European tax agencies. These interpretations could cause us some economic damage, either by the actual beneficiary of these dividends or by any other requirement. These aspects deserve an important part in the study of the tax planning of international groups with companies in more than one country.

Do you need clarification of any of this concepts? Contact us. Our International Department will assist you with further information.

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