EU Court of Justice rules on the limits of anti-abuse rules

  • On 20 December 2017, the Court of Justice of the European Union (CJEU) decided on two cases involving German anti-abuse legislation that denies a (partial) exemption or refund of withholding tax on distributions made by German companies to foreign parent companies, confirming the Court’s previous jurisprudence.
  • The CJEU analysed the conformity of the German anti-abuse provision in regard to both the restrictions imposed by the EU Parent-Subsidiary Directive and the freedom of establishment, finding the German provision too restrictive.
  • The CJEU reconfirms that taxpayers are free to rely on their EU freedoms when structuring investments as long as the underlying contractual arrangements are not “wholly artificial arrangements” which do not reflect economic reality and the purpose of which is to unduly obtain a tax advantage.
  • The case law of the CJEU provides for clear guidelines regarding the design and interpretation of anti-abuse provisions in an EU context, contributing to legal certainty in the post-BEPS era.
  • On 4 April 2018, the German Ministry of Finance issued official guidance in response to the decision of the CJEU, but it remains to be seen how the German tax authorities will respond in practice.

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