On 27 January 2015, the European Council formally adopted a binding general anti-abuse rule to be included in the Parent-Subsidiary Directive (PSD), which aims at preventing Member States from granting the benefits of the PSD to arrangements that are not “genuine,” i.e., that have been put into place to obtain a tax advantage without reflecting economic reality.
The history behind the above decision started in November 2013, when the Commission proposed amending the Directive to stop it from being misused for the purposes of tax avoidance. Two amendments were proposed:
1. Provisions designed to prevent corporate groups from using hybrid loan arrangements to benefit from double non-taxation under the PSD ( something like our “ non-refundable contributions” of Dec 13th 2010, under which money can be transferred to a sub, without the issue of new shares but still considered to be capital ( under the conditions relevant to this act)
2. Introduction of a general anti-abuse rule
Member states will have until 31 December 2015 to implement the general anti-avoidance rule into national law.
This news are crucial indeed and what remains unclear though, is the set of criteria for a holding company in EU to be recognized as being eligible for the tax benefits, and not to be an "artificial construct". It is key to identify which criteria or substance attributes will count in a dispute?
Probably the ECJ will provide some guidelines soon; meanwhile, the anti-abuse rule requires the substance over form analysis to be done on the case-by-case basis, which, basically, means that as long as a company has proper substance and commercial rationale, there should not be any problems.
In this regard, since the primary purpose of holding companies is to control other companies (e.g. their policies and management), the relevant factor would be whether a holding company actually exercises its shareholding rights. In this case, minutes of the company’s board of directors, approved at its office, could serve as a proof of the company’s genuineness.
However, it is uncertain if the holding of shares could be viewed as an economic activity. Thus, an incorporation of a pure holding company might not meet the “genuine” test, since the “commercial” element would be missing. In this case, for a holding company to comply with economic substance, it would have to have certain other economic activities, e.g. the provision of services to its subsidiaries with proper documentation thereof (like management services).
It seems that a single holding/management company in Cyprus, which employs people locally at senior positions with decent payrolls, having various subsidiaries under its management, can probably withstand the new PSD challenges. So it seems that under the new rules Groups should combine the holding and management function together. Having said that it several cases were won in the past, when Companies/Groups employed professional directors with solid experience that could take business decisions that were on the best interest of their employers. In addition such Companies should be located in owned or leased premises.
It worth noticing that recently the Austrian Administrative High Court decision (Zl.2011/15/008013) under which an Austrian company which was owned by a Cypriot pure holding company, which in turn was ultimately held the Russian company, through intermediary companies in the Channel Islands and the BVI; the Cypriot company also owned a German subsidiary. The Cypriot company applied for the refund of the WHT on dividends under the PSD (in Austria the exemption at source is not allowed for EU pure holding companies; the refund method is applied instead). It was denied by the Austrian tax administration since the structure was considered as abusive. The Austrian Administrative High Court confirmed the tax administration’s decision. The Cypriot company had no employees and no business location, did not perform any separate economic activity, the management functions were performed by the employees of the Russian company.
Overall Groups should develop a commercial rationale behind the use of a holding company (e.g. certain business strategy with the respective economic projections), bearing in mind that the holding of shares, probably, would not be considered an economic activity.