4.2.3.2 Deister Holding and Juhler Holding

In Deister Holding and Juhler Holding,1 the CJEU in essence has ruled on the answer to the question whether the PSD anti-abuse provision precludes a German domestic anti-avoidance rule. The legislation is assessed not only in the light of the provisions of the Directive, but also in the light of the relevant provisions of primary EU law.2 In this regard it should be kept in mind that the objective of combatting tax evasion and avoidance has the same scope, whether it is relied on under the anti-abuse provision of the PSD or as a justification for an exception to primary law.3

The case revolves around a dividend payment made by a company established in Germany to its 26,5% parent company based in the Netherlands. The dividend payment fell within the scope of the PSD. It should therefore be exempt from withholding tax. Nevertheless, Germany applied a specific anti-abuse provision which denied the application of the withholding tax exemption. Under the German anti-abuse regulation, the exemption was applied only if three conditions were met. First, there should be sufficient economic reasons for interposing the Dutch company. Secondly, the parent company should earn more than 10% of its entire gross income for the financial year in question from its own economic activity. Finally, it was required that the parent company participated in general economic commerce with a business establishment that is suitably equipped for its business purpose.4 This anti-abuse provision essentially ensures that the withholding tax exemption is not applied if the recipient is not the effective beneficiary of the dividend, but functions as an intermediary entity with no real substance. The German rule contains an irrebuttable presumption of fraud or abuse. It is therefore not possible for a taxpayer to provide evidence to the contrary.5

The CJEU ruled that the German anti-abuse conditions are not in line with the provisions of the PSD. The Directive allows ‘rules of national or treaty law to combat fraud and abuse’ to affect its application. However, the foregoing does not change the fact that an anti-abuse provision must always be applied on a case-by-case basis. A general and irrebuttable abuse presumption does not fit within such an approach. In addition, the PSD does not prescribe conditions regarding the specific activity of the companies qualifying under the Directive, while the German regulation does specify such requirements. If the parent company's activity consists of managing or acquiring the assets of the subsidiary exclusively from that management income, there is not necessarily ‘a wholly artificial arrangement which does not reflect economic reality’.6 This should be assessed on a case-by-case basis, with all aspects of the situation in question to be examined. The aspects to be examined include the organizational, economic and other relevant characteristics of the group to which the parent company belongs, as well as the structure and strategy of that group.7 The fact that the group's structure and strategy should be taken into account implies that when answering the question of whether there is abuse, not only the parent company itself should be taken into account. In this context, the activities of other group companies, e.g., the indirect shareholder or sister companies, are also relevant.

In the case at hand, Juhler Holding8 in itself did not meet the requirements to receive dividends from its German subsidiaries exempt from withholding tax. However, the holding company held more than 25 subsidiaries. In addition, it had amongst others a property portfolio, exercised financial control within the group so as to optimise the group’s interest costs and was responsible for supervising and monitoring the performance of the individual subsidiaries. The entity did not have its own office. If required, it used the premises, other facilities and staff of other companies within the group.9 In this situation, from a group perspective there seems to be economic reality. The CJEU basically explains that the economic activities in the other group entities are relevant for the application of the anti-abuse provision. The Deister Holding and Juhler Holding case therefore prescribes a group approach for assessing whether there is abuse. Due to this group approach economic double taxation10 can be avoided.