Limiting Benefit Shopping : Use and Abuse of EC Law

This article forms part of a triptych, each panel of which is independent but also complements the other two. The theme of the triptych is what measures are possible - and impossible - in combating conduit tax arrangements under EU law. As the use of EU conduit companies to acquire tax benefits and the invoking of abuse in order to withhold those benefits the first panel deals with the question of how much scope a Member State has under EC law to prevent the enjoyment of benefits arising for EU conduit companies from EC law. It follows from the case law of the European Court of Justice that an EU conduit company as a beneficiary of the right of secondary establishment, must pursue genuine economic activity in another Member State in order to be entitled to invoke the benefits of that right. This means that Member States in their capacity as source states have the discretionary power to impose a qualitative critical test when granting benefits pursuant to the right of secondary establishment.This might mean that Member States need not allow a reduction in tax at source to an EU conduit company that they do allow in an internal situation. It has also become apparent that the doctrine of abuse developed by the ECJ inspired by the Halifax case and applied in the Cadbury Schweppes case does not give Member States any additional discretion as regards the right of secondary establishment for denying the benefits of that right. Where invocation by an EU conduit company of the Parent-subsidiary directive and the Interest & Royalty Directive is concerned, the Member States are subject to an obligation not to grant the benefits of those two directives in the event of an abuse, although is not clear precisely what this obligation entails. Member States might be required, in their capacity of source state, not to grant any reduction in tax at source to EU conduit companies. Our analysis of the ECJ's case law in the field of primary Community law, in particular the freedom of establishment, and secondary Community law leads us to the conclusion that Member States have substantial discretion as regards combating artificial arrangements that are intended to minimize taxation on capital payments and/or capital gains