1.

In these proceedings, and in three parallel sets of proceedings, ( 2 ) the Court of Justice is required to rule on the conditions under which the beneficial owner of interest under civil law also qualifies as beneficial owner within the meaning of the Interest and Royalties Directive. ( 3 ) In order to do so, it will need to clarify whether EU law has also to be interpreted in light of the commentaries on the OECD Model Tax Convention, especially those revised after the adoption of the directive. The question also arises as to how the ban on abuse is defined in EU law and whether it is directly applicable.

2.

These questions have been raised in connection with a tax dispute in Denmark. The tax administration’s view is that avoidance of Danish tax at source, via an interpolated ‘controlled’ company established outside the EU, constitutes abuse of the law, as it fundamentally precludes any final liability for tax at source within the corporate structure, even where the interest is ultimately channelled to a capital investment company in a third country. If that third country then prevents information on interest payments to investors in the capital investment companies from reaching their countries of residence, it may be that no tax is ultimately assessed on investors’ income.

3.

The above questions ultimately apply to the fundamental conflict between the taxable person’s freedom to arrange his affairs under civil law and the need to prevent arrangements that are valid under civil law but nonetheless abusive under certain circumstances. Even though this problem has existed since the invention of modern tax legislation, it is hard to draw a dividing line between admissible and inadmissible tax-reduction measures. A driver who sells his car following an increase in road tax obviously acts in order to avoid road tax. However, that cannot be construed as an abuse of law, even if his sole reason was to save tax.

4.

In light of the angry political mood concerning the tax practices of certain multinational groups, drawing that dividing line is no easy task for the Court of Justice and not every action by an individual to reduce their tax should be open to a verdict of abuse.

5.

The EU legal framework applicable to this case is Directive 2003/49 and Articles 43, 48 and 56 EC (now Articles 49, 54 and 63 TFEU).

6.

Directive 2003/49 states in recitals 1 to 6:

7.

Article 1(1) of Directive 2003/49 is worded as follows:

‘Interest or royalty payments arising in a Member State shall be exempt from any taxes imposed on those payments in that State, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.’

8.

Article 1(4) of Directive 2003/49 further states:

‘A company of a Member State shall be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person.’

9.

Article 1(7) of Directive 2003/49 states:

‘This Article shall apply only if the company which is the payer, or the company whose permanent establishment is treated as the payer, of interest or royalties is an associated company of the company which is the beneficial owner, or whose permanent establishment is treated as the beneficial owner, of that interest or those royalties.’

10.

Article 5 of Directive 2003/49 contains the following rule under the heading ‘Fraud and abuse’:

‘(1)   This Directive shall not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.

(2)   Member States may, in the case of transactions for which the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this Directive or refuse to apply this Directive.’

11.

The Denmark-Luxembourg Double Taxation Convention (‘the DTC’) of 17 November 1980 provides as follows in Article 11(1) on the distribution of the power to tax interest:

‘Interest arising in a Contracting State and paid to a person resident in another Contracting State can be taxed in that other State only if that person is “the beneficial owner” of the interest.’

12.

Under that provision, the source State, in this case Denmark, cannot tax interest paid to a person resident in Luxembourg, if that person is ‘the beneficial owner’ of the interest. The concept ‘beneficial owner’ is not defined in the DTC.

13.

According to the referring court, the legal situation under Danish law in the years at issue in this case is as follows.

14.

The Danish Law on corporation tax ( 4 ) regulates the limited tax liability of foreign companies for interest credited or paid by Danish companies as follows in Paragraph 2(1)(d):

‘Paragraph 2. Companies, associations etc. within the meaning of Paragraph 1(1) having their registered office abroad are liable for tax inasmuch as they ...

15.

Ultimately, limited tax liability did not apply in 2007 to the interest paid to a parent company which is not taxed or is subject only to reduced taxation under Directive 2003/49 or a DTC.

16.

Where, however, interest channelled outside Denmark is subject to a limited tax liability under Paragraph 2(1)(d) of the Law on corporation tax, the interest payer is required under Paragraph 65D of the Danish Law on tax at source ( 5 ) to withhold the tax at source (‘tax on interest’).

17.

The rate was 30% for the 2006 and 2007 tax years and 25% for the 2008 tax year. In the event of late payment of tax withheld at source (where there is limited tax liability), interest is charged on the tax liability (Paragraph 66 B of the Law on tax at source). The default interest is payable by the person required to withhold the tax at source.

18.

There were no general provisions of law to prevent abuse in force in Denmark between 2006 and 2008. However, the ‘reality doctrine’ established in case-law requires tax to be assessed on the basis of a specific analysis of the facts. This means, for example, that fictitious and artificial tax arrangements may be disregarded under certain circumstances and tax may be assessed instead based on a substance-over-form approach. It is common ground that the reality doctrine does not provide a basis on which the legal transactions conducted in the present case could be disregarded.

19.

The principle of the ‘rightful income recipient’ has also been established in Danish case-law. That principle is based on the fundamental provision on income taxation in Paragraph 4 of the Statsskatteloven (Danish tax Code), which states that the tax authorities are not required to accept an artificial separation between the income-generating business/activity and the allocation of interest deriving therefrom. It is therefore necessary to determine who — irrespective of the corporate structure as presented — is the real recipient of certain forms of income and therefore has a tax liability. The question is thus to whom the income is to be allocated for tax purposes. The ‘rightful income recipient’ will thus be the person who is the taxable person for the income in question.

20.

A number of capital investment companies resident in a third country incorporated several companies in Luxembourg and Denmark with a view to acquiring T Danmark (a large Danish service provider). They included the claimant in the main proceedings, N Danmark 1 (resident in Denmark, now trading as N Luxembourg 1).

21.

The acquisition of T Danmark was financed in part by loans granted by the capital investment companies ( 6 ) to N Danmark 1. Those loans were granted as a particular type of corporate bond, namely Preferred Equity Certificates (PECs) issued by N Danmark 1. A PEC is a financial instrument which is broadly similar to an interest-bearing corporate bond and the purchasers therefore become the lenders to the PEC issuer. Interest on the PECs was paid/credited to the capital investment companies from the date of issue (21 December 2005) to the summer of 2008. N Danmark 1 ultimately used the money borrowed from the third-country capital investment companies to acquire approximately 80% of the share capital of T Danmark.

22.

C Luxembourg (resident in Luxembourg) was subsequently incorporated (in April 2006) by the Luxembourg companies previously incorporated. During a share swap in the spring of 2006, all shares in N Danmark 1 were transferred to C Luxembourg, which thus became the sole parent company of the Danish company. A Luxembourg Holding (a subsidiary of the capital investment companies), also resident in Luxembourg, became the indirect owner of C Luxembourg in the spring of 2006 and its direct owner at the end of 2007.

23.

In April 2006, the PECs were transferred first from the capital investment companies to A Luxembourg Holding and then, on the same day, by A Luxembourg Holding to C Luxembourg (the parent company of N Danmark 1), which thus became the owner of the PECs.

24.

Payments in connection with the transfer of the PECs were made on each occasion by entering into agreement on an interest-bearing loan of equal amount. C Luxembourg and A Luxembourg Holding have unlimited tax liability in Luxembourg. The interest on the PECs is paid by N Danmark 1 to C Luxembourg, which uses these interest payments to service its interest payments to A Luxembourg Holding, which in turn uses the payments to service its interest payments to the capital investment companies.

25.

Between 2006 and the summer of 2008, the interest rate payable by N Danmark 1 to C Luxembourg was 10%, whereas the interest rate payable by C Luxembourg to A Luxembourg Holding was 9.96875%. The interest rate payable by A Luxembourg Holding to the capital investment companies was also 9.96875%. This changed on 9 July 2008, when the interest rate payable by C Luxembourg rose to 10% (the same interest rate as that payable to it by N Danmark 1), whereas the interest rate payable by A Luxembourg Holding to the capital investment companies remained at 9.96875%.

26.

In the period from 2006 to 2008, C Luxembourg and A Luxembourg Holding reported further six-figure yearly operating expenditure (i.e. in addition to interest expenditure). That expenditure included salaries, rents, office running costs and consultancy fees. In 2007 and 2008, both companies employed an average of one or two part-time employees. They are registered at the same address, which is also used by companies with a direct connection to one of the capital investment companies.

27.

Aside from the one-off contributions received from N Danmark 1 on 6 December 2006 in connection with interest and repayments, no other liquidity was channelled to the companies. Apart from its shareholding in N Danmark 1, C Luxembourg’s only other asset is its claim pursuant to the PECs issued by N Danmark 1.

28.

None of the capital investment companies is resident in an EU Member State or in a State with which Denmark has concluded a DTC. According to information provided by the claimant during the hearing in the main proceedings, they qualify under tax legislation as transparent ( 7 ) entities. N Danmark 1 has stated that the overwhelming majority of the ultimate investors behind the capital investment companies are resident in countries with which Denmark has concluded a DTC.

29.

In 2011, the SKAT (Danish tax authority) issued the claimant (at that time still N Danmark 1, now N Luxembourg 1) with an assessment notice for tax at source for the 2006 to 2008 tax years totalling 925764961 Danish crowns (DKK). The SKAT took the view that neither of the Luxembourg companies (C Luxembourg and A Luxembourg Holding) was the ‘beneficial owner’ of the interest and that they were simply acting as conduit companies. The interest was channelled from the Danish side of the group, via the two Luxembourg companies, to the capital investment companies. The SKAT therefore found that tax at source should have been withheld on the interest paid and credited and that, because it was not, the claimant was liable for the tax at source not withheld.

30.

N Luxembourg 1 lodged an appeal against the notice issued by the SKAT before the Landsskatteret (tax authority of last resort). As the Landsskatteret failed to rule on the appeal within six months of the lodging of the appeal, the claimant seised the Østre Landsret (High Court of Eastern Denmark).

31.

The Østre Landsret (High Court of Eastern Denmark) has now decided to make an order for reference.

32.

The Østre Landsret (High Court of Eastern Denmark) has referred the following questions for a preliminary ruling:

33.

Cases C‑115/16, C‑118/16 and C‑119/16 were joined by order dated 13 July 2016. Written observations on the questions referred were submitted to the Court of Justice in the joined proceedings by N Luxembourg 1, X Denmark A/S, C Danmark I, the Kingdom of Denmark, the Federal Republic of Germany, the Grand Duchy of Luxembourg, the Kingdom of Sweden, the Italian Republic, the Kingdom of the Netherlands and the European Commission. N Luxembourg 1, X Denmark A/S, C Danmark I, the Kingdom of Denmark, the Federal Republic of Germany, the Grand Duchy of Luxembourg and the European Commission attended the hearing on 10 October 2017, which also included Cases C‑116/16, C‑117/16 and C‑299/16.

34.

By its Questions 1 to 1.4, which should be examined together, the referring court ultimately asks how the concept of beneficial owner in Article 1(1), read in conjunction with Article 1(4) of Directive 2003/49, is to be interpreted. Therefore, the concept of beneficial owner within the meaning of Directive 2003/49 needs to be elaborated (1) and then the effect of the OECD Model Tax Convention (‘OECD MTC’) and its commentaries (‘OECD model commentaries’) on that interpretation needs to be investigated (2).

35.

Directive 2003/49 seeks to ensure equality of tax treatment between national and cross-border transactions between associated companies.

36.

Article 1(1) of Directive 2003/49, read in light of recitals 2 to 4 of the directive, aims to avoid legal double taxation of cross-border payments of interest by prohibiting the taxation of interest in the source State to the detriment of the actual beneficial owner. That provision thus concerns the tax position of the interest recipient only. ( 8 )

37.

The interest recipient is the person with a civil-law claim to the interest in his own name. In that regard, it follows from the case-law of the Court that, as a rule, the beneficial owner within the meaning of Directive 2003/49 is the person entitled under civil law to demand payment of the interest. ( 9 )

38.

Article 1(4) of Directive 2003/49 confirms this. It states that an agent, trustee or authorised signatory cannot be treated as the beneficial owner. Such persons enforce the claim either not in their own name (agent or authorised signatory) or not on their own account (trustee). Conversely, it follows that an interest recipient who collects the interest in his own name and on his own account (i.e. for his own benefit) is also the beneficial owner.

39.

The referring court notes that C Luxembourg now owns the PECs. Thus it also collects the interest in its own name. The decisive question, therefore, is whether that interest is being drawn on own account or on behalf of a third party. A person who alone can decide on the appropriation of the interest and who also alone bears the risk of loss is acting on his own account, while a person who is bound to a third party in such a way that that third party ultimately bears the risk of loss (in this case of the interest) is acting on behalf of a third party.

40.

It follows from Article 1(4) of Directive 2003/49 that a beneficial owner under civil law acting simply as a trustee would not qualify as the beneficial owner within the meaning of the directive.

41.

That C Luxembourg has set up an open trust for the benefit of A Luxembourg Holding or the capital investment companies can be ruled out. Although a trustee has property rights transferred to him, he can only exercise them in keeping with the trust agreement. By reason of that agreement, a trustee’s legal authority vis-à-vis third parties takes precedence over the legal, fiduciary, relationship between the trustee and the trustor. It is only by reason of that particular relationship that, although he acts in his own name, he no longer does so on his own account. However, there appears to be no such relationship here.

42.

Whether, in terms of substance over form, C Luxembourg has set up some form of hidden trust for the benefit of A Luxembourg Holding or the capital investment companies would be for the referring court alone to determine during the course of its overall assessment based on the history of this case and the close economic ties between the companies involved. However, the Court can provide some useful pointers here.

43.

A refinancing agreement concluded with a third party on similar terms and at a similar time as in the present case would not, of itself, suffice to assume that a trust relationship exists. Directive 2003/49 too assumes in Article 1(7) and in recital 4 that certain ties under company law exist, which per se (i.e. taken in isolation) cannot affect the determination of the beneficial owner. This is further underlined by recital 5 and by Article 4(2) of Directive 2003/49, which, even where a ‘special relationship’ exists between the payer and the beneficial owner, only provides for a correction in that amount, without calling into question the status of payer or beneficial owner. In that respect, a trust within the meaning of Article 1(4) of Directive 2003/49 goes beyond a loan agreement between associated companies.

44.

Rather, more extensive ties would have to exist internally (i.e. between the capital investment companies and A Luxembourg Holding or between C Luxembourg and A Luxembourg Holding) that limited the existing powers of C Luxembourg and/or A Luxembourg Holding vis-à-vis third parties. No such legal ties have been identified to date. In any event, they would not be established merely by reason of the fact that equity capital was used for the loan or that interest was added to the principal or converted into equity in the recipient.

45.

However, in my opinion, it would be different if, for example, the considerable expenses of the Luxembourg companies were not to be met out of the interest income and the interest had to be passed on alone and in full. It might also be different if the refinancing interest rate and the interest rate received were identical or the interpolated company incurred no costs of its own to be paid out of its interest income. It would also be somewhat different if the default risk of the Danish-registered company (N Danmark 1, now N Luxembourg 1) were borne solely by the capital investment companies, because in that case the loan claim of the Luxembourg company against the capital investment companies would also lapse. However, it is for the referring court alone to determine if such evidence exists.

46.

If the referring court were to find, based on all the circumstances of the case, that such a trust relationship exists, then, on the basis of the wording of Article 1(4) of Directive 2003/49, the trustor would certainly be the beneficial owner within the meaning of Directive 2003/49. Inasmuch as the interest payment made to it via the trustee also fulfils the requirements of Directive 2003/49, exemption from tax at source would still apply.

47.

The answer to Question 1 and 1.4 is therefore that a company resident in another Member State which owns the interest-bearing claim is to be regarded as the beneficial owner within the meaning of Article 1(1) of Directive 2003/49. The situation would be different if it was acting not in its own name and on its own account, but for and on the account of a third party pursuant to a (possibly hidden) trust relationship. In that case the third party would have to be regarded as the beneficial owner. It is for the referring court to determine whether that is the case in the course of its overall assessment of all the facts.

48.

By Questions 1.1 to 1.3, the referring court asks in particular whether the concepts of Directive 2003/49 should be interpreted in light of the commentaries on the OECD MTC and, if so, whether subsequent commentaries on an OECD MTC that postdates the directive should be taken into account.

49.

In the subsequent commentaries on the OECD MTC (e.g. sections 8 and 9 added in 2008), a conduit company is not normally regarded as the beneficial owner if, though the formal beneficial owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties.

50.

OECD MTCs are not legally binding, multilateral conventions under international law; they are the unilateral acts of an international organisation in the form of recommendations to its member countries. Even the OECD does not consider these recommendations to be binding; rather, under the OECD Rules of Procedure, the member countries must consider whether their implementation is opportune. ( 10 ) This applies a fortiori to the commentaries published by the OECD, which ultimately only contain legal opinions.

51.

However, in light of settled case-law, it is not inappropriate for the Member States to derive guidance for the balanced allocation of their fiscal competence from international practice, as reflected in the Model Tax Conventions. ( 11 ) The same applies to guidance from any prevailing international legal opinion, which may be reflected in the commentaries on the OECD MTC.

52.

However, the commentaries on the OECD MTC cannot have a direct effect on the interpretation of an EU directive, even if the terms used are identical. In that sense, those commentaries simply reflect the opinion of the persons who worked on the OECD Model Tax Convention, not the views of a parliamentary legislature or indeed of the EU legislature. At most, should it transpire from the wording and history of the directive that the EU legislature was guided by the wording of an OECD Model Tax Convention and the commentaries (available at the time) on that OECD Model Tax Convention, a similar interpretation might be appropriate.

53.

Therefore, the Court has already held that a rule in a double taxation agreement, interpreted in the light of the OECD commentaries on its applicable Model Tax Convention, cannot restrict EU law. ( 12 ) This applies in particular to changes to the OECD Model Tax Convention and the commentaries published after the adoption of the directive. Otherwise, the OECD member countries would be able to decide on the interpretation of an EU directive.

54.

However, if the OECD commentaries have no direct binding effect and if the criterion applied in Article 1(4) of Directive 2003/49 is whether the recipient receives the payments for its own benefit rather than as a trustee, then that is the decisive criterion (under EU law) by which to determine a beneficial owner within the meaning of Article 1(1) of Directive 2003/49. If no (possibly hidden) trust exists, then the person with the civil-law claim is also the beneficial owner for the purposes of Directive 2003/49. In the final analysis, however, this is again similar to the approach taken in the more recent commentaries on the OECD MTC.

55.

Therefore, the answer to Questions 1.1 and 1.2 is that the concept of beneficial owner must be interpreted under EU law autonomously and independently of Article 11 of the 1977 OECD Model Tax Convention or subsequent versions. It is therefore unnecessary to answer Question 1.3.

56.

By its Question 4, the referring court essentially asks if an arrangement such as that in the present case, which also avoids tax at source in Denmark, may be seen as abuse within the meaning of Article 5 of Directive 2003/49.

57.

Abuse is determined from a general examination of all the circumstances of the individual case, which it is for the competent national authorities to make and which must be open to judicial review. ( 13 ) It is for the referring court to conduct that general examination; ( 14 ) however, the Court can give the referring court some useful pointers ( 15 ) for the purpose of determining if the transactions are being carried out in the context of normal commercial transactions or solely for the purpose of wrongfully obtaining advantages provided for by EU law. ( 16 )

58.

First, I will examine the concept of abuse in EU law more closely (1) and then the existence of abuse in this particular case (2).

59.

According to Article 5 of Directive 2003/49, the Member States should not be precluded from taking appropriate measures to combat fraud and abuse (recital 6).

60.

The interpretation of the concept of beneficial owner suggested above (point 36 et seq.) does not conflict with that concern. On the contrary, that concern is addressed not primarily via the concept of beneficial owner (in particular, the involvement of a trustee is not necessarily abusive), but by Article 5 of the directive.

61.

That provision ultimately expresses what has been held in settled case-law: EU law cannot be relied on for fraudulent or abusive ends. In fact, the application of a rule of EU law cannot be extended to cover abusive practices by economic operators, i.e. transactions that are carried out not in the context of normal commercial transactions, but solely for the purpose of wrongfully obtaining advantages provided for by EU law. ( 17 )

62.

Although Directive 2003/49 itself does not define abuse, other EU directives provide necessary pointers. For example, the Mergers Directive ( 18 ) refers in the second sentence of Article 11(1)(a) to an absence of valid commercial reasons for the operation as a typical example of such motivation. Furthermore, Article 6 of the directive laying down rules against tax avoidance practices ( 19 ) (‘Directive 2016/1164’), which was not yet in force in the years at issue, defines the concept of abuse. The criterion there is whether a non-genuine arrangement has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law. According to Article 6(2), an arrangement is regarded as non-genuine to the extent that it was not put into place for valid commercial reasons which reflect economic reality.

63.

Last but not least, the Court has held on various occasions that for a restriction of freedom of establishment to be justified on grounds of the prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory. ( 20 ) As the Court has also since held on various occasions, it suffices if the arrangement is put in place not with the sole aim, ( 21 ) but with the essential aim, of obtaining a tax advantage. ( 22 )

64.

This case-law of the Court contains two mutually contingent elements. First, wholly artificial arrangements which ultimately only exist on paper are refused recognition a priori. Furthermore, decisive importance is attached to circumvention of tax laws that is also made achievable by arrangements that exist in commercial life. Such cases may be the more frequent and are now also expressly covered by the new Article 6 of Directive 2016/1164. The Court too held in a more recent judgment that the wholly artificial nature of the arrangement was just one fact that suggested that the essential aim was to obtain a tax advantage. ( 23 )

65.

A wholly artificial arrangement which does not reflect economic reality can hardly be assumed in the present case. That is confuted by the actual existence of office premises, employees and six-figure operating expenditure. One to two part-time employees were in fact employed. The companies also actually traded, incurring considerable costs in the form of consultancy fees, rents, notary’s fees and office running costs (e.g. EUR 7810 in salaries, EUR 3253 in rents and for premises, EUR 300 in telephone bills, EUR 174579 in legal fees and EUR 15000 in accountancy and audit fees).

66.

The somewhat strange distribution of costs (low rents, low staff costs, high consultancy fees) may be due to the fact that small office space and few employees are required to manage a single loan. As the Court found recently, the fact that the activity consists only in the management of assets and the income results only from such management does not mean that a wholly artificial arrangement exists which does not reflect economic reality. ( 24 ) There is nothing in the order for reference of the national court to suggest that this business exists on paper only.

67.

In light of the fact that asset management companies in particular (may) engage per se in little activity, this criterion is also subject to very minor requirements. If the company has been validly incorporated, can actually be reached at its registered office and has tangible and human resources at its disposal on site to achieve its object (in this case the management of a loan agreement), it cannot be seen as an arrangement that does not reflect economic reality.

68.

However, in my opinion, that does not preclude the existence of an abusive tax arrangement, as the wording of the new Article 6 of Directive 2016/1164 shows.

69.

Thus, there are other criteria that are key factors in the present case, especially the non-fiscal reasons to be considered.

70.

According to the case-law of the Court, the fact that either the registered office or real head office of a company was established in accordance with the legislation of a Member State for the purpose of enjoying the benefit of more favourable legislation does not, in itself, constitute abuse. ( 25 ) The mere fact that interpolated Luxembourg companies were also involved in the business transaction with foreign investors in the present case does not, therefore, automatically mean that abuse must be assumed.

71.

Furthermore, where the taxable person has a choice between two possibilities, he is not obliged to choose the one which involves paying the higher amount of tax but, on the contrary, may choose to structure his business so as to limit his tax liability. ( 26 ) Thus, again according to the Court, taxable persons are generally free to choose the organisational structures and the form of transactions which they consider to be most appropriate for their economic activities and for the purpose of limiting their tax burdens. ( 27 ) The mere fact that a business structure was chosen in the present case that did not generate the maximum tax burden (in this case additional and final liability for tax at source) cannot in itself qualify as abuse.

72.

Furthermore, apart from in the case of a wholly artificial arrangement that does not reflect economic reality, a Union citizen, whether a natural or a legal person, cannot be deprived of the possibility of relying on the provisions of the Treaty because he has sought to profit from tax advantages in force in a Member State other than his State of residence. ( 28 ) Thus, a business structure that involves a Member State that dispenses with tax at source, as in the present case, cannot for that reason alone be considered to be an abuse.

73.

In that regard, freedom of establishment includes the choice of Member State which, in the opinion of the undertaking concerned, offers the best tax situation. If that principle applies to the more highly harmonised VAT laws, ( 29 ) it applies a fortiori to less harmonised income tax laws, where acceptance of the differences between the tax regulations ( 30 )of the individual Member States is an intentional, political choice.

74.

Furthermore, the Court has clarified, in light of the fundamental freedoms which are also relevant to this case, that the mere fact that a resident company is granted a loan by a related company which is established in another Member State cannot be the basis of a general presumption of abusive practices and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty. ( 31 ) Consequently, the various loan arrangements between the parent, subsidiary and sub-subsidiary companies in the present case are not in themselves abusive.

75.

The Court has further clarified that the tax relief on dividends provided for under EU law is not contingent upon the origin or residence of the shareholder, which is immaterial for the purposes of the Parent-Subsidiary Directive. ( 32 ) Nor does Directive 2003/49 make any such distinction. Therefore, the fact that shareholders of A Luxembourg Holding are third-country capital investment companies is not in itself abusive.

76.

In my opinion, the background to the arrangement deemed abusive is a decisive factor in an overall examination. According to the parties at the hearing, it was advantageous in the past, due to Danish tax laws, for foreign investors to acquire operational companies in Denmark via a Danish (leveraged) holding company. Denmark later tightened up those laws (with effect from 2006) by introducing a tax at source that gives rise to an additional and final tax liability.

77.

Every State is at liberty to amend its tax laws. However, that also changes the basis of assessment of the economic operators involved. In my opinion, to attempt to maintain the original basis for assessment of a business transaction (in this case the acquisition of an operational Danish company with the help of foreign investors) is not abusive. Indeed every undertaking must be expected to want to maximise its profits.

78.

However, more significant in the present case is the fact that the actual investors — here the capital investment companies, which may or may not qualify as fiscally transparent — are often registered in particular third countries (as a rule on small islands such as the Cayman Islands, ( 33 ) Bermuda ( 34 ) or Jersey ( 35 )). This may suggest an unusual overall approach, the financial reason for which is not immediately apparent. The capital investment companies could have been established in other States, especially if, as counsel for the claimants emphasised at the hearing, they are, in any event, fiscally transparent.

79.

In that sense, the overall arrangement might qualify as an abusive arrangement due more to the ‘establishment’ of the capital investment companies in particular third countries than to the ‘interpolation’ of Luxembourg companies. Of particular significance here is the purpose of the arrangement or the objective of the tax law circumvented (in this case, taxation in Denmark).

80.

First, it must be noted that Denmark has not been deprived of taxes on the profits of the operational company acquired (T Danmark). Those profits were duly taxed in the State of residence (i.e. in Denmark).

81.

The profits of the holding company resident in Denmark (N Danmark 1, now N Luxembourg 1) were also fully taxed in Denmark. That those profits were reduced by interest payments to the Luxembourg investors is compatible with the taxation of financial performance and the fact that such interest is fully deductible in Denmark as operating expenditure.

82.

That interest was also taxed in Luxembourg as operating income of the Luxembourg company. The fact that interest payments to investors are in turn tax-deductible as operating expenditure in Luxembourg is also in keeping with the principle of the taxation of financial performance that applies there. In that regard, Luxembourg taxed the difference between the interest paid from Denmark (10%) and the interest paid to the capital investment companies in the third countries (9.96875%).

83.

Both Luxembourg companies have unlimited tax liability in Luxembourg and are subject in Luxembourg to corporation tax on their income. Thus the requirements of Article 3(a)(iii) of Directive 2003/49 are fulfilled. Moreover, it does not follow from any provision of Directive 2003/49 that actual taxation of the beneficial owner (in this case the Luxembourg companies) in a particular amount is a precondition of the exemption. If the beneficial owner has such high operating expenditure (or losses carried forward from previous years) in the State of residence, that does not lead to actual taxation, but that taxable person is still subject to corporation tax. It therefore falls within the scope of Directive 2003/49 and its interest income is therefore also taxed ‘in a Member State’. The same applies if there is only a small corporation tax liability and no tax at source in the beneficial owner’s State of residence.

84.

Any such actual minimal taxation or non-taxation is a consequence of the tax autonomy of each State. If fiscal competition between Member States is admissible under EU law due to the lack of harmonisation of income taxes, a taxable person cannot be blamed for availing himself in reality (i.e. not just on paper) of the tax advantages offered by certain Member States.

85.

In the final analysis, the interpolation of the Luxembourg companies ultimately ‘only’ avoids tax at source on interest payments in Denmark. However, as the Court has previously ruled, tax at source actually taxes the recipient of the income (in this case, the interest). ( 36 ) That is achieved by having the payer withhold part of the income at source at the time of disbursement.

86.

Thus, tax at source in the interest payer’s State of residence is simply a particular taxation technique, rather than a type of tax, intended essentially to secure (minimum) taxation of the interest recipient. In cross-border cases in particular, proper taxation of the recipient’s income is not always ensured. As a rule, the interest recipient’s State of residence will rarely be aware of his income from abroad, unless functioning data exchange systems exist between the tax authorities (as they do now in the Union).

87.

Therefore, two requirements must be fulfilled for an arrangement to qualify as abusive circumvention of this objective of the law (to ensure the interest recipient is taxed). First, in the case of direct disbursement, tax must be chargeable in Denmark (see point 92 et seq.). Second, there must be a risk that the income will not be caught in the actual State of receipt and thus will not be taxed.

88.

If, therefore, one reason for choosing a particular business structure is to pay interest to investors via a third country in order to prevent their States of residence from obtaining information on their income, then that overall arrangement should, in my opinion, qualify as abuse of law.

89.

Any such complaint of abuse might, in turn, be invalidated if the capital investment companies provide the relevant tax information to the investors’ States of residence or if the information in question is available to the State of residence of the capital investment companies and they forward the information to the relevant States. Such a corporate structure would not then circumvent the purpose of the tax at source that has been avoided (see point 86 above). That too must be included by the referring court in its overall examination.

90.

Where tax at source is avoided on interest payments to capital investment companies resident in third countries, the primary issue is avoidance by the actual interest recipients (i.e. the investors) of tax on their interest income. In particular, abuse may be assumed to exist here if the corporate structure chosen is designed to take advantage of a lack of information exchange between the States involved in order to prevent the effective taxation of interest recipients.

91.

By Question 5, the referring court asks whether the Member State that does not wish to recognise that the interest recipient is also the beneficial owner within the meaning of Directive 2003/49, because it is simply an artificial conduit company, is bound to state whom it deems to be the beneficial owner. The nub of this question referred is who bears the burden of proving the existence of an abuse.

92.

In order for abuse of possible legal arrangements to exist, a legal arrangement must be chosen that differs from the arrangement normally chosen and gives a more favourable result than the ‘normal’ arrangement. In the present case, the ‘normal arrangement’ would have been a direct loan agreement between the investors and the claimant in the main proceedings for the purpose of acquiring the target company.

93.

In principle, it is for the tax authorities to demonstrate that the approach chosen gives a more favourable tax result than the normal arrangement, although the taxable person may have a certain duty to assist. However, the taxable person may then ‘produce, if appropriate ..., evidence as to the commercial justification for the transaction in question’. ( 37 ) Should it transpire from that evidence that the essential aim ( 38 ) was not to avoid the tax that would normally be assessed, the approach chosen cannot be deemed abusive, especially as it is the State that provides taxable persons with such options.

94.

It further follows from the case-law of the Court ( 39 ) that, if conduct is deemed abusive, the situation must be determined that would have existed in the absence of the circumstances that constitute the abusive practice and that redefined situation must be assessed in the light of the relevant provisions of national law and EU law. However, the identity of the beneficial owner must be clear.

95.

Thus, from Denmark’s perspective, abuse within the meaning of Article 5 of Directive 2003/49 can only arise if interest disbursed directly would have been taxed accordingly in Denmark. However, this is precluded under Danish law if, disregarding the conduit company, the actual interest recipient is also an undertaking registered in a different Member State or the interest recipient is resident in a State with which Denmark has concluded a DTC. If the capital investment companies are indeed fiscally transparent companies, each investor would have to be considered individually in order to answer this question.

96.

Therefore, the fifth question can be answered to the effect that a Member State that does not wish to recognise a company resident in a different Member State, to which the interest was paid, as the beneficial owner of the interest must in principle state whom it considers to be the beneficial owner in order to assume that abuse exists. This is necessary in order to determine whether a more favourable tax result is achieved as a result of the arrangement qualified as abusive. In particular in cross-border cases, the taxable person may have an enhanced duty to assist.

97.

By Questions 2, 2.1 and 3, the referring court asks (1) if Denmark can rely directly on Article 5 of Directive 2003/49 in order to refuse taxable persons exemption from tax. If this is not so, it must be clarified whether (2) by its current national law, Denmark has in fact adequately transposed Article 5 of Directive 2003/49.

98.

If, based on the aforementioned criteria, abuse exists within the meaning of Article 5 of Directive 2003/49, the peculiarity of the present case is that Danish law contained no specific provision transposing Article 5 of Directive 2003/49. Nor, according to the referring court, was there any general provision to prevent abuse. The claimant in the main proceedings, in particular, is therefore of the opinion that it cannot be denied tax relief under national law even if abuse were assumed to exist.

99.

However, it is not always necessary formally to enact the provisions of a directive (in this case Article 5 of Directive 2003/49) in specific legislation; on the contrary, the transposition of a directive may, depending on its content, be achieved through a general legal context, including general principles of national constitutional or administrative law, if it ensures the full application of the directive in a sufficiently clear and precise manner. ( 40 )

100.

The referring court refers in the proceedings for a preliminary ruling to the existence of two principles (the ‘reality doctrine’ and the principle of the ‘rightful income recipient’). However, it is common ground that these are irrelevant here if, in fact, the interest is formally paid first to the Luxembourg companies.

101.

However, Article 5 of Directive 2003/49 allows the Member States to apply provisions to prevent abuse. That is in keeping with practice throughout the Union. Thus, all Member States have developed, to the greatest possible extent, instruments to prevent abuse of the law for the purposes of tax avoidance. ( 41 ) So there is a consensus, even under national tax law, that the application of the law must in no case be extended to such an extent that abusive practices by economic operators must be tolerated. This principle, which is accepted throughout the Union, ( 42 ) is now also enshrined in Article 6 of Directive 2016/1164.

102.

In that sense, all national provisions, whether adopted in transposition of Directive 2003/49 or not, must respectively be interpreted and applied in accordance with this general principle of law and, in particular, with the wording and purpose of Regulation 2003/49 and Article 5 thereof. ( 43 ) The fact that, in interpreting national law in conformity with EU law, detriment to an individual may result does not militate against such interpretation. It is lawful, by way of national law provisions, that is to say, indirectly, to apply EU law to the detriment of an individual. ( 44 )

103.

A simple direct application of Article 5 of Directive 2003/49 to the claimant’s detriment would be denied the Danish authorities, also for reasons of legal certainty. ( 45 ) For example, a Member State cannot hold an individual to the provision of a directive that it has not transposed. ( 46 ) It is settled case-law that a directive cannot of itself impose obligations upon an individual, i.e. the directive cannot be invoked as such against him. ( 47 ) A Member State that did so would itself be guilty of ‘abusive conduct’, first, by not transposing a directive addressed to it (even though it could) and, second, by relying on a provision to prevent abuse enacted in a directive which it had not transposed.

104.

Nor could the competent authorities in the main proceedings rely directly against the individual on the general principle of EU law that abuse of rights is prohibited. At least in cases falling within the scope of Directive 2003/49, such a principle has been given specific effect in Article 5(2) of the directive and has been expressed in a concrete manner. ( 48 ) If it were to be permitted, in addition, to have direct recourse to a general principle of law which in terms of content is much less clear and precise, there would be a danger that the harmonisation objective of Directive 2003/49 and of all other directives containing specific provisions to prevent abuse (such as Article 6 of Directive 2016/1164) would be undermined. Moreover, such an approach would undermine the prohibition, already mentioned, on directly applying non-transposed provisions of directives to the detriment of individuals. ( 49 )

105.

This does not conflict with judgment delivered by the Court ( 50 ) in Italmoda and Cussens, in which the Court ruled that the prohibition of abusive practices must be interpreted as being capable, regardless of a national measure giving effect to it in the domestic legal order, of being applied directly in order to refuse exemption from VAT, without conflicting with the principles of legal certainty and legitimate expectation.

106.

However, those two judgments referred exclusively to value added tax (VAT), which differs from the subject matter at issue here. First, VAT is much more harmonised under EU law and, as it is coupled to the funding of the Union, has far more of an impact on interests under EU law than national income tax.

107.

Second, EU law (Article 325(1) and (2) TFEU) requires the Member States to take (effective) measures to collect VAT, ( 51 ) whereas the same does not apply under income tax law. Moreover, VAT law is particularly susceptible to fraud; therefore particularly effective enforcement of tax claims is required. In that sense, the Court itself drew a distinction in a recent judgment between VAT law and secondary EU law, which contains an express authority to prevent abuse. ( 52 ) Therefore, direct application of Article 5 of Directive 2003/49 to the detriment of the taxable person is out of the question. ( 53 )

108.

It will be the task of the referring court, however, to determine whether in the present case general provisions or principles of national law (including principles established in case-law) already apply, as a result of which, for example, sham transactions are disregarded under tax law or reliance on particular advantages for abusive ends is prohibited.

109.

For a restriction of freedom of establishment to be justified on grounds of the prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory. ( 54 )

110.

For that reason, Questions 2.1 and 3 can be answered to the effect that neither Paragraph 2(2)(d) of the Danish law on corporation tax, nor a DTC rule predicated on the beneficial owner for the purpose of taxing interest, suffice to be deemed to be a transposition of Article 5 of Directive 2003/49.

111.

However, that would not apply to the application in conformity with EU law of the ‘reality doctrine’ and the principle of the ‘rightful income recipient’ in Denmark, both of which have been developed precisely in order to resolve the problem that civil law allows numerous arrangements, whereas tax law is applied to economic facts. Those legal principles therefore specifically target artificial arrangements or abuse of the law by the individual and therefore constitute a sufficiently specific legal basis on which to restrict freedom of establishment. Inasmuch as the claimant in the main proceedings pointed out several times at the hearing that Denmark has not expressly transposed Article 5 of Directive 2003/49, that would ultimately not matter. It is for the national court to determine that case by case.

112.

The ‘reality doctrine’ developed in Denmark, interpreted in conformity with EU law, might therefore suffice as a legal basis on which to ignore wholly artificial or abusive arrangements, where they exist (see point 57 et seq.) for tax purposes. The ‘reality doctrine’ too seems to me to be nothing other than a particular kind of economic viewpoint which probably underlies the majority of abuse defence measures of the individual Member States. ( 55 ) This becomes clear at EU level, e.g. in Article 6(2) of Directive 2016/1164, under which an arrangement is deemed non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. It is for the national court to determine whether that is the case.

113.

If the aim of the arrangement is to prevent taxation of investors, then, despite the formal payment to the Luxembourg companies, from an economic point of view the payment is actually made to the capital investment companies or their investors. The payment to the Luxembourg companies simply reflects the (formal) reality under civil law, not the economic reality.

114.

As the Luxembourg companies must be treated in principle as the beneficial owners (as explained in point 34 et seq.), no further consideration need be given to Questions 6 and 7 referred.

115.

Inasmuch as, in application of the principles enshrined in national law, interpreted in compliance with EU law, the referring court finds that the arrangement in question is abusive, tax at source will apply under certain circumstances. However, the question then no longer arises in the present case, as that taxation is the result of abuse and it is settled case-law of the Court that abusive reliance on EU law is not permitted. ( 56 )

116.

That notwithstanding, however, the Court has also already ruled that different treatment of national and foreign interest recipients on the grounds of different taxation arrangements relates to situations which are not comparable. ( 57 ) Even if they were deemed to be comparable situations, restriction on the freedom of establishment would be justified under the case-law of the Court as long as the liability for Danish tax at source of the interest recipient resident abroad is no higher than the liability for Danish corporation tax of a national interest recipient. ( 58 )

117.

The same holds for different interest or a different accrual of the Danish corporation tax debt for the interest recipient and a Danish obligation to withhold tax at source for the interest payer. These are not similar situations as, on the one hand, a national tax (corporation tax) is charged and, on the other, a foreign tax payable by interest recipients (their income or corporation tax) is withheld and paid on their behalf. Differentiated accrual and interest payments are the result of the different technique and function of a tax at source (see point 86).

118.

In view of the foregoing, I propose that the answers to the questions from the Østre Landsret (High Court of Eastern Denmark, Denmark) should be as follows: