27/08/2020
Student ID: i6147620
Matteo Barchi
International and European Tax Law LLM
Master Thesis
Number of words: 9.983
Thesis supervisor: Alice Draghici
How did the Danish cases impact the structuring of private equity
investments via Luxembourg?
1
,Table of Contents
I. Introduction ............................................................................................................. 4
A. Research question .................................................................................................. 5
B. Research structure and outline............................................................................... 5
C. Methodology.......................................................................................................... 6
II. Luxembourg’s attractiveness for private equity investments ......................... 7
A. Private equity investments: an alternative asset class............................................ 7
B. The variety of investment vehicles in Luxembourg .............................................. 7
C. A typical Luxembourg private equity investment structure .................................. 8
i. The structure’s characteristics: the fund and its investors ................................. 9
ii. The structure’s characteristics: the société à responsabilité limitée (SARL) .. 10
iii. The structure’s characteristics: the bid company’s acquisition ................... 11
iv. The structure in operation ............................................................................ 11
III. The Danish cases ................................................................................................ 13
A. T Danmark v Skatteministeriet ............................................................................ 13
B. Y Denmark v Skatteministeriet ........................................................................... 13
C. The Danish tax authority and the search for an applicable legal basis ................ 14
D. The preliminary questions referred by the Skatteministeriet ............................... 15
IV. The anti-abuse principle under EU law........................................................... 16
A. The decisions in Van Bisebergen and Emsland Starke ....................................... 16
B. The Kofoed decision............................................................................................ 16
C. The Cadbury Schweppes decision ....................................................................... 17
D. The notion of abuse in the field of VAT ............................................................. 17
V. The Advocate General’s Opinion ......................................................................... 19
A. The theory behind the PSD exemptions .............................................................. 19
B. Article 1(2) PSD vis-à-vis the Kofoed doctrine .................................................. 19
C. The prevention of abuse principle under EU law ................................................ 20
D. The tax treaty beneficial ownership concept and Article 1(2) PSD .................... 21
VI. The Court’s ruling in the Danish cases............................................................ 22
A. The anti-abuse principle in EU direct taxation .................................................... 22
i. The elements of abuse ..................................................................................... 23
ii. The ‘artificiality’ requirement ......................................................................... 24
iii. An economic test to identify abuse.............................................................. 25
B. The obligation to deny benefits ........................................................................... 26
i. The EU fundamental freedoms ........................................................................ 27
2
, ii. Article 4(3) TEU and the principle of sincere cooperation ............................. 27
C. The notion of beneficial ownership ..................................................................... 28
i. The Spanish Central Tax Court Decision on the application of the PSD ........ 30
VII. The structuring of Luxembourg private equity investments in the post-
Danish cases era ............................................................................................................. 31
A. The short-term impacts ........................................................................................ 31
i. Safe harbour rules ............................................................................................ 31
ii. The elements of abuse and the Deister Holding doctrine ................................ 32
iii. Alternatives to profit repatriations ............................................................... 33
B. The potential impact on the industry as a whole ................................................. 35
C. The long-term impacts ......................................................................................... 36
D. An alternative for private equity investments...................................................... 37
i. The payment to the US holding company ....................................................... 38
ii. The payment to the Hungarian holding company............................................ 41
iii. The payment to the fund .............................................................................. 42
VIII. Conclusion and outlook................................................................................. 43
A. Outlook ................................................................................................................ 44
IX. Bibliography....................................................................................................... 45
A. Primary sources ................................................................................................... 45
B. Secondary sources ............................................................................................... 48
3
, I. Introduction
Following the 2007 credit crunch, global private equity activity rebounded, and it
is now regarded as an important investment opportunity for institutional investors.
Indeed, in 2019 private equity investments in Europe reached all-time records in
terms of deals value and fundraising.1 In this respect, Luxembourg plays a pivotal
role. Backed by its political and economic stability, financial services industry, and
business-friendly environment, it has become a leading hub for structuring private
equity investments.2 As such, foreign investors are offered an attractive platform
to access European markets and repatriate their profits.
To do so, Luxembourg private equity investments often rely on a standard structure
to achieve structural subordination and minimise tax leakages. The structure
generally comprises the fund at the top, which pools the investor’s money together.
One or more Luxembourg holding companies are then interposed between the fund
and the target company for both commercial and tax reasons.3 Concerning the
latter, the presence of the holding companies enables investors to access the
Parent-Subsidiary Directive (hereinafter the ‘PSD’)4 and eliminate withholding tax
in instances of dividend payments. For this to be the case, the jurisprudence of the
European Court of Justice (hereinafter the ‘ECJ’ or ‘Court’) specified that the
arrangement cannot be ‘wholly artificial’.5 Conversely, intermediaries with
sufficient legal substance could benefit from the application of the PSD.6
On 26 October 2019, however, the Court delivered a landmark ruling concerning
the obtainment of benefits under the PSD in the so-called Danish cases.7 Contrary
to its prior jurisprudence in the field of direct taxation, it held that a self-executing
anti-abuse principle exists under EU law. Taxpayers are therefore prevented from
obtaining Directive’s benefits in instances of abuse. To determine whether this is
the case, the Court provided several subjective elements to disentangle abusive
1
Nouel, G.L., 2019.
2
LPEA 2020.
3
Duro, C., 2019. Page 365.
4
Council Directive 2011/96/EU. Given the common use of the ‘leverage buy-out model’ in
private equity investments, this strucutre also allows the application of the Interest and Royalties
Directive (Council Directive 2003/49/EC).
5
Case C-196/04. Para 51.
6
Ibid. Para 67.
7
Case 116/16.
4
Student ID: i6147620
Matteo Barchi
International and European Tax Law LLM
Master Thesis
Number of words: 9.983
Thesis supervisor: Alice Draghici
How did the Danish cases impact the structuring of private equity
investments via Luxembourg?
1
,Table of Contents
I. Introduction ............................................................................................................. 4
A. Research question .................................................................................................. 5
B. Research structure and outline............................................................................... 5
C. Methodology.......................................................................................................... 6
II. Luxembourg’s attractiveness for private equity investments ......................... 7
A. Private equity investments: an alternative asset class............................................ 7
B. The variety of investment vehicles in Luxembourg .............................................. 7
C. A typical Luxembourg private equity investment structure .................................. 8
i. The structure’s characteristics: the fund and its investors ................................. 9
ii. The structure’s characteristics: the société à responsabilité limitée (SARL) .. 10
iii. The structure’s characteristics: the bid company’s acquisition ................... 11
iv. The structure in operation ............................................................................ 11
III. The Danish cases ................................................................................................ 13
A. T Danmark v Skatteministeriet ............................................................................ 13
B. Y Denmark v Skatteministeriet ........................................................................... 13
C. The Danish tax authority and the search for an applicable legal basis ................ 14
D. The preliminary questions referred by the Skatteministeriet ............................... 15
IV. The anti-abuse principle under EU law........................................................... 16
A. The decisions in Van Bisebergen and Emsland Starke ....................................... 16
B. The Kofoed decision............................................................................................ 16
C. The Cadbury Schweppes decision ....................................................................... 17
D. The notion of abuse in the field of VAT ............................................................. 17
V. The Advocate General’s Opinion ......................................................................... 19
A. The theory behind the PSD exemptions .............................................................. 19
B. Article 1(2) PSD vis-à-vis the Kofoed doctrine .................................................. 19
C. The prevention of abuse principle under EU law ................................................ 20
D. The tax treaty beneficial ownership concept and Article 1(2) PSD .................... 21
VI. The Court’s ruling in the Danish cases............................................................ 22
A. The anti-abuse principle in EU direct taxation .................................................... 22
i. The elements of abuse ..................................................................................... 23
ii. The ‘artificiality’ requirement ......................................................................... 24
iii. An economic test to identify abuse.............................................................. 25
B. The obligation to deny benefits ........................................................................... 26
i. The EU fundamental freedoms ........................................................................ 27
2
, ii. Article 4(3) TEU and the principle of sincere cooperation ............................. 27
C. The notion of beneficial ownership ..................................................................... 28
i. The Spanish Central Tax Court Decision on the application of the PSD ........ 30
VII. The structuring of Luxembourg private equity investments in the post-
Danish cases era ............................................................................................................. 31
A. The short-term impacts ........................................................................................ 31
i. Safe harbour rules ............................................................................................ 31
ii. The elements of abuse and the Deister Holding doctrine ................................ 32
iii. Alternatives to profit repatriations ............................................................... 33
B. The potential impact on the industry as a whole ................................................. 35
C. The long-term impacts ......................................................................................... 36
D. An alternative for private equity investments...................................................... 37
i. The payment to the US holding company ....................................................... 38
ii. The payment to the Hungarian holding company............................................ 41
iii. The payment to the fund .............................................................................. 42
VIII. Conclusion and outlook................................................................................. 43
A. Outlook ................................................................................................................ 44
IX. Bibliography....................................................................................................... 45
A. Primary sources ................................................................................................... 45
B. Secondary sources ............................................................................................... 48
3
, I. Introduction
Following the 2007 credit crunch, global private equity activity rebounded, and it
is now regarded as an important investment opportunity for institutional investors.
Indeed, in 2019 private equity investments in Europe reached all-time records in
terms of deals value and fundraising.1 In this respect, Luxembourg plays a pivotal
role. Backed by its political and economic stability, financial services industry, and
business-friendly environment, it has become a leading hub for structuring private
equity investments.2 As such, foreign investors are offered an attractive platform
to access European markets and repatriate their profits.
To do so, Luxembourg private equity investments often rely on a standard structure
to achieve structural subordination and minimise tax leakages. The structure
generally comprises the fund at the top, which pools the investor’s money together.
One or more Luxembourg holding companies are then interposed between the fund
and the target company for both commercial and tax reasons.3 Concerning the
latter, the presence of the holding companies enables investors to access the
Parent-Subsidiary Directive (hereinafter the ‘PSD’)4 and eliminate withholding tax
in instances of dividend payments. For this to be the case, the jurisprudence of the
European Court of Justice (hereinafter the ‘ECJ’ or ‘Court’) specified that the
arrangement cannot be ‘wholly artificial’.5 Conversely, intermediaries with
sufficient legal substance could benefit from the application of the PSD.6
On 26 October 2019, however, the Court delivered a landmark ruling concerning
the obtainment of benefits under the PSD in the so-called Danish cases.7 Contrary
to its prior jurisprudence in the field of direct taxation, it held that a self-executing
anti-abuse principle exists under EU law. Taxpayers are therefore prevented from
obtaining Directive’s benefits in instances of abuse. To determine whether this is
the case, the Court provided several subjective elements to disentangle abusive
1
Nouel, G.L., 2019.
2
LPEA 2020.
3
Duro, C., 2019. Page 365.
4
Council Directive 2011/96/EU. Given the common use of the ‘leverage buy-out model’ in
private equity investments, this strucutre also allows the application of the Interest and Royalties
Directive (Council Directive 2003/49/EC).
5
Case C-196/04. Para 51.
6
Ibid. Para 67.
7
Case 116/16.
4
