Since 2015, when there was the release of the famous BEPS (base erosion and profit shifting) reports, the Private Equity sector has been a collaterally impacted by tax measure primarily aiming at fighting the aggressive tax planning which is supposedly organized by multinational groups. So many measures have been introduced without considering the diversity in the economic sphere and the co-existence of different environments with pre-existing multi-layers of taxes.
What are the challenges for Private Equity Asset Managers?
There is an unprecedented pace of changes in the tax environment and Private Equity Asset Managers have to deploy resources to make sure that none of them are adversely impacting their existing set up and that they are taken into consideration when designing their investment structures. The following are some selected examples from 2020 only:
- French Supreme Administrative Court 5 June 2020, n° 423809, Stés Eqiom et Enka
The Court, by making a direct reference to Court of Justice of the European Union (CJEU) Danish Case (C-116/16) (point 113), has ruled that the beneficial ownership test is not contrary to the EU Parent Subsidiary Directive (EU PSD) and must be seen as a condition to get dividend withholding tax (WHT) relief under EU PSD.
- Italian Supreme Court Case 16697/2019 (Fingen)
The Italian tax authorities challenged the tax residency of a Dutch holding company (DutchCo) having its legal seat in The Netherlands, by arguing that the place of effective management of the Dutch entity was in Italy. The DutchCo was considered to be a tax resident in Italy as the strategic and operative decisions were taken in Italy and the Amsterdam office (with 2 employees) was considered to be simply the place where the daily business was carried out.
- Spanish Supreme Court Case 5448/2018 (3 March 2020)
The Supreme Court rejected the argument that the branch in Switzerland of a Spanish entity could be characterized as a permanent establishment because, in its view, the activity carried on by the branch was merely ancillary, even though the branch was being treated in Switzerland as a permanent establishment.
Swiss Supreme Court 2C-354/2018 (April 2020)
In a situation where a Swiss company has an Irish parent, the Lower Swiss court maintained that the Irish company was not the beneficial owner of the dividend. The Swiss Supreme Court maintained that (i) the arrangement was abusive because of the nexus between the share transfer (2006) and the distribution of pre-acquisition reserves (2007) and (ii) the Irish company did not have premises or employees of its own.
- Spanish Administrative Resolution 185/2017 (8 October 2019 Interest payments)
Although some controversial aspects remain, the Spanish Tax Administration takes the approach that the Danish Cases doctrine is fully applicable and has denied the EU directive exemption and the Tax Treaty benefits to a Dutch company holding a Spanish subsidiary. The Spanish Tax Administration took the position that the Dutch holding company was not the beneficial owner of the interest it received, as the debt instrument (on which interest was accrued) was considered to be granted only with the purpose to use an instrument to channel the payments through the shareholder chain.
- New WHT requirements in Germany
On 20 November 2020, the German Ministry of Finance issued a working draft law proposing a revision of certain WHT procedures with respect to income from capital investment and royalties in Germany. Within this draft, the information and certification requirements for WHT agents are revised and the anti-treaty shopping rules are aligned with the CJEU decisions.
What change can we expect in the future?
The legislative and administrative changes have mostly been driven by the so-called Danish Doctrine but a new set of tax measures is upcoming, in particular with BEPS 2.0. and its impact to deductible payments made to investment funds. In addition, in a post-Covid environment, the government will undoubtedly be looking to increase their revenues and new tax measures are to be expected in the coming years.
How can EY Luxembourg assist the market?
With our strong network and our solid understanding of investment structures, we are able to monitor, on a real time basis, the impact of those changes and to provide relevant guidance to facilitate PEAM to secure their expected return and offer a decent level of predictability to their Limited Partners.