Lux Times, April 2019

Beneficial Ownership and the SPV model used by Alternative Investment Funds

  • Share

Holding companies and special purpose vehicles (SPVs) are widely used for the acquisition and holding of assets of Alternative Investment Funds (AIF) investing for instance in real estate, private equity and debt. These entities are established for various reasons, such as to segregate risks from other investments, improve credit rating, limit asset pledges for bank financing and allow investors to enter at a lower level of the structure.

These entities are usually formed to hold asset(s) for a limited period of time (fund cycle) and their activities mainly consist of holding and financing. Support services, treasury and advisory activities are typically performed by other entities in the group although they can be carried out by the holding companies if they have the appropriate resources to do so.

As the main sources of income are dividends and interest, holding companies usually benefit from the availability of exemptions under the Parent-Subsidiary Directive (90/435) or the Interest and Royalties Directive (2003/49) (hereafter the “EU Directives”).

However, in view of recent decisions by the European Court of Justice (CJEU) on six cases involving withholding tax on dividends or interest paid by Danish entities to companies in other Member States [1] , the availability of the EU Directives should not be taken for granted.

The CJEU decided that the exemptions provided under the EU Directives must be denied by the national authorities or courts in cases of abuse or fraud. It addressed a number of situations that can indicate the presence of an abuse:

  • A group of companies is set up for artificial reasons if the structure is purely formal, devoid of economic justification and its main objective (or one of its main objectives) is to obtain an improper tax advantage. For instance, conduit entities interposed, without economic justification, to achieve a withholding tax exemption which otherwise would not have been possible;
  • The sole activity of the company is the receipt and distribution of dividends (conduit entity). An analysis of all the relevant factors – management of the company, balance sheet, costs and expenses, staff employed, premises and equipment held – is needed to conclude on the (absence of) actual economic activity;
  • All (or almost all) dividends or interest - immediately or shortly after receipt - are / is transferred to entities who do not benefit from the conditions for the exemption of the EU Directives;
  • The company only makes an insignificant taxable profit when it acts as a conduit company;
  • A complex or intra-group financing structure has been put in place shortly before an anticipated change of tax law.

Moreover, to benefit from the interest exemption under the EU Interest and Royalties Directive, the company must be the beneficial owner of the interest – i.e. it has the right to use and enjoy the interest as it deems fit without being bound by contractual or legal arrangements.

It is important to note that if an exemption under the EU Directives would have been available had the income been paid directly to the beneficial owner in another country, the structure might not be regarded as abusive.

If an AIF has structured its investments through holding companies, this does not imply that the structure is abusive. However, the overall economic purpose of an AIF structure with holding companies, the substance of the transactions involved and the presence of the AIF and its holding companies in the relevant jurisdictions should be carefully analyzed to consider the availability of the exemptions under the EU Directives. In addition, the timing of payments (interest and dividends) in and out of the structure, as well as the ability of the company to decide how to use these funds, are now more likely to be scrutinized.


[1] Cases C-115/16, C-116/16, C-117/16, C-118/16, C-119/16 and C-299/16.