The PSD and its Subject-to-Tax Requirement

In the recent Wereldhave case (Case C-448/15), the CJEU was asked to shed some light on the subject-to-tax requirement of Art. 2(a)(iii) PSD.

[This post contains a short summary of an article which was recently published in Dutch in Internationale Fiscale Actualiteit, see below.]

– Art. 2(c) PSD contains a positive (subject-to-tax) and a negative criterion (not exempt)
– Exempt means: complete absence of tax, which is established by means of an express legal provision, permanently, in advance and irrespective of the profits received


In 1999 and 2000, Wereldhave Belgium (WB) distributed a dividend to its Dutch parent companies (Wereldhave International & Wereldhave). Both parent companies were fiscal investment institutions (FII’s), subject to a zero percent corporation tax in the Netherlands. The Belgian tax administration refused to apply the withholding tax exemption as provided for by Art. 5 PSD, on the grounds that the Dutch FII’s did not comply with the subject-to-tax requirement of Art. 2(a)(iii) PSD.

On the basis of these facts, two questions were referred to the CJEU. One (which will be discussed in detail here) concerned the interpretation of the subject-to-tax requirement:  “[Does the PSD preclude] a national rule that does not waive Belgian [WHT] in respect of dividend payments made by a Belgian subsidiary to a [Dutch FII], on the ground that the [FII]  is required to distribute all its profits to its shareholders and, subject to that proviso, is eligible for the zero rate of corporation tax?

Interpretation of Art. 2(a)(iii)

The CJEU concluded that the FII’s did not comply with the subject-to-tax requirement on the basis of both a textual and teleological interpretation:

  • Textual: First, Art. 2(a)(iii) lays down a positive criterion for qualifying for the benefits of the PSD (being subject to the tax in question), and a negative criterion, that is to say, not being exempt from that tax and not having the possibility of an option. According to the Court, the company should fall within the scope of the tax in question. This seeks to exclude situations involving the possibility that, despite being subject to that tax, the company is not actually liable to pay that tax.
  • Teleological: The Court further argued that the mechanisms of the PSD are  intended for situations in which, if they were not applied, might lead to the profits distributed by the subsidiary company to the parent company being subject to double taxation. This risk for double taxation is absent if the parent company is subject to a zero tax rate.


The Court’s findings, in combination with the AG’s opinion upon which it relied, can provide some guidelines for assessing future situations.

  • Meaning of exemption: On the basis of the AG’s reasoning (§43-44), which was implicitly followed the Court, one can conclude that an entity is exempt even when it is ab initio subjected to a tax, but subsequently there is a complete absence of tax which is established by means of an express legal provision, permanently, in advance and irrespective of the profits received.
  • Irrelevance of legislative technique: On the basis of an effet utile reasoning, one can can conclude that all companies which are in an equal situation (i.e. a complete absence of tax), must be excluded from the scope of the PSD. This means that the exclusion applies irrespective of the legislative technique which establishes the situation of ‘complete absence of tax’.


  • Quasi-exempt companies: On the basis of the AG’s opinion, one could a contrario conclude that only fully exempt companies are excluded from the scope of the PSD. This is also in line with the position of some authors (e.g. G. KOFLER, “Mutter-Tochter-Richtlinie”, in H. SCHAUMBURG et al. (eds.) Europäisches Steuerrecht, Köln, Otto Schmidt, 2015, 608-609). Deciding otherwise, would also force the CJEU to arbitrarily decide what is the ‘proper’ tax rate, an issue which should be approached very cautiously given the fiscal sovereignty of the EU Member States. Nevertheless, the absence of clear guidance on this is clearly a lacuna in current Directive.
  • Factual exemptions: It can be argued that a company which is in a certain tax year factually exempt of any tax is still subject-to-tax for the purposes of the PSD. If a company should pay tax (and thus complies with abovementioned conditions), the mere fact that the tax base is diminished (possible to zero) by the use of tax attributes does not change the outcome of this analysis. Indirectly, the company is negatively affected and, for example, losses which are used in a certain tax year to diminish the tax base, are in fact permanently lost.

In addition, one can wonder how this case can impact the application and interpretation of other EU Directives. Note that the personal scope of both the Merger Directive and the Interest & Royalties Directive are drafted in a substantially similar way (by including both a positive and a negative criterion). On the basis of the principle of systematic interpretation, it would be logical that the CJEU would rule in a similar way when asked to interpret the analoguous provisions (Art. 3(c) Merger Directive & Art. 3(a)(iii) Interest & Royalties Directive).

Further reading:

  • P. Arginelli, Wereldhave Belgium. Parent-Subsidiary Directive does not preclude an advance tax on dividends paid to a Dutch collective investment undertaking, 2017 H&I 5, 65-67.
  • F. Debelva & J. Luts, C-448/15 Wereldhave: Onderworpenheid en de Moeder-dochterrichtlijn, 18 Int. Fisc. Act. 2017 6, p. 1-7. (incl. a detailed analysis of the case’s impact on Belgian investment entities (cfr. Art. 185bis BITC), the ignored ‘third criterion’ and more).

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