On 9 July 2014, the European Free Trade Association (“EFTA”) Court decided that Norwegian Controlled Foreign Companies (“CFC”) rules, which permit national taxation of capital placed in a low tax country (i.e. via a Liechtenstein trust), were contradictory to the freedom of establishment set out by the European Economic Area (“EEA”) agreement.
Two cases were jointly referred to the EFTA Court (“the Court”), with respect to the taxation in Norway of Norwegian beneficiaries, who hold interest in a Liechtenstein resident trust (“the Trust”).
The Trust was constituted to manage the beneficiaries’ shares in different companies, and was registered as a tax exempt asset management trust, on the condition that the Trust was not engaging in business or commercial activities on the Liechtenstein market.
The purpose of Norwegian CFC rules is to prevent tax avoidance and to give the same tax treatment to Norwegian capital, whether the investment takes place in Norway or in a low tax country.
Based on their domestic CFC rules, the Norwegian tax authorities considered that the beneficiaries were directly liable to Norwegian tax on their share of the Trust’s profits.
In addition, the beneficiaries were taxed at a higher rate on amounts distributed by CFC entities than if the distributing company would have been a Norwegian entity.
The Norwegian State argued that the Trust had no legal personality and that it should therefore not be entitled to benefit from the freedoms guaranteed by the EEA agreement.
The Court discarded this position and considered that the freedom of establishment is granted to legal entities, no matter whether they have a legal personality or not, provided that they have been set up in accordance with the law of an EEA State and have their registered office, central administration or principal place of business within the territory of a contracting State.
Accordingly, the Court concluded that the Trust could take advantage of the freedom of establishment if and to the extent that it pursues economic activities that are real and genuine.
This would for instance be the case when the Trust is involved in the management of a group’s company, or other activities for a group, such as managing a pool of resources and if its actual incorporation reflects its contractual activities.
Whether we are in the presence of a genuine economic activity is for the national court to assess.
Even though the present decision is not directly addressing the discriminatory tax treatment of outbound dividend distributions to foreign funds, it gives us a clear guidance, under which conditions contractual funds or unit trusts can benefit from the EU fundamental freedoms. It clarifies that the lack of legal personality cannot be per se a reason for rejecting tax reclaims filed by contractual funds (FCPs) or unit trusts. This decision therefore reinforces our understanding that all funds, regardless of their legal form, should be entitled to reclaim WHT levied based on a discriminatory tax treatment.
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