Compability of Beneficial Owner Requirements Included in Tax Treaties with the Freedom of Establishment

The OECD Model Tax Convention contains a beneficial owner requirement for the taxation of dividend, interest and royalty income. The purpose of the requirement is to prevent improper use of tax treaties, and consequently counteract abusive treaty shopping structures that aim at gaining tax treaty benefits that would not otherwise be achievable. As the beneficial owner requirement is included in the OECD Model Tax Convention, it is consequently included in tax treaties that are concluded by Member States of the European Union. From the perspective of the EU law, the requirement may, however, constitute as a restriction on free movement. As there is not significant harmonization of direct taxation within the European Union, nationals of Member States are able to use the different tax systems of different Member States to minimize their tax burden by exercising the freedom of establishment. The structures that make use of the disparities in the national tax systems of Member States can be view as abusive on national level, but they may be protected by the fundamental freedoms that the EU treaties provide for. Therefore, anti-abusive legislation that a Member State has introduced may create a restriction on free movement. The freedom of establishment ensures that a national of a Member States has the right to move freely within the EU without being subject to excessive measures, which are not applied in purely domestic but comparable situations. This gives an EU national the possibility to choose to establish an entity in a Member State where the taxation of dividend, interest and royalty income on source is most favourable for the tax payer. However, in order to invoke the freedom of establishment, the company in question must pursuit effective and genuine economic activities in the state of establishment. This thesis examines whether the structures that are used by Member State nationals to gain tax treaty benefits are protected by the EU law, and if the application of the beneficial ownership concept that is included in the tax treaties that are concluded between different Member States, is in fact against EU law, and particularly against the freedom of establishment. Furthermore, the thesis examines the potential justifications for the restriction that the beneficial ownership requirement might create on the freedom of establishment. The thesis aims to conclude how the beneficial ownership provisions in tax treaties should be interpreted so that the interpretation is essentially in compliance with EU law. When examining the case law of the European Court of Justice, it seems evident that the beneficial owner requirement can create a restriction on the freedom of establishment. Nevertheless, this restriction may be justified, to some extent, by the necessity to prevent tax avoidance. The European Court of Justice has developed in its practice a doctrine of abuse, under which the Member States are allowed to introduce national anti-abuse legislation to counteract tax avoidance. It is established in the case law of the European Court of Justice that while national anti-abusive legislation may create a restriction on the freedom of establishment, the restriction may be justified on the grounds of prevention of abusive practices. The national anti-abusive legislation must be, however, designed exclusively to prevent the use of wholly artificial arrangements, and therefore establishments that entail effective and genuine economic activities cannot be excluded from obtaining tax treaty benefits. Consequently, the beneficial owner requirement must be applied in such manner that it only excludes purely artificial arrangement from attaining the benefits of a tax treaty