The huge potential implications of the anti-abuse rule of the Parent-Subsidiary Directive. The example of the passive SOPARFI

​On 27 January 2015, the European Council formally amended the EU's parent-subsidiary directive, adding a binding general anti-abuse rule (“GAAR”) to prevent tax avoidance and aggressive tax planning by corporate groups. The aim is to stop the parent-subsidiary directive from being misused for the purposes of tax avoidance, and to achieve greater consistency in its application in different member states. The anti-abuse clause will prevent member states from granting the benefits of the directive to arrangements that are not "genuine", i.e. that have been put into place to obtain a tax advantage without reflecting economic reality (the text of the GAAR refers more precisely to “valid commercial reasons which reflect economic reality”).
Member states have until 31 December 2015 to introduce an anti-abuse rule into national law. It will enter into force on 1 January 2016. On 5 August 2015, a draft bill of law (n° 6847) has been deposited in the Luxembourg parliament, with a view to implementing the GAAR into Luxembourg law. Based on several sources, the GAAR should be adopted by the Belgian Parliament after the summer.

In my view, the new GAAR will have a huge impact on EU holding structures deprived of sufficient economic substance. To illustrate my point, I will take the classical example of the Luxembourg holding called “SOPARFI”.

Luxembourg is a very attractive jurisdiction for holding companies and many major multinational groups have indeed located a holding vehicle in Luxembourg (the commonly called Société de Participations Financières or SOPARFI). The competitive participation exemption regime (100% exemption) on dividends received and capital gains on shares is one of the main reasons why Luxembourg is so popular as a host country for holding companies. There are approximately 50.000 SOPARFI in Luxembourg. It cannot be denied that many SOPARFIs lack organizational (no office space, no employees, …) and economic substance (mere holding of one participation, absence of performance of a managerial activity,…). The new GAAR will in my view impact such SOPARFI and could result in the full taxation of the dividends distributed to the SOPARFI.

What measures may be taken to mitigate or even avoid this tax risk? The following considerations come to mind.

First, the availability of sufficient documentation evidencing the business motives of the overall holding structure will be key.

Secondly, it is clear that a SOPARFI will need to increase its level of economic substance. For instance, a strong argument could be made that a passive SOPARFI holding one single participation should acquire additional subsidiaries.

Alternatively, the SOPARFI could contemplate carrying out an intra-group financing activity (granting of loans) and performing management services to the benefit of its subsidiaries. Employees (having the relevant experience) could be hired by the SOPARFI, in order to perform these services.

In any case, the substance of EU holding structures will need to be closely monitored in the following months, more than ever.