Adverse effects of the PPT rule

Adverse effects of the PPT rule In the EU context, the ECJ case law cannot be ignored to interpret anti-abuse provisions such as the PPT rule. Apart from settle case law, I considered the recent decisions on French and German anti-abuse rules confirming the ECJ’s adherence to the familiar wholly artificial arrangement test. Abuse is considered to exist if the setting up of an intermediate or other holding company qualifies as wholly artificial arrangements. This is the case if the facts show that setting up or maintaining the holding company does not correspond to the freedom of establishment’s intended aim of promoting economic integration. For this to exist, a company must pursue genuine activities for an indefinite period through a fixed establishment in another Member State. This in turns requires the existence of premises, staff and equipment to carry out economic activities. The question of what facilities can be considered to constitute a sufficient physical presence depends on the nature of th e activities pursued. These facilities must in any event be proportionate for the activities that are to be carried out. Instead, passive activities, such as certain holding company activities, generally require few facilities. The further requirement is for the entity to perform genuine economic activities. Passive activities can in principle satisfy this requirement, unless the activities are so marginal that they can no longer be regarded as bearing any relationship to economic reality. It could potentially be concluded from the ECJ case law that pursuing passive activities without any accompanying provision of services does not constitute a genuine economic activity. The absence, therefore, of any services provided by the intermediate or other holding company to a group company or third party could suggest the lack of a link to economic reality. If arrangements are to qualify as abuse – and, therefore, as lacking an establishment – it also has to be determined whether the parent company was objectively seeking to obtain a tax advantage by setting up the secondary establishment. This will be the case if the facts demonstrate that the arrangements could not have any purpose other than a wish to escape tax. An aspect of critical importance is the link that a company has with the host Member State through its pursuit of genuine economic activities, whereby the term ‘genuine economic activities’ has to be interpreted widely. Even activities of a more passive nature, such as certain holding company activities, can in principle be covered by this term, providing the intermediate or other holding company has sufficient physical presence to perform the activities and the arrangements have not been put in place solely for the purposes of avoiding tax. Finally, I tried to exemplify the adverse effects that the PPT may generate in practice by simulating the application of the rule to an equity wall structure. I showed the reasons why the PPT rule may represent a stronger weapon in the hands of tax authorities.