Direct Taxation - Global Topics (Last Reviewed: 25 January 2024)

Direct Taxation

Authors
Teresa Morales Gil
Uría Menéndez, Madrid, Spain
Sharvari Kale
IBFD Headquarters, Amsterdam, the Netherlands
(section 7. on Transfer Pricing)

IBFD Tax Technical Editor

Carla Valério
The chapter is based on information priorly included in the following chapters:
European Union – Holding Companies – Gerwin de Wilde
European Union – Mergers & Acquisitions – Paulus Merks and Sebastian Frankenberg
European Union – Permanent Establishments – Dr Klaus von Brocke
Transfer Pricing – Introductory chapter – Dr Giammarco Cottani, LLM, PhD

Latest Information
This chapter is based on information available up to 25 January 2024. Please find below the main changes made to
this chapter up to that date:
Progress on the implementation of the Minimum Taxation Directive (Pillar Two).
ECJ decisions on certain restrictions for EU companies to benefit from the participation exemption and interest
deductions available for resident groups.
ECJ decisions on the restrictions of certain tax benefits for individuals receiving foreign income.
Update of signatories of the Framework Agreement on the application of social security regulations in cases of
habitual cross-border telework.
Final ECJ decision in favour of Amazon in the State aid case.

Introduction
The European Union comprises the following 27 Member States: Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic,
Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Poland, Portugal, Romania, the Slovak Republic, Slovenia, Spain and Sweden. The United Kingdom was part of the
European Union until 31 January 2020 when the withdrawal process from the European Union was concluded (see details below).
Member States, Norway, Iceland and Liechtenstein form the European Economic Area (EEA) from 1 January 1994, by the
conclusion of the Agreement of 13 December 1993 on the European Economic Area (94/1). The Agreement covers company
law directives, customs and social security legislation and all primary and secondary legislation regarding the Treaty on the
Functioning of the European Union (TFEU) treaty freedoms (see section 1.1.). The European Union has also concluded several
agreements with Switzerland on, inter alia, the free movement of persons as well as the automatic exchange of financial account
information, which includes an exemption for cross-border payments of dividends, interest and royalties (Amending Protocol to the
European Union-Switzerland Agreement (2015)).
A common currency, the euro, has been introduced in Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany,
Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, the Slovak Republic, Slovenia and Spain.

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The following is an overview of the most significant of both the adopted and proposed EU regulations and directives covering
direct tax. Topical tax developments at EU level are also covered, including Brexit (see below), State aid (see section 1.5.),
implementation of global minimum taxation (Pillar Two) (see section 3.5.), taxation of the digitalized economy, including the
reallocation of taxing rights (Pillar One) (see section 5.1.), the financial transaction tax (see section 5.2.) and the windfall tax for
energy companies (see section 5.3.). Relevant case law of the Court of Justice of the European Union on fundamental freedoms is
covered in section 4.

Brexit
Following a referendum held on 23 June 2016 (the so-called Brexit), the United Kingdom voted to leave the European Union and
triggered the formal process of leaving the European Union by invoking article 50 of the Treaty on European Union (TEU) on 29
March 2017. The United Kingdom formally withdrew from the European Union at midnight CET on 31 January 2020. From that
date until 31 December 2020, the United Kingdom entered into a transition period, regulated under the Withdrawal Agreement,
in which the United Kingdom was not represented in EU institutions, agencies, bodies and offices, but EU law still applied under
certain conditions (see details below).
During the transition period, the European Union and the United Kingdom negotiated the terms of their future partnership in the
framework of the political declaration of 17 October 2019. On 30 December 2020, the United Kingdom and the European Union
signed a Trade and Cooperation Agreement (TCA) (see details below).

The Withdrawal Agreement

The Withdrawal Agreement was concluded on 30 January 2020 by the Council of the European Union (the Council), after the
United Kingdom completed the ratification process on 23 January 2020.
The Withdrawal Agreement contains a transitional period during which the European Union treats the United Kingdom as if it were
a Member State (with certain procedural exceptions). Such transitional period ended on 31 December 2020.
The most important aspects of the Withdrawal Agreement relating to direct taxation are the following:

- EU social security regulations (see section 6.) will remain applicable to EU and UK citizens that, at the end of the transition
period, were residents or were subject to the legislation of the United Kingdom or European Union, respectively, as well as to
their family members and survivors;
- the Recovery Directive (2010/24) will apply until 5 years after the end of the transition period between Member States and the
United Kingdom for, inter alia, claims that relate to amounts that became due or transactions that took place before the end of
the transition period;
- for State aid granted before the end of the transition period, for a period of 4 years after the end of the transition period, the
European Commission (the Commission) will be competent to initiate new administrative procedures on State aid governed
by Council Regulation (EU) 2015/1589 concerning the United Kingdom. The Commission will continue to be competent after
the end of the 4-year period for procedures initiated before the end of that period;
- the ECJ remains competent for all judicial procedures (including appeals and referrals) concerning the United Kingdom
registered before the end of the transition period, and those procedures should continue until a final and binding judgment is
given in accordance with EU rules;
- within 4 years from the end of the transition period, the ECJ will still have jurisdiction over infringement cases against the
United Kingdom concerning breaches of EU law that occurred before the end of 2020;
- within 4 years from the end of the transition period, the United Kingdom may also bring before the ECJ cases of non-
compliance with an administrative decision of an EU institution or body taken before the end of the transition period or, for
certain procedures identified in the Withdrawal Agreement, after the end of the transition period; and
- ECJ decisions made before the end of the transition period are still binding. Retained EU law should be interpreted by
domestic courts in accordance with previous ECJ case law and any retained general principles of EU law.
The Trade and Cooperation Agreement (TCA)
The Trade and Cooperation Agreement (TCA) lays down a free trade agreement, a partnership on citizens’ security and a
governance framework for regulating the relations between the European Union and the United Kingdom as from 1 January 2021.
The TCA was ratified by UK Parliament on 30 December 2020, and, after the consent of the European Parliament on 27 April

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2021, by the Council on 29 April 2021 (OJ L 149, 30.4.2021). The TCA, which applied provisionally from 1 January 2021, entered
into force on 1 May 2021.
The Agreement covers trade in goods and services as well as other areas in the European Union’s interest, such as investment,
competition, State aid, tax transparency, air and road transport, energy and sustainability, fisheries, data protection and social
security coordination.
As regards direct taxation, the TCA provides for:

- subsidy control provisions replacing the EU State aid rules, which set forth principles that must be respected for the granting
of subsidies and that oblige the parties to establish control, transparency and recovery mechanisms;
- a commitment to applying base erosion and profit shifting (BEPS) minimum standards and international standards for the fight
against tax avoidance and tax evasion;
- a minimum level of protection based on OECD standards on anti-avoidance (interest limitation, controlled foreign company
(CFC) rules and anti-hybrid rules) and tax transparency (exchange of information on financial accounts, cross-border tax
rulings, country-by-country (CbC) reports between tax administrations, and potential cross-border planning arrangements);
and
- coordination on social security benefits related to sickness, maternity, paternity, invalidity, old-age, survivors, accidents at
work and occupational diseases, death grants, unemployment, and pre-retirement benefits. For these benefits, the TCA
establishes non-discrimination between Member States and between EU/UK citizens and own nationals; equal treatment of
benefits, income, facts and events; aggregation of periods to determine the entitlement to benefits; and exportability of cash
benefits (except for disability and unemployment benefits) in the case of individuals moving to a Member State or the United
Kingdom.
The European Parliamentary Research Service (EPRS) published a study (The EU-UK Trade and Cooperation Agreement two
years on: Unpacking early evidence – European Implementation Assessment) on the implementation of the TCA on 9 August 2023.
The study includes details of UK legislation to end the application of retained EU laws within the United Kingdom (and retained
EU Law, with the consequence that general principles of EU law cease to form part of UK law. As regards taxation, it mentions
the call for scrutiny to ensure that the TCA does not contain loopholes that allow UK Crown Dependencies (Guernsey, Jersey
and the Isle of Man) and UK Overseas Territories (which include Anguilla, Bermuda, the British Virgin Islands, Gibraltar and the
Turks and Caicos Islands) to be used as counterparts for developing new harmful tax schemes impacting the functioning of the
internal market (given that these territories are excluded from the TCA). It also highlights that taxation is one of the areas where no
arrangements were made between the European Union and United Kingdom in the context of the TCA, as taxation is not subject to
dispute settlement provisions nor to rebalancing measures.

1. General Principles of EU Law and Taxation

EU law enjoys priority over national laws of Member States. There are three sources of EU law:

- primary law (see section 1.1.),

- secondary law (see section 1.2.) and
- supplementary law (see section 1.3.).
In the area of direct taxation, Member States maintain broad sovereignty rights as decision-making requires unanimity among
Member States (see section 1.4.). Nevertheless, Member States must exercise their taxing powers consistently with EU law and,
in particular, State aid rules (see section 1.5.) and the fundamental freedoms (see section 4.).

1.1. Primary law

Primary law is the supreme source of law within the European Union. It consists of the treaties establishing the European Union,
namely:

- the Treaty on European Union (TEU) (2007); and

- the Treaty on the Functioning of the European Union (TFEU) (2007).
These two treaties, which became effective in 2009, consist of the EU founding treaties (the Treaty of Paris (1951), the Treaty of
Rome (1957) and the Maastricht Treaty (1992)), as amended by subsequent treaties (the Single European Act (1986), the Treaty

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of Amsterdam (1997), the Treaty of Nice (2001) and the Treaty of Lisbon (2007)). Under the Treaty of Lisbon, the Maastricht
Treaty was renamed the Treaty on the European Union and the Treaty of Rome was renamed the TFEU.
These treaties distribute competences between the European Union and Member States, and lay down the powers of the
European institutions (i.e. determine the legal framework within which the EU institutions may operate).
Nationals and legal entities of a Member State can rely on the directly applicable provisions of the TEU and the TFEU.
As regards taxation, the TFEU is the most relevant as its main objectives are establishing a functioning internal market, as well as
an economic and monetary union. These objectives cannot be reached if, inter alia, the four fundamental freedoms (see section
1.3.) are hindered. As such, any national tax measures that violate these principles must be abolished. Also important for tax
purposes is article 115 of the TFEU, which authorizes the issuance of directives.
Primary law also includes the accession treaties of new Member States and the Charter of Fundamental Rights of the European
Union.

1.2. Secondary law

Secondary sources of EU law are legal instruments that are based on the European Union’s primary law (i.e. the treaties, see
section 1.1.). Secondary law can be divided into two categories:

- unilateral acts: this comprises regulations, directives (e.g. the Parent-Subsidiary Directive (2011/96), see section 3.1.),
decisions, opinions and recommendations, and in some cases other acts such as communications and White and Green
papers; and
- conventions and agreements: this includes international agreements, agreements between Member States and agreements
between EU institutions.
Regulations are legal instruments of general application and are binding and directly applicable in each Member State.
Directives are binding in respect of the result to be achieved, but – unlike regulations – the manner of their implementation and
enforcement is a matter left for the national authorities to determine. In accordance with the case law of the ECJ, a directive is
directly enforceable within a Member State only if:

- that Member State fails to (properly) execute the directive by a designated deadline; and
- the provisions of the directive are unconditional and sufficiently clear (theory of acte clair).
If these conditions are fulfilled, the provisions of a directive may have a direct effect, and may be invoked before a court, including
those provisions which grant rights to companies and individuals, against Member States.
Decisions are binding upon those to whom they are addressed, and are directly applicable. Recommendations and opinions are
not binding.

1.3. Supplementary law

These sources of EU law, which are not specifically mentioned in the treaties, comprise ECJ case law, international law and
general principles of law.
The decisions of the ECJ are official, legally binding interpretations of EU law. The interpretation of EU law by the ECJ plays a
major role in the absence of harmonization in the field of direct taxation. In this regard, the interpretation of the four fundamental
freedoms (i.e. the free movement of goods, the free movement of persons (including the free movement of EU citizens, the free
movement of workers and the freedom of establishment), the freedom to provide services and the free movement of capital and
payments) and the interpretation of State aid rules, both regulated under the TFEU, have resulted in an extensive body of case law
aimed at preventing cases of discrimination against cross-border activities of companies and distortions in the internal market (see
section 4.).
Fundamental rights, as guaranteed by the Convention for the Protection of Human Rights and Fundamental Freedoms, as well as
those that result from the constitutional traditions common to Member States, are recognized as general principles of EU law.

1.4. Decision-making with regard to tax policy

Currently, taxation is the only policy area where decision-making requires unanimity among Member States.

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There is, however, an “escape clause” from unanimity, the so-called “enhanced cooperation” mechanism, which is very rarely
used. This mechanism can be enacted where the Council fails to secure the necessary level of agreement, but a group of nine
or more Member States indicate that they still want to undertake action in the relevant area. The Commission can then withdraw
its initial proposal and provide a new one that would only apply between Member States who want to be bound by the new rules.
Enhanced cooperation will generally only come into play when the discussions have halted, but significant agreement exists
between a substantial number of Member States on the type of rules that they would like to see introduced.
Ongoing examples of difficulty in achieving unanimity in tax policies, e.g. the attempt to introduce a common consolidated
corporate tax base (CCCTB, see section 3.8.) or a digital services tax (see section 5.1.), have pushed the Commission to look for
alternative decision-making mechanisms.
As such, the Commission has proposed a gradual shift to qualified majority voting (QMV) that would remove the need for unanimity
(COM(2019) 8 final of 15 January 2019). In this regard, the Commission invited the European Council to adopt by unanimity a
decision authorizing the European Council for Financial and Economic affairs (ECOFIN) to act by a qualified majority in a specific
area (based on article 48(7) of the TEU).
In particular, the Commission has suggested that QMV could be initially introduced for measures designed to improve cooperation
and mutual assistance between Member States in fighting tax fraud and evasion, as well as for administrative initiatives which
would benefit EU businesses (e.g. harmonized reporting obligations) and those in which taxation supports other policy goals
(e.g. fighting climate change, protecting the environment or improving public health). The Council could subsequently consider
extending the QMV (from 2025) to measures designed to modernize already harmonized EU rules (e.g. VAT and excise duty
rules), or to major tax projects such as the above-mentioned CCCTB and a new system for the taxation of the digital economy. On
4 May 2022, the European Parliament adopted a resolution proposing the abolition of unanimity in the Council (2022/2705(RSP)).
According to the programme of the Spanish Presidency of the Council for the second semester of 2023, the Spanish presidency
had planned to advance the debate on passerelle clauses to extend the use of qualified majority voting on essential EU policies,
such as taxation. However, no relevant progress was achieved on this point. In this regard, the European Parliament reiterated
its call to amend the EU treaties in a resolution adopted on 22 November 2023, by which it sent a proposal to the Council and the
Commission, as well as to the parliaments and governments of the Member States (2022/2051(INL)).

1.5. Harmful tax competition and forbidden State aid

Tax measures introduced by Member States are subject to State aid rules regulated under the TFEU. Any aid granted by a
Member State or through State resources that distorts competition and trade within the European Union by favouring certain
companies or the production of certain goods is incompatible with the internal market. Furthermore, Member States must notify the
Commission of all new aid measures, and wait for the Commission’s decision before they put the measure into effect (see State
Aid procedures below). Aid granted without the Commission’s prior authorization constitutes unlawful State aid. However, in
some circumstances, government interventions are necessary for a well-functioning economy. Accordingly, the TFEU, in article
107(2) and (3), also leaves room for some policy objectives for which State aid can be given that is considered compatible with the
internal market.
Examples of such aid include financial compensation for the damages caused by natural disasters or exceptional occurrences or to
remedy a serious disturbance in the economy of a Member State. In this regard, the Commission adopted the State aid Temporary
Framework to enable Member States to grant several types of aid, including (selective) tax advantages to mitigate the adverse
effects of the COVID-19 pandemic. For instance, Member States could decide to take measures, such as implementing wage
subsidies and suspending payments of corporate and value added taxes or social contributions. The Framework was in place until,
at the latest, 31 December 2023. Similarly, the Commission adopted a State aid Temporary Crisis Framework to enable Member
States to support the economy in the context of Russia's invasion of Ukraine until 31 December 2022 (OJ C 131I/1 24.03.2022),
which was extended until 30 June 2024.
In other instances, State aid plans are moving towards a longer-term basis. The European Commission adopted the Temporary
Crisis and Transition Framework to support measures in key sectors for the transition to a net-zero economy, in line with the
Green Deal Industrial Plan. The new Temporary Crisis and Transition Framework, in addition to amending and prolonging in part
the State aid Temporary Crisis Framework related to Russia’s invasion of Ukraine (until 30 June 2024), also introduced other
measures to accelerate investments in key sectors for the transition towards a net-zero economy (until 31 December 2025).
Another example of State aid which can be considered compatible with the internal market is the framework for research,
development and innovation (RDI Framework), which sets out the rules under which Member States can grant State aid to
companies for RDI activities, while ensuring a level playing field (C(2022) 7388 final). Under the RDI Framework, Member
States can provide aid for R&D projects, feasibility studies, construction of research facilities and testing and experimentation
infrastructures and innovation activities. Member States must notify this type of aid to the Commission.

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In addition, the Commission has issued many regulations, notices, frameworks, guidelines and communications in respect of State
aid.
State aid rules only apply to measures that meet all of the following criteria:

- there is a transfer of state resources;

- an economic advantage is conferred on a firm;
- the measure is selective or specific; and
- the measure affects competition and trade.
With effect from July 2023, the European Commission is also able to investigate subsidies granted by non-EU public authorities
to companies operating in the European Union (see Foreign Subsidies Regulation (2022/2560)). On 10 July 2023, the European
Commission adopted rules (Implementing Regulation (EU) 2023/1441) clarifying the practical aspects of the implementation of the
Foreign Subsidies Regulation (2022/2560).

Transfer of state resources

In order to qualify as State aid, the advantage must be granted:

- by a Member State;
- through Member State resources (including national, regional and local bodies; and public institutions (such as banks and
foundations)) – see Germany v. Commission, Case C-248/84, (1987) ECR 4013; or
- by private or public intermediate bodies appointed by a Member State.
Transfer of state resources can take many forms, including fiscal expenditures (e.g. grants and subsidies or state capital
investments), a loss of tax revenues (e.g. via accelerated depreciation allowances or reduced tax rates) or otherwise (e.g. loan
guarantees; provisions of a legislative, regulatory or administrative nature; or the practices of tax authorities).

Economic advantage conferred on a firm

The (tax) measure should give the recipient an economic advantage that they would not have received in the normal course of
business. The advantage may be provided through a reduction in the undertaking’s tax burden in several ways, including:

- a reduction in the tax base (e.g. special deductions or accelerated depreciation);

- a partial or total reduction in the amount of tax (e.g. tax exemptions or tax credits); and
- deferment, cancellation or rescheduling of tax debt.
Examples of economic advantages can be:

- an undertaking buys or rents publicly owned land for less than the fair market price;
- an undertaking is granted a loan by a private party (bank) with a state guarantee;
- an undertaking is selling products, services or assets to a Member State for a price exceeding the fair market price;
- an undertaking receives capital injections from a Member State under conditions that are not at arm’s length;
- an undertaking receives public services at fees that are not at arm’s length; or
- an undertaking receives a tax payment deferral not based on the applicable domestic law.
A measure does not constitute unlawful State aid in cases where a Member State makes funds available to an undertaking under
the same terms and conditions that would be provided in the normal course of events by a private investor applying ordinary
commercial criteria (the so-called Market Economy Operator Principle) (Case C-278/92 Spain v. Commission [1994] ECR I-4103).

Selectivity or specificity
The aid measure must be specific or selective in that it favours certain undertakings, thereby affecting the balance between certain
undertakings and their competitors, or the production of certain goods.

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Tax measures that are open to all undertakings in a Member State are in principle “general measures”, and do therefore not
constitute State aid. To qualify as such, general measures must be effectively open to all undertakings on an equal-access
basis, and they may not in effect be reduced in scope through, for example, a discretionary power (that goes beyond the simple
management of tax revenue) of the Member State to grant them or via other factors that restrict their practical applicability – see
France v. Commission (Kimberly Clark Sopalin) (C-241/94).
The criterion of “selectivity” is also met if the relevant measure only applies to part of the Member State’s territory, as is the case
for regional, local and sectorial measures. In the same way, measures that only favour:

- national products which are exported – see Joint Cases 6/69 and 11/69 Commission v. France [1969] ECR 561;
- sectors that are subject to international competition;
- an entire sector of the economy;
- undertakings with special (legal) status (e.g. public versus private undertakings); or
- undertakings with a specific function (e.g. holding and/or finance functions),
may constitute State aid.
Nevertheless, Member States may still choose the economic and tax policy they consider most appropriate and spread the
tax burden across different industry sectors in a way they feel is most beneficial (intersectoral measures). If they apply without
distinction to all undertakings and to the production of all goods and services, the following measures are examples of measures
that do not constitute State aid:

- tax measures of a pure technical nature (e.g. tax rates, depreciation rules, deferment schedules, tax exemptions and tax
credits, and use of losses regulations); and
- measures pursuing general economic policy objectives through a reduction of the tax burden related to certain production
costs (e.g. in respect of R&D, employment, and investments in environment).
Effect on competition and trade
State aid must have a potential effect on the competition and trade between Member States. It is sufficient in this respect if it can
be shown that the recipient undertaking carries on an economic activity and that this undertaking operates in a market in which
there is trade between Member States.
In the view of the Commission, small amounts of aid (de minimis aid) do not affect competition and trade – see Commission
Regulation (EU) 1407/2013 of 18 December 2013. The ceiling for aid covered by the de minimis rule is, in general, EUR 200,000
in a 3-year period.

State aid procedures

After receiving a notification or information concerning alleged unlawful aid, the Commission may start a preliminary investigation
to determine if:

- the measure is not aid under EU law (and so it may be implemented);

- the measure constitutes aid that is compatible with EU law; or
- there are serious doubts as to the compatibility of the notified measure with EU State aid rules.
If the Commission has serious doubts (or faces procedural difficulties in obtaining relevant information) about the compatibility of a
Member State’s aid with EU State aid rules, it must open a formal in-depth investigation under article 108(2) of the TFEU.
The decision to initiate this procedure is then sent to the relevant Member State. This decision contains a summary of the factual
and legal bases for the investigation, and includes a preliminary assessment of the measure’s compatibility with EU State aid rules.
The Member State concerned has the opportunity to respond to this decision.
At the end of the formal investigation, the Commission adopts a final decision. There is, however, no legal time frame within which
the in-depth investigation must be completed. The possible outcomes of the investigation are: (i) a positive decision (there is no
aid or the aid is compatible); (ii) a conditional decision (the aid is in principle compatible, but implementation must fulfil conditions
stated in the decision); or (iii) a negative decision (aid is incompatible and cannot be implemented).

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If a negative decision is related to aid that has already been paid out, the Member State must recover that aid (with interest) from
the beneficiary (unless such recovery would be contrary to EU law). In this way, the undue advantage granted to a beneficiary is
reversed. The Commission then opens a “recovery” case to enforce the implementation of its decision – see Commission Notice
on the recovery of unlawful and incompatible State aid C/2019/5396, OJ C 247, 23.7.2019.
As regards taxation, incompatible State aid may, however, exist in the following situations (Commission Notice C/2016/2946):

- a preferential treatment of undertakings for collective investments;

- rulings misapplying domestic tax law – available only for certain companies – or providing a more favourable tax treatment
compared to other taxpayers which are in a similar factual and legal situation (tax rulings);
- tax settlements that disproportionately reduce the tax due without a clear justification;
- depreciation incentives for certain types of assets or undertakings, if they are not based on the guiding principles for the
depreciation rules; and
- reduced excise duties.
Some of the more notable procedures and decisions (many of which concern tax rulings) regarding State aid include UK CFC
Group Financing Exemption (Case SA.44896 – T-363/19 and T-456/19; currently before the ECJ (C-556/22 P)), Gibraltar
corporate income tax regime (Case SA.34914 (2013/C) – T-37/23), IKEA (Case SA.46470), Nike (Case SA.51284 – T-648/19),
McDonald’s (Case SA.38945), Amazon (Case SA.38944 – C‑457/21 P), Starbucks (Case SA.38374 – T-760/15), Apple (Case
SA.38373 – currently before the ECJ (C-465/20 P)) and FIAT (Case SA.38375 – C-885/19 P). For details on the decisions
covering TP issues, see section 7.

2. Harmonization of Company Law

Several types of legal entities can be formed under European law. Specifically, these are:

- the European company (Societas Europaea, SE) (see section 2.1.);

- the European economic interest grouping (EEIG) (see section 2.2.); and
- the European cooperative society (Societas cooperativa Europaea, SCE) (see section 2.3.).
Additionally, the European Commission has proposed new rules to establish a new legal form of non-profit associations specifically
designed for cross-border purposes, the European cross-border association (ECBA) (COM(2023) 516 final). To become effective,
the proposal needs to be presented to the European Parliament and the Council for approval. Once adopted, Member States will
have 2 years to transpose the Directive into national law.

2.1. European company

Under Council Regulation 2157/2001/EC of 8 October 2001 (SE Regulation), effective from 8 October 2004, it is possible to form
an SE. The SE is intended to facilitate cooperation within the European Union and the cross-border reorganization of companies
within the EEA across the frontiers of Member States. The SE Regulation applies not only to Member States, but also to EEA
states. The name of an SE must be preceded or followed by the abbreviation SE.
Under the SE Regulation, an SE can be established by a merger, by the formation of a holding company or by the creation of a
joint subsidiary. The minimum share capital is EUR 120,000. The SE Regulation does not contain provisions concerning groups of
companies.
An SE is resident in the Member State of its real seat, which is not necessarily the Member State of its statutory seat.
For tax purposes, SEs are treated the same as public limited liability companies that are formed under the national laws of a
Member State. Losses of an SE’s foreign permanent establishment can be offset against the SE’s profits. If, however, such a
permanent establishment becomes profitable later, those profits may be taxed in the Member State of the SE up to the amount
of losses previously deducted. The SE Regulation does not contain any provisions on the tax treatment of losses suffered by
subsidiaries.

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2.2. European economic interest grouping

Under Council Regulation (EEC) 2137/85 of 25 July 1985, fully effective from 1 July 1989, it is possible to form a European
economic interest grouping (EEIG).
The purpose of an EEIG is to facilitate or develop the cross-border economic activities within the European Union of its members,
and to improve or increase the results of these activities.
An EEIG may not be formed for the purpose of making profits for itself. In the event that an EEIG earns profits as an ancillary result
of its activities, the taxation system applicable to such profits is comparable to that commonly applied to partnerships; the EEIG
itself is not to be taxed, but its profits may be taxed in the hands of its members.

2.3. European cooperative society

Under Council Regulation (EC) 1435/2003 of 22 July 2003, effective from 18 August 2006, it is possible to form a European
cooperative society (SCE). Like SEs (see section 2.1.), SCEs may be established in EU Member States, Iceland, Liechtenstein
and Norway (i.e. in the EEA).
An SCE has legal personality (with subscribed capital divided into shares), and must have members from (at least) two different
Member States. The amount of capital or number of members is variable.
Each Member State must treat an SCE as a cooperative formed in accordance with the laws of the Member State where its
registered office is located.
For tax purposes, an SCE is treated the same as a cooperative society that is formed under the national laws of a Member State.

3. Harmonization of Corporate Taxation

There are four directives that seek to harmonize certain tax provisions in the field of direct taxation among different Member States.
These are:

- the Parent-Subsidiary Directive (2011/96) – which aims to, inter alia, eliminate tax obstacles to cross-border distributions of
intra-group profits (see section 3.1.);
- the Interest and Royalties Directive (2003/49) – which aims to eliminate withholding taxes on cross-border interest and royalty
payments between related companies (see section 3.2.);
- the Merger Directive (2009/133) – which aims to eliminate tax hurdles to cross-border corporate reorganizations (see section
3.3.);
- the Anti-Tax Avoidance Directive (2016/1164) (ATAD) and the Amending Directive to the 2016 Anti-Tax Avoidance Directive
(2017/952) (ATAD2) – which contain anti-abuse measures against common forms of aggressive tax planning (see section
3.4.); and
- the Minimum Taxation Directive (2022/2523) – which introduces a minimum-level taxation for large groups in the European
Union (see section 3.5.).
In addition, there are several proposed directives, such as:

- a directive to tackle the misuse of shell companies (see section 3.6.);

- a directive introducing an allowance on equity (see section 3.7.);
- a directive to develop a common corporate tax framework in the internal market (BEFIT), which replaced the CCCTB
proposal (see section 3.8.); and
- directives to tax the digitalized economy (see section 5.1.).

3.1. Parent-Subsidiary Directive

A directive aimed at reducing the differences between taxation rules for nationally organized groups of companies and taxation
rules for EU-wide groups was adopted by the Council on 23 July 1990 (90/435) – the Parent-Subsidiary Directive (90/435). This
directive had two purposes:

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- to ensure that the Member State of the parent company either refrains from taxing the profits distributed by a subsidiary that
is resident in another Member State or, if taxing such profits, authorizes the parent company to deduct from the amount of tax
due the corporate income tax paid by the subsidiary in the other Member State; and
- to exempt from withholding tax profit distributions by the subsidiary to the parent company.
The implementation deadline of the directive for Member States was 1 January 1992.
The Parent-Subsidiary Directive (90/435) was amended by Amending Directive to the Parent Subsidiary Directive (2003/123),
which extended its application to cases in which profit distributions by subsidiaries in one Member State are received by
permanent establishments of companies situated in another Member State.
In the interest of clarity, a recast version of the directive and its successive amendments was adopted on 30 November 2011,
Parent-Subsidiary Directive (2011/96) (the Directive). The recast version repealed the previous versions of the Directive, and
entered into force on 20 December 2011. The implementation deadline for Member States was 1 January 2012.

Scope
The Directive applies to the following distributions:

- distributions of profits received by a parent company in one Member State from a subsidiary in another Member State;
- distributions of profits by a subsidiary in one Member State to its parent company in another Member State;
- distributions of profits, received by a permanent establishment situated in one Member State, of a company established in
another Member State, which are made by a subsidiary established in a Member State other than the Member State where
the permanent establishment is situated; and
- distributions of profits by a company of a Member State to a permanent establishment situated in another Member State of a
company of the same Member State as the company making the distribution.
Definition of “company of a Member State”
The Directive defines “company of a Member State” as any company that:

- takes one of the forms listed in Part A of Annex I to the Directive;

- is considered to be a resident of a Member State for tax purposes according to the national laws of that Member State, and
is not considered to be a resident for tax purposes outside the European Union under the terms of a tax treaty with a non-EU
Member State; and
- is subject to one of the taxes listed in Part B of Annex I to the Directive, or to any other tax that may be substituted for any of
the expressly mentioned taxes, without the possibility of an option or of being exempt.
All of the three above-mentioned criteria must be cumulatively met.
Dual resident companies can still qualify for the Directive where, generally, taxing rights remain in a Member State, specifically:

- a company incorporated under the laws of a Member State but having its effective place of management and control in
another Member State;
- a company incorporated (and fully taxable) under the laws of a Member State but having its effective place of management
and control in a state outside the European Union (and therefore being fully taxable in that state) while no tax treaty has been
concluded between these two states;
- a company incorporated (and fully taxable) under the laws of a state outside the European Union but having its effective place
of management and control in a Member State (and therefore being fully taxable in that Member State) while no tax treaty is
concluded between these two states; and
- a company incorporated (and fully taxable) under the laws of a Member State but having its effective place of management
outside the European Union, where between these two states a tax treaty is concluded that allocates the taxing rights to the
Member State.
Private and public companies limited by shares, as well as SEs (see section 2.1.) and cooperatives (see section 2.3.) are under
the scope of the application of the Directive. Otherwise, it is left to each Member State to decide which entity forms are covered.
Some Member States expressly included in Part A of Annex I to the Directive an exhaustive list of all national entity forms covered.

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Other Member States have not included an express list of all possible national entity forms in the Annex, but they have determined
broadly that all national company forms incorporated under the law of the State concerned fall under the scope of the Directive,
provided that the other two criteria set forth are met.

Qualifying shareholding
A qualifying parent-subsidiary relationship exists if the parent company holds at least 10% of the issued shares of the subsidiary.
Member States are allowed to replace, by means of bilateral agreement, this criterion by that of a holding of voting rights.
Additionally, Member States are also permitted to require a minimum holding period not exceeding 2 years, but they are not
allowed to require that the minimum holding period has already come to an end at the time when the profit distribution is made –
see Denkavit I (Case C-283/94). Member States are free to define procedures under their own national law to assure that the 2-
year holding period is met.

Tax treatment
When a parent company (or permanent establishment thereof) receives distributed profits from a qualifying subsidiary established
in another Member State, the Member State of that parent (or permanent establishment) must either:

- not tax such distributions (i.e. exempt them); or

- relieve any economic double taxation by way of a(n) (indirect) credit for the fraction of the corporation tax paid by the
qualifying subsidiary – or any qualifying lower-tier subsidiary – in relation to the profits distributed.
Member States may consider part of the distributed income as “management costs relating to the holding”, and not exempt that
part from taxation. Where these costs are fixed as a flat rate, the fixed amount may not exceed 5% of the profits distributed by the
subsidiary. France, Germany, Italy, Slovenia and Spain have fixed these (management) costs at 5% of the dividends received. As
a consequence, these countries in fact only exempt 95% of the dividends received.
The Member State of the parent company may also refuse the deduction of a subsidiary’s losses (from the taxable profits of the
parent company) resulting from the distribution of the subsidiary’s profits.
These possibilities may be exercised only in accordance with the EU fundamental freedoms and within the limits of the Directive. In
particular, Member States may not generally deny the deductibility of costs related to a holding in another Member State until the
profits from the shareholding are taxable – see Bosal (Case C-168/01). Likewise, Member States may not deny the deductibility of
the interest paid by a parent company when such interest does not relate to the financing of the holding – see Argenta Spaarbank
NV (Case C-39/16). Member States cannot impose the liability to make an advance payment which exceeds the 5% threshold on
a parent entity when redistributing profits received by its subsidiaries to its shareholders (even if such profits have not been subject
to corporate income tax at the regular corporate income tax rate) – see Schneider Electric and Others (Case C-556/20).
In addition, under the Amending Protocol to the European Union-Switzerland Agreement (2015), dividends paid by subsidiaries
to parent companies, whereby one is established in the European Union and the other in Switzerland, are exempt if the parent
company maintains a direct minimum holding of 25% for at least 2 years in the subsidiary (paying) company.

Anti-abuse
The Parent-Subsidiary Directive (2011/96) has been amended by two directives to address double non-taxation concerns and
abuse.

Directive 2014/86
On 8 July 2015, the Council adopted Amending Directive to the 2011 Parent-Subsidiary Directive (2014/86) to prevent double non-
taxation through the use of hybrid financing arrangements. Member States had to implement this directive by 31 December 2015 at
the latest.
Under the amending directive, Member States must refrain from taxing qualifying profit distributions to the extent they are not
deductible by the subsidiary.
This anti-hybrid rule aims to prevent groups of companies from structuring their intra-group payments, through the use of hybrid
instruments, to realize mismatches and double non-taxation outcomes. Such mismatch might occur if the Member State of the
borrower qualifies a payment as debt, while the Member State of the parent company qualifies the payment as equity. As a result,
the amount paid (qualifying as interest) would be deductible in the first Member State and not taxable in the other (qualifying as
dividend). The anti-hybrid rule prevents this effect.

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Directive 2015/121
On 27 January 2015, the Council adopted the Amending Directive to the 2011 Parent-Subsidiary Directive (2015/121), which
introduced a general anti-abuse provision (GAAR) into the Parent-Subsidiary Directive (2011/96). Member States had to
implement this directive by 31 December 2015 at the latest.
Under the GAAR, Member States shall not grant the benefits of the Parent-Subsidiary Directive (2011/96) to an arrangement
(or series of arrangements) which (i) has been put into place for the main purpose or one of the main purposes of obtaining a tax
advantage that defeats the object or purpose of the Directive (the subjective test or the main purpose test); and (ii) is not genuine,
having regard to all relevant facts and circumstances (the objective test).
The subjective test is not met if the tax advantage of the structure is not derived from the Directive (e.g. avoidance of withholding
tax on dividends) or no tax advantage is gained at all. The wording of the main purpose test is largely consistent with the principal
purpose test set out in Action 6 of the BEPS Action Plan, which denies treaty benefits if the structure that is set up has tax
avoidance as one of its main purposes.
An arrangement (or series thereof) is “not genuine” to the extent that it is not put into place for valid commercial reasons which
reflect economic reality. In order to be treated as genuine, the company invoking the Directive should have sufficient substance
(e.g. it conducts a material business enterprise).
Application of the GAAR requires an individual examination of the whole operation at issue. The competent authorities may
not, therefore, confine themselves to applying predetermined general criteria. The imposition of a general tax measure that
automatically excludes certain categories of taxable persons from the tax advantage without the tax authorities having to provide
evidence of fraud and abuse, would go further than what is necessary for preventing fraud and abuse. For example, the mere fact
that a company residing in a Member State is directly or indirectly controlled by residents of third states does not, in itself, indicate
the existence of abuse – see Deister and Juhler (Joined Cases C-504/16 and C-613/16) and Eqiom and Enka (Case C-6/16).
Nevertheless, the tax authorities may consider some situations as indications of abuse. For example, abuse may be present if
dividends received are passed on wholly or partially shortly after they are received (even where no legal obligation to pass on
such dividends exists), the recipient lacks substance, or the recipient is interposed to obtain the benefits of the Parent-Subsidiary
Directive (2011/96). Accordingly, domestic safe harbours (e.g. a minimum level of substance in order for a structure not to qualify
as abuse) may not hold – see T-Danmark (Cases C-116/16 and C-117/16).
Member States must deny treaty benefits if an arrangement constitutes abuse of rights, even if the Member State has not
implemented any specific anti-avoidance legislation in its domestic law. This requirement flows from the general EU anti-abuse
principle – see Z-Denmark v. Skatteministeriet (C-299/16) and T-Danmark (C-116/16 and C-117/16).
The GAAR does not preclude the application of domestic or agreement-based provisions required for the prevention of tax
evasion, tax fraud or abuse.

3.2. Interest and Royalties Directive

Scope
On 3 June 2003, the Council adopted Interest and Royalties Directive (2003/49) to eliminate withholding taxes on interest and
royalty payments between related companies of different Member States (the Directive). The implementation deadline for Member
States was 1 January 2004.

Definition of “company of a Member State”

The Directive defines “company of a Member State” as any company that:

- takes one of the forms listed in the Annex to the Directive;

- is considered to be a resident of a Member State for tax purposes according to the national laws of that Member State, and
is not considered to be a resident for tax purposes outside the European Union under the terms of a tax treaty with a non-EU
Member State; and
- is subject to one of the taxes listed in article 3(a) of the Directive, or to any other tax that may be substituted for any of the
expressly mentioned taxes, without the possibility of an option or of being exempt. Based on the wording of the article, only
the (recipient) company seems to be required to be subject to tax, without the interest or royalty income being effectively
subject to tax in the Member State of residence. However, the ECJ noted in N Luxembourg 1 (Joined Cases C-115/16,

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C-118/16, C-119/16 and C-299/16) that to the extent that the interest received by an entity (in this case by Luxembourg
resident SICAR) is exempt from profits tax in Luxembourg, this entity does not qualify as a “company of a Member State”.
All of the three above-mentioned criteria must be cumulatively met.

Qualifying shareholding
As mentioned above, the Directive applies to interest and royalty payments between related companies. Companies are “related”
if:

- one company has a direct holding of at least 25% of the capital of the other company (or vice versa). Member States can opt
to replace the minimum shareholding requirement with that of a minimum holding of voting rights; or
- a third company has a direct holding of at least 25% of the capital of each of the two companies. The third company (holding
at least 25% of the capital of two qualifying companies) does not seem to be required to be a resident of a Member State.
A Member State may decide not to apply the Directive if the 25% shareholding requirement has not been maintained for at least 2
years.
Moreover, before applying the Directive, the Member State in which the payment arises may request that an attestation be
submitted stating that the requirements set out in the Directive are met (e.g. the 25% shareholding, residence of the recipient,
beneficial ownership). Inability to provide such attestation may lead to the relevant Member State refusing to apply the Directive.
The attestation must be valid for at least 1 year, but no more than 3 years.
If both the payer and the recipient are residents of the same Member State, the Directive does not apply.

Tax treatment
Under the Directive, interest or royalty payments that arise in a Member State are exempt from any taxes imposed on such
payments in that State if the beneficial owner of the interest or royalties is a related company of another Member State (or a
permanent establishment thereof).
The beneficial owner is not a formally identified recipient, but rather the entity that economically benefits from, and has the
freedom to use and enjoy, the interest and/or royalties. In this regard, the OECD Model Tax Convention on Income and on Capital:
Commentary on Articles 11 and 12 is relevant for interpreting the term “beneficial owner” – see N Luxembourg 1 (Joined Cases
C-115/16, C-118/16, C-119/16 and C-299/16).
A permanent establishment can be considered the beneficial owner of the interest and/or royalties provided two requirements are
met:

- the receivable, the right, or the use of information in respect of which the interest and/or royalties are received can be
allocated to this permanent establishment (because they are instrumental in the business carried on by the permanent
establishment based on the internationally accepted allocation rules); and
- the interest and/or royalties are subject to a profit tax in the country where the permanent establishment is located. The
Directive does not prescribe a minimum level of taxation in the Member State where the permanent establishment is located.
The Directive aims to eliminate double taxation in the source Member State at the level of the recipient of the interest and/or
royalties and therefore only eliminates legal double taxation. Member States may, accordingly, limit the deductibility of the payment
from the debtor’s tax base – see Scheuten Solar Technology (Case C-397/09).
In relation to Switzerland, under the Amending Protocol to the European Union-Switzerland Agreement (2015), Member States
must exempt interest and royalty payments to companies resident in Switzerland, and vice versa, under essentially the same
conditions as those laid down in the Interest and Royalties Directive (2003/49).

Anti-abuse
The Interest and Royalties Directive (2003/49) does not preclude the application of domestic or agreement-based provisions that
aim to prevent fraud or abuse. Where the principal motive or one of the principal motives of the transaction is tax evasion, tax
avoidance or abuse; Member States can withdraw or refuse application of the Directive. The terms “evasion”, “avoidance” and
“abuse” are not defined in the Directive.
Application of this rule requires an individual examination of the whole operation at issue. The competent authorities may not,
therefore, confine themselves to applying predetermined general criteria – see Deister and Juhler (Joined Cases C-504/16 and
C-613/16) and Eqiom and Enka (Case C-6/16).

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Nevertheless, the tax authorities can consider some situations as indications of abuse. For example, abuse may be present if the
interest and/or royalties received is passed on wholly or partially shortly after it is received (even where no legal obligation to pass
on such interest and/or royalties exists), the recipient lacks substance, or the recipient is interposed solely to obtain the benefits
of the Directive. Accordingly, domestic safe harbours (e.g. a minimum level of substance in order for a structure not to qualify as
abuse) may not hold.
The general principle of EU law, according to which EU law cannot be relied on for abusive or fraudulent purposes, requires that
the taxpayer be refused the benefits under the Directive and fundamental freedoms, even where no domestic or agreement-based
provisions exist upon which such a refusal may be based. Proof of abuse requires a combination of objective and subjective
elements – see N Luxembourg 1 (Joined Cases C-115/16, C-118/16, C-119/16 and C-299/16).

3.3. Merger Directive

The Merger Directive (2009/133) (the Directive), which constitutes a codified version of the previous Merger Directive (90/434) and
its amendments, aims to facilitate cross-border reorganizations within the European Union. The Directive provides for the deferral
of the taxation on unrealized capital gains on certain cross-border reorganizations. Such transactions should not cause immediate
direct tax consequences (i.e. corporation taxes, income taxes and capital gains taxes) to the participating companies and their
shareholders. The related taxation is deferred up to the moment in which such assets are retransferred.
The objective of Merger Directive (90/434) is to facilitate cross-border mergers, divisions and similar transactions between
companies established in Member States. The implementation of Merger Directive (90/434) enables groups of companies to
reorganize their activities into the most appropriate structure for operating within the European Union without incurring the tax
costs which would otherwise generally apply to such transactions.

Scope
The Directive covers the following five types of corporate reorganizations:

- Mergers in which one or more companies, on being dissolved without going into liquidation, transfer all their assets and
liabilities to another existing or new company. In exchange, the shareholders of the transferor companies receive shares in the
capital of the transferee company and, if applicable, a related cash payment not exceeding 10% of the nominal value of those
shares. This also includes the situation where a wholly owned subsidiary transfers all its assets and liabilities to the parent
company.
First alternative
One or more companies are merged into another already existing company.

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Second alternative
Two or more companies are merged into another new company.

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Third alternative
A company transfers all of its assets and liabilities to its parent company which owns 100% of the shares.

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- Divisions of companies in which a company, on being dissolved without going into liquidation, transfers assets and liabilities
to two or more existing or new companies. In exchange, the shareholders of the transferor company receive shares in the
capital of the transferee companies and, if applicable, a related cash payment not exceeding 10% of the nominal value of
those shares.

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- Partial divisions in which a company, without being dissolved, transfers one (or more) branches of activity to one (or more)
existing or new companies, and at least one branch of activity remains with the transferring company. In exchange, the
transferring company receives securities and possibly a cash payment of up to 10% of the nominal value or, in the absence of
a nominal value, of the accounting par value of those securities. This cash payment has practical reasons, as computing an
exact amount of shares to be exchanged for other shares can be difficult.
- Transfers of assets in which there is a transfer of one or more branches of a company’s activities to another company in
exchange for shares in the capital of the transferee company.

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- Exchanges of shares in which a company acquires a holding in the capital of another company such that it obtains the
majority of the voting rights in that company. The Directive also covers a transaction whereby a company already holding
such a majority, acquires a further holding. The acquiring company issues to the shareholders of the acquired company
securities that represent the capital of the acquiring company in exchange for their securities. As with mergers and divisions,
a cash payment of up to 10% of the nominal value or, if there is no nominal value, of the accounting par value of the securities
issued may be included in the transaction.

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The Directive also applies to split-offs and to the conversion of branches to subsidiaries.

Branch of activity
A branch of activity is defined as all the assets and liabilities of a division of a company which from an organizational point of view
constitute an independent business, i.e. an entity capable of functioning by its own means.
The independent operation of the transferred business must be determined primarily from a functional and only secondarily from
a financial point of view. The assets transferred must be capable of operating as an independent undertaking without requiring
additional investment. The fact that a company receiving a transfer takes out a bank loan under normal market conditions cannot
in itself mean that the transferred business is not independent, even if the loan is guaranteed by its shareholders. However, if
the financial situation of the receiving company as a whole would inevitably point to the conclusion that it would not be able to
survive by its own means, the transferred business might not be regarded as independent. Such assessment as to whether or
not a business is independent must be left to the national court, having regard to the particular circumstances of each case – see
Andersen og Jensen (Case C-43/00).
As emphasized by the ECJ, the Directive does not grant EU Member States the discretion to introduce conditions beyond the
ones outlined in the directive itself. Accordingly, the Merger Directive precludes legislation of an EU Member State that makes the
benefit of tax neutrality in case of a partial division subject to conditions (in the case at hand, e.g. reductions in the shareholding or
share capital) that are not specified in the Directive (see GE Infrastructure Hungary Holding (Case C-318/22)).

Definition of “company of a Member State”

For the purposes of the Directive, “company of a Member State” means a company meeting the following three requirements:

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- The company takes one of the company forms listed in the Annex to the Directive for the country in which it is established.
- The company must be resident in a Member State under the tax laws of that Member State. However, a company does not
qualify if, on the basis of a tax treaty with a third (i.e. non-EU) state, the company results in being resident of that third state.
Dual resident companies are excluded from the scope of the Directive to prevent such treaties from being used to avoid
ultimate tax liabilities within Member States. For example, without this provision, assets might be transferred under a merger
transaction to a receiving company such that the taxation otherwise arising on capital gains relating to the assets transferred
is deferred in accordance with the reliefs under the Directive. When, however, the receiving company finally disposes of the
assets transferred to it (at which stage the gains on which taxation has been deferred would normally be brought into charge
to tax), a tax treaty may prevent the Member State of the receiving company from taxing the gains on the grounds that (i) the
receiving company is resident in a country outside of the European Union under the terms of a tax treaty; and (ii) the treaty
reserves the right to tax such gains to that non-EU Member State.
- The company must be subject to one of the taxes listed in the Annex to the Directive, without the option of being exempt.
The Directive also applies to SEs (see section 2.1.), cooperatives, mutual companies, certain non-capital-based companies,
savings banks, funds and associations engaged in a business.

Tax treatment
The Directive provides that capital gains (i.e. the differences between the “real values” of the assets and liabilities transferred and
their values for tax purposes) arising in relation to the transfer of assets and liabilities in a merger, division or transfer of assets are
not subject to tax. The term “value for tax purposes” is defined as the value on the basis of which any gain or loss would have been
computed for tax purposes in the transferring company if the assets or liabilities had been independently sold at the time of the
transaction. Taxation is deferred up to the moment when a subsequent transfer of the assets takes place.
The scope of the reliefs available under the Directive is, however, limited to assets and liabilities of the transferring company which
become effectively connected with a permanent establishment of the receiving company in the Member State of the transferring
company and play a part in generating the profits or losses taken into account for tax purposes of that receiving company. As such,
the existing book values of the transferred assets and liabilities are maintained by the permanent establishment of the receiving
company in the Member State of the transferring company. A future realization of a capital gain upon the alienation of assets and/
or liabilities for which in the past tax deferral was granted, will constitute taxable income of the permanent establishment in the
Member State that granted the tax deferral. The purpose of these restrictions is to ensure that the Member State of the transferring
company retains the assets and liabilities within its taxing jurisdiction even though no tax has been charged on the transfer to the
receiving company. In this way, the financial interests of the Member State of the transferring company are safeguarded.
A further prerequisite for the tax deferral is that the receiving company continues the depreciation method and computation
method for any gains and/or losses with respect to the assets and liabilities transferred, as used by the transferring company.
Consequently, if under the tax laws of a Member State the receiving company may opt for a step-up in basis, relief does not apply
to the assets and liabilities for which such option is exercised.
The Directive also addresses the situation where the transferring company in a merger, division or transfer of assets has provisions
or reserves on its balance sheet that are partly or wholly exempt from tax. Without a specific relief, a merger, division or transfer
of assets would often create a tax charge in respect of tax-exempt reserves and provisions present in the transferring company.
The Directive therefore imposes a requirement on Member States to provide relief from such taxation. The relief takes the form
of a deferral of taxation rather than a permanent relief in that the provisions or reserves may only be carried over with the same
tax exemption by a permanent establishment of the receiving company situated in the Member State of the transferring company.
The receiving company is furthermore required to assume the rights and obligations of the transferring company. Accordingly, the
Member State of the transferring company will have a future opportunity to tax the receiving company in respect of the reserves or
provisions if and when they are released.
If the domestic tax laws of a Member State provide – in pure domestic mergers, divisions and asset transfers – for the possibility of
carrying over the tax losses not yet exhausted from the transferring company to the receiving company, such carry-over of losses
should also be extended to the equivalent transactions under the Directive. Consequently, in that instance, the Member State of the
transferor company would have to permit the permanent establishment of the transferee company to carry forward prior losses of
that same business.
However, Member States may restrict the transfer of losses if the disappearing company is a resident of another Member State
while allowing the transfer of losses between domestic companies, to the extent that the losses are not “final”. In this sense,
Member States must give the domestic receiving company the possibility to show that the disappeared, transferring company of
the other Member State has exhausted all possibilities to use these losses itself, and that no other company can use these losses
in the future – see Veronsaajien oikeudenvalvontayksikkö and Valtiovarainministeriö v. Oy A (C-123/11). As such, the receiving

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company should be allowed to deduct the losses of the transferring company only if it can demonstrate that it is impossible to use
the losses in the disappearing company’s jurisdiction in future years. In this respect, it is not sufficient – nor decisive – that such
losses cannot be transferred upon a merger, as there can be other ways that these losses may be offset against future profits in
the transferring jurisdiction (e.g. through a sale of the transferring entity to a third party) – see Memira Holding AB v. Skatteverket
(C-607/17).
The Directive provides for relief from the taxation that would otherwise arise to the shareholders of the transferor company on
the exchange of shares arising in connection with a merger, division or an exchange of shares. However, the relief is provided by
means of a “rollover” so that the taxation of such gains is deferred until the shares acquired are disposed of.
A cash payment, however, may be taxed in the hands of the shareholders even if the payment does not exceed the 10% maximum,
provided the shareholder attributes to the securities received a higher value for tax purposes than the value the securities
exchanged had immediately before the merger, division or exchange of shares.
Gains earned by the transferee company upon the cancellation of a substantial participation, held by the transferee company in the
capital of the transferor company prior to the reorganization, are not taxed under the provisions of the Directive.
If the Commission’s BEFIT proposal (see section 3.8.) was to be adopted, the tax treatment of the Merger Directive would also be
applicable. In case of a reorganization in the context of the Merger Directive, the BEFIT group member that disposes of the assets
and liabilities will exclude any resulting gain or loss from the computation of its preliminary tax result and the BEFIT group member
that acquires the assets and liabilities will determine its preliminary tax result, in that fiscal year and the following fiscal years, by
using the value for tax purposes, as it stands at the time of the transfer and as it is defined under article 4 of the Merger Directive.

Anti-abuse
The Directive allows Member States to deny the benefits of the Directive where the reorganization has as its principal objective, or
as one of its principal objectives, tax evasion or tax avoidance. The fact that a transaction is not carried out for valid commercial
reasons may constitute a presumption that the transaction has tax evasion or avoidance as one of its principal objectives.
Due to the general nature of this anti-abuse clause, many Member States have introduced additional anti-abuse provisions in their
domestic laws. As Member States hold different views on what is abusive, this has led to referrals to the ECJ, which was asked to
decide whether such additional domestic conditions are in line with the Directive.
General rules that automatically exclude certain categories of operations from the benefits of the Directive on the basis of general
criteria – e.g. the acquiring company does not carry on business by itself; the same person wholly owns all companies involved; or
there is no joining of businesses – irrespective of whether tax evasion or tax avoidance takes place, go further than necessary for
preventing tax evasion or tax avoidance and undermine the aim pursued by the Directive. None of these criteria can be considered
decisive on their own – see Leur-Bloem (Case C-28/95).
Where the motive for a transaction is solely tax based, the benefits of the Directive may not be obtained, as “a valid commercial
reason” is a concept involving more than the attainment of a purely fiscal advantage – see Leur-Bloem (Case C-28/95). In addition,
if more objectives are involved, tax objectives may not be predominant. In this context, a valid commercial reason is not present
where the cost savings resulting from restructurings and rationalizations are marginal compared to the level of tax benefits (e.g. the
use of tax losses incurred by the merged company) – see Foggia (Case C-126/10).
However, it is not abusive under EU legislation to structure the transaction in the most tax-beneficial way if sound commercial
reasons are available – see Eurowings (Case C-294/97).
Nevertheless, the benefits of the Directive may not be denied if the main purpose of a merger is the avoidance of a tax that is not
covered by the Directive. In this sense, the anti-abuse rule does not cover transactions which, although primarily undertaken for
tax purposes, aim at avoiding a tax that does not fall within the scope of the Directive – see Zwijnenburg v. Staatssecretaris van
Financiën (Case C-352/08).
Cross-border reorganizations may lead to cases of double taxation where one Member State considers a transaction legitimate
(therefore allowing the transaction to take place based on book values), while another Member State considers the same
transaction abusive (as a result of which a deferral of tax is not granted). Under such circumstances, the applicable tax treaty (if
any) or the Arbitration Convention (90/436) may oblige the Member States concerned to avoid the double taxation.

3.4. Anti-Tax Avoidance Directive

On 21 July 2016, the Anti-Tax Avoidance Directive (2016/1164) (ATAD) was adopted. This directive, which applies to all
taxpayers subject to corporate income tax (including permanent establishments in Member States of companies based in third

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countries), contains anti-avoidance rules such as (i) a limitation on the deduction of interest expense; (ii) exit taxes; (iii) a general
anti-abuse rule; (iv) controlled foreign company (CFC) rules; and (v) hybrid mismatch rules.
The ATAD was amended by Amending Directive to the 2016 Anti-Tax Avoidance Directive (2017/952) (ATAD 2) – adopted by
the Council on 29 May 2017 – to address hybrid mismatches involving third countries. Member States had to implement ATAD
2 by 31 December 2018, which was extended to 31 December 2019 for the implementation of the exit tax provisions and hybrid
mismatches, and to 31 December 2021 for reverse hybrid mismatches.
On 19 August 2020, the Commission adopted the first report on the implementation of the ATAD, which included an overview of
the implementation of the interest limitation, and general anti-abuse and CFC rules across Member States (COM(2020) 383 final).
By 1 January 2023, almost all Member States had implemented the ATAD’s rules, except for some countries that already had
similar provisions in place under their domestic law deemed equally effective as the ATAD’s rules.
The hybrid mismatch rules of ATAD 2 have been implemented by all Member States.

3.4.1. Interest limitation rules

Interest limitation rules, under which net borrowing costs in a taxable period, are only deductible up to the higher of (i) 30% of the
taxpayer’s earnings before, interest, tax, depreciation and amortization (EBITDA); or (ii) EUR 3 million. Member States can allow a
full deduction of interest expenses for standalone entities.
The net borrowing costs are equal to the interest expenses, economically equivalent costs and costs incurred for the raising of
finance less taxable interest income and economically equivalent income.
Member States may allow companies belonging to a consolidated group for financial accounting purposes to calculate their
deductible expenses using group ratios. Accordingly, companies showing that their equity over asset ratio is equal to or higher than
the equivalent group ratio may also fully deduct the interest. This is deemed to be the case if the equity over asset ratio is not more
than 2% lower than the equivalent ratio of the worldwide group and all assets and liabilities are valued using the same method.
Alternatively, Member States may allow a higher deduction calculated in two steps. First, the group ratio must be determined by
dividing the excess borrowing costs towards third parties by the group EBITDA. Thereafter, the group ratio must be multiplied with
the EBITDA of the company concerned.
With respect to non-deductible interests, Member States may introduce carry-forward and carry-back possibilities for an unlimited
period or a maximum of 3 years, respectively. With respect to unused interest capacity, Member States can also opt to implement
a carry-forward provision for a maximum of 5 years.
Member States may exclude financial undertakings from the scope of these rules, even where such financial undertakings are
part of a consolidated group for financial accounting purposes. Excess interest expenses incurred on loans which were concluded
before 17 June 2016 and loans used to fund certain long-term public infrastructure projects can also be excluded.
Member States that have sufficient special target rules may postpone the implementation of the interest limitation rule until 1
January 2024.

3.4.2. Exit taxes

The exit tax rules cover certain cross-border transfers of assets or residence of companies to EU or non-EU countries. The
following transactions are taxed:

- transfer of assets from the head office to a permanent establishment located in another Member State or in a third country to
the extent that the Member State of the head office no longer has the right to tax the transferred assets;
- transfer of assets from a permanent establishment in a Member State to its head office or another permanent establishment
located in another Member State or third country;
- transfer of the tax residence of a company to another Member State or third country, unless the assets remain connected with
a permanent establishment in the Member State of origin; and
- transfer of the business carried out in a permanent establishment to another Member State.
In the aforementioned cases, the difference between the fair market value of the assets and the tax value is taxed.
Besides immediate taxation, Member States must also provide for the possibility to defer the payment to five instalments in the
event of transfers to Member States or third countries that belong to the EEA and that concluded an agreement equivalent to
the Recovery Directive (2010/24). Interest may be charged on deferred exit tax and the deferral may be subject to guarantee

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arrangements in the case of demonstrable and actual risk of non-recovery to ensure proper tax collection. The deferral of payment
can be immediately discontinued and the tax debt can become recoverable under certain circumstances (e.g. transfers to third
countries or bankruptcy of the taxpayer).
Certain temporal transfers of assets are excluded from these provisions (e.g. assets related to the financing of securities,
collaterals, capital requirements or liquidity management).
A step-up rule is introduced for certain taxable transactions between Member States. Accordingly, Member States must accept
the exit value established by the Member State of origin unless the exit value does not reflect the market value under certain
circumstances.

3.4.3. General anti-abuse rule (GAAR)

Under the GAAR, non-genuine arrangements or series thereof with the main purpose or one of the main purposes of obtaining
a tax advantage which is against the object or purpose of the applicable law are ignored for the purposes of determining the
corporate tax liability.
Arrangements or series thereof are regarded as non-genuine to the extent that they are not based on valid commercial reasons,
which reflect economic reality.

3.4.4. Controlled foreign company rules

CFC legislation applies to entities or permanent establishments that meet the following conditions:

- taxpayers holding alone or together with associated enterprises a direct or indirect participation of more than 50% of the
voting rights or capital or that are entitled to more than 50% of the profits of that entity; and
- the entity or permanent establishment is subject to an effective tax rate of less than 50% of the effective tax rate that would
have been charged in the Member State of the taxpayer.
The non-distributed income of a CFC must be included in the taxable income of a taxpayer. Member States may opt between the
following approaches:

- inclusion of interest; dividends; income from the disposal of shares; royalties; income from financial leasing; income from
banking, insurance and other financial activities; and income from invoicing associated enterprises as regards goods and
services where there is no or little economic value added. In EEA situations the income does not have to be included: (i) if the
CFC carries on substantive economic activities supported by staff, equipment, assets and premises; (ii) if the income of the
CFC consists for one third or less of the specific types of listed income; or (iii) for financial undertakings (under conditions).
This rule may be extended to third countries; or
- inclusion of non-distributed income arising from non-genuine arrangements put in place mainly to obtain a tax advantage.
The included income is limited to the income attributable to the significant people functions carried out by the controlling
company. Member States may introduce exceptions for CFC entities or permanent establishments with accounting profits not
exceeding EUR 750,000 and non-trading income not exceeding EUR 75,000 or with accounting profits not exceeding 10% of
their operating costs for the taxable period.
The income to be included under the CFC rules must be calculated in accordance with the rules of the Member State where the
taxpayer resides. Double taxation relief is granted through a credit for the underlying corporate tax paid by the CFC and, in the
case of profit distributions and disposals of the participation in the CFC, through the deduction of the income previously included in
the tax base as CFC income from the taxpayer’s taxable income.

3.4.5. Hybrid mismatches

The goal of the provisions on hybrid mismatches is to neutralize the effects of arrangements that exploit differences in the tax
treatment of an entity or instrument under the laws of two or more jurisdictions.
Under the ATAD (as amended by ATAD 2), hybrid mismatches concern situations in which an entity or transaction is treated
differently – for tax purposes – under the laws of two Member States (or of a third country), and this difference results in:

- a double deduction of the same payment, expense or loss; or

- a deduction of a payment without the inclusion of the corresponding income for tax purposes in the payee jurisdiction.

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The hybrid mismatches covered by the ATAD are related to entities, financial instruments and permanent establishments.
Specifically, the ATAD covers hybrid mismatches resulting from (i) payments under a financial instrument; (ii) payments to a hybrid
entity, permanent establishment or a disregarded permanent establishment; (iii) payments made by a hybrid entity to its owners;
(iv) deemed payments between the head office and permanent establishment or between two or more permanent establishments;
and (v) payments made by a hybrid entity or a permanent establishment. Additionally, the ATAD includes specific rules for dealing
with dual residence mismatches, hybrid transfers, imported mismatches and reverse hybrid mismatches.
The personal scope of application of the provisions is restricted to payments between associated enterprises, between permanent
establishments and their head offices and payments made under structured arrangements.
The ATAD establishes primary and secondary rules under which mismatches are neutralized by one Member State. For example,
when the mismatch results in a double deduction, the Member State of the investor must deny the deduction. Failing this, the
deduction must be denied in the Member State of the payor jurisdiction.

3.4.6. Impact on investment funds

The impact of the ATAD on investment funds may be limited. In particular, the ATAD contains an option for Member States to
exclude financial undertakings from application of certain anti-avoidance rules to prevent that, amongst others, investment banks
are adversely impacted. Specifically, the interest limitation rule and the CFC rules do not apply to financial undertakings.
For banks, there is an exception to the hybrid mismatch provisions for financial instruments. Until 31 December 2022, Member
States could exclude certain financial instruments (from banks) from this regime. These included so-called “contingent
convertibles” (CoCo’s), which are a mixture of equity and debt and are widely used by banks to meet Basel III capital
requirements. However, this exception did not give Member States a carte blanche: point 17 of the preamble to ATAD 2 states that
the scheme is without prejudice to the rules on State aid.
The reverse hybrid rule does not apply to collective investment vehicles with a diversified securities portfolio that are subject to
financial supervision. Qualifying investment vehicles for the exception are (i) those referred to in article 1 of the UCITS Directive
(2009/65); and (ii) alternative investment funds referred to in article 4(1)(k) of the Alternative Investment Fund Managers Directive
(2011/61), as well as Regulations (EC) 1060/2009 and (EU) 1095/2010. Such collective investment undertakings will therefore not
be affected by the reverse hybrid measure. However, this does not mean that the other hybrid mismatch provisions do not apply to
such investment funds.

3.5. Minimum Taxation Directive

EU Member States approved the Minimum Taxation Directive (2022/2523) on 15 December 2022 to implement the OECD
Pillar Two Global Anti-Base Erosion (GloBE) rules. The Minimum Taxation Directive was published in the Official Journal of the
European Union on 22 December 2022 (ST/8778/2022/INIT, OJ L328 (2022)).
The Minimum Taxation Directive aims to ensure that large groups in the European Union pay a minimum tax rate in every
jurisdiction in which they operate. It provides for a minimum effective tax rate of 15% for domestic and international groups with
a consolidated group revenue of more than EUR 750 million a year during two of the last four tax periods, and with either a
parent company or a subsidiary situated in an EU Member State. If the group is not taxed at such a minimum effective rate on a
jurisdictional basis, a top-up tax is triggered to reach the 15% minimum effective tax rate.

Calculation of the top-up tax

Where the effective tax rate (ETR) for the entities in a particular jurisdiction is below 15%, the group must pay a top-up tax to
bring its rate up to 15%. The ETR is calculated as the ratio of the aggregate amount of covered taxes paid in a jurisdiction to the
aggregate amount of qualifying income in each jurisdiction. The amount of qualifying income is based on consolidated accounting
results, as a starting point, with specific GloBE adjustments (e.g. exclusion of dividends from certain portfolios, timing differences,
exclusion of shipping income).
In the application of a substance-based carve-out, the calculation of qualifying income is reduced by an amount equal to 5% of
the value of tangible assets and 5% of payroll that the group employs in the jurisdiction (with a 10-year transitory regime with
increased carve-out percentages).
The amount of covered taxes does not include indirect taxes, payroll and property taxes. It is calculated from the accounting tax
expense with specific GloBE adjustments.

Allocation rules of the top-up tax

The Minimum Taxation Directive provides two rules for allocating the top-up tax:

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- an income inclusion rule (IIR) in accordance with which a parent entity of a multinational enterprise (MNE) group or of a large-
scale domestic group computes and pays its allocable share of top-up tax in respect of the low-taxed constituent entities of
the group; and
- an undertaxed profit rule (UTPR) in accordance with which a constituent entity of an MNE group has an additional cash tax
expense equal to its share of top-up tax that was not charged under the IIR in respect of the low-taxed constituent entities
of the group. The allocation of tax under the UTPR is based on the number of employees and tangible assets in the relevant
jurisdiction.
Taxpayers
The directive establishes the following types of taxpayers based on a top-down approach:

- Ultimate parent entities, which are located in the European Union, incur the primary obligation to apply the IIR to their
allocable share of top-up tax relating to all low-taxed constituent entities of the MNE group, whether they are located in or
outside the European Union. In the case of domestic groups, the ultimate parent entity must apply the IIR to the entire amount
of top-up tax.
- Intermediate parent entities located in the European Union must apply the IIR up to their allocable share of the top-up tax
when the ultimate parent entity is an excluded entity or is located in a third-country jurisdiction that has not implemented the
OECD Model rules or equivalent rules.
- Partially owned parent entities located in the European Union that are more than 20% owned by interest holders outside the
group are obliged to apply the IIR up to their allocable share of the top-up tax, regardless of whether the ultimate parent entity
is located in a jurisdiction that has a qualified IIR (unless they are wholly owned by another partially owned parent entity which
is required to apply the IIR).
- Other entities located in the European Union must apply the UTPR to any residual amount of top-up tax that has not been
subject to the IIR and the top-up tax corresponding to the ultimate parent entity which is located in low-taxed jurisdictions.
Special rules apply for restructuring transactions and the transfer of assets. CFC rules and distribution regimes are also specifically
treated.

Qualified domestic top-up tax (QDMTT)

The directive allows EU Member States to exercise the option to apply a domestic top-up tax to low-taxed domestic subsidiaries.
This option will allow the top-up tax due by the subsidiaries of the multinational group to be charged locally, within the respective
Member State, and not at the level of the parent entity.

Exclusions
A transitory exemption applies for MNE groups that are at the initial phase of their international activity for a period of 5 years,
provided that the MNE group does not have constituent entities in more than six jurisdictions and the value of all assets of the
group located outside the Member State does not exceed EUR 50 million. Domestic groups can also be excluded for a transitional
period of 5 years under the same conditions.
The rules also provide for an exclusion of minimal amounts of income to reduce the compliance burden. According to the de
minimis exclusion, no top-up tax will be charged when average revenues are less than EUR 10 million and an average qualifying
income (or loss) is less than EUR 1 million in a jurisdiction.
Additionally, Member States in which very few groups are headquartered (i.e. less than 12 ultimate parent entities of groups within
the scope of this directive are located in the jurisdiction) have the option to not apply the IIR and the UTPR for 6 years. The election
for the delayed application of the rules must be notified to the European Commission by 31 December 2023. As of 12 December
2023, Estonia, Latvia, Lithuania, Malta and the Slovak Republic have communicated their intention to delay the application of the
IIR and UTPR for 6 consecutive fiscal years, beginning from 31 December 2023 (PUB/2023/1760, OJ C, C/2023/1536).

Transposition deadlines
Member States had to bring into force the laws, regulations and administrative provisions necessary to transpose the directive by
31 December 2023, with the exception of the UTPR for which the transposition deadline is 31 December 2024.
By 25 January 2024, Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Finland, France, Germany, Hungary, Ireland,
Italy, Luxembourg, the Netherlands, Romania, Slovenia and Sweden had implemented the Directive. The European Commission

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has sent a letter of formal notice to Estonia, Greece, Spain, Cyprus, Latvia, Lithuania, Malta, Poland and Portugal for failure to
communicate national measures transposing the Directive by that date.

Importance of OECD works

The directive refers to the OECD Model rules and the explanations and examples in the Tax Challenges Arising from the
Digitalisation of the Economy – Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two) released by the OECD/G20
Inclusive Framework on BEPS, as well as the GloBE Implementation Framework, including its safe harbour rules, as a source of
illustration or interpretation in order to ensure consistency in application across Member States of the Minimum Taxation Directive.
The OECD continues working on the implementation package. On 15 December 2022, the Inclusive Framework on BEPS agreed
on a minimum transitional safe harbour based on the CbC reporting information to exclude operations in lower-taxed jurisdictions
provided that in the jurisdiction (i) the de minimis exclusion applies; (ii) the ETR (calculated on a simplified basis) is at least 15%
(16% for 2025 and 17% for 2026); or (iii) the pre-tax profit is less than the amount resulting from the substance-based exclusion. A
transitional penalty relief regime, which requires careful consideration by tax authorities for applying penalties or sanctions where
an MNE has taken reasonable measures to ensure the correct application of the GloBE rules, was also approved. Together with
this publication, the OECD launched a public consultation on the GloBE Information Return and dispute prevention and resolution
mechanisms which ran until 3 February 2023.
On 1 February 2023, additional Agreed Administrative Guidance on the model rules was approved by the OECD Inclusive
Framework on BEPS. Along with new details on the standardized GloBE Information Return, a second set of Administrative
Guidance was published on 17 July 2023 to cover, among other things, safe harbours for states designing QDMTTs and a
transitional UTPR safe harbour.

3.6. Misuse of shell entities

The Commission, as part of its business tax agenda for the 21st century for 2021-2023 (COM(2021) 251 final), launched an
initiative to tackle the abusive use of shell companies to ensure that legal entities without a substantial business presence do not
benefit from tax advantages. The Commission issued a proposal for a Council directive on 22 December 2021 ("ATAD 3") and
opened a feedback period which ran from 23 December 2021 to 6 April 2022.
Through the use of objective indicators related to income, personnel and premises, the proposed directive aims to establish
transparency standards in relation to the use of shell entities, in order to allow tax authorities to detect and prevent misuse of such
entities for tax purposes and deny them certain tax benefits.
As an advisory body in this procedure, the European Parliament adopted its report on ATAD 3 proposal on 17 January 2023
(COM(2021)0565 – C9-0041/2022 – 2021/0434(CNS))). The report is not legally binding for the ECOFIN but it should be taken
into account while discussing and voting on the proposal.

3.7. Debt-equity bias reduction allowance

The Commission, as part of its business tax agenda for the 21st century for 2021-2023 (COM(2021) 251 final), launched an
initiative to address the debt-equity bias in corporate taxation through a debt-equity bias reduction allowance (DEBRA) (i.e. an
equity allowance). To this end, the Commission issued a proposal for a Council directive on 11 May 2022 (COM(2022) 216 final)
and opened a feedback period which ran from 13 May until 8 July 2022.
In short, the DEBRA initiative proposes:

- an allowance on equity of up to 30% of the taxpayer's EBITDA – for a period of ten consecutive tax periods – with carry-
forward for excesses and unused capacity. This allowance will reduce the corporate income tax base. The allowance is
calculated by applying a notional interest rate to the allowance base, which is the difference between the net equity at the end
of a tax period and the net equity at the end of the preceding tax period; and
- that 15% of the exceeding borrowing costs (i.e. interest paid minus interest received) is non-deductible.
The European Economic and Social Committee (EESC) has recommended to include an exclusion from the rules for small and
medium-sized enterprises (SMEs) and micro-enterprises on the grounds that the proposed measures could make EU companies
financially weaker and hamper investment, growth and job creation in the European Union (ECO/595-EESC-2022).
The ECOFIN suspended work on DEBRA in light of the many interlinkages with other corporate tax dossiers, e.g. ATAD 3 (see
section 3.6.), the Minimum Taxation Directive (see section 3.5.) and BEFIT (see section 3.8.), which were under discussion in the
Council or had been announced by the Commission (see Report to the European Council on tax issues (14905/22 LIMITE FISC

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227 ECOFIN 1177), as approved on 6 December 2022). Nevertheless, Members of the European Parliament (MEPs) continued to
exchange views on this proposal with the purpose of reaching a general Parliament opinion (see COM(2022) 216 final).
On 28 November 2023, MEPs of the Committee on Economic and Monetary Affairs (ECON Committee) approved its report that
was adopted by plenary session on 16 January 2024 (2022/0154(CNS). The European Parliament acts as a consultative body in
this procedure.

3.8. Business in Europe: Framework for Income Taxation (BEFIT)

On 12 September 2023, the European Commission launched a proposal to develop a common corporate tax framework in the
internal market (COM(2023) 532 final). This Business in Europe: Framework for Income Taxation (BEFIT) proposal replaced the
Commission’s Common Corporate Tax Base and Common Consolidated Corporate Tax Base proposals, which were withdrawn
(see previous versions of the chapter).
The BEFIT proposal aims to implement a common corporate tax framework for EU large-scale groups of companies, which would
replace the 27 national systems. The proposal establishes a common set of rules to determine the tax base of companies that are
part of a group that prepares consolidated financial statements and are subject to corporate income tax in a Member State. If the
proposal is adopted by the Council, Member States will have to implement the BEFIT into their national laws by 1 January 2028
and the new rules will apply from 1 July 2028.
Together with the BEFIT proposal, the European Commission proposed a Council directive establishing a Head Office Tax
system for micro, small and medium sized enterprises, and amending Directive 2011/16/EU (HOT) (COM(2023) 528 final) and a
transfer pricing directive – the Council directive on transfer pricing (COM(2023) 529 final) – to harmonize minimum standards. For
details on the latter, see section 7. On 4 December 2023, MEPs of the ECON Committee discussed the draft report on the BEFIT
proposal (2023/0321(CNS)). The draft report is scheduled to be voted on on 22 February 2024 for the BEFIT proposal (indicative
date).

Scope
The BEFIT rules foresee a hybrid scope. On one side, a mandatory scope comprises (domestic and multinational) groups which (i)
prepare consolidated financial statements, (ii) had annual combined revenues of at least 750 million in at least 2 of the preceding
4 fiscal years and (iii) the ultimate parent entity holds at least 75% of the ownership rights or the rights giving entitlement to profit.
Additionally, if the group is headquartered outside the European Union, the EU sub-set will need to additionally raise at least 5% of
group revenues in the European Union or the amount of EUR 50 million annual combined revenues in at least 2 of the preceding 4
fiscal years. In-scope groups include the entities that meet the 75% ownership framework.
On the other side, a voluntary scope comprises smaller groups that prepare consolidated financial statements. When a group opts
in for this regime, the BEFIT rules apply to all EU entities and permanent establishments that meet the ownership threshold of 75%.
In this case, they are bound for a minimum period of 5 years.
Although the rules would cover all sectors, certain sector-specific characteristics are included, such as a carve-out from the BEFIT
tax base (which is discussed below) for shipping income covered by a national tonnage tax regime.

Computation and allocation of the tax base

The taxable base is calculated at the single entity level of the relevant group company. These tax bases are then aggregated at the
EU group level and ultimately reallocated to the relevant EU Member State.
The starting point for calculating single tax bases is the accounting result from the financial accounts. Then, it foresees tax
adjustments by which some items are added back in case they were deducted (e.g. financial assets held for trading, certain
borrowing costs, fines, penalties, corporate taxes) or subtracted from the financial net income or loss if they were in the financial
accounts (e.g. dividends and capital gains from qualifying participations, profits or losses from permanent establishments). The
preliminary tax result is also adjusted to consider depreciation, timing and quantification issues. Tax depreciation rules aim to
remain closer to financial accounting than national tax depreciation rules.
The proposal includes special rules for dealing with the tax bases and losses of entities entering or leaving the BEFIT group. These
rules also deal with business reorganizations, maintaining the benefits of the Merger Directive while applying an anti-abuse rule
to ensure that capital gains are taxed when assets are finally sold out of the group. In this regard, the capital gains that arise from
a reorganization within the BEFIT group would normally benefit from a tax exemption, but such exemption would be refused if the
company is subsequently sold outside the BEFIT group unless the transaction was carried out for valid commercial reasons. The
proposal also accommodates distribution-based tax systems by introducing specific rules.

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The preliminary tax results of all members of the BEFIT group are aggregated into a single pool at EU level (called the BEFIT tax
base). Among other benefits, the aggregation would allow cross-border tax relief and avoid withholding taxation on transactions
such as interest and royalty payments within the BEFIT group insofar as the beneficial owner of the payment is a BEFIT group
member.
Income and losses from extractive activities are separated from the BEFIT tax base (they are allocated to their jurisdiction of
origin). Results from shipping which is not covered by a tonnage tax regime or from air transport are also excluded.
The aggregated tax base is then allocated to the Member State of each BEFIT group according to a transition rule. The transition
allocation rule is calculated as the average of taxable results in the previous three fiscal years. The transition rule would be in place
for 7 years (i.e. until 30 June 2035 at the latest). Upon allocation, Member States remain free to further apply any deductions,
tax incentives or base increases to their allocated parts, insofar as these adjustments are in line with the rules laid down in the
Minimum Taxation Directive (2022/2523) (see section 3.5.).

Administration
The proposal provides a common administrative framework by introducing a one-stop shop regime for BEFIT groups. Under the
one-stop shop regime. the filing entity will generally be the ultimate parent entity which will file an information return for the whole
BEFIT group to its domestic administration. The tax administration will share the BEFIT Information Return with the other Member
States in which the BEFIT Group operates. After filing the Information Return, a team of representatives of each relevant tax
administration will examine the completeness and accuracy of the filled information.
Additionally, each entity forming the BEFIT group will also file an individual tax return to its local administration to apply the
domestically set adjustments to their allocated part.
In principle, individual Member States remain competent to perform tax audits. It will, however, be possible for Member States to
request joint audits with other Member States. The latter is obligated to accept such a request.
Appeals against the content of the BEFIT Information Return may be brought to an administrative body of the Member State of the
filing entity. Appeals of an individual BEFIT group member against an individual tax return may be brought to its tax administration.

3.9. Other developments

Other initiatives
FASTER (Faster and Safer Tax Excess Relief)
The European Commission has proposed a new EU system for the avoidance of double taxation and prevention of tax abuse in
the field of withholding taxes. This system is known as FASTER (Faster and Safer Tax Excess Relief). The European Commission
proposed the Council Directive on 19 June 2023 (COM(2023) 324 final). Once adopted by Member States, the proposal should
come into force on 1 January 2027.
The proposed rules aim to improve withholding tax procedures in cross-border dividends and/or interest payments, while providing
Member States with the necessary tools to effectively tackle tax fraud and abuse. In particular, it creates an EU common tax
residence certificate and a standardized reporting obligation for certified financial intermediaries (e.g. banks) through which
the domestic tax authorities will be able to assess the eligibility of the applicant for a reduced withholding tax rate and to trace
potential tax abuse situations. It provides for withholding relief procedures and the obligation for Member States to set up fast-track
procedures that will complement the existing standard procedure. Member States may choose to apply:

- a “relief at source” procedure, under which the tax rate applied at the time of payment of dividends or interest is directly based
on the applicable rules of the tax treaty provisions;
- a “quick refund” system, under which the initial payment is made taking into account the withholding tax rate of the Member
State where the dividends or interest are paid, but the refund for any overpaid taxes is granted within 50 days from the date of
payment; or
- a combination of both.
On 7 November 2023, MEPs of the ECON Committee discussed a draft report calling for amendments to the FASTER proposal
(2023/0187(CNS)). The draft report was adopted on 23 January 2024 and is scheduled to be voted on on 26 February 2024
(indicative date).

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HOT (Head Office Tax System for SMEs)

On 12 September 2023, the European Commission launched a new proposal to create a head office tax system (HOT) for SMEs
(COM(2023) 528 final). Under this proposal, SMEs that operate cross-border through permanent establishments will have the
option to interact with only one tax administration (i.e. the administration of the head office) instead of having to comply with
multiple tax systems. It aims to increase certainty and reduce compliance costs by filing one single tax return and calculating tax
liability based on the applicable rules of the Member State of its head office. If adopted by the Council, Member States will have to
transpose it into their national laws by 31 December 2025 and the new rules will apply from 1 January 2026.
On 4 December 2023, MEPs of the ECON Committee discussed the draft report on the HOT proposal (2023/0320(CNS)). The
draft report is scheduled to be voted on on 22 February 2024 (indicative date) at the ECON Committee level, and on 10 April 2024
at the plenary level of the European Parliament.

SAFE (Securing the Activity Framework of Enablers)

The European Commission has released a new initiative to tackle the role that enablers can play in facilitating arrangements or
schemes that lead to tax evasion or aggressive tax planning involving third countries. The European Commission published a
report which summarizes the contributions made by stakeholders during the feedback period (that ran from 6 July to 12 October
2022) on 31 January 2023. This initiative is known under the acronym SAFE (Securing the Activity Framework of Enablers). The
adoption of the legislative proposal by the European Commission was expected for the first quarter of 2023, but has not yet been
scheduled. According to the meeting of the Committee on Economic and Monetary Affairs of the European Parliament held on 28
June 2023, work on the SAFE proposal will depend on the progress of the negotiations of ATAD 3 (see section 3.6.).

Code of conduct list of preferential tax regimes

The Code of Conduct Group (Business Taxation) regularly publishes an overview of preferential tax regimes in (i) the European
Union; (ii) dependent or associated territories of Member States to which EU treaties do not apply; and (iii) other jurisdictions.
On 8 November 2016, the ECOFIN set out criteria for screening jurisdictions with the purpose of establishing an EU list of non-
cooperative jurisdictions (14166/16). The ECOFIN agreed on a Revised Code of Conduct for Business Taxation on 8 November
2022 (14452/22 FISC 214 ECOFIN 1131) which broadened the scope of the tax measures under scrutiny and clarified the review
process in the Code of Conduct Group.
The screening focuses on the following three areas:

- tax transparency: implementation of, or commitment to, exchange of information under various standards, e.g. the Common
Reporting Standard, OECD Exchange of Information on Request and the OECD Multilateral Convention on Mutual
Administrative Assistance;
- fair taxation: the existence of harmful preferential regimes, the facilitation of offshore structures and arrangements attracting
profits that do not reflect real economic activity in the jurisdiction and, from 2022, tax features of general application which can
be considered as harmful if they lead to double non-taxation or the double/multiple use of tax benefits; and
- implementation of BEPS measures: implementation of, or commitment to, the agreed OECD anti-BEPS minimum standards.
Jurisdictions that, after screening, do not meet all three criteria are placed on the list of EU non-cooperative jurisdictions. The list,
first adopted on 5 December 2017, is generally updated twice a year and currently contains the following jurisdictions (updated on
17 October 2023): American Samoa, Anguilla, Antigua and Barbuda, the Bahamas, Belize, Fiji, Guam, Palau, Panama, Russia,
Samoa, Seychelles, Trinidad and Tobago, the Turks and Caicos Islands, the US Virgin Islands and Vanuatu.
Countries taken off the non-cooperative list may be moved to a separate category of jurisdictions subject to close monitoring (the
so-called grey list).

4. The Fundamental Freedoms and Their Impact on Direct Taxation

In relation to direct taxation, Member States retain, in principle, their sovereignty to regulate issues related to income taxation, such
as the residency test, the rules on taxable base, rates, loss relief, exemptions or depreciation.
However, the exercise of this sovereignty in direct tax matters must be aligned with the principles established under EU treaties. In
this regard, EU law prevents Member States from imposing rules that restrict companies in exercising their fundamental freedoms
or that result in unlawful discrimination between resident and non-resident companies.

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The four fundamental EU freedoms – i.e. the free movement of goods, the free movement of persons (including the free movement
of EU citizens, the free movement of workers and the freedom of establishment), the freedom to provide services and the free
movement of capital and payments – as well as the principle of non-discrimination, all regulated under the TFEU, form immediately
applicable law and constitute individual and enforceable rights for every single individual or enterprise in the European Union
(subject to the procedural requirements of national courts or the ECJ). Accordingly, in view of the fact that there has been little
progress harmonizing direct taxation, the direct application of the TFEU’s provisions continues to form the most important source
of EU law in that area.
The ECJ has assessed the compatibility of national measures on direct taxation with EU law by determining whether:

- the domestic measure distinguishes between cross-border and internal situations;

- there is an objective difference between the cross-border and the internal situation that makes them comparable in light of the
object and purpose of the concerned measure;
- the restriction can be justified by a legitimate aim (i.e. a mandatory requirement of public interest) such as the prevention of
abuse or safeguarding the tax base integrity; and
- the measure’s restrictive effect is proportionate to the legitimate aim.
For legislation to be regarded as a restriction on EU freedoms, it is sufficient to establish that such legislation could restrict the
exercise of the freedom(s) in question in a Member State by companies established in another Member State, without having to
establish that the legislation in question has actually restricted that (those) EU freedom(s).
The sections below summarize the ECJ’s conclusions on the most relevant aspects related to corporate and individual taxation.

4.1. Corporate taxation

4.1.1. Treatment of cross-border transactions
Member States generally provide some reliefs to mitigate or eliminate juridical and economic double taxation that can arise from
cross-border investments.
In some cases, the Parent-Subsidiary Directive (2011/96) and the Interest and Royalties Directive (2003/49) regulate such relief
mechanisms (see sections 3.1. and 3.2.). In cases not falling within the scope of these (or other) directives, such relief mechanisms
may be limited, by domestic rules, to resident recipients or domestic income.
Domestic rules under both cases must be compatible with EU freedoms. EU law provides for:

- home state neutrality, i.e. the right not to be hindered to earn income abroad (national tax treatment of foreign-source income
should not be less advantageous than that applied to resident taxpayers deriving similar income from domestic sources); and
- host state neutrality, i.e. equal treatment of non-residents and residents as regards their tax base.

Home state neutrality: Taxation of resident companies receiving foreign-source income

In general terms, resident companies receiving foreign-source income should be treated the same way as resident companies
receiving domestic income, provided they are in an objectively comparable situation. This applies unless the disparate treatment
is justified by an overriding reason of public interest. For example, legislation of a Member State under which certain reliefs aimed
at mitigating the risk of double taxation do not apply where the income arises from foreign sources is often found incompatible with
EU law.
Member States are free to choose a method for avoiding a series of charges to tax. For example, the method to relieve double
taxation may be different for domestic dividends (exemption method) than it is for inbound foreign dividends (credit method). This
is not an issue as long as the latter are not treated less favourably than the former. As both categories of dividends are comparable
as concerns the risk of economic double taxation, a Member State must mitigate such double taxation on inbound foreign
dividends to the same extent as it does for domestic dividends. Accordingly, the tax rate applied to foreign-source dividends
cannot be higher than the rate applied to nationally-sourced dividends, and the tax credit granted should be at least equal to the
amount paid in the Member State of the company making the distribution – see FII Group Litigation (Case C-446/04) and CFC and
Dividend Group Litigation (Case C-201/05).
In this regard, allowing full neutralization for the add-back of a proportion of costs and expenses (equal to 5% of the net dividends
received) only for group domestic subsidiaries but not for foreign subsidiaries – see Groupe Steria (Case C-386/14) – is
incompatible with the freedom of establishment.

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Likewise, denying a carry-forward of credit to subsequent years (when the company receiving dividends has recorded an operating
loss for the year in which it received the foreign-source dividends), while a resident company can carry-forward losses and apply
an exemption to domestic dividends – see Haribo and Salinen (Case C-436/08) – is incompatible with the free movement of
capital. The refusal to grant a tax credit to resident shareholders receiving domestic-source dividends, where those dividends
originated from foreign-source profits – see The Trustees of the BT Pension Scheme (Case C-628/15) – is also in breach of the
free movement of capital. Also, Member States cannot provide a tax advantage exclusively with respect to dividends attached
to shares listed on the stock exchange of that Member State while denying dividends attached to shares listed on foreign stock
exchanges such an advantage – see Real Vida Seguros (Case C-449/20).
Further, applying an exemption and allowing for the set off of withholding tax against corporation tax payable for resident
investment companies and non-resident investment companies with a permanent establishment in the Member State, while
disallowing non-resident investment companies with no permanent establishment in the Member State this same treatment –
see Commission v. Belgium (Case C-387/11) – constitutes unlawful restrictions of both the freedom of establishment and the free
movement of capital.
The application of the credit system to foreign dividends can imply administrative burdens that fall on the taxpayer. In this regard,
Member States are allowed to require evidence with regard to foreign-source dividends, insofar as that evidence is not (virtually)
impossible or excessively difficult to obtain – see Accor (Case C-310/09). Possible justifications for imposing this administrative
burden include ensuring the effectiveness of fiscal supervision and combating tax avoidance.
In particular, Member States can make relief for foreign-source dividends contingent on the existence of a treaty containing an
exchange-of-information clause with the source state – see A (Case C-101/05); Pharol, SGPS, SA v. Autoridade Tributária e
Aduaneira (C-67/22). However, requiring an agreement for mutual assistance not only at the administrative level but also with
regard to enforcement can be deemed disproportional – see Haribo and Salinen (Case C-436/08). In the same way, legislation
of a Member State that makes the application of a tax credit conditional upon the provision of a specific tax certificate, without
any opportunity for the shareholder to prove, by means of other factors and relevant information, payment of the tax, is also
disproportional – see Meilicke II (Case C-262/09).
Member States cannot require that the application of a participation exemption to foreign dividends be dependent on the condition
that the distributing entity derives its gross profits from active business activities while not requiring the same from domestic-source
dividends. Such a requirement cannot be justified based on the need to prevent tax avoidance (as it does not specifically target
conduct involving the creation of wholly artificial arrangements that do not reflect economic reality, but provides for an irrebuttable
presumption of abuse merely because dividends are distributed out of profits derived from passive income) – see EV (Case
C-685/16).
Similarly, Member States cannot reject the deduction of the interest paid to an associated company that resides in another
Member State on the ground that the principal reason for the debt is for the group to receive a substantial tax benefit, and such
tax benefit would not have been deemed to exist if both companies had been resident in the first Member State – see Lexel
(Case C-484/19). The legislation at issue enables tax authorities to deny the deductibility of interest expenses even in cases
where the interest is at arm’s length and the transactions are conducted for commercial reasons. By contrast, Member States
are not required to grant a credit for the withholding tax levied on foreign portfolio dividends to prevent juridical double taxation
– see Haribo and Salinen (Case C-436/08). In this regard, juridical double taxation arising from the parallel exercise of tax
competences by different Member States is not contrary to EU law – see Damseaux (Case C-128/08). Furthermore, Member
States are not obliged to grant a refund for the tax paid by the distributing company at the level of the parent company where the
tax is paid in the other Member State – see Kronos International (Case C-47/12).
Member States can also restrict a refund of foreign dividend withholding tax granted to the resident parent company, to the
amount that the latter could have credited on the basis of a tax treaty. Having regard to the disparities between the Member
States’ systems of taxing distributed profits, a Member State may treat, by treaty or unilaterally, dividends from various Member
States differently. In this context, a most favoured nation treatment under EU law is not required. Member States may also limit
the credit granted for foreign withholding taxes to the amount of tax that would have been imposed in dividends paid between
resident companies – see Société Générale (Case C-403/19). However, reducing the amount of the refund to the extent to which
the shareholders are residents of other Member States or third countries is incompatible with the free movement of capital, as the
reduction adversely affects all the shareholders of those enterprises without distinction – see Orange European Smallcap Fund
(Case C-194/06).

Host state neutrality: Taxation of foreign companies receiving domestic-source income

Generally speaking, the state of the payor (i.e. the host state) should ensure that non-resident recipients and resident recipients are
treated equally, to the extent that they are in a comparable situation. In these cases, a comparable situation is generally deemed
to exist if non-resident recipients are subject to host state taxes. Accordingly, a tax imposed by the host state only on outbound

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dividends, or a relief from economic double taxation only available to resident shareholders, could be found incompatible with EU
law if the non-resident shareholder is also subject to tax on those dividends in the host state.
It follows from this that Member States are not obliged to extend to non-resident parent companies a tax credit that is granted upon
distribution of dividends to resident parent companies for the underlying corporate tax, if the non-resident parent companies are
not taxed on such dividend income in that Member State. Member States are also free to differentiate between various Member
States depending on the provisions of tax treaties, as well as to refuse treaty benefits in cases where the outbound dividends
would flow to third Member States – see ACT Group Litigation (Case C-374/04).
On the contrary, when a Member State extends its taxing power to dividends received by non-resident parent companies, these
companies and resident parent companies are in a comparable situation as concerns the risk of economic double taxation on
dividends received from that Member State. Hence, when it does not levy withholding taxes on dividends paid to resident parent
companies, the source state must grant the same or similar treatment to non-resident companies to avoid economic double
taxation – see Denkavit II (Case C-170/05) and Amurta (Case C-379/05). The same applies as regards companies resident in
other EEA countries – see Commission v. Netherlands (Case C-521/07).
In particular, legislation that imposes a withholding tax on dividends paid to an investment company resident in another Member
State but exempts dividends paid to a resident parent company or resident investment fund, is incompatible with the EU freedom
of establishment. Differences in legal form of the funds or the fact that the income of the investment company was not taxed in
the other Member State does not make the situation incomparable. Such a restriction cannot be justified by the prevention of
tax avoidance, as the measure does not specifically target wholly artificial arrangements lacking economic reality, designed to
circumvent the legislation of the Member State concerned – see Aberdeen (Case C-303/07).
Likewise, national tax legislation that exempts dividends received by resident pension funds operating in accordance with domestic
regulations, while taxing dividends received by non-resident pension funds, infringes the free movement of capital and contravenes
EU and EEA law – see Commission v. Portugal (Case C-493/09), Commission v. Finland (Case C-342/10) and College Pension
Plan of British Columbia (Case C-641/17). The same applies to withholding taxes imposed on dividends paid to non-resident
undertakings for collective investment in transferable securities (UCITS) – see Santander Asset Management SGIIC and Others
(Case C-338/11) and AllianzGI-Fonds AEVN (Case C-545/19) – or to other investment funds resident in third countries if such
states have a mutual administrative assistance agreement that permits the exchange of information – see Emerging Markets
Series (Case C-190/12). Member States cannot make non-resident specialized property funds partially liable to corporate income
tax in respect of the income from property which they receive in the territory of that Member State, whereas domestic funds are
exempted from that tax – see L Fund (Case C-537/20).
The restriction could be justified by the aim to safeguard the cohesion of the tax system if the legislation makes the tax exemption
available to resident funds contingent on a minimum distribution to investors (which in turn is subject to withholding tax). In
this case, the exemption granted to resident funds is offset by the subsequent taxation of the distribution to their investors.
Nevertheless, the restriction would be contrary to EU freedoms if it goes beyond what is necessary to safeguard the coherence
of the tax system – see Fidelity Funds (Case C-480/16). Similarly, the inability of a non-resident investment fund to reclaim a
withholding tax levied in a Member State on the grounds that it does not comply with the distribution requirement applicable to
funds registered in that Member State may be contrary to the free movement of capital if both situations are comparable – see
Köln-Aktienfonds Deka (Case C-156/17).
On similar grounds, a withholding tax on interest paid to non-residents can form a restriction that is justified by an overriding reason
in the general interest and does not go beyond what is necessary to attain the objective pursued. A Member State may postpone
the application of a deduction at a later stage following a refund application – see Viva Telecom Bulgaria (Case C-257/20). A
Member State may not, however, categorically deny the deduction of expenses to non-residents as it cannot a priori be ruled out
that a non-resident is able to provide relevant evidence enabling the tax authorities of the Member State of taxation to ascertain,
clearly and precisely, the nature and genuineness of the business expenses in respect of which deduction is sought – see Brisal
(Case C-18/15).
Also, a restriction cannot be justified by the balanced allocation of taxation powers between Member States or the need to ensure
the effective collection of taxes, in cases where a withholding tax on dividends paid to a resident company only applies if the
company is profitable – resulting in deferred taxation or even non-taxation (if the company ceases to exist) – while applying
unconditionally to dividends paid to a non-resident company. The exclusion of such cash-flow advantage in cross-border
situations constitutes a restriction on the free movement of capital – see Sofina and Others (Case C-575/17). Likewise, Member
States cannot limit a tax exemption to non-resident investment funds constituted in accordance with contract law while denying
that benefit to similar, non-resident investment funds constituted in accordance with a statute – see A SCPI v. Veronsaajien
oikeudenvalvontayksikkö (Case C-342/20). The balanced allocation of taxation powers between Member States cannot justify
the taxation of recipient companies established in another EU Member State where an EU Member State has chosen not to tax
recipient companies established in its territory in respect of dividends received – see ACC Silicones (Case C-572/20).

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4.1.2. Treatment of cross-border groups

Integration in a tax consolidation regime
Member States usually grant resident companies belonging to the same group the possibility to apply for a tax consolidation
regime. A tax consolidation regime allows a pooling of the results (profits and losses) of the integrated group.
While such a regime is generally available for groups formed by resident subsidiaries and a resident parent company (vertical
tax integration), Member States must also allow resident subsidiaries owned by companies established in other Member States
(horizontal tax integration) to apply for the regime – see X AB & Y AB (Case C-200/98). A resident parent company with resident
subsidiaries, whereby the latter are held indirectly through an intermediary company resident in another Member State, may also
apply a tax consolidation regime to all the resident group companies – see Papillon (Case C-418/07) and SCA Group Holding and
Others (Case C-39/13). Furthermore, Member States must allow a resident subsidiary of a non-resident parent company to exit
a pre-existing vertical tax integration group and to integrate into a horizontal tax integration group with other subsidiaries without
dissolving the pre-existing vertical tax group – see B and Others (Case C-749/18).
On the contrary, Member States can deny a group taxation regime to a resident parent company and its subsidiaries resident in
other Member States (see X-Holding (Case C-337/08)). However, in these cases, Member States cannot restrict the participation
exemption to 95% for dividends paid from non-resident subsidiaries when such dividends would have been fully exempt if the
distributing subsidiaries had been resident and thereby eligible to join the tax group (see Manitou BF (Case C-407/22)). Likewise,
the freedom of establishment precludes legislation of an EEA state allowing lessening or removing the impact of rules limiting
interest deductions in respect of loans taken out with affiliated companies for a company liable to taxation in Norway that is in a
group with other companies liable to taxation in Norway, but does not provide the same treatment for a company in a group with
companies liable to taxation in another EEA state (see PRA Group Europe AS (Case E-3/21)).

Treatment of losses in cross-border situations

Most Member States permit the domestic relief of losses within a group of companies under specific circumstances. A group of
companies is treated as a single economic unit by allowing losses incurred by one company to be set off against the profits of
another company of the same group.
Some Member States limit such group relief to internal situations. In general terms, EU law does not preclude domestic measures
that disallow cross-border loss relief within the European Union, even if it provides for such a possibility in a purely domestic,
comparable scenario.
The restriction between comparable cross-border and internal situations can be justified by a need to (i) preserve the allocation
of taxing rights between Member States and prevent double relief of losses both in the Member State of the subsidiary and the
Member State of the parent company; or (ii) prevent abuse, on the grounds that the transfer of a subsidiary’s taxable income to a
parent company carries the risk that such transfer may be organized within a group of companies to ensure that the income flows
towards Member States that apply the lowest rates of taxation (or non-taxation).
However, such a national provision is not proportional to these legitimate aims (and therefore not compatible with EU law) if it does
not allow the parent company to prove that its non-resident subsidiary has exhausted all possibilities of claiming loss relief in its
Member State of residence and there are no possibilities of obtaining future relief, either for that EU subsidiary or for a third party –
see Marks & Spencer (Case C-446/03) and Commission v. United Kingdom (Case C-172/13). It is for the national court to decide
whether the exhaustion of possibilities test has been satisfied – see Oy AA (Case C-231/05).
Tax losses can only be regarded as final if the parent company provides evidence that it is impossible to use those losses
economically. In this regard, the parent company must prove that it is impossible for a third party to use such losses in future tax
periods, in particular after a sale for a price that includes the tax value of the losses – see Memira Holding (Case C-607/17). It
is irrelevant for the purposes of assessing the finality of the losses, to which extent (i) the loss-making company was limited in
carrying forward its losses; or (ii) other entities belonging to the same group located in the state of establishment of the loss-making
subsidiary may have been limited in having the subsidiary’s losses transferred to them – see Holmen (Case C-608/17).
In any case, the above conclusions only apply if the cross-border and the internal situations are objectively comparable. In this
regard, the following two situations are not comparable – see AURES Holdings (Case C-405/18): (i) a company that is resident
in a Member State incurs a loss in that Member State; and (ii) a company that transfers its place of effective management and,
consequently, its tax residence to a Member State, incurs a loss in a tax year during which it was a tax resident of another Member
State, without having any residual activity in the former Member State. Likewise, exempt permanent establishments of non-
resident companies due to the application of a tax treaty are not in a situation comparable to that of permanent establishments
resident in that EU Member State as regards measures to avoid double taxation and, accordingly, final losses of a permanent

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establishment are not deductible when a tax treaty applies – see W (Déductibilité des pertes définitives d’un établissement stable
non-résident) (Case C-538/20).
Nevertheless, Member States cannot make a group loss relief subject to the requirement that the holding company’s business
consists wholly or mainly in the holding of shares in subsidiaries that are established in that Member State – see ICI (Case
C-264/96). Member States are also not permitted to make a group relief conditional on being either resident or carrying out an
activity through a permanent establishment in that Member State – see Felixstowe Dock and Railway Company and Others (Case
C-80/12).

CFC legislation
As a general rule, a group company is not taxed on the profits of other companies within the group, whether resident or not, unless
those other companies (being separate legal entities) are integrated in a tax consolidation regime. CFC regimes constitute an
exception to this rule. Notwithstanding their purpose to prevent abuse and combat harmful tax competition, CFC rules involve a
home state restriction.
As such, the taxation of a resident parent company on the profits of a subsidiary resident in another Member State, where those
profits are subject in the other Member State to a lower level of taxation than that applicable in the Member State of the parent,
constitutes an incompatible restriction on the freedom of establishment. This is the case unless the provision is applied only to
wholly artificial arrangements intended to escape the normally due national tax. A wholly artificial arrangement does not exist
where a subsidiary carries on genuine economic activities in the host Member State, even where tax motives played a role in
its establishment. The taxpayer must be given an opportunity to prove such genuine economic activity on the basis of objective
factors (e.g. premises, staff and equipment of the subsidiary in its Member State of establishment) – see Cadbury Schweppes and
Cadbury Schweppes Overseas (Case C-196/04).
Likewise, the free movement of capital is unjustifiably restricted where legislation of a Member State provides that gains obtained
from shareholdings in non-resident, close companies are immediately taxable in the hands of the shareholders resident of
that Member State, whereas such gains would not be taxable if they are derived from shareholdings in resident companies –
see Commission v. United Kingdom (Case C-112/14).
CFC rules may be applied in relation to shareholdings in third countries. However, Member States must grant taxpayers the
opportunity to prove that the income subject to CFC rules is derived in connection with a genuine economic activity carried out
by the non-resident company. This obligation must be assessed according to the availability of administrative and legislative
measures permitting, if necessary, the accuracy of such evidence to be verified with a view to demonstrating that the shareholding
in the non-resident company is not the result of an artificial scheme – see X (Case C-135/17).

4.1.3. Specific issues regarding permanent establishments

The EU freedom of establishment guarantees neutrality of legal form in cross-border investments. This means that a company of
a Member State should not be restricted in choosing the appropriate legal form in which to pursue activities in another Member
State. Accordingly, companies having their seat in a Member State may choose to open a branch in another Member State to
pursue their activities under the same conditions as those that apply to subsidiaries – see Avoir Fiscal (Case C-270/83) and Royal
Bank of Scotland (Case C-311/97).
For example, Member States cannot apply a higher tax rate to companies that have their seat in another Member State and
that carry on business in their national territory through a permanent establishment, than that applied to domestic companies. In
this regard, the status of domestic subsidiaries and foreign branches is objectively comparable. The fact that the first category
is subject to worldwide taxation while the second is taxed only on the profits attributable to the permanent establishment in
the Member State concerned, does not prevent the two entities from being considered, all other things being equal, to be in a
comparable situation as regards the method of determining the taxable base – see Royal Bank of Scotland (Case C-311/97).
Furthermore, the fact that profits, distributed by a subsidiary to its parent company, are no longer assets of the subsidiary – as
opposed to profits transferred by a branch to its head office that continue to be part of the internal assets of the same company –
does not prevent comparability. In both cases, the profits are made available to the company that controls the subsidiary or branch,
respectively. The only difference between the two situations lies in the fact that the distribution of the profits of a subsidiary to its
parent company entails a formal decision to that effect, whereas the profits of a company’s branch are part of the assets of that
company even in the absence of a formal decision to that effect – see CLT-UFA SA (Case C-253/03).
On the contrary, legislation of a Member State under which the transfer of money from a branch situated in that Member State
to its head office resident in another Member State is a transaction subject to TP rules, while the same transaction in a purely
domestic scenario is not subject to TP rules, can be justified by the need to ensure the preservation of the allocation of the power
to tax between Member States – see Impresa Pizzarotti (Case C-558/19).

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The application of certain tax reliefs to permanent establishments of foreign entities can entail additional issues to the ones
discussed in the above paragraphs.

Entitlement to corporate tax reliefs

Member States grant some form of corporate tax relief for dividends that resident parent companies receive from their subsidiaries
in other Member States. However, such relief does not always apply to permanent establishments of non-resident companies in
their capacity as recipients of foreign-source dividends.
In many cases, double taxation relief for dividends received is not based on domestic provisions of the parent company’s Member
State, but only on bilateral tax treaties. In these cases, the question arises whether a permanent establishment situated in one
of the contracting states is entitled to corporate tax relief under the tax treaty’s provisions. Such an extension of these provisions
to permanent establishments has always been denied, as permanent establishments do not qualify as “persons” in the terms of
a tax treaty. Consequently, under the strict terms of a tax treaty, permanent establishments are not entitled to any form of relief
for foreign-source dividends. However, under EU law, the national equal treatment principle requires the Member State to grant
the advantages provided for in the tax treaty to the permanent establishments of non-resident companies on the same conditions
as those applying to resident companies. Unilateral extensions necessary to comply with EU law do not affect the balanced and
reciprocal rights and obligations under a tax treaty, as such extensions would not in any way affect the rights and duties of a non-
Member State that was a party to a tax treaty – see Saint-Gobain (Case C-307/97).
As regards the application of tax reliefs to profits generated by permanent establishments, Member States can impose a unilateral
switch-over from the exemption method (as provided under a tax treaty) to the credit method on low-taxed passive income of
foreign permanent establishments – see Columbus Container Services (Case C-298/05). On the other hand, Member States
cannot reduce a deduction granted to a resident company based on the value of the assets of that company’s permanent
establishment situated in another Member State (where the taxing rights are exclusively allocated to that other Member State),
while they do not apply a reduction in relation to assets attributed to a domestic permanent establishment of that same company –
see Argenta Spaarbank (Case C-350/11). Likewise, legislation that denies companies resident in another Member State interest
compensation on overpaid tax, while granting such compensation to resident companies, is incompatible with the freedom of
establishment – see Commerzbank (Case C-330/91).

Treatment of losses
Member States must allow permanent establishments of other Member States’ companies to carry forward previous (domestic)
losses under the same terms that would apply in a purely domestic situation. That said, Member States may require an economic
link with the income earned in their territory according to the principle of fiscal territoriality. In this situation, however, the Member
State of the permanent establishment cannot require, without disproportionately restricting the freedom of establishment, that
non-residents keep separate accounts for the permanent establishment’s activities in that state to comply with the tax accounting
rules applicable there, this in addition to their accounts kept in their Member State of residence – see Futura Participations (Case
C-250/95).
Member States cannot require losses of a domestic company from a previous tax year to be set off first against foreign permanent
establishment profits of the same tax year that are exempt under a tax treaty (which would imply effectively denying the carry-
forward of losses), while allowing the same carry-forward in a purely domestic situation – see AMID (Case C-141/99).
Member States cannot deny the deduction of losses, in the context of group taxation, incurred by a permanent establishment
situated in that Member State of a company established in another Member State, while allowing the deduction of losses by a
permanent establishment situated in that Member State of a resident company – see NN A/S (Case C-28/17). Likewise, a Member
State cannot make the transfer of losses, in the context of group taxation, incurred by a permanent establishment of a non-resident
company to a resident company, conditional on the provision of proof that those losses cannot be used for purposes of foreign
taxation, whereas the same transfer in a purely domestic situation is not subject to any equivalent requirement – see Philips
Electronics (Case C-18/11).
A different approach is taken with regard to loss reliefs where the losses arise from activities performed in other Member States
(cross-border losses). Not all Member States allow a head office to deduct the losses of a foreign permanent establishment. In this
regard, Member States can deny a resident company the deduction of losses incurred by a permanent establishment situated in
another Member State to the extent that, by virtue of a tax treaty, the income of that permanent establishment is (i) exempt in the
Member State where the company is resident; and (ii) taxable only in the permanent establishment state, unless the company can
demonstrate that all possibilities to take the losses into account in the permanent establishment state have been exhausted. Such
a restriction can be justified by the need to prevent the same losses from being taken into account twice – see Lidl Belgium (Case
C-414/06) and Timac Agro Deutschland (Case C-388/14).

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However, it is contrary to the freedom of establishment for a Member State to deny a head office deduction of a currency loss
resulting from the repatriation of the start-up capital of its permanent establishment situated in another Member State. This is due
to the fact that such a loss can never, by its nature, be taken into account in the Member State of the permanent establishment –
see Deutsche Shell (Case C-293/06). The losses can be final if the permanent establishment has closed – see Bevola and Jens
W. Trockl (Case C-650/16).
Furthermore, Member States may provide for deduction and recapture of losses rules. In this regard, provisions that establish
the recapture of losses generated by a foreign permanent establishment of a resident company provide for a less favourable
treatment than that enjoyed by a resident company with a domestic permanent establishment, even when the reintegration only
takes place up to the amount of profits made by the foreign permanent establishment. However, the restriction is justified by the
need to guarantee the coherence of the tax system. Besides, it is appropriate and proportionate to achieve such an objective if only
previously deducted losses were recaptured up to the amount of the profits made – see KRW (Case C-157/07).
However, the freedom of establishment precludes legislation under which, in the event of the transfer by a resident company of a
permanent establishment situated in another Member State to a non-resident affiliated company, the losses previously deducted in
respect of the permanent establishment transferred are reincorporated into the taxable profit of the transferring company resident
in the first Member State, resulting in that Member State taxing both the profits made by that permanent establishment before its
transfer and those resulting from the gain made upon the transfer – see Nordea Bank (Case C-48/13).

4.1.4. Corporate migration: Exit taxation

Corporate migrations may be hindered by the absence of cross-border loss relief provisions (see section 4.1.1.), but may also
trigger the taxation of unrealized capital gains and tax reserves (“exit taxes”), affecting both the company and its shareholders, and
resulting in increased reorganization costs.
Exit taxes are usually imposed on the unrealized capital gains of a person’s assets upon transfer of its tax residency, or on assets
transferred to another Member State.
As further detailed below, in principle, EU law does not prevent Member States from imposing taxes on unrealized capital gains
relating to a company’s assets upon a transfer of the place of effective management to another Member State, even if the transfer
did not affect the company’s status of being a company of the first Member State. In the absence of such a provision, the home
state might lose the right to tax the gains accrued prior to the migration. Therefore, such a restriction may be justified on the basis
of preserving the allocation of taxing rights between Member States. For instance, imposing an immediate corporate income tax
without a possibility to defer this tax on the capital gains derived from a cross-border transfer of assets can be justified by the
need to preserve a balanced allocation of taxing powers if the seller has realized capital gains from that transfer – see Gallaher
(Case C-707/20). In addition, once the capital gain is realized, Member States are not obliged to revalue the amount of tax to take
account of decreases or increases in value that may have occurred after the transfer of the place of effective management – see
National Grid Indus (Case C-371/10) and Commission v. Netherlands (Case C-301/11).
However, requiring the immediate payment of the tax at the time of the transfer is considered disproportional. The availability of a
choice between an immediate payment of the tax or deferral of the payment of the tax with interest is a less harmful measure – see
Commission v. Portugal (Case C-38/10). In this regard, mutual assistance mechanisms between Member States are considered
to be sufficient to control the accuracy of the companies’ statements in the event of a deferred payment of the tax due – see
Commission v. Spain (Case C-64/11).
As regards the treatment of certain assets “which are not meant to be realized”, Member States are entitled to apply a different
criterion than the actual realization of the asset as the event that triggers the exit taxation (see Commission v. Denmark (Case
C-261/11)). For example, value increases of shares in subsidiaries recorded by a company in an EU Member State, after the
transfer of its registered office in that EU Member State, can be taxed as unrealized capital gains without taking into account
whether those shares gave rise to the recording of write-downs by that company on a date on which it was a tax resident of another
EU Member State (see VP Capital (Case C-414/21)).Where the taxable person opts for the deferred payment, a requirement to
provide a bank guarantee may be imposed, but only on the basis of the actual risk of non-recovery of the tax (i.e. not a priori);
otherwise the restriction could be incompatible with the free movement of capital – see DMC (Case C-164/12). Recovery of tax
on unrealized capital gains spread over a certain number of annual instalments, instead of immediate recovery, may also be
considered proportionate – see Verder LabTec (Case C-657/13).
On the contrary, legislation of a Member State under which a reduction of the tax due is dependent on the obligation to remain
liable to tax in that Member State for the following 5 years is incompatible with the freedom of establishment – see DI VI Finanziaria
SAPA di Diego della Valle (Case C-380/11).

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4.2. Individual taxation

Home state neutrality: Tax treatment of foreign-source income earned by residents
EU law contains no requirements as to how the state of residence must take personal and family circumstances into account in
granting related tax benefits, to the extent that it does not restrict the exercise of the fundamental freedoms.
Generally, given that such benefits are not attributable to a specific item or source of income, the source state is not required
to take personal and family circumstances into account. For example, this applies to situations where the taxpayer does not
derive substantially all of their income from the source state. The state of residence, however, must take personal and family
circumstances into account, as it is best placed to assess the taxpayer’s ability to pay taxes – see De Groot (Case C-385/00).
Member States cannot deny a tax advantage to their residents earning income from other Member States, while granting such
tax advantage to residents earning income only from sources within that Member State (see Imfeld and Garcet (Case C-303/12),
Belgische Staat (Case C-241/20) and, in relation to UCITS, Veronsaajien oikeudenvalvontayksikkö (Case C-480/19)). In this
sense, Member States cannot implement full taxation on capital gains resulting from the transfer of shares held by individuals
in companies established in other EU Member States while allowing for a 50% taxation of capital gains derived from shares
held in companies established in that EU Member State (see Autoridade Tributária e Aduaneira (Plus-values sur cessions de
parts) (Case C-472/22)). In addition, a Member State may not refuse a resident taxpayer the advantages of a joint income tax
assessment with a non-permanently separated spouse resident in another Member State, on the grounds that the spouse received
a certain level of income from that Member State, but was not subject to income tax therein (see Meindl (Case C-329/05)).
Furthermore, Member States must also allow deductions or exemptions for contributions to insurance and pension plans paid
to institutions established in other Member States – see Bachmann (Case C-204/90), Safir (Case C-118/96), Commission v.
Denmark (Case C-150/04) and Commission v. Belgium (Case C-522/04) – or exemptions for received disability allowances
– see Belgian State (Case C-35/19), when they allow such treatments for payments made under contracts entered into with
national institutions. Likewise, the provision of a tax relief to individuals for the acquisition of shares in capital companies cannot
be made conditional on those companies having their seat in the Member State – see Weidert and Paulus (Case C-242/03). The
same applies to denying a tax exemption for interest on deposits with financial institutions established in other Member States
by imposing on such institutions conditions that are de facto specific to the domestic market of that Member State – see Van der
Weegen and Pot (Case C-580/15).
Moreover, applying a progressive individual income tax rate with a credit granted for any tax levied at source to dividends received
from companies resident in other Member States or EEA countries, while exempting domestic dividends – see Commission v.
Greece (Case C-406/07) – is incompatible with the freedom of establishment. Similarly, Member States cannot impose a higher
progressive tax rate on interest resulting from bonds and debt instruments issued and paid by an entity resident in another EU
Member State or a third state (e.g. Switzerland), whereas interest income arising on bonds and debt instruments issued and paid
by a resident entity in the first EU Member State is taxed at a lower final rate (see FL (Case C-312/22)).When a tax treaty allocates
the taxing rights to the source state, Member States may deny the deduction of losses arising on the transfer of immovable
property situated in another Member State from the income obtained from movable assets that is taxable in the first Member State.
The restriction can be justified by the cohesion of the tax system – see K (Case C-322/11). Member States may also apply the
same flat tax rate to dividends received from domestic companies and dividends received from companies resident in another
Member State, without providing any credit for the withholding tax levied at source in the other Member State – see Kerckhaert-
Morres (Case C-513/04).

Host state neutrality: Tax treatment of domestic-source income earned by non-

residents
Non-resident individuals are usually taxed at a flat rate on gross income, whereas resident individuals can benefit from taxation
at progressive tax rates (on their net income) and other adjustments to their taxable base and tax debt according to their ability to
pay.
Withholding taxes levied on income paid to non-resident individuals – whereby such income paid to resident individuals is not
subject to withholding taxes – are compatible with EU law. However, in those circumstances, the withholding agent must be
permitted to deduct at the time of withholding business expenses that the non-resident service provider reported and that are
directly linked to the service provider’s activity – see Scorpio (Case C-290/04). Non-residents should have the same opportunity
as residents to re-assess their tax situation. Making the refund of excess tax withheld on income from employment that is subject
to progressive individual income tax conditional on permanent residency within a Member State constitutes a covert form of
discrimination contrary to the free movement of workers – see Biehl (Case C-175/88) and Commission v. Luxembourg (Biehl II)
(Case C-151/94).

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Likewise, the free movement of capital precludes legislation of a Member State that provides for a mechanism for deducting or
reimbursing dividend withholding tax paid on dividends distributed by a resident company to residents, while treating the same
withholding tax on dividends distributed to non-residents as final, insofar as the final tax burden on those dividends is higher for
non-residents than for residents – see Miljoen (Case C-10/14). Also, Member States cannot tax a repurchase of shares as a
distribution of dividends and deny the deductibility of the acquisition costs when the shareholders are non-residents, whereas
the same transaction would have been taxed as a capital gain and the acquisition costs would have been deductible, had the
shareholders been residents in the Member State – see Bouanich (Case C-265/04).
Furthermore, if a Member State takes into account worldwide income, including negative income, of residents for the calculation
of the tax rate applicable to them, it cannot refuse non-residents who derive almost all their income from that Member State to take
into account for the same purpose their negative rental income from real estate situated in another Member State. Such negative
income, even where the real estate is not used for personal residential purposes, affects the personal income tax calculation
of a non-resident. Therefore, where such negative income cannot be taken into account in the taxpayer’s Member State of
residence, the Member State of employment must do so – see Lakebrink (Case C-182/06) and Renneberg (Case C-527/06). It is
an infringement of the free movement of workers if a Member State applies exemption with progression to positive, foreign-source
income from real estate for non-resident workers taxable on their worldwide income in that Member State, while corresponding
foreign losses on the same income are not taken into account for purposes of negative progression – see Ritter-Coulais (Case
C-152/03). The free movement of workers also precludes legislation of an EEA state pursuant to which individuals who are EEA
nationals but not tax residents in that EEA state are subject to a higher rate of taxation on employment income derived from that
EEA state in comparison with the tax applicable in similar situations to tax residents of that EEA state (see RS (Case E-11/22)).
The free movement of capital precludes legislation of a Member State under which residents and non-resident taxpayers are
treated differently for tax purposes in relation to capital gains arising from the sale of immovable property, irrespective of whether
the non-resident had the option to choose which tax regime (i.e. the regime for residents or non-residents) to be subject to –
see MK v. Autoridade Tributária e Aduaneira (Case C-388/19), VX (Case C-224/21) and XG (Case C-647/20).
The same applies to the deduction on certain expenses. Member States must allow non-residents to deduct expenses that are
related to their taxable income. For the deduction of expenditure directly linked to an income-generating activity in another Member
State, a non-resident taxpayer must be treated in the same manner as a resident taxpayer – see Conijn (Case C-346/04). For
example, it is contrary to the freedom to provide services to tax gross income of non-resident artistes and disallow the deduction of
their business expenses, while taxing resident artistes on their net income (i.e. after deduction of those expenses) – see Gerritse
(Case C-234/01). With regard to the allocation of personal and family circumstances in situations where there is more than one
Member State of activity, each Member State must grant the deduction of the expenses in proportion to the income received by the
taxpayer in the Member State of activity – see X (Case C-283/15).
As regards profit determination rules, the application of a minimum tax base only to non-resident taxpayers who are self-employed
and carry out only part of their operations in the host Member State, constitutes an infringement of the freedom of establishment,
which cannot be justified by the need to ensure the effectiveness of fiscal supervision – see Talotta (Case C-383/05). Adjusting
family benefits and social and tax advantages for workers whose children reside permanently in another EU Member State is also
incompatible with EU law – see Commission v. Austria (Indexation des prestations familiales) (Case C-328/20).
Member States are not generally obliged to apply allowances for personal and family circumstances, on the grounds that, in this
regard, residents and non-residents are usually not in a comparable situation – see Gschwind (Case C-391/97) and Turpeinen
(Case C-520/04). Discrimination only arises if the personal and family circumstances of the non-resident are not taken into
consideration in either the residence state or the source state. This is (often) the case where (i) the non-resident earns substantially
all of their income in the source Member State – meaning that their Member State of residence, in the absence of sufficient income
taxable there, cannot take into account their personal and family circumstances – see Schumacker (Case C-279/93) and Kieback
(Case C-9/14); or (ii) under a tax treaty the non-resident’s state of residence applies the exemption-with-progression method to
avoid double taxation – see Asscher (Case C-107/94).
In these situations, the EU principle of equal treatment requires that the source state take the personal and family circumstances
of non-resident taxpayers into account in the same way as it does for resident taxpayers (including providing access to the same
tax benefits) – see Schumacker (Case C-279/93) and Wallentin (Case C-169/03). For example, the source state must allow non-
residents personal deductions for pension contributions that are granted to self-employed residents, even if the pension income
may be taxed only by the state of residence under a tax treaty – see Wielockx (Case C-80/94) or for alimony and annuities –
see Commission v. Belgium (Déduction des rentes alimentaires) (Case C-60/21).
In any case, any consideration of the tax burden (of residents versus non-residents) must include the tax rate, deductions and
allowances. Accordingly, legislation of a Member State that does not grant non-resident taxpayers the personal deductions
available to resident taxpayers but does tax the former at a lower rate than the latter, can be compatible with the free movement

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of citizens – see Hirvonen (Case C-632/13). The fact that the non-resident may opt to be treated as a resident taxpayer (and
subsequently benefit from that tax advantage) has no bearing on this conclusion – see Gielen (Case C-440/08).
Finally, a tax regime resulting from a tax treaty concluded between two Member States, pursuant to which the taxing rights of those
Member States on retirement pensions are allocated differently based on whether the recipients of those pensions were employed
in the private or public sector and, in the latter case, on whether or not they are nationals of the Member State of residence, does
not violate the fundamental freedoms. Therefore, where in a tax treaty the criterion of nationality appears in a provision that is
intended to allocate fiscal sovereignty, such a differentiation on the basis of nationality does not constitute prohibited discrimination
or restriction – see Istituto Nazionale della Previdenza Sociale (Case C-168/19).

5. Harmonization of Taxes on Special Types of Activity or Specific

Industries
5.1. Taxation of the digital economy
The importance of creating rules on the taxation of the digital economy has received increasing attention in the global tax policy
debate. It has been argued that the current international tax rules, which generally require physical presence in the jurisdiction for
corporate taxing rights to arise, are unable to address the operating parameters of the emerging digital economy, where digital
goods or services may be delivered with minimal physical presence, even in the country of residence.
On 8 September 2017, the ministers of finance of France, Germany, Italy and Spain sent a letter to the Estonian presidency of
the European Union proposing to impose an equalization levy on the turnover generated in Europe by digital companies. On 13
September 2017, the President of the Commission issued a statement setting forth a series of initiatives to be launched by the end
of 2018, calling on the possibility of further enhancing the use of the qualified majority voting and the ordinary legislative procedure
in internal market matters, on the basis of article 48(7) of the TEU.
In the subsequent ECOFIN meeting, participants observed that the gap between business realities and current tax rules
undermines the principle of tax neutrality. Two approaches to fill the gap were discussed during the meeting. The first was a short-
term approach, according to which different kinds of taxes and levies would apply in addition to corporate income tax on profits.
Such an approach would centre on the potential short-term adoption of an equalization levy. The second approach was a long-term
one, entailing amendments to, and improvement of, the current international tax rules to address the existence of new, digitalized
business models. The tax rules regarding “old” non-digitalized, business models would remain unchanged.
On 21 March 2018, the Commission issued the “Fair taxation of the digital economy” package, including a proposal for two new
directives. The package focuses on a two-phased approach: a comprehensive solution (based on “significant digital presence”)
and an interim solution (a digital services tax).

Taxation of a significant digital presence

The first proposal, Council Directive laying down rules relating to the corporate taxation of a significant digital presence
(COM(2018) 147 final), would enable Member States to tax profits that are generated in their territory, even where the company
generating the profits does not have a physical presence there. A digital platform will be deemed to have a taxable digital presence,
or a virtual permanent establishment, in a Member State if:

- it exceeds the threshold of EUR 7 million in annual revenues in the Member State;
- it has more than 100,000 users in the Member State in a tax year; or
- over 3,000 business contracts for digital services are drawn up between the company and business users in the Member
State in a tax year.
The term “digital services” means services that are delivered over the Internet or an electronic network, the nature of which
renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of
information technology. The definition includes in particular:

- the supply of digitized products, including software and changes to or upgrades of software;
- services providing or supporting a business or personal presence on an electronic network, such as a website or a webpage;
- services automatically generated from a computer via the Internet or an electronic network, in response to specific data input
by the recipient;

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- the transfer for consideration of the right to put goods or services up for sale on an Internet site operating as an online market;
- Internet service packages (ISPs) of information in which the telecommunications component forms an ancillary and
subordinate part; and
- other services listed in Annex II to the proposed directive.
Digital services do not include services listed in Annex III to the proposed directive or the sale of goods or other services that are
facilitated by using the Internet or an electronic network.
The Authorized OECD Approach (AOA) remains the underlying principle for attributing profits to a significant digital presence,
and builds on the current corporate tax rules that look at risks managed, functions performed and assets used by a permanent
establishment. However, additional tests in the profit allocation process are required to reflect the fact that a significant part of the
value is created where users are based and data is collected. In particular, the analysis also includes the following economically
significant activities performed by the significant digital presence through a digital interface:

(1) collection, storage, processing, analysis, deployment and sale of user-level data;
(2) collection, storage, processing and display of user-generated content;
(3) sale of online advertising space;
(4) making available of third-party created content on a digital marketplace; and
(5) supply of any digital service not listed in points (1)-(4).
The proposal notes that such measures would supersede current tax treaties concluded between Member States, and also apply
where a Member State does not have a tax treaty with a third country. When a Member State does have a tax treaty in place with a
third country, the proposed new rules do not apply. The Commission therefore recommends Member States to amend current tax
treaties accordingly.

Digital services tax

The second proposal, Council Directive on the common system of a digital services tax on revenues resulting from the provision of
certain digital services (COM/2018/0148 final), concerns the introduction of an interim tax on the following types of digital services:

- services where the main value is created by user data, either through advertising or by the sale of the data collected by
companies such as social media or search engines; and
- services of supplying digital platforms that facilitate interaction between users, who can then exchange goods and services
via the platform (such as peer-to-peer sales apps).
Tax revenues would be collected by the Member States in which the users are located. The tax only applies to companies with
total annual worldwide revenues of at least EUR 750 million, and EU revenues of at least EUR 50 million.
In order to mitigate the risk of double taxation, companies will be able to deduct the tax as a cost from their corporate tax base. At
the same time, by simply introducing this coordinated EU tax, the Commission considers that it is averting the risk of new burdens
for businesses due to unilateral measures adopted by single Member States. The tax will be based on a system of self-declaration
by taxpayers. A digital portal, known as the one-stop shop, will be set up to help companies comply.
No consensus among Member States has been reached yet on the timing of the introduction of the tax. However, some Member
States (e.g. Austria, France, Italy and Spain) have unilaterally introduced a similar digital services tax.

Recent developments
Together with the proposals on digital taxation detailed above, the Commission, in the context of the taxation of a significant
digital presence, published a recommendation (COM(2018) 1650 final) to Member States on amending their tax treaties with third
countries to ensure that the same rules apply to EU and non-EU companies. If Member States have tax treaties in place with third
countries, the proposed new rules on the taxation of the digital economy will not apply. This means that, unless the tax treaties are
adapted, the new provisions do not apply in situations where a business with EU users is tax resident outside the European Union.
Therefore, the Commission recommends that Member States make the following changes to their tax treaties:

- change the definition of “permanent establishment” to take into account situations where a company has a significant digital
presence in a given country or jurisdiction; and

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- include rules concerning the manner in which profits must be attributed to a significant digital presence, in line with the
provisions proposed by the Commission.
Since late 2019, EU institutions have been showing their support for an international solution to address the tax challenges of the
digital economy as a preferred way forward, as opposed to fragmentation and unilateral measures (see Council of the European
Union’s conclusions regarding the Action Plan for Fair and Effective Taxation in the Globalized and Digitalized Economy, approved
on 27 November 2020; European Council for Financial and Economic affairs (ECOFIN) Report to the European Council on Tax
Issues, approved on 16 June 2020; and European Parliament resolution of 18 December 2019 on fair taxation in a digitalized and
globalized economy: BEPS 2.0 (2019/2901(RSP)).
In the context of a COVID-19 recovery plan, the Commission announced its intention to propose a digital levy (to be introduced by
2023) as part of the European Union’s own new resources of the Recovery Plan for 2021-2027. However, the proposal was put
on hold in light of the OECD/G20 global agreement (the Two-Pillar approach) to reform the international corporate tax system to
address the tax challenges of the digital economy, as agreed by 137 members of the Inclusive Framework in October 2021.
According to the OECD’s outcome statement published on 11 July 2023, the Inclusive Framework has delivered a text of a
Multilateral Convention, which will allow the contracting parties to exercise a domestic taxing right (Amount A of Pillar One) with
respect to a defined portion of the residual profits of MNEs that meet certain revenue and profitability thresholds and that have a
defined nexus to the markets of these parties. Following this announcement, the Spanish presidency of the Council has expressed
its intention to sign the Multilateral Convention by the end of 2023.

5.2. Financial transaction tax

On 14 February 2013, the Commission published a proposal for the introduction of a financial transaction tax (FTT) entitled
Proposal for a Council Directive implementing enhanced cooperation in the area of financial transaction tax (COM(2013) 71 final).
The legal basis for the proposal is article 113 of the TFEU. A total of 11 Member States would participate.
The proposal aims at harmonizing legislation concerning indirect taxation on financial transactions, which is needed to ensure the
proper functioning of the internal market and to avoid distortion of competition. The proposed directive would apply to all financial
transactions, on the condition that at least one party to the transaction is established in the territory of a participating Member State
and that a financial institution established in the territory of a participating Member State is party to the transaction, acting either on
its own account or that of another person, or acting in the name of a party to the transaction. Financial instruments issued in the 11
participating Member States will be taxed when traded, even if those trading them are not established in a participating Member
State. The new mechanism will enter into force once the proposal is unanimously adopted by the 11 Member States.
The main transactions that fall outside the scope of the proposal or that are exempt from the FTT are the following:

- day-to-day financial activities of ordinary citizens and businesses (e.g. insurance contracts, mortgage and business lending,
credit card transactions, payment services, deposits, and spot currency transactions);
- the raising of capital (i.e. primary issuance of shares and bonds, and units of collective investment funds) and certain
restructuring operations; and
- financial transactions with the European Central Bank (ECB) and national central banks, the European Financial Stability
Facility (EFSF) and the European Stability Mechanism (ESM).
The applicable rates would be:

- 0.1% for shares and bonds, units of collective investment funds, money market instruments, repurchase agreements and
securities lending agreements; and
- 0.01% for derivative products.
The above are proposed minimum rates, and participating Member States would be free to apply higher rates if they wanted to.
At the ECOFIN meeting of 12 June 2017, it was indicated that further work was needed that respects the competencies, rights and
obligations of the Member States not participating in the enhanced cooperation on FTT before a final agreement can be reached
between the participating Member States. Accordingly, in 2019, Germany and France jointly presented a unified position and
secured consensus among the finance ministers in the ECOFIN meeting to proceed with negotiations based on a Franco-German
proposal. Additionally, there was consensus that the revenue generated should be distributed through a compensation mechanism
among states interested in implementing the tax. Discussions are ongoing regarding the precise form this mechanism should take.

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5.3. Windfall tax for energy companies

In view of the energy price rise, the Council of the European Union approved a solidarity contribution for the fossil fuel sector and a
cap on electricity market revenues:
The solidarity contribution for the fossil fuel sector applies to EU businesses with activities in the crude petroleum, natural gas, coal
and refinery sectors, including those that are part of a consolidated group merely for tax purposes. It is thought as a redistributing
measure to ensure that the companies concerned which have earned surplus profits as a result of the unexpected circumstances,
contribute in proportion to the improvement of the energy crisis in the internal market.
The base shall be calculated on the taxable profits, as determined under national tax rules, in the fiscal year 2022 and/or the fiscal
year 2023 (EU Member States may choose to implement the contribution either for the 2022 or 2023 fiscal year, or for both) and for
their full duration, which are above a 20% increase of the average of the taxable profits, as determined under national tax rules, in
the 4 fiscal years starting on or after 1 January 2018. The rate should be at least 33% and it will apply in addition to regular taxes
and levies applicable in EU Member States.
The solidarity contribution must be used for: (i) financial support measures to final energy customers, and in particular vulnerable
households, to mitigate the effects of high energy prices; (ii) financial support measures to help reducing the energy consumption;
(iii) financial support measures to support companies in energy intensive industries; and (iv) financial support measures to develop
the energy autonomy of the Union. Member States are also be permitted to assign a share of the proceeds of the temporary
solidarity contribution to common financing.
Member States are obliged to adopt and publish measures implementing the solidarity contribution by 31 December 2022, unless
Member States have enacted equivalent national measures. Such solidarity contribution should be an exceptional and strictly
temporary measure.
The cap on electricity market revenues applies to electricity generators, including intermediaries, that use so-called inframarginal
technologies to produce electricity, such as renewables, nuclear and lignite, from 1 December 2022 to 30 June 2023. The cap
is set at EUR 180 per MWh in order to mitigate the rise caused by the role of coal and gas as price-setting marginal sources for
determining the final price of electricity. Member States may adopt measures of their choosing to collect and redirect the surplus
revenues towards supporting and protecting final electricity customers.
These measures were introduced by Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to
address high energy prices (OJ L 261I, 7.10.2022, pp. 1-21).

6. Harmonization of Social Security Contributions

The following regulations provide for a common social security territory covering all EEA countries (and Switzerland):

- Social Security Regulation (883/2004) of 29 April 2004 (and the implementing regulation thereto: Social Security
Implementing Regulation (987/2009) of 16 September 2009); and
- Social Security Regulation for Nationals of Third Countries (1231/2010), which extends the above-mentioned regulations to
nationals of non-EU countries legally resident in the European Union (except for Denmark and the United Kingdom).
The regulations apply to Switzerland from 1 April 2012 and to Norway, Iceland and Liechtenstein from 1 June 2012, but do not yet
apply between Croatia and Switzerland.
The regulations cover a broad range of topics regarding the application of social security schemes to individuals who chose to
work in another Member State. The regulations protect an individual’s social security rights within the EEA and Switzerland, and
therefore represent an important vehicle for enabling the free movement of labour within the European Union.
The four main principles underpinning the various regulations are the following:

(1) an individual is covered by (and consequently pays contributions into) the social security legislation (system) of only one
country at any time;
(2) an individual covered by the social security system of any EEA country (or Switzerland) has the same rights and obligations
as a national of that country;
(3) insurance periods in different Member States are taken into account (where necessary) to determine entitlement to benefits;
and

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(4) an individual who is entitled to a cash benefit from one country may (generally) receive that benefit if they are living in another
country.
In regard to (1), it must be noted that an individual cannot choose which country’s social security legislation is applicable to them:
this choice is made by the relevant social security institution(s). Under the general rule, a person is subject to the legislation of the
Member State in which they are employed. Different rules may apply, however, if the person (i) works in one country, but lives in
another (“frontier worker”); (ii) is seconded to another country (“posted worker”); or (iii) works in more than one country.
Social Security Regulations Nos 883/2004, 987/2009 and 1231/1210 (see above) generally replaced:

- Social Security Regulation (1408/71) of 14 June 1971 (and the implementing regulation thereto; Social Security Regulation
(574/72) of 21 March 1972); and
- Social Security Regulation (859/2003) of 14 May 2003 (which continues to apply in respect of UK nationals), respectively.
There are, however, instances in which Social Security Regulation (1408/71) still applies (e.g. the EEA agreement and the
agreement between the European Union and Switzerland where reference to that regulation is made).
Some EEA states (i.e. to date, Austria, Belgium, Croatia, the Czech Republic, Finland, France, Germany, Italy, Liechtenstein,
Luxembourg, Malta, Norway, the Netherlands, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden, Switzerland)
have signed the Framework Agreement on the application of article 16(1) of Regulation (EC) No. 883/2004 in cases of habitual
cross-border telework. The Agreement provides the possibility for a frontier worker to telework from their country of residence,
while remaining subject to the social security legislation of the signatory state in which his employer's registered office or place of
establishment is situated, provided that:

- both countries have signed the framework agreement; and

- the teleworking constitutes less than 50% of the worker's total working time.
The Framework Agreement entered into force on 1 July 2023 (1 September 2023 for Slovenia and 1 January 2024 for Italy).

7. Transfer Pricing
Interpretation of the arm’s length principle according to the Commission
Since 2001, the Commission has conducted a series of investigations into Member States’ fiscal schemes that appeared to
benefit only certain companies. Since then, the Commission has adopted a series of negative decisions, finding such schemes
to selectively advantage multinational companies. These decisions have, inter alia, concerned national schemes that accept
multinational corporations pricing their intra-group transactions in a manner that does not reflect the conditions that apply between
independent companies at arm’s length. According to the Commission, the arm’s length principle aims to ensure that all economic
operators are treated in the same manner when determining their taxable base for corporate income tax purposes, regardless of
whether they are part of an integrated corporate group or operate as standalone companies on the market.
In 2006, the ECJ endorsed the arm’s length principle for determining whether a fiscal measure prescribing a method for an
integrated group company to determine its taxable profit gives rise to a selective advantage for the purposes of article 107(1) of
the TFEU. Accordingly, a fiscal measure that endorses a method for determining the taxable profit of an integrated group company
in a manner that does not result in a reliable approximation of a market-based outcome in line with the arm’s length principle, can
confer a selective advantage on its recipient. That would be the case where such fiscal measure results in a reduced taxable profit,
and therefore reduced corporate income tax liability. The Commission does not call into question the granting of tax rulings by
the tax administrations of Member States. It recognizes the importance of advance rulings as a tool to provide legal certainty to
taxpayers. Provided the tax administrations do not grant selective advantages to specific economic operators, tax rulings do not
raise issues under State aid.
Since 2013, the Commission’s Directorate-General for Competition (DG Competition) has been carrying out an inquiry into tax
ruling practices from the perspective of State aid rules. The inquiry has focused, in particular, on tax rulings that endorse TP
arrangements proposed by the taxpayer for determining the taxable basis of an integrated group company. Transfer prices refer
to the prices charged for intra-group transactions concerning the sale of goods or services between associated group companies.
The Commission has also analysed “confirmatory rulings”, which confirm the application, or the non-application, of a certain
legislative provision to a specific situation. From mid-2014 to the present, the inquiry led the Commission to open formal State
aid investigations on tax rulings granted by Ireland (to Apple), Luxembourg (to Fiat) and the Netherlands (to Starbucks). Further

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investigations were opened on tax rulings granted by Luxembourg (to Amazon and McDonald’s), Belgium (the Excess Profit
scheme) and the Netherlands (to IKEA and Nike).
The arm’s length principle that the European Commission applied in its State aid inquiries and decisions seems to be diverging
from the wording of article 9 of the OECD Model, which is a non-binding instrument. However, article 9 is considered a general
principle of equal treatment in taxation falling within the scope of application of article 107(1) of the TFEU, which binds Member
States and from whose scope national tax rules are not excluded.
The starting point of the Commission’s legal analysis is article 107 of the TFEU, of which the arm’s length principle “necessarily
forms part” (see paragraph 264 of the Commission’s decision of 21 October 2015 on State aid SA.38374 (2014/C ex 2014/NN)
implemented by the Netherlands to Starbucks, hereinafter Starbucks).
In all its decisions on tax rulings, the Commission has made thorough reference to the OECD Guidelines. The OECD Guidelines
capture the international consensus on transfer pricing and provide useful guidance to tax administrations and multinational
enterprises (MNEs) on how to ensure that a TP methodology produces an outcome in line with market conditions (see paragraph
66 of the decision in Starbucks).
In the Commission’s view, a tax ruling (or an advanced pricing agreement, APA) confers on the beneficiary a selective advantage
under article 107(1) of the TFEU insofar as it leads to lowering the tax burden by deviating from the tax that the beneficiary
would otherwise be obliged to pay under the general corporate tax system. It follows that whenever the application of the TP
methodology endorsed in an APA does not depart from the OECD Guidelines, the APA itself does not amount to State aid, i.e. the
APA beneficiary is not treated more favourably compared to non-integrated companies whose taxable profit is determined by the
market.
According to the Commission, the taxable basis accepted in the APA must be substantiated by reference to comparable
transactions. In particular, if direct observations can be identified in respect of the related transactions, such observations should
serve to determine the remuneration of the company engaging in comparable transactions (see paragraph 368 of the decision in
Starbucks). In particular, in assessing the arm’s length nature of commercial conditions applicable between related parties, the first
step is to look for and analyse potential internal comparables, if present (see paragraph 272 of the decision in Starbucks).
Moreover, the comparability analysis (inherent to the choice of TP method) should be determined on the basis of the functional
analysis of the company for which the APA is requested (see paragraph 379 of the decision in Starbucks). In particular, the
Commission endorses the use of a comparables database search to estimate arm’s length returns, provided that selected
comparables result in a reliable approximation of a market-based outcome. For instance, according to the Commission, companies
without a sustainable business model cannot, in principle, constitute reliable comparables when establishing an appropriate level
of remuneration (see paragraph 352 of the Commission decision of 30 August 2016 on State aid SA.38373 (2014/C) (ex 2014/NN)
(ex 2014/CP) implemented by Ireland to Apple, hereinafter Apple).
Moreover, the approximate nature of the arm’s length principle cannot be invoked by the taxpayer to justify a TP analysis that
is either methodologically inconsistent or based on an inadequate comparables selection (see paragraph 230 of Commission
decision of 21 October 2015 on State aid SA.38375 which Luxembourg granted to Fiat, hereinafter FFT).
The Commission has also referred to industry average determinations (see paragraph 311 of the decision in FFT). However, such
approach may be contested, as the OECD Guidelines explicitly affirm that unadjusted industry average returns can in no event
themselves establish arm’s length conditions (paragraph 1.35 of the OECD Guidelines).
According to the Commission, to appropriately estimate the arm’s length remuneration of functions, the taxpayer should carry out
a comparison of the functions performed by each party with respect to the related transactions (see paragraph 364 of the decision
in Starbucks). As regards the transactional net margin method (TNMM), the Commission maintains that the analysis should take
into account the complexity of functions of all group companies involved in controlled transactions so as to identify the entity to
be regarded as the one carrying out the “least complex function” (i.e. the “tested party”) (see paragraph 273 of the decision in
Starbucks). In this regard, the Commission, referring to the OECD Guidelines, agrees that the “tested party” is the one to which a
TP method can be applied in the most reliable manner and for which the most reliable comparables can be found (i.e. it will most
often be the one that has the least complex functional profile).
According to the Commission, complexity is to be assessed by comparison to the other parties involved in the transactions.
Therefore, for the purpose of choosing the tested party, reference should be made to the “least” complex function rather than, in
absolute terms, to a function that would not be complex (see paragraphs 366 and 367 of the decision in Starbucks).
According to the Commission, the OECD Guidelines set out certain requirements for the choice of the appropriate TP method to
comply with the arm’s length principle (see paragraph 64 of the Commission decision of 7 October 2014 on State aid SA.38944
(2014/C), Luxembourg, Alleged aid to Amazon by way of a tax ruling, hereinafter Amazon). Within the framework of an APA

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procedure, taxpayers and tax authorities should always be able to justify the reasons behind the selection of the most appropriate
method. The Commission has elaborated on this conclusion in various State aid decisions.
The Commission has stated that the use of the most appropriate TP method does not rule out per se the existence of State aid.
The choice of an appropriate TP method and of the parameters that support its application must still be tested against the “market-
based outcome” standard. Accordingly, the Commission has explicitly maintained that the choice of method and of parameters
cannot be arbitrary (see paragraph 242 of the decision in FFT).
By contrast, the choice of a second-best method does not give rise per se to State aid. For example, where such method is chosen
and used in combination with an overly conservative set of parameters, the remuneration arrived at might nevertheless result in a
market-based outcome or in an overestimated tax burden, in which case a tax ruling accepting that second-best method would not
give rise to an advantage for the purposes of article 107(1) of the TFEU (see paragraph 243 of the decision in FFT).
According to the Commission, methodologies based on a two-sided approach, i.e. where the financials of both companies that
are part of the intra-group transaction are analysed, leave less room to deviate from a market outcome (see reference to DG
Competition – Internal Working Paper – Background to the High Level Forum on State Aid of 3 June 2016 (Internal Working
Paper), paragraph 20). Therefore, theoretically, those methodologies are less likely to give rise to State aid.
This being said, amongst the two-sided methodologies, the Commission’s decisional practice, in line with the OECD Guidelines,
set a preference for the comparable uncontrolled price (CUP) method. Where applicable, this method is considered the best way
for approximating conditions close to regular competition (see paragraph 73 of the decision in Amazon and paragraph 245 of the
decision in FFT). However, the Commission also seems to accept the use of “transactional profit methods”, such as the profit split
method. Provided that it is applied consistently in all jurisdictions involved, the profit split method leads to an allocation of the full
amount of profits between the companies participating in the intra-group transaction (see paragraph 20 of the Internal Working
Paper).
Accordingly, the apparent preference of the Commission vis-à-vis two-sided methods does not imply that one-sided methods
may not be considered State aid compliant. In a number of decisions, the Commission has also referred to the TNMM, which
determines the remuneration of a tested party based on its activity or functions performed. As regards this methodology,
the Commission’s criticism originated from the fact that it has always been applied in a wrong manner. For example, in the
Commission decision of 11 January 2016 on the excess profit exemption State aid scheme SA.37667 (2015/C) implemented by
Belgium, the use of the TNMM was challenged, as its application resulted in the automatic allocation of the remaining profit (i.e. the
residual profit) to another group company in a foreign jurisdiction, regardless of any precise information on the activities carried on
by such foreign group company.
The Commission has taken the view that, to avoid granting an advantage, the point in the range closest to the most likely market
outcome should be used for the purposes of pricing controlled transactions (paragraph 396 of the decision in Starbucks). With
regard to the positioning in the range, the Commission has also acknowledged that, according to paragraph 3.57 of the OECD
Guidelines, use of the central tendency of the sample minimizes the risk of error due to unknown or unquantifiable comparability
defects (see paragraph 295 of the decision in FFT).
A profit level indicator is deemed to be appropriate insofar as it is consistent with the taxpayer’s main functions (see paragraph 400
of the decision in Starbucks). Typically, and subject to the facts of the case, sales or distribution operating expenses might be an
appropriate base for distribution activities when using the TNMM (see paragraph 387 of the decision in Starbucks). In the event
of profit generated and recorded through a margin on distributed products, the Commission considers sales as a more adequate
indicator of a profit-generating reselling function (see paragraph 388 of the decision in Starbucks).
As regard cost-based indicators, the Commission may challenge both the choice of the taxpayer to include or exclude certain costs
in or from the cost base and the calculation of the markup applied (see paragraph 149 of the decision in Apple). As regards the
markup, the Commission affirms that it may not be reverse engineered so as to arrive at a target taxable income (see paragraph 62
of the decision in Apple).
Should an entity not derive any benefit from the use of intellectual property licensed, no royalty should be due (see paragraph
339 of the decision in Starbucks). However, the Commission maintains that the calculation of the amount of the royalty should
always be commensurate with the user’s output, sales or, in some rare circumstances, profits (see paragraph 287 of the decision
in Starbucks). Therefore, the Commission will raise doubts regarding the arm’s length level of a royalty payment disconnected from
the economic value of any underlying intellectual property such as when, for example, the royalty is merely calculated as a residual
in the taxpayer’s profit and loss account (see paragraph 287 of the decision in Starbucks).
The method accepted by the tax authorities should take into account future changes, if any, to the economic environment and/or
the remuneration levels required that may occur in the years following the ruling application. In the view of the Commission, indeed,
an agreement between a tax administration and a taxpayer that has no end date provides less accurate predictions as to future

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conditions on which that agreement is based, thereby casting doubt on the reliability of the method endorsed by the APA (see
paragraph 364 of the decision in Apple). This applies a fortiori for open-ended rulings.
The Commission acknowledges that the OECD Guidelines list the type of information that may be useful when determining
transfer prices for tax purposes in accordance with the arm’s length principle (see paragraph 64 of the decision in Amazon). The
APA request must be accompanied by a TP report to substantiate the choice of a TP method and the arm’s length nature (see
paragraph 12 of the Internal Working Paper).
However, on 8 November 2022, the ECJ overturned the General Court’s decision in favour of the Commission in the case of FFT
(Case C-885/19). The ECJ:

- found that the Commission erred in analysing the “selective advantage” requirement of State aid;
- found that the General Court erred in the application of article 107(1) of the TFEU by validating the Commission’s approach of
applying an arm’s length principle different from that defined by Luxembourg law; and
- stressed that any fixing of the methods and criteria for determining arm’s length outcomes falls within the discretion of the
Member States and that there are significant differences between those States in the detailed application of TP methods.
As for other State aid cases, the outcomes are varied, and some are still waiting for the final resolution. The current status of the
investigations is presented in the table below.
Case name Status
Amazon On 14 December 2023, the ECJ gave its final judgement in case C-457/21
P, Commission v. Amazon.com and Others. It confirmed the General Court’s
decision that there was no incompatible State aid, based on the same
argumentation the ECJ put forward against the Commission in the FFT case.[1]
Apple The Commission’s decision has been annulled by the General Court, but
the Commission has appealed. The ECJ’s final decision is still pending, but
considering the FFT and Amazon judgments, it is likely that the ECJ will rule in
favour of the taxpayer.
Belgian Excess Profit Scheme The Commission’s decision was initially set aside by the General Court, but since
the ECJ has overturned this ruling, it has been referred back to the General Court.
On 20 September 2023, the General Court upheld the Commission’s decision
that the Belgian scheme at issue granted tax advantages to its beneficiaries and
ordered the applicants to pay the costs.
An appeal, limited to points of law only, could be brought before the ECJ within 2
months and 10 days of notification of the decision. [1]At the time of writing, it is not
known whether the decision was appealed.
IKEA The scope of the investigation was extended in 2020. The Commission’s decision
is still pending.
McDonald’s The Commission concluded its investigation, finding that no State aid was
granted.
Nike The General Court has dismissed an action by Nike in 2021 to annul the
Commission’s investigation. The Commission’s decision is still pending.
Starbucks The Commission’s decision has been annulled by the General Court, and the
Commission has decided not to appeal, thus making the annulment final.

1 See European Union; Belgium - State Aid: General Court Upholds Commission Decision on Belgian Excess Profit Scheme in Joined
Cases Magnetrol v. Commission (T-263/16 RENV, T-265/16, T-311/16, T-319/16, T-321/16, T-343/16, T-350/16, T-444/16,
T-800/16 and T-832/16) (20 Sep. 2023), News IBFD.

In March 2023, the possibility of a new wave of investigations into EU Member States’ APAs with multinationals was announced by
the Commission’s vice-president.

Joint Transfer Pricing Forum (JTPF)

One of the methods of tackling the specific EU TP problems mentioned in the Commission’s study Company Taxation in the
Internal Market (SEC(2001) 1681), and proposed by the Commission in its Communication Towards an Internal Market without
tax obstacles – A strategy for providing companies with a consolidated corporate tax base for their EU-wide activities (COM(2001)
582 final), was the establishment of the JTPF. Following the Council Conclusions of 11 March 2002 welcoming this initiative, the
Commission established the JTPF.

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The JTPF is an advisory body of the Commission on TP tax matters. Its members consist of an expert from each Member State
and experts from business. Representatives from applicant countries and the OECD Secretariat attend as observers.
The JTPF works on a consensus basis and aims at providing non-legislative improvements to practical TP problems. The work
carried out by the JTPF focuses on two main areas:

- the Arbitration Convention (90/436) (for details, see section 8.3.); and
- other TP issues as identified by the JTPF and included in its work programme.
The Commission reports on the JTPF’s work in communications.
The first communication presented a Code of Conduct for the Effective Implementation of the Arbitration Convention, which sought
to ensure that the Arbitration Convention (90/436) operates more efficiently. The Code addresses a significant part of the (often
administrative or operational) problems with practical suggestions. The Code is an expression of political commitment and does
not affect the Member States’ rights and obligations or their spheres of competence.
The second communication presented a Code of Conduct concerning TP documentation requirements for associated enterprises
within the European Union. The Code aimed at a consistent approach by specifying the type of documentation that Member States
should request and accept from taxpayers doing business in the European Union.
The third communication presented guidelines for APAs within the European Union. APAs are considered to be an efficient tool for
dispute avoidance, as they provide advance certainty concerning TP methodology.
The fourth communication presented a revised Code of Conduct for the Effective Implementation of the Arbitration Convention,
providing recommendations to further improve the functioning of the Arbitration Convention (90/436). The revised Code addresses,
among others, EU triangular TP cases (cases where two Member States cannot resolve the double taxation arising from TP
adjustments because an associated enterprise situated in a third Member State is involved in the chain of transactions suffering
double taxation), thin capitalization cases and a variety of procedural issues.
The fifth communication included a report with guidelines on low-value-added intra-group services and a report on non-EU
triangular cases. As regards the first report, it serves to reduce the burden on taxpayers and tax authorities arising from audits
and adjustments related to service transactions, by recommending what information should be available and audited and by
encouraging tax auditors to apply certain presumptions.
The sixth communication included a report on small and medium-sized enterprises and transfer pricing, and a report on cost
contribution arrangements for services not creating intangible property.
A seventh communication was issued in June of 2014, regarding the period July 2012 to January 2014. It reports on (i) secondary
adjustments; (ii) TP risk management; and (iii) compensating adjustments, in addition to its monitoring function.
The JTPF issued a proposed Work Programme for 2015-2019 that included the following action items:

- work on practical issues arising from CbC reporting and TP documentation;

- use and improvement of comparable data and comparability methods in the European Union;
- economic valuation methods applied to transfer pricing in the European Union;
- a stocktaking review and assessment of the state of play of multilateral controls in the European Union in the TP area;
- assessment of practical issues linked to the use of the profit split method within the European Union; and
- internal monitoring and follow-up of the functioning of dispute resolutions and APAs in transfer pricing.
With regard to the Work Programme 2015-2019, listed below are all relevant developments:

- in December 2016, the Commission accepted two studies, one being a Study on Comparable data used for transfer pricing
in the EU, which provides an overview and assessment of the availability and quality of comparables used for TP purposes
in the European Union, and the other being a Study on the Application of Economic Valuation Techniques for Determining
Transfer Prices of Cross Border Transactions between Members of Multinational Enterprise Groups in the EU;
- in March 2017, the JTPF agreed on the Report on the Use of Comparables in the European Union. The report establishes
best practices and pragmatic solutions by issuing various recommendations for both taxpayers and tax administrations in the
European Union. The report aims to increase the objectivity and transparency of comparable searches for transfer pricing in
practice;

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- in October 2018, the JTPF agreed on the Report on a Coordinated approach to transfer pricing controls within the European
Union. This report establishes best practices by issuing various recommendations for both taxpayers and tax administrations
and encourages closer cooperation in the field of TP controls; and
- in March 2019, the JTPF agreed on the Report on the application of the profit split method within the European Union. The
report clarifies key concepts and conditions under which to use the method and also how to split the profit.
The mandate of the JTPF expired in March 2019 and was not renewed.

Transfer Pricing Directive proposal

On 12 September 2023, the Commission issued a proposal for a Council Directive on transfer pricing (TP Directive). The TP
Directive aims to harmonize TP rules within the European Union by ensuring that the arm’s length principle and its interpretation in
the 2022 OECD Guidelines become part of the legislation of all EU Member States. It provides among others:

- a common definition of associated enterprises (with a 25% threshold for the control criterion);
- a process for applying corresponding adjustments that aim at resolving any double taxation that follows from TP adjustments
made by an EU Member State within 180 days; and
- a framework through which year-end adjustments within the European Union are recognized both by the Member State where
the upward adjustment is made and the State where the downward (compensating) adjustment is made.
The second part of the TP Directive establishes common rules with respect to (i) accurate delineation of commercial and financial
relations; (ii) TP methods; (iii) selection of the most appropriate method; (iv) comparability analysis; (v) the arm’s length range; and
(vi) documentation.
The rules are mainly designed as a reference to the OECD Guidelines (the latest version, favouring a dynamic approach), but with
some differences. For example, the TP Directive adopts a stricter approach by mandating the use of the interquartile range as a
reference, whereas the OECD Guidelines in paragraph 3.57 refer to central tendency measures only when comparability defects
remain in the set of comparables.
Finally, the Directive envisages that the Commission may advance a future proposal on the application of the arm’s length principle
and other rules of the Directive, particularly with respect to:

- transfers of intangible assets or rights in intangible assets between associated enterprises, including hard-to-value
intangibles;
- the provision of services between associated enterprises, including the provision of marketing and distribution services;
- cost contribution arrangements between associated enterprises;
- transactions between associated enterprises in the context of business restructurings;
- financial transactions; and
- dealings between the head office and its permanent establishments.
The Commission proposes that the Member States transpose the TP Directive by 31 December 2025 and apply these provisions
from 1 January 2026. The draft TP Directive is now in the negotiation phase, but its adoption is uncertain as unanimous approval
of the Council of the European Union is required.
On 4 December 2023, Members of the European Parliament of the Committee on Economic and Monetary Affairs discussed
the draft report on the proposal for a Council Directive on transfer pricing (2023/0322(CNS)). The draft report is scheduled to be
voted on by the ECON Committee on 22 February 2024 (indicative date).

8. Administrative Cooperation
8.1. Transparency and exchange of information
Many treaties for the avoidance of international double taxation contain “mutual assistance” provisions permitting cooperation
and an exchange of information between the treaty partners on matters related to the assessment and collection of taxes. If a tax
authority is unable to determine certain facts during the investigation of an international tax case, it may be able to obtain additional
information from the treaty partner by way of mutual assistance.

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In addition to tax treaties, Member States have concluded bilateral treaties for mutual administrative assistance with other states
or are parties to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters. The European Union itself is
also a party to agreements that establish the automatic exchange of financial account information, such as those with Andorra
(Amending Protocol to the European Union-Andorra Agreement (2016)), Liechtenstein (Amending Protocol to the European Union-
Liechtenstein Agreement (2015)), Monaco (Amending Protocol to the European Union-Monaco Agreement (2016)), San Marino
(Amending Protocol to the European Union-San Marino Agreement (2015)) and Switzerland (Amending Protocol to the European
Union-Switzerland Agreement (2015)). On 17 January 2024, the European Commission requested authorization from the Council
for negotiating amendments to bring these agreements in line with DAC8 and the latest version of the OECD's Common Reporting
Standard, which takes into account the Crypto-Asset Reporting Framework (CARF). Mutual assistance in EU cross-border
situations is mainly regulated by the Directive on Administrative Cooperation (2011/16) (DAC).

Directive on Administrative Cooperation (2011/16) (DAC)

The DAC covers the exchange of information between tax authorities of Member States, as well as a broad range of aspects on
mutual assistance.
The purpose of the DAC is to:

- extend cooperation between Member States to cover direct taxes of any kind;
- establish time limits for the provision of information on request and other administrative enquiries;
- allow officials of one Member State to participate in administrative enquiries on the territory of another Member State;
- provide for feedback on the exchange of information; and
- provide that information is exchanged using standardized forms, formats and channels of communication.
The DAC is not limited to assessments, but also covers information relevant for the administration and enforcement of Member
States’ domestic laws concerning all taxes, except VAT and customs and excise duties.
The DAC prevents a Member State from refusing to supply information on the sole grounds that (i) the information is held by a
bank or other financial institution; or (ii) there is a lack of domestic interest in collecting the information. This is quite similar to
the standards of transparency and exchange of information for tax purposes endorsed by the Global Forum. In the case of the
automatic exchange of information, however, such information must be available (the “availability criterion”).
Member States had to implement the above provisions of the directive by 1 January 2013 at the latest. The automatic exchange of
available information concerning employment income, directors’ fees, certain life insurance products, pensions, and ownership of
as well as income from immovable property, however, took effect from 1 January 2015.
The DAC (also referred to as “DAC1”) was subsequently amended by various directives, namely the following:
Directive Effect
Amending Directive to the 2011 Directive on Expands the scope of automatic exchange of information to include dividends, capital gains, other financial
Administrative Cooperation (2014/107) (DAC2) income and account balances as from 1 January 2016 (1 January 2017 for Austria).
Member States (excluding Austria) had to exchange this information for the first time in 2017 (2018 for Austria).
The “availability criterion” (see above) does not apply to these forms of income
Amending Directive to the 2011 Directive on Provides for the automatic exchange of information on advance cross-border tax rulings and APAs from 1
Administrative Cooperation (2015/2376) (DAC3) January 2017. Advance tax rulings and APAs issued to companies with an annual net turnover of less than EUR
40 million at group level and amended or renewed before 1 April 2016, may be excluded from the exchange of
information. However, this exemption does not apply to companies mainly conducting financial or investment
activities
Amending Directive to the 2011 Directive on Provides for the automatic exchange of information concerning CbC reports of multinationals. This directive
Administrative Cooperation (2016/881) (DAC4) applies from 5 June 2017
Amending Directive to the 2011 Directive on Provides tax authorities with access to anti-money laundering information. Under this directive, from 1 January
Administrative Cooperation (2016/2258) (DAC5) 2018, Member States automatically exchange information on bank account balances, interest income and
dividends. Furthermore, the directive requires Member States to provide access to information on the beneficial
ownership of companies and enables tax authorities to access that information in monitoring the proper
application of rules on the automatic exchange of tax information

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Directive Effect
Amending Directive to the 2011 Directive on Provides for the automatic exchange of certain cross-border arrangements within the European Union, as well
Administrative Cooperation [on reportable cross- as between Member States and third countries. The directive applies to (i) intermediaries that design or promote
border arrangements] (2018/822) (DAC6) a reportable arrangement; and, under certain circumstances (ii) the relevant taxpayer(s). The directive applies
from 1 July 2020[1] (with retrospective effect for arrangements made between 25 June 2018 and 30 June 2020).
To determine if a cross-border arrangement is potentially aggressive, a list of hallmarks has been appended
to the directive. The existence of one of those hallmarks in the cross-border arrangement can indicate an
aggressive structure.
A hallmark is defined as a “characteristic or feature of a cross-border arrangement that presents an indication of
a potential risk of tax avoidance”. Hallmarks are divided into generic and specific. Generic hallmarks and some
of the specific hallmarks only apply if the main benefits test is satisfied. This test is met if it can be established
that the main benefit or one of the main benefits of the arrangement is obtaining a tax advantage. There are five
categories of hallmarks.
(1) Generic hallmarks that are linked to engagement with the intermediary and apply if:

- one of the parties to the arrangement agrees to confidentiality provisions based on which it is prohibited to
disclose to other intermediaries or the tax authorities how the arrangement could secure a tax advantage;

- the intermediary is entitled to receive a fixed remuneration linked to the amount of the tax advantage derived
from the arrangement; or

- the arrangement has substantially standardized documentation and/or structure and is available to more
than one relevant taxpayer without needing to be significantly customized for implementation.
(2) Specific hallmarks that are also linked to the application of the main benefit test:

- acquisition of a loss-making company, discontinuing its main activities and using the losses to reduce its tax
liability, including through a transfer of losses or by acceleration of the use of the losses;

- conversion of income into gifts, capital or other categories of revenue that are taxed at a lower level or are
exempt from tax; or

- an arrangement that includes circular transactions resulting in the round-tripping of funds.

(3) Specific hallmarks relating to certain cross-border transactions, as follows:

- an arrangement that involves deductible cross-border payments between associated enterprises and that
meets certain additional conditions;

- deducting amounts for depreciation on the same asset in various jurisdictions;

- claiming relief for double taxation for the same income in various jurisdictions; or

- transferring assets whereby there is a material difference in the amount that is treated as consideration for
the assets transferred in the jurisdictions involved.
(4) Hallmarks relating to the automatic exchange of financial information under the Common Reporting
Standard (CRS) as implemented in Member States and the determination of the ultimate beneficial ownership.
Hallmarks include arrangements that may have the effect of undermining the reporting obligation under the CRS.
Furthermore, this category of hallmarks describes arrangements trying to hide beneficial owners.
(5) Hallmarks relating to transfer pricing, as follows:

- arrangements involving the use of unilateral safe harbour rules;

- arrangements involving the transfer of hard-to-value intangibles; and

- arrangements involving an intra-group cross-border transfer of functions, risks and/or assets, if the
projected earnings before interest and taxes (EBIT) of the transferor(s) in the 3-year period following the
transfer are less than 50% of the projected annual EBIT of such transferor(s) had the transfer not been
made.
Furthermore, intermediaries must be defined broadly, covering, among others, consultants, (tax) lawyers and
financial advisors. Under the directive, the term “intermediary” refers to “any person that designs, markets,
organizes, makes available for implementation or manages the implementation of a potentially aggressive cross-
border arrangement”. If such an intermediary is protected by legal professional privilege or is not located in
the European Union, the obligation to disclose information transfers to any other intermediary.[2] If no other
intermediary is able to disclose information (for example due to protection by legal professional privilege), the
obligation to disclose information is transferred to the taxpayer. The disclosed information is automatically
exchanged between Member States

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Directive Effect
Amending Directive to the 2011 Directive on Provides for the automatic exchange of information and new reporting obligations to cover transactions made
Administrative Cooperation (2021/514) (DAC7) through digital platforms. DAC7 also modifies existing regulations as regards, inter alia, joint audits, group
information requests and data breaches. The directive applies from 1 January 2023 (1 January 2024 for
provisions related to joint audits).
The European Commission adopted an implementing regulation in respect of certain provisions of the
Amending Directive to the 2011 Directive on Administrative Cooperation (2021/514) (DAC7) on 13 April 2023.
The implementing regulation is aimed at establishing the criteria for determining whether the information
automatically exchanged under an agreement between the tax authorities of Member States and a non-EU
country is equivalent to that specified by DAC7 (e.g. information relates to activities within the DAC’s scope,
which is equivalent to the information that is required under the DAC’s reporting rules).
Amending Directive to the 2011 Directive on Extends the scope of the automatic exchange of information to cover crypto-assets that can be used for payment
Administrative Cooperation (2023/2226)(DAC8) or investment purposes. This includes crypto-assets that have been issued in a decentralized manner, as well
as stablecoins, including e-money tokens and certain non-fungible tokens (NFTs). The reporting obligations
affect crypto-asset service providers and operators. Additionally, the scope of advance tax rulings and advance
pricing arrangements that must be automatically exchanged between Member States is expanded to include
high-net-worth individuals whose transactions or series of transactions exceed EUR 1.5 million. This rule applies
from 1 January 2026. Once transposed by Member States, the reporting and exchange obligations apply from 1
January 2026.

1 On 24 June 2020, the Council adopted Amending Directive to the 2011 Directive on Administrative Cooperation (2020/876) to
address the urgent need to defer certain time limits for filing and exchanging information in the field of taxation because of the
COVID-19 pandemic. The directive provided for an optional deferral of up to 6 months of the deadlines for filing and exchanging
information under DAC6 and 3 months of the deadline for exchanging financial account information under DAC2 (12 months instead
of 9 months).
2 Some Member States have requested preliminary rulings on the validity of DAC6 reporting obligations. In this regard, the ECJ
decided that the obligation to inform another intermediary of a lawyer who invokes the legal professional secrecy is not compatible
with article 7 of the Charter of Fundamental Rights of the European Union and annulled the corresponding provision in DAC6 – see
Orde van Vlaamse Balies and Others (Case C-694/20). Some countries (such as Spain and the Netherlands) have already modified
their legislation or issued interpretative guidance in accordance with the ECJ resolution. The Constitutional Court of Belgium partially
nullified the DAC6 Implementation Decree of the French-speaking community (Decision 4/2024 of 11 January 2024; available
here in French) and the corresponding article of the Flemish DAC6 Implementation Decree (Decision 111/2023 of 20 July 2023;
available here in Dutch).

Further developments
The European Commission has been preparing a report to evaluate the effectiveness, efficiency and continued relevance of
the Directive on Administrative Cooperation (2011/16) (DAC1) and its subsequent amendments (DAC2 to DAC6). A feedback
period was initially planned to be opened in the second quarter of 2023 (delayed for the third quarter of 2023). The Commission
aims to adopt the report in the third quarter of 2024. Previously, the European Commission had published a proposal for a formal
consolidation of the DAC and its subsequent amendments (COM(2020) 49 final); however, there has been no progress on this up
to this date.

Public CbC reporting

Finally, it is important to note the tendency within the European Union towards public reporting of taxpayer data. In November
2021, the Parliament endorsed a directive on the public disclosure of income tax information by certain undertakings and branches
– the Amending Directive to the Accounting Directive (2013/34) as regards the Disclosure of Income Tax Information by Certain
Undertakings and Branches (2021/2101) (the Public Country-by-Country Reporting (CbCR) Directive).
The directive requires both EU-based MNEs and non-EU based MNEs doing business in the European Union through a branch or
subsidiary with a total consolidated revenue of more than EUR 750 million (in each of the last two consecutive financial years) to
publicly disclose income tax information in each Member State and in every third country that either is included in Annex I to the list
of non-cooperative jurisdictions for tax purposes or is included for two consecutive years in Annex II to the list (see section 3.9.).
As far as the information to be disclosed is concerned, the directive provides for a complete list, as follows:

- name of the ultimate parent undertaking or the standalone undertaking, financial year concerned, currency used and, where
applicable, a list of all subsidiary undertakings consolidated in the financial statements of the ultimate parent undertaking;
- brief description of the nature of the activities;
- number of employees;
- revenues;
- amount of profit or loss before income tax;

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- amount of income tax accrued during the relevant financial year;

- amount of income tax paid on cash basis; and
- amount of accumulated earnings at the end of the relevant financial year.
As the immediate disclosure of the required data could be detrimental to the commercial position of an undertaking, Member
States should provide for the possibility to defer the publication of certain items of information for a limited number of years. The
undertaking must, however, give a reasoned explanation for seeking the deferral.
Member States must also ensure that penalties are applicable in case the undertaking fails to meet its obligations regarding the
publication of the relevant information.
The Public CbC reports are to be published by way of filing with the commercial register, as well as on the undertaking's corporate
website. There is also an audit requirement, under which an auditor must – for undertakings falling under a statutory auditing
requirement – include in the audit report a statement on whether an undertaking was required to publish an income tax information
report, and if such a report was published.
The directive entered into force on 21 December 2021. Member States had to transpose the directive into national law by 22 June
2023. The first financial year of public reporting will be the year starting on or after 22 June 2024. However, Member States may
also choose to apply the rules earlier. The due date for publishing the information will be 12 months from the date of the balance
sheet for the relevant financial year.

EU taxpayers’ rights and related simplification of tax obligations

On 10 March 2021, the Commission launched a public consultation on EU taxpayers’ rights and related simplification of
tax obligations. The initiative aims to improve tax compliance and enhance the relationship between tax administrations of
Member States and taxpayers (specifically through greater transparency, service orientation and use of digital technologies).
The Commission expected to issue a recommendation in view of the results of this initiative by the third quarter of 2021. The
recommendation has not been issued yet.

8.2. Recovery of tax claims

On 16 March 2010, the Council adopted the Recovery Directive (2010/24) concerning mutual assistance for the recovery of
claims relating to taxes, duties and other measures, which repealed the Mutual Assistance Directive (for the Recovery of Claims)
(2008/55). The Recovery Directive (2010/24) lays down the rules under which Member States must assist with the recovery
of certain claims related to any taxes and duties that arise in another Member State. The directive creates a single European
enforcement instrument that is available in all official languages of the European Union and is the sole legal basis for enforcement.
Member States had to implement the above provisions of the directive by 1 January 2012 at the latest.
On 18 November 2011, the Commission adopted a new Commission Implementing Regulation (EU) 1189/2011 for the application
of the Recovery Directive (2010/24), including, inter alia, detailed provisions for various assistance requests, and containing two
annexes: a uniform enforcement instrument and a uniform notification form. This Regulation was later amended by Commission
Implementing Regulation (EU) 2017/1966 of 27 October 2017.

8.3. Arbitration Convention

On 23 July 1990, the Council adopted the Convention on the Elimination of Double Taxation in Connection with the Adjustment of
Profits of Associated Enterprises, generally known as the Arbitration Convention (90/436).
The Arbitration Convention (90/436) aims to eliminate double taxation in cases where the tax authorities adjust the taxable income
of associated enterprises, including permanent establishments. Double taxation occurs when one Member State adjusts (upward)
the taxable income of an enterprise because of transactions that are not valued at arm’s length, but another Member State is not
prepared to allow a corresponding downward adjustment of the associated enterprise’s taxable income. Income of the enterprise is
consequently overstated and excessive tax is levied.
The Arbitration Convention (90/436) envisages the establishment of a legally binding procedure to settle disputes between
Member States and enterprises regarding the justification of profit adjustments by a Member State’s competent tax authorities.
The mutual agreement procedure (MAP) provided under article 25 of the OECD Model and contained in most of the bilateral tax
treaties concluded between Member States only obliges Member States to enter into negotiations with the objective of resolving
the dispute. However, these provisions do not require the contracting states to finally avoid double taxation. Another disadvantage
of the previously applicable MAPs is that they are not limited in their duration.

T. Morales Gil & S. Kale, Direct Taxation, Global Topics IBFD (accessed 6 March 2024). 53
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The Arbitration Convention (90/436) therefore suggests the introduction of an arbitration committee, to be established by experts
from both contracting states and a certain number of independent experts. The decision of the arbitration committee will have
legally binding effects for both Member States’ tax authorities if they cannot agree on a common solution to avoid double taxation
within 3 years.
The scope of the Arbitration Convention (90/436) is not restricted to affiliated companies. According to paragraph 2 of article 1
of the Convention, the relationship between a company and its permanent establishment in another Member State also qualifies
for the application of the Arbitration Convention (90/436) in cases where the tax authorities of the company’s and the permanent
establishment’s Member State cannot agree on the extent of an intended profit adjustment by one of them.
The Arbitration Convention (90/436) itself does not contain any substantive rules as to how a dispute regarding a profit adjustment
should be resolved, apart from a reiteration in article 5 of the general “arm’s length principle” as defined under article 9 of the
OECD Model.
The Arbitration Convention (90/436) is not an EU legal instrument, but a multilateral convention under international public law. The
key difference between a multilateral convention and a directive is that under a multilateral convention Member States maintain
their tax sovereignty. In principle, the ECJ has no jurisdiction to interpret and enforce provisions of a convention. Technically, a
convention is not subject to EU law, although ECJ decisions have indicated that treaties may not be interpreted contrary to or in
violation of EU law, and it is argued that double taxation in and of itself may be an obstacle to trade in the common market – see
Lankhorst-Hohorst GmbH v. Finanzamt Steinfurt (C-324-00).

8.4. Dispute resolution

On 10 October 2017, the Council adopted the Tax Dispute Resolution Mechanisms Directive (2017/1852). Member States were
obliged to bring into force the laws, regulations and administrative provisions necessary to comply with this directive by 30 June
2019.
The directive aims to resolve disputes between Member States arising from the interpretation and application of agreements and
conventions that provide for the elimination of double taxation of income and capital.
Member States may deny access to the dispute resolution procedure to cases concerning fraud, wilful default or gross negligence.
In addition, the directive contains a criterion to ensure the independence of appointed arbitrators and provides for the possibility to
establish a permanent body to deal with dispute resolution cases.
A taxpayer may bring a complaint to the competent authorities of each of the Member States concerned, requesting the resolution
of that complaint. The competent authorities shall then endeavour, through mutual agreement, to resolve the complaint within 2
years of receipt.
However, if:

(1) one (but not all) of the competent authorities rejects the complaint; or
(2) the competent authorities cannot resolve the complaint within the 2-year period,
the competent authorities concerned will, upon request of the taxpayer, set up an “Advisory Commission”. This Advisory
Commission must:

- in the event of scenario (1): decide on the admissibility and acceptance of the complaint within 6 months of the complaint’s
rejection, which is binding on the countries concerned; or
- in the event of scenario (2): give its opinion on how to solve the dispute no later than 6 months after having been set up. This
opinion does not have to be followed by the countries concerned, but if they do not reach an agreement on how to settle the
dispute within 6 months of the date the opinion is issued, they are bound by it.
The scope of this directive is much wider than that of the Arbitration Convention (90/436), as it not only applies to transfer
pricing and the attribution of profits to permanent establishments. The directive is expected to operate adjacent to the Arbitration
Convention (90/436), with a key benefit that it has direct effect and taxpayers can directly rely on the rights and obligations
included in the directive. Furthermore, due to its status as a directive, the Tax Dispute Resolution Mechanisms Directive
(2017/1852) is binding on Member States and subject to interpretation by the ECJ pursuant to article 267 of the TFEU. On the
other hand, the directive does explicitly allow competent authorities to reject a complaint filed, whereas the Arbitration Convention
(90/436) does not envisage a rejection once a request filed meets the scope of the convention. The taxpayer is entitled to appeal a
rejection under national law.

T. Morales Gil & S. Kale, Direct Taxation, Global Topics IBFD (accessed 6 March 2024). 54
© Copyright 2024 IBFD: No part of this information may be reproduced or distributed without permission of IBFD.
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The directive applies to complaints submitted after 1 July 2019 in respect of questions relating to the tax year starting on or after 1
January 2018.

T. Morales Gil & S. Kale, Direct Taxation, Global Topics IBFD (accessed 6 March 2024). 55
© Copyright 2024 IBFD: No part of this information may be reproduced or distributed without permission of IBFD.
Disclaimer: IBFD will not be liable for any damages arising from the use of this information.

Exported / Printed on 26 Mar. 2024 by University of Cape Town.