COMPARATIVE TAX POLICY

SEMINAR: EU TAX LAW AND

POLICY

Univ.-Prof. DDr. Georg Kofler, LL.M. (NYU)

Spring 2019
OVERVIEW | CONTENTS

 Part I – Introduction
 Part II – Fundamental Freedoms and Direct Taxation
 Part III – State Aid and Direct Taxation
 Part IV – EU Charter of Fundamental Rights
 Part V – Direct Tax Directives
 Part VI – Recent EU Legislation and Initiatives

2
OVERVIEW | SOURCES
 Research resources, e.g.,
 Cases available at http://curia.europa.eu/
 Legal texts available at http://eur-lex.europa.eu
 Commission documents available at http://ec.europa.eu/taxation_customs/index_en.htm
 Collection of old EU documents at http://www.steuerrecht.jku.at/gwk/ → “EU-Doku”
 Recommended reading, e.g.,
 Lang/Pistone/Schuch/Staringer (eds.), Introduction to European Tax Law on Direct
Taxation, 5th edition (2018)
 Helminen, EU Tax Law – Direct Taxation 2018 (2018)
 Terra/Wattel, European Tax Law, 7th edition (2018)

3
PART I
INTRODUCTION
European Commission

Council

European Parliament

Court of Justice
OVERVIEW | BACKGROUND
 Direct and Indirect Taxation
 Indirect taxation
 Customs Union (Art. 28 TEFU, ex-Art. 23 EC)
 Prohibition of discrimination (Art. 110 TFEU, ex-Art. 90 EC)
 “Standing harmonization order” (Art. 113 TFEU, ex-Art. 93 EC) → E.g., VAT
 Direct taxation
 General “internal market” harmonization under Art. 115 TFEU → Only directives!
Unanimity

 However, relevance of direct taxation for the “internal market” (Art. 26 TFEU), the
fundamental freedoms (Arts. 45, 49, 56, 63 TFEU) and in respect of State aid
(Art. 107 TFEU)

6
OVERVIEW | BACKGROUND
 Direct Taxation
 Fundamental Freedoms
 Free Movement of Workers (Art 45 TFEU, ex-Art 39 EC — Art 28 EEA)
 Freedom of Establishment (Art 49 TFEU, ex-Art 43 EC — Art 31 EEA)
 Freedom to Provide Services (Art 56 TFEU, ex-Art 49 EC — Art 36 EEA)
 Free Movement of Capital (Art 63 TFEU, ex-Art 56 EC — Art 40 EEA) — Between the
Member States and between Member States and third countries!
 State Aid (Art. 107 TFEU)

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OVERVIEW | BACKGROUND
 Directives
 Taxpayers
 Anti-Tax-Avoidance-Directive (ATAD) (Directive (EU) 2016/1164, [2016] OJ L 193/1), as
amended by Directive (EU) 2017/952, [2017] OJ L 144/1 [7 June 2017])
 Parent-Subsidiary-Directive (Council Directive 2011/96/EU, [2011] OJ L 345/8, as
amended by Directive 2014/86/EU, [2014] OJ L 219/40, and Directive (EU) 2015/121,
[2015] OJ L 21/1)
 Merger Directive (Directive 2009/133/EC, [2009] OJ L 310/34)
 Interest-Royalties-Directive (Directive 2003/49/EC, [2003] OJ L 157/49) – Amending
proposal COM(2011) 714 final (11 November 2011)
 Dispute Resolution Directive (Directive (EU) 2017/1852, [2017] OJ L 265)
 Tax adminstrations
 Directive on Mutual Assistance (Directive 2011/16/EU, [2011] L 64/1, as amended by
Directive 2014/107/EU, [2014] OJ L 359/1, Directive (EU) 2015/2376, [2015] OJ L 332/1,
Directive (EU) 2016/881, [2016] OJ L 146/8, Directive (EU) 2016/2258, [2016] OJ L
342/1, and Directive (EU), [2018] OJ L 139/1)
 Directive on Recovery of Tax Claims (Directive 2010/24/EU, [2010] OJ L 84/1)
 Savings Interest Directive (Directive 2003/48/EC, [2003] OJ L 157/38, as amended by
Directive 2014/48/EU, [2014] OJ 111/50) – Repealed by Council Directive (EU)
2015/2060 of 10 November 2015, [2015] OJ L 301/1

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OVERVIEW | STRUCTURE

Primary EU Law (TEU and TFEU)

(Fundamental Freedoms)
Primacy of Primacy of
EU Law EU Law
Secondary EU Law
(Directives)

Implementation
Double Taxation Conventions

Domestic Tax Law Lex Specialis

9
PART II
FUNDAMENTAL
FREEDOMS
CONTENT
 Chapter I – Foundations
 Chapter II – Personal and family benefits
 Chapter III – Business expenses
 Chapter IV – Permanent establishments
 Chapter V – Cross-border dividends
 Chapter VI – Foreign losses
 Chapter VII – Exit taxation
 Chapter VIII – Tax planning
 Chapter IX – Horizontal discrimination
 Chapter X – Double taxation

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CHAPTER I
FOUNDATIONS
OVERVIEW | STRUCTURE

 Fundamental Freedoms
 Workers (Art. 45 TFEU,
ex-Art. 39 EC — Art. 28 EEA)
 Establishment (Art. 49 TFEU,
ex-Art. 43 EC — Art. 31 EEA)
 Services (Art. 56 TFEU,
ex-Art. 49 EC — Art. 36 EEA)
 Movement of Capital (Art. 63 TFEU,
ex-Art. 56 EC — Art. 40 EEA) —
Between the Member States and
between Member States and third
countries!
 Impact
 The freedoms are (1) directly applicable in the Member States, (2) confer rights to
individuals and companies, (3) take precedence over domestic legislation to the extent of
any inconsistency, (4) and not only operate “negatively” by superseding national law, but
also “positively” by granting taxpayers benefits denied to them in breach of EU law
 CJEU (ECJ) and domestic courts → Preliminary Rulings and Acte Clair
 “Retroactivity” and domestic procedural law

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OVERVIEW | FUNDAMENTAL
FREEDOMS
 Nationals of the Member States (Art. 21 TFEU) or EU companies (Art. 54 TFEU)
Personal and for Arts. 45, 49, 56 TFEU (no personal requirement for Art. 63 TFEU)
Teritorial  Cross-border economic activity (private movements are covered by Art. 21
Scope TFEU), not purely internal situations
 Convergence → Internal Market (Art. 26 TFEU)

 Discriminatory restrictions (→ difference in treatment and comparability) for

inbound and outbound situations
− Overt v. Covert
− Direct v. Indirect
− Vertical v. Horizontal
− „Single Country Approach“ v. „Overall Approach“
Restriction
 Inbound and outbound situations
− Ad personam v. ad rem-comparison
− Obligation to grant “national treatment”
 Non-discriminatory restrictions (?)
 ≠ Disparities (e.g., Gilly)
 ≠ Quasi-restrictions (e.g., Kerckhaert-Morres)

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OVERVIEW | FUNDAMENTAL
FREEDOMS
 Written grounds of justification (Arts. 45(3), 52(1) and 65(1) TFEU) , i.e.,
public policy, public security or public health
 Unwritten grounds of justification (“rule of reason”, Gebhard), e.g.,
− prevention of tax avoidance (e.g., Metallgesellschaft und Hoechst,
Marks & Spencer, Cadbury Schweppes)
Justification − administrative supervision (zB Futura Participations, Baxter)
− efficiency of tax collection (e.g., Scorpio, X NV)
− coherence (e.g., Bachmann, Krankenheim Ruhesitz am Wannsee,
Société Papillon)
− balanced allocation of taxing rights (e.g., D, Marks & Spencer, Lidl
Belgium, X Holding, National Grid Indus)

 National measures restricting the individual freedoms cannot exceed what

Proportionality
is necessary to attain their legitimate objectives.

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OVERVIEW | INBOUND AND OUTBOUND
SITUATIONS
 Disadvantageous treatment of non-residents by the source State
 Ad personam-comparison (→ Competition!)
 Obligation of the Source State to grant non-nesidents equal treatment with residents,
insofar the former are subjected to its taxing jurisdiction, and even if they are Source State
Inbound nationals → Prohibition of vertical discrimination → Obligation to grant national treatment
Situations  Main issues
− Subjective ability to pay (e.g., Schumacker, Wallentin, D)
− Objective ability to pay
− Companies (e.g., Avoir Fiscal, Saint-Gobain, CLT-UFA, Denkavit Internationaal)
− Individuals (e.g., Gerritse, Conijn, Scorpio)

 Disadvantageous treatment of residents by the residence State

 Ad rem-comparison (→ domestic v. cross-border situation)
 Guidline → Equal treatment has to be granted if foreign-source income is included in the
tax base
Outbound  Main issues
Situations − Foreign-source income, e.g., dividends (e.g., Lenz, Manninen, Meilicke, Kronos)
− Deductions, incentives and cross-border loss relief (e.g., Bachmann, Bosal, Marks &
Spencer)
− Exit taxation (e.g., Hughes de Lasteyrie du Saillant, N, National Grid Indus)

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FOREIGN SOURCE INCOME | OVERVIEW

 Leading Cases
 ECJ, 13 April 2000, C-251/98, Baars, EU:C:2000:20,
ECJ, 15 July 2004, C-315/02, Lenz, EU:C:2004:446,
ECJ, 7 September 2004, C-319/02, Manninen,
EU:C:2004:484

 Guideline
 Identification of a pair of comparison and the criterion Income
of comparison (tertium comparationis) → Ad rem-
comparison
 Comparability if foreign-source income is included in Problems, e.g., with wealth tax
the tax base (e.g., ECJ, 17 September 2015, C-10/14, exemption only for domestic shares
(Baars), beneficial treatment only for
C-14/14 and C-17/14, Miljoen, EU:C:2015:608, para.
domestic dividends (Verkooijen,
67) Lenz, Manninen, Meilicke), taxation
of capital gains only for sales of
foreign shares (Wiedert and Paulus),
different thresholds for taxability of
sales (Gronfelt), different valuation
of domestic and foreign assets
(Scheunemann)

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CHAPTER II
PERSONAL AND FAMILY
BENEFITS
“SUBJECTIVE ABILITY TO PAY” |
SCHUMACKER
 Leading Case
 ECJ, 14 February 1995, C-279/93, Schumacker, EU:C:1995:31 etc

 Decision
 Prohibition also of “covert” discrimination (based on residence rather
than nationality), but “[i]n relation to direct taxes, the situations of
residents and of non-residents are not, as a rule, comparable” (ad Economic
personam-comparison), … Activity
 … but they become comparable if a taxpayer …
 … obtains his income entirely or almost exclusively from the
work performed in the source State [90%; full-year basis, ECJ,
18 June 2015, C-9/14, Kieback, EU:C:2015:406) and
 … does not receive in his residence State sufficient income to Income taxation, but benial of
be subject to taxation there in a manner enabling his personal splitting (Schumacker,
and family circumstances to be taken into account (determined Gschwind, Zurstrassen), tax
under the legislation of the residence State, ECJ, 10 May 2012, rate benefits (Turpeinen), zero-
C-39/10, Commission v. Estonia, EU:C:2012:282, para. 53) bracket (Gerritse, Wallentin,
 The scope of the case-law arising from the judgment in Schumacker Meindl), negative progressivity
extends to all the tax advantages connected with the non-resident’s (Lakebrink) or loss utilization
ability to pay tax which are granted neither in the State of residence (Renneberg)
nor in the State of employment. → I.e., personal ability to pay tax or
personal and family circumstances.

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“SUBJECTIVE ABILITY TO PAY” |
SCHUMACKER REFINED
X
 ECJ, 9 February 2017, C-283/15, X, EU:C:2017:102
 Deduction of the negative income arising from his dwelling Dutch
in Spain in the Netherlands? national
 Discrimination? , because the Member State of residence
is not in a position to grant him the benefits that result from
taking into account his personal and family circumstances
 Granting of benefits in proportion to the share of his income ES
received within each such Member State, it being his
responsibility to provide to the competent national NL CH
authorities all the information on his global income needed
by them to determine that proportion
60% of 40% of
total total
taxable taxable
income income

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“SUBJECTIVE ABILITY TO PAY” |
DE GROOT
 Cases
 ECJ, 12 December 2002, C-385/00, De Groot,
Exclusion of
EU:C:2002:750 → See also ECJ, 28 February 2013, C-
personal and family
168/11, Beker & Beker, EU:C:2013:117, and ECJ 12 benefits to the extent
December 2013, C-303/12, Imfeld & Garcet, EU:C:2013:822 of foreign income

 Decision
 Pro-rata exclusion of personal and family benefits by
the taxpayers residence State violates freedoms Economic
Activity
 Example
 Exemption with progression in residence State (e.g., income
of 50.000 in each State, 50% flat rate in residence State,
10.000 of personal exemption/deduction):

Effectively 2.500 “exported” to source

State (and not taken into account in
the home State) → Violates freedoms!

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CHAPTER III
BUSINESS EXPENSES
“OBJECTIVE ABILITY TO PAY” |
GERRITSE
 Leading Case
 ECJ, 12 June 2003, C-234/01, Gerritse, EU:C:2003:340

 Decisions
 Tax Base → Prohibition of gross-base taxation (also on
the level of withholding taxation) → ECJ, 12 June 2003, Economic
C-234/01, Gerritse, EU:C:2003:340, and ECJ, 3 October 2006, Activity
C-290/04, Scorpio, EU:C:2006:630
 Expenses → In relation to expenses directly linked to an
activity which has generated taxable income in a Member
State, that residents of that State and non-residents are in
Income taxation, but gross
a comparable situation. → ECJ, 31 March 2011, C-450/09, taxation (Gerritse, Centro
Schröder, EU:C:2011:198 Equestre), withholding
 Form of Taxation → Justification of the form of taxation taxation (Gerritse, Scorpio,
(through a withholding tax → entails an additional administrative Truck Center, X NV), denial of
cost deduction (Conjin,
burden and related liability risks) by the need to ensure the
Schröder, Grünwald),
effective collection of income tax, even if the Recovery Directive minimum tax base (Talotta)
would be applicable → E.g., ECJ, 18 October 2012, C-498/10,
X NV, EU:C:2012:635, and ECJ, 13 July 2016, C-18/15, Brisal,
EU:C:2016:549

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CHAPTER IV
PERMANENT
ESTABLISHMENTS
PERMANENT ESTABLISHMENTS |
“AVOIR FISCAL”
 Case
 ECJ, 28 January 1986, 270/83, Commission v.
France („Avoir fiscal“), EU:C:1986:37 EU Head
Office
 Decision
 The Court declares “that by not granting to the
branches and agencies in France of insurance No imputation
companies whose registered office is in another credit (“avoir
Member State on the same terms as apply to insurance fiscal”) for
companies whose registered offices is in France the dividends for
the permanent
benefit of shareholder tax credits in respect of estalbishment.
dividends paid to such branches or agencies by French
companies, the French Republic has failed to fulfil its
obligations under Article 52 of the EEC Treaty [now Art
49 TFEU].”
 Not justified by (1) (potential) advantages that branches
enjoy, (2) the fact that subsidiaries could have been
established instead of branches, or (3) the fact that
tax laws are not harmonized.

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PERMANENT ESTABLISHMENTS |
TREATY BENEFITS
 Case
 ECJ 21 September 1999, C-
307/97, Saint-Gobain, Saint-Gobain
EU:C:1999:438 FR

 Decision
 Discrimination that branches of Organschaft
Denial of
EU companies are not entitled to
tax treaty DE PE
(1) exemption under German tax exemption
treaties with third States, (2) or indirect
indirect credits under domestic credit for
law, and (3) exemption from dividends DE Co. DE Co.
capital tax under domestic law.
 Not justified by (1) the (potential)
advantage branches enjoy in
comparison with resident
subsidiaries as regards the
AT Co. IT Co.
transfer of profits to the non-
resident parent company or (2)
the principle of reciprocity and the
balance inherent in tax treaties.
 Conclusions for triangular CH Co. US Co.
situations?

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PERMANENT ESTABLISHMENTS |
TAX RATES
 Case
 ECJ, 23 February 2006, C-253/03, CLT-
UFA, EU:C:2006:129. – See also ECJ, LU Head
29 April 1999, C-311/97, Royal Bank of Office
Scotland, EU:C:1999:216
 Decision
 Discrimination (higher tax rate on
branch profits) …
DE Sub Co
 … but it “is necessary to apply a tax rate
DE PE
to the profits made by a branch which is Tax rate: 30% + 3,5%
equivalent to the overall tax rate which withholding tax Tax rate: 42%
would have been applicable in the same (70%*5%) = 33,5%
circumstances to the distribution of the (until 30 June 1996)
profits of a subsidiary to its parent
company.” → Horizontal comparison! →
I.e., 33,5% (BFH, 9 August 2006, I R
31/01, BFHE 214, 496)

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CHAPTER V
CROSS-BORDER DIVIDENDS
OVERVIEW | CROSS-BORDER PROFIT
DISTRIBUTIONS
 Economic Double Taxation
 Domestic → Corporate Level Tax in one
State and withholding tax on the recipient in
the same Sate
 Solutions
 Reduction of withholding taxes by the
Parent Co.
Source State and credit by the Residence
State → DTCs (Art 10, 23 OECD-MC)
 Extension of the domestic system to
cross border-dividends → Freedom of
Capital Movement Withholding
 Prohibition of source taxation → Parent- Tax
Subsidiary-Directive (Art 5 and Art 15 of
the EU-Swiss Savings Income Corporate
Agreement)
Subsidiary Co.
Income Tax

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OVERVIEW | CROSS-BORDER PROFIT
DISTRIBUTIONS
 Economic Double Taxation
 Cross-border → Corporate Level
Tax in one State and Shareholder
Level Tax in the other State
 Solutions
 Usually no solution in DTCs Corporate
(but: participation privileges) Parent Co.
Income Tax
 Extension of the domestic
integration system to cross
border-dividends  Freedom
of Capital Movement
 Prohibition of economic Withholding
double taxation  Parent- Tax
Subsidiary-Directive (Art 4)
Corporate
Subsidiary Co.
Income Tax

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OVERVIEW | CROSS-BORDER PROFIT
DISTRIBUTIONS
 Juridical Double Taxation
 Source State (= State of residence of
the distributing company) levies a
withholding tax (e.g., 25%), i.e., a tax
on the foreign shareholder, and the
Residence State of the shareholder Corporate
taxes the dividends received Parent Co. Income Tax
 Solutions
 Reduction of withholding taxes by
the Source State and credit by
the Residence State → DTCs (Art
10, 23 OECD-MC) Withholding
 Extension of the domestic system Tax
to cross border-dividends →
Freedom of Capital Movement Corporate
 Prohibition of source taxation → Subsidiary Co.
Income Tax
Parent-Subsidiary-Directive (Art 5
and Art 15 of the EU-Swiss
Savings Income Agreement)

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CROSS-BORDER DIVIDENDS |
OVERVIEW
 Case Law
 Inbound Dividends (e.g., Lenz, Manninen, FII Group Litigation 1 & 2, Haribo
and Salinen, Kronos)
 Outbound Dividends (e.g., Fokus Bank, ACT Group Litigation, Denkavit
Internationaal, Amurta, Commission v. Germany, Miljoen)
 Commission
 Communication on “Dividend taxation of individuals in the Internal Market”
COM(2003) 810 final (19 December 2003)
 Recommendation on withholding tax relief procedures, C(2009)7924 final (19
October 2009)

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CROSS-BORDER DIVIDENDS |
INBOUND (LENZ, MANNINEN)
 Leading Cases
 ECJ, 15 July 2004, C-315/02, Lenz,
EU:C:2004:446 (reduced rate) and
ECJ, 7 September 2004, C-319/02, Normal
Manninen, EU:C:2004:484 Flat rate progressive rate
of 25% of up to 50%
(imputation credit)
 Decisions
 Comparability of situations with respect AT Co.
to the economic double taxation of
distrubuted profits.
 No justification based on (1) the need to
ensure the coherence of the national DE Co.
tax system or (2) the need to ensure the
effectiveness of fiscal supervision.

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CROSS-BORDER DIVIDENDS |
INBOUND (HARIBO AND SALINEN)
 Case
 ECJ, 10 February 2011, C-436/08
and C-437/08, Haribo and AT Parent Co.
Salinen, EU:C:2011:61
 See also ECJ. 13 November
0% 0% 0% Indirect Credit
2012, C-35/11, FII 2,
EU:C:2012:707, and ECJ, 11 0% – 100% ≥ 10% < 10% < 10%
September 2014, C-47/12,
Kronos, EU:C:2014:2200 AT Sub Co.

 Decision
 Relief also for portfolio
EU/EEA/TC EU/EEA
dividends from EEA States and TC TC Sub Co.
Sub Co. Sub Co.
 Permissibility of administrative
assistance, but not recovery With EOI and
assistance as a prerequisite Recovery
 Equivalence between the exemption and imputation
methods (→ based of effective, not nominal foreign taxation; FII 2) → Conversely: Non-comparability
if an indirect credit is granted for domestic dividends and exemption for foreign dividends (Kronos)
 Indirect (not: direct) credit-carry forward in loss situations

AT = Austria; EU = European Union; EEA = European Economic Area; TC = Third Country.

34
CROSS-BORDER DIVIDENDS |
INBOUND (HARIBO AND SALINEN)

Tax base* € 100.000

Tax burden on the “Austrian group”: AT CIT (25%) € 25.000
AT Parent Co.
25% (CIT at the subsidiary level, TC CIT (10%)** € 10.000
exemption at the parent level) = € 15.000

0% – 100% 0% –
100% Tax burden on
25% CIT AT Sub Co. € 90.000 the “cross-
border group” :
25%

10% CIT TC Sub Co

* Credit carry-forward in loss situations (ECJ,

10 February 2011, C-436/08 und C-437/08, Profit € 100.000
Haribo and Salinen, EU:C:2011:61). CIT (10%) € 10.000
** Tax credit arguably to be calculated by
reference to the nominal tax rate of the TC
(ECJ, 13 November 2012, C-35/11, FII 2,
EU:C:2012:707)

35
CROSS-BORDER DIVIDENDS |
OUTBOUND
 Leading Cases
 ECJ, 14 December 2006, C-170/05, Denkavit Internationaal,
EU:C:2006:783, ECJ, 8 November 2007, C-379/05, Amurta,
EU:C:2007:655, ECJ, 20 October 2011, C-284/09, Commission
v. Germany, EU:C:2011:670, and ECJ, 17 September 2015, C-
10/14, C-14/14 and C-17/14, Miljoen, EU:C:2015:608. – See
also EFTA-Court, 23 November 2004, E-1/04, Fokus Bank, EU Co.
[2004] EFTA Court Report 11.

 Decisions
 Definitive (final) withholding tax on distributions to EU/EEA Final
shareholders (companies, individuals) is discriminatory if less With-
advantageous than the taxation of domestic recipients (e.g., holding
exemption) Tax
 But: Neutralization through a tax credit?
NL Co.
 Yes, but only if elimination of discrimination by way of a
tax treaty credit in the recipients residence State → Treaty-
based overall approach (Denkavit Internationaal, Amurta, Exemption
Miljoen. – Contra: Fokus Bank), no neutralization by a credit
under domestic law. NL Sub Co.
 “Full credit” v. partial credit (because of credit limitation)?

36
CROSS-BORDER DIVIDENDS |
COST DEDUCTION (BOSAL)
 Case
 ECJ, 18 September 2003, C-168/01, Bosal,
EU:C:2003:479 Deduction of Financing
Costs for Subsidiary?
 Decision
 The Parent-Subsidiary-Directive, “interpreted in NL Parent Co.
the light of Article 52 of the EC Treaty (now, after
amendment, Article 43 EC) precludes a national
provision which, when determining the tax on the
profits of a parent company established in one NL Sub Co.
Member State, makes the deductibility of costs in
connection with that company's holding in the
capital of a subsidiary established in another
Member State subject to the condition that such
costs be indirectly instrumental in making profits EU Sub Co.
which are taxable in the Member State where the
parent company is established.”
 Not justified by (1) the need to preserve the
coherence of the tax system, (2) the principle of
territoriality, or (3) the aim of avoiding an erosion
of the tax base

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CROSS-BORDER DIVIDENDS |
COST DEDUCTION (GROUPE STERIA)
 Case
 ECJ, 2 September 2015, C-386/14, French Tax Group → Full
Groupe Steria, EU:C:2015:524 deduction for costs and expenses

 Decision NL Parent Co.

 Discrimination (because the fact that 5% of dividend
the dividends received by a parent included in
company which enjoy full tax exemption income as
deemed costs
come from subsidiaries that are part of
NL Sub Co. and expenses
the tax-integrated group to which the
that are not
parent company concerned also belongs
deductible
does not amount to an objective
difference in the situation of parent
companies that would justify the
difference in treatment identified) …
 … and no justification based on (1) the EU Sub Co.
need to safeguard the balanced
allocation of the power to impose taxes
between the Member States (as only the fiscal sovereignty of one and the same Member State is
concerned), on (2) the need to safeguard the cohesion of the tax system (as there is no offsetting
disadvantage), or on (3) the option offered by Art. 4(2) of the Parent-Subsidiary-Directive (which must be
exercised in compliance with the fundamental provisions of the Treaty).

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CROSS-BORDER DIVIDENDS |
CONCLUSIONS
Schedular Full Imputation Exemption
System System System
 Credit for foreign corporate tax  Same treatment as for
(Manninen, Meilicke, FII) domestic dividends (A, Les
 Same treatment as  Limited by the level of domestic Vergers du Vieux Tauves)
for domestic corporate tax (FII)  However, a Member State
Shareholder’s
dividends may decide to grant an
Residence State  But: Non-comparability if
(Verkooijen, indirect foreign tax credit
exemption for foreign dividends
Lenz) instead (FII 1 & 2, Haribo
(Kronos)
and Salinen)

 Same treatment as for resident  Same treatment as for

shareholders (Avoir Fiscal, resident shareholders (Saint-
Saint-Gobain, Fokus Bank, Gobain, Denkavit, Amurta,
Taxation of ACT Group Litigation) Commission v. Netherlands,
 Same treatment as
Source Non-  Only to the extent to cancel Aberdeen, Secilpar)
for resident
State = Resident shareholders domestic economic double  “Neutralization”? (Denkavit,
Company’s Shareholder taxation (ACT Group Litigation) Amurta, Commission v.
Residence  “Neutralization”? (Denkavit, Spain, Commission v. Italy,
State Amurta, Commission v. Spain, Miljoen)
Commission v. Italy, Miljoen)

Taxation of
Company’s Not affected by fundamental freedoms (ACT Group Litigation, Burda)
Profits

39
CROSS-BORDER DIVIDENDS |
THIRD-COUNTRY SITUATIONS
50% Dividends Received
 ECJ, 24 November 2016, C-464/14, SECIL, Deduction?
EU:C:2016:896
 Applicability of the freedom of capital movement? 
 Restriction? 
 PT Parent Co.

 Possible justification based on the effectiveness of
fiscal supervision? /, depending on exchange of
information
 “Grandfathering” in light of the EU-Agreements with
Lebanon and Tunesia?  PT Sub. Co.
 Direct effect of the EU-Agreements with Lebanon
and Tunesia? 
Lebanon/
Tunesia Sub.
Co.
CROSS-BORDER DIVIDENDS |
THIRD-COUNTRY SITUATIONS

Note: A 10% holding requirement does not necessarily imply control (Itelcar, Kronos, Secil), and neither does 20% (Eqiom).
CHAPTER VI
FOREIGN LOSSES
LOSSES | OVERVIEW
 Case Law
 Cross-Border Group Relief and Group Taxation (Marks & Spencer, Oy AA, X Holding,
Commission v. UK [Marks & Spencer II])
 Foreign Permanent Establishments (Lidl Belgium, Krankenheim Ruhesitz am Wannsee,
Nordea Bank Danmark, Timac Agro)
 Cross-Border Reorganizations (A Oy)
 Foreign Private Assets (K)
 “Indirect” Utilization of Domestic Losses (Papillon, Felixstowe Dock and Railway Company
Ltd, SCA Group Holding BV)
 Commission
 Withdrawn Proposal for a Council Directive concerning arrangements for the taking into
account by enterprises of the losses of their permanent establishments and subsidiaries
situated in other Member States, COM(90)595, [1991] OJ (C 53), 30.
 Commission Communication on “Tax Treatment of Losses in Cross-Border Situations”,
COM(2006) 824 final (19 December 2006), and Commission Staff Working Document
SEC(2006) 1690 (19 December 2006)
 Commission’s work on a CC(C)TB, where the plans to propose that, “until full CCCTB
consolidation is introduced, group entities should be able to offset profits and losses they
make in different Member States” (i.e., loss utilization with recapture) → Chapter 3.1 of
COM(2015) 302 final (17 June 2015).

43
LOSSES | SUBSIDIARIES (MARKS &
SPENCER I & II)
 Cases (Grand Chamber)
 ECJ, 13 December 2005, C-446/03, Marks & Spencer, Group Relief?
EU:C:2005:763 → ECJ (Grand Chamber), 3 February 2015,
C-172/13, Commission v. UK, EU:C:2015:50.
M&S UK
 Decision
 Restriction on freedom of establishment (different treatment for tax
purposes to losses incurred by a resident subsidiary and losses 
incurred by a non-resident subsidiary) ... M&S Int‘l
M&S Sub UK
 … but justified by (1) the consideration profits and losses are two Holding
sides of the same coin and must be treated symmetrically (i.e., to
protect a balanced allocation of the power to impose taxes
between the different Member States concerned), (2) to avoid that
losses are taken into account twice (“double dip”), and (3) the risk M&S NL
of tax avoidance, taken together ...
 ... but proportionality requires that losses are taken into account if
„the non-resident subsidiary has exhausted the possibilities
available in its State of residence of having the losses taken into 
account for the accounting period concerned by the claim for relief
and also for previous accounting periods and where there are no
EU Sub Cos.
possibilities for those losses to be taken into account in its State of
residence for future periods either by the subsidiary itself or by a
third party, in particular where the subsidiary has been sold to that
Losses
third party” (“final loss exception” or “Marks & Spencer exception”).

44
LOSSES | SUBSIDIARIES (OY AA)
 Case
 ECJ, 18 July 2007, C-231/05, Oy AA,
EU:C:2007:439
Losses
 Decision UK Parent
 “Article 43 EC [now: Art 49 TFEU] does not Co.
preclude a system instituted by legislation
of a Member State […] whereby a subsidiary Losses
resident in that Member State may not
deduct an intra-group financial transfer which FIN Parent No
Co. Deductibility of
it makes in favour of its parent company from
Group
its taxable income unless that parent Deductibility of Contributions
company has its establishment in that same Group
Member State.” Contributions
 Justified by the objectives of (1) safeguarding
the balanced allocation of the power to  Oy AA FIN

impose taxes between Member States and Profits
(2) the prevention of tax avoidance.

45
LOSSES | SUBSIDIARIES (X HOLDING)
 Case
 ECJ, 25 February 2010, C-337/08,
X Holding, EU:C:2010:89
NL Parent Co. Loss Utlilization?
 Decision
 “Articles 43 EC and 48 EC
[now: Arts. 49 and 54 TFEU] do
not preclude legislation of a
   
Member State which makes it
possible for a parent company
to form a single tax entity with NL Sub Co. PE
its resident subsidiary, but
which prevents the formation of
such a single tax entity with a Treatment
non-resident subsidiary, in that Like Domestic PE EU Sub Co.
the profits of that non-resident PE („Fiscal
Unity“) Losses
subsidiary are not subject to the
fiscal legislation of that Member
State.”
 Justified by the aim of safeguarding the allocation of the power to impose taxes between the Member
States (i.e., to avoid that companies can choose freely the Member State in which the losses of that
subsidiary are to be taken into account),
 Not altered by the fact that NL permits the temporary offsetting of losses incurred by a foreign permanent
establishment.

46
LOSSES | CROSS-BORDER
REORGANIZATIONS
 Case
 ECJ, 21 March 2013, C-123/11, A Oy, ECLI:EU:C:2013:84

 Decision
 Does the freedom of establishment require (non-discriminatory) loss
relief if no PE remains? → Confirmation of Marks & Spencer and FIN Co.
the “final loss exception” (contra AG Kokott), also the voluntary
decision to merge does not lead to “non-finality” (contra AG Kokott);
moreover, the PE requirement of Art. 4 of the Merger Directive is
irrelevant.
Merger
 Which law determines the calculation of losses? → No abstract answer
possible, but prohibition of discrimination.
 Decision on finality of losses left to the national court → “The German
SWE Co.
Government submits that those losses can be deducted from the income,
admittedly very small, which B continues to receive in Sweden. It adds
Losses
that B is still involved in leases which could be assigned. The French
Government also submits that Swedish law allows companies to take
losses into account in previous tax years or on the occasion of the
taxation of capital gains made on the assets and liabilities of the merged
company. The Italian Government submits that Sweden is entitled to
evaluate the assets transferred and to tax the merged company on the
profit thus realised.”

47
LOSSES | PERMANENT
ESTABLISHMENTS (LIDL BELGIUM)
 Case
DE Head
 ECJ, 15 May 2008, C-414/06, Lidl Belgium,
Office
EU:C:2008:278

 Decision Tax Treaty –

 “Article 43 EC [now: Art. 49 TFEU] does not preclude a Exemption
situation in which a company established in a Member Method
State cannot deduct from its tax base losses relating to a DE PE
permanent establishment belonging to it and situated in
another Member State, to the extent that, by virtue of a
double taxation convention, the income of that LUX PE
establishment is taxed in the latter Member State where
those losses can be taken into account in the taxation of
the income of that permanent establishment in future accounting periods.
 Justified by (1) the need to preserve the allocation of the power to impose taxes between the Member
States concerned and (2) the need to prevent the danger that losses may be taken into account twice,
taken together
 But “final loss exception” (did not apply as the Luxembourg tax legislation provides for the possibility of
deducting a taxpayer’s losses in future tax years for the purposes of calculating the tax base).

 Symmetrical system: Utilization and (full) recapture (of final losses)?

 See ECJ, 23 October 2008, C-157/07, Krankenheim Ruhesitz am Wannsee, EU:C:2008:588, and ECJ,
17 December 2015, C-388/14, Timac Agro, EU:C:2015:829

48
LOSSES | PERMANENT
ESTABLISHMENTS (NORDEA BANK)
 Case (Grand Chamber)
 ECJ, 17 July 2014, C-48/13, Nordea
Bank Danmark, EU:C:2014:153 Recapture of foreign losses
upon restructuring
 Decision
 Comparability of situations as, „by DK Head
making the profits“ of the foreign Office
permanent establishments subject to
Danish tax“, Denmark „has equated Tax Treaties –
Credit Method
those establishments with resident
permanent establishments so far as DK PE
concerns the deduction of losses“
 No justification by the need to
safeguard the symmetry between the EU PE EEA PE
power to tax profits and the right to Losses Losses
deduct losses, as Denmark could tax
(1) profits when the permanent
establishments belonged to the Restructuring (closing down,
Danish company (after deducting transfer of clients, staff to local
a tax credit) and (2) gains upon the subsidiaries)
transfer (valued at market terms)

49
LOSSES | PRIVATE ASSETS (K)
 Case
 ECJ, 7 November 2013, C-322/11, K, EU:C:2013:716

 Decision
 “Articles 63 TFEU and 65 TFEU do not preclude
national tax legislation […], which does not allow
a taxpayer who resides in the Member State
concerned and is fully liable to income tax there to
deduct the losses arising on the transfer of
immovable property situated in another Member State
from the income from moveable assets which is
Sale of
taxable in the first Member State, although that would foreign EU
have been possible, on certain conditions, if the real estate at
immovable property had been situated in the first a loss
Member State.”
 No application of the “final loss exception” because
“the Member State in which the property is situated
does not provide for the possibility of losses incurred
on the sale of the property being taken into account”,
i.e., such a possibility of exhaustion of losses in the
source State has never existed.

50
LOSSES | PERMANENT
ESTABLISHMENTS (BEVOLA)
 ECJ, 12 June 2018, C-650/16, Bevola,
Jens W. Trock
EU:C:2018:424 (DK)
 Difference in treatment → Between Danish
companies which possess a permanent
Potential
establishment in Denmark and those whose option for
permanent establishment is situated in another inter-
Member State. Bevola national
(DK) group
 Comparability (distingusihing Timac Agro, C-388/14)
taxation
→ Companies with exempt foreign PEs are in DK
principle not comparable to companies with domestic
PEs, but become comparable „as regards losses FIN
attributable to a non-resident permanent
establishment which has ceased activity and whose
losses could not, and no longer can, be deducted FIN PE
from its taxable profits in the Member State in which it
carried on its activity“ Losses of €
375.000

51
LOSSES | PERMANENT
ESTABLISHMENTS (BEVOLA)
 ECJ, 12 June 2018, C-650/16, Bevola,
EU:C:2018:424 Jens W. Trock
 Justification (DK)
 Preservation of the allocation of the power to impose taxes
between Member States Potential
 Coherence of the tax system option for
inter-
 Risk of the double use of losses Bevola national
 Proportionality (DK) group
 Where there is no longer any possibility of deducting the taxation
losses of the non-resident permanent establishment in the DK
Member State in which it is situated, the risk of double FIN
deduction of losses no longer exists
 Marks & Spencer and Commission v. UK also for PEs
 Criteria
FIN PE
 First, the company possessing the establishment has
exhausted all the possibilities of deducting those losses Losses of €
available under the law of the Member State in which
375.000
the establishment is situated and,
 second, it has ceased to receive any income from that
establishment, so that there is no longer any possibility
of the losses being taken into account in that Member
State.
52
LOSSES | “INDIRECT” DOMESTIC
LOSSES (PHILIPS ELECTRONICS)
 Case
 ECJ, 6 September 2012, C-18/11,
Philips Electronics, EU:C:2012:532 – Limited
by ECJ, 4 July 2018, C-28/17, NN, NL Parent Co.
EU:C:2018:526 (?)
 See also UK First Tier Tribunal 27 and
28 July 2009, Philips Electronics UK Ltd
v. HMRC [2009] UKFTT 226(TC) NL Sub Cos.

 Decision
 A loss surrender cannot be made dependent
on whether it is clear that at the time of the Philips UK
claim there can never be any deduction or
allowance in any State outside the UK
(including another Member State, such as the
UK Sub Co.
Netherlands) UK PE
 No justification (1) by the need to prevent the
double use of losses, (2) by need to preserve
Losses?
the balanced allocation of taxing powers
between Member States, or (3) both.

53
LOSSES | “INDIRECT” DOMESTIC
LOSSES (SCA GROUP HOLDING)
 Case
 ECJ, 12 June 2014, C-39/13, C-40/13 and C-41/13,  NL Parent Co.
SCA Group Holding BV et al, EU:C:2014:1758
 → See also ECJ, 27 November 2008, C-418/07,
Papillon, EU:C:2008:659, and ECJ, 1 April 2014,
No “Fiscal
C-80/12, Felixstowe Dock and Railway Company
Unity” EU Sub Co.
et al, EU:C:2014:200
Possible
 Decision
 Denial of “fiscal unity” because (1) the “linking”
NL Sub Co.
intermediate subsidiary (and sub-subsidiary) is
resident in another EU Member State or (2) because
the common parent of two resident sister companies
was resident in another Member State
 Different treatment of objectively comparable situations
(irrespective of the level of consolidation) EU Parent
 Not justified by (1) Member State’s preservation of Co.
powers of taxation (with regard to symmetry between
the right to tax profits and the right to deduct losses),
(2) the risk of tax or (3) the coherence with regard to  NL Sub Co. NL Sub Co.
the prevention of the double use of losses.

No “Fiscal Unity” Possible

54
LOSSES | “FINAL LOSSES” AND
SCHUMACKER
 Case
 ECJ, 16 October 2008, C-527/06, Renneberg,
EU:C:2008:566. – See also ECJ, 18 July 2007, C-182/06,
Lakebrink, EU:C:2007:452

 Decision
 “Article 39 EC must be interpreted as precluding national Losses?
legislation such as that at issue in the main proceedings,
pursuant to which a Community national who is not resident
in the Member State in which he receives all or almost all of
his taxable income cannot, for the purposes of determining Profits
the basis of assessment of that income in that Member State,
deduct negative income relating to a house owned by him and
used as a dwelling in another Member State, whereas a
resident of the first Member State may deduct such negative
income for the purposes of determining the basis of
assessment of taxation of his income.”

 Practical problems (recapture etc)?

55
LOSSES | REVERSE LOSSES (SOFINA)?
 ECJ, 22 November, C-575/17, Sofina et al, EU:C:2018:943

Parent
Loss (EU)

EU

RF
Parent Net
Loss (FR) taxation Dividend and
final (15%)
Dividend withholding tax

Subsdiary Subsdiary
(FR) (FR)

56
LOSSES | CONCLUSIONS
 “Symmetrical” (Krankenheim Ruhesitz, Nordea Bank) versus
“Asymmetrical” (Marks & Spencer, Lidl Belgium, A Oy, Bevola) Loss
Utilization Regimes
 “ Final Loss Exception”
 Legal versus factual circumstances → I.e., losses do not become final because of a
lack of carry-forward in the source State (K, Commission v. UK [Marks & Spencer II];
see also BFH 3 February 2010, I R 23/09)
 Exhaustion of all possibilities?
 Even receipt of minimal income hinders losses to become final (A Oy, Commission v.
UK [Marks & Spencer II])
 Does the mere legal possibility of a carry-forward hinder losses to become final? →
Timac Agro, contra: UK Supreme Court 22.5.2013, HMRC v Marks & Spencer, [2013]
UKSC 30
 Timing issues
 Permissible (?) to require the assessment of “finality” of losses “immediately after the
accounting period” (Commission v. UK [Marks & Spencer II])
 Permissible (?) to limit “final” losses to the losses of the last accounting period (and not
extend the concept to accumulated loss carry-forwards) (Commission v. UK [Marks &
Spencer II])

57
CHAPTER VII
EXIT TAXATION
EXIT TAXATION | OVERVIEW
 Case Law
 Individuals (Hughes de Lasteyrie du Saillant, N)
 Corporations (e.g., National Grid Indus, Arcade Drilling, Verder LabTec)
 Cross-Border Reorganizations (A Oy, DMC)

 Commission and Council

 Commission Communication on “Exit taxation and the need for co-ordination of
Member States’ tax policies”, COM(2006) 825 final (19 December 2006)
 Council Resolution on coordinating exit taxation, 2911th Economic and
Financial Affairs (2 December 2008)
 Art 5 of the Ant-Tax-Avoidance-Directive

59
EXIT TAXATION | INDIVIDUALS

 Cases
 ECJ, 11 March 2004, C-9/02, Hughes de Lasteyrie du Saillant,
EU:C:2004:138, and ECJ, 7 September 2006, C-470/04, N,
EU:C:2006:525
 Still good law? → ECJ, 21 December 2016, C-503/14,
Commission/Portugal, EU:C:2016:979 Hidden
reserves in
 Decisions shares
 Discrimination (as in a domestic situation increases in value would have
become taxable only when, and to the extent that, they were actually
realised) …
 … but justified by the need to preserve the allocation of the power to tax Emigration
between Member States is a legitimate, …
 ... but proportionality requires suspension of payment (1) without
guarantees (because of the existence of EOI/Recovery) and (2) must
take full account of post-exit decreases in value, unless those decreases
have already been taken into account in the host Member State.
 However, Hughes de Lasteyrie du Saillant and N need to be
distinguished for companies (businesses) since „[t]he assets of a
company are assigned directly to economic activities that are intended to
produce a profit. Moreover, the extent of a company’s taxable profits is
partly influenced by the valuation of its assets in the balance sheet, in so
far as depreciation reduces the basis of taxation“ (National Grid Indus,
paras. 54-57)

60
EXIT TAXATION | COMPANIES
 Case (Grand Chamber)
 ECJ, 29 November 2011, C-371/10, National Grid Indus,
EU:C:2011:785. UK Parent
 See also, e.g., EFTA-Court, 3 October 2012, E-15/11, Co.
Arcade Drilling, ECJ, 18 July 2013, C-261/11, Commission
v. Denmark, EU:C:2013:480, ECJ, 23 January 2014,
C-164/12, DMC, EU:C:2014:20, and ECJ, 21 May 2015, Move of
C-657/13, Verder LabTec, EU:C:2015:331 the real
 Also for individuals/private assets? ECJ, 21 December 2016, Claim
seat
C-503/14, Commission/Portugal, EU:C:2016:979 in £

 Decision NL Sub Co.

 Company may rely on the freedom of establishment
(distinguish Daily Mail and Cartesio)  Rejection of the “If I Unrealized currency gains
Can Shoot You, I Can Tax You”-Argument!
 Exit taxation is discriminatory but may be justified based on Also for the cross-border transfer of
the allocation of taxing rights if proportionate (depreciable) assets (e.g.,
 Deferral of tax collection, however (1) no consideration of Commission v. Portugal; Commission
later decreases in value, (2) interest and (3) provision of a v. Spain, Commission v. Denmark),
bank guarantee the transfer of intangibles (Verder
 However: Proportionate to spread the recovery of tax on LabTec), for the move of the statury
unrealised capital gains over five annual instalments (DMC) seat (Arcade Drilling; Commission v.
Netherlands), and for reorganizations
or ten annual instalments (Verder LabTec)
(DMC)
 ATAD!

61
EXIT TAXATION | COMPANIES

Question Analysis

DMC, para. 64 (5 instalments) and Verder

Is it proportionate to to spread the LabTec, para. 52 (10 instalments) –
recovery of tax on unrealised capital Swedish solution (5 years for tangible

gains over five or ten annual assets, 10 years for intangible assets)
instalments? accepted by Commission (IP/10/299 of 18
March 2010)

Does the “Exit” State have to take National Grid Indus, paras. 52 et seq. →

post-exit losses into consideration? Contra N, para. 54 (unless “double use”)

National Grid Indus, paras. 73;

Commission v. Portugal (C-38/10), para.
Can the “Exit” State charge interest , according to the national
32; Commission v. Denmark (C-261/11),
on the deferred tax? rule
para. 73; Verder LabTec, para. 49. →
Contra N, paras. 56 et seq.

National Grid Indus, paras. 73; Arcade

Can the “Exit” State take measures , if there is a genuine and Drilling, para. 101 et seq.; DMC, para. 67;
to secure the eventual payment? proven risk of non-recovery Verder LabTec, para. 50. → Contra N,
paras. 51 et seq.

62
EXIT TAXATION | COMPANIES

Question Analysis

Can the “Exit” State require annual proof

 National Grid Indus, paras. 70 et seq.
about the assets?

Is it relevant if a subsequent decrease in

value is tax effective in the “Import”  National Grid Indus, para. 64
State?

Does the “Import” State have to give a

 Unclear National Grid Indus, paras. 58, 61
step-up?

Do qualified unrealized gains have to be

? —
set off against losses?

May the “Exit” State tax if there is no loss

 Commission v. Denmark (C-261/11 ), para. 47
of a taxing right?

/, depending on Commission v. Spain (C-269/09), paras. 97 et

Does NGI apply to EEA countries?
EOI/Recovery seq.; Arcade Drilling

63
EXIT TAXATION | INFRINGEMENT
PROCEEDINGS
Commission
Case AG ECJ
(COM(2006) 825 final)

IP/10/299 (18 March 2010 – 2nd step)

Belgium Closed.
– RefNr 2008/4250

IP/10/1565 (24 January 2010 – ECJ) 18 July 2013

Denmark C-261/11 —
– RefNr 2008/2157 (3d Chamber)

Germany Request – RefNr 2011/4043 — — —

IP/12/285 (22 March 2012 – 2nd step)

United Kingdom Closed.
– RefNr 2008/4923

Ireland IP/11/78 (27 January 2011 – 2nd step) Closed.

Luxembourg Request – RefNr 2012/4016 — — —

IP/10/1565 (24 November 2010 – ECJ) 31 Jan, 2013

Netherlands C-301/11 —
– RefNr 2008/2207 (7th Chamber)

IP/09/1460 (8 October 2009 – ECJ) 28 June 2012 6 Sept. 2012

Portugal C-38/10
– RefNr 2007/2365 (Mengozzi) (4th Chamber)

IP/08/1362 (18 September 2008 – 2nd

Sweden Closed. – IP/10/299 (18 March 2010)
step) – RefNr 2007/2372

IP/10/1565 (24 November 2010 – ECJ) 25 Apr. 2013

Spain C-64/11 —
– RefNr 2007/2382 (2nd Chamber)

64
CHAPTER VIII
TAX PLANNING
TAX PLANNING | OVERVIEW
 Case Law
 Thin Capitalization (Lankhorst-Hohorst, Thin Cap Group Litigation, Itelcar)
 CFC-Legislation (Cadbury Schweppes, Fred. Olson, Commission v. UK)
 Switch Over Clauses (Columbus Container Services)
 Transfer Pricing (SGI)
 “Matching Rules” (SIAT)

 Commission and Council

 Commission Communication on the application of anti-abuse measures in the
area of direct taxation – within the EU and in relation to third countries,
COM(2007)785 final
 Council Resolution of 8 June 2010 on coordination of the Controlled Foreign
Corporation (CFC) and thin capitalisation rules within the European Union,
[2010] OJ C 156/1
 Arts 4, 6, 7, 8 and 9 of the Anti-Tax-Avoidance-Directive – See also, e.g.,
OECD, Designing Effective Controlled Foreign Company Rules, Action 3 –
2015 Final Report (5 October 2015), p. 17 et seq.

66
TAX PLANNING | THIN
CAPITALIZATION RULES
 Cases
 ECJ, 12 December 2002, C-324/00, Lankhorst-
Hohorst, EU:C:2002:749 , ECJ, 13 March 2007,
C-524/04, Thin Cap Group Litigation, Application of Thin Capitalization Rules?
EU:C:2007:161, and ECJ, 3 October 2013,
Loan,
C-282/12, Itelcar, EU:C:2013:629 LT BV NL
Interest
 Decisions
 Discrimination if thin capitalization rule only apply to
cross border interest payments, but … LH BV NL
 … possible justification where it specifically targets
wholly artificial arrangements which do not reflect
economic reality and the sole purpose of which is DE Parent
to avoid the tax normally payable on the profits Co.
generated by activities carried out on the national
territory …

 
 … but need to be proportionate (i.e., assessment of Lankhorst-
objective and verifiable elements, possibility for Hohorst DE
taxpayer to show a commercial justification,
limited on an arm’s length basis)

67
TAX PLANNING | CFC RULES

 Cases
 ECJ, 12 September 2006, C-196/04, Cadbury
Schweppes, EU:C:2006:544, EFTA-Court, 9 July Application of CFC rules
2014, E-3/13 and E-20/13, Fred. Olson, and ECJ, 13
Cadbury
November 2014, C-112/14, Commission v. UK,
Schweppes
EU:C:2014:2369,

 Decisions
 Discrimination (immediate taxation of the UK parent on CS Overseas
the CFC’s income), but …
 … possible justification by preventing conduct
involving the creation of wholly artificial arrangements
CSTS IR CSTI IR
which do not reflect economic reality, with a view to
escaping the tax normally due on the profits generated
International Financial Services Center
by activities carried out on national territory … (IFSC)
 … but not when it is proven, on the basis of objective
factors which are ascertainable by third parties, that
despite the existence of tax motives that CFC is
actually established in the host Member State (e.g., in
terms of premises, staff and equipment) and carries on
genuine economic activities there (e.g., is not
“letterbox” or “front” subsidiary).

68
TAX PLANNING | SWITCH-OVER

 Case
 ECJ, 6 December 2007, C-298/05, Columbus
Container Services, EU:C:2007:754 Switch-over from (tax
treaty) exemption to
 Decision credit
 “Articles 43 EC and 56 EC [now: Art. 49 and
Head Office
63 TFEU] must be interpreted as not precluding DE
tax legislation of a Member State under which
the income of a resident national derived from
capital invested in an establishment which has its
registered office in another Member State is, DE PE
notwithstanding the existence of a double
taxation convention concluded with the Member
State in which the establishment has its
BE PE AT PE
registered office, not exempted from national
Low Taxation High Taxation
income tax but is subject to national taxation
against which the tax levied in the other Member
State is set off.”

69
TAX PLANNING | LIMITATION-ON-
BENEFITS CLAUSES
 Case
 ECJ, 12 December 2006, C-374/04,
ACT Group Litigation, EU:C:2006:773 Entitlement to tax-treaty benefits (e.g., tax
credit) under the NL-UK DTC?
 Decision
 Limitation-on-Benefits-Provision (“LoB-Rule”)
DE Parent
 “The fact that those reciprocal rights and Co.
obligations apply only to persons resident in NL
one of the two contracting Member States is
an inherent consequence of bilateral double
taxation conventions. It follows, as regards
the taxation of dividends paid by a company  NL Co. NL Co.

resident in the United Kingdom, that a
company resident in a Member State which
has concluded a DTC with the United UK Sub Co. UK Sub Co.
Kingdom which does not provide for such a
tax credit is not in the same situation as a
company resident in a Member State which
has concluded a DTC which does provide for
one […]” (para. 91)

70
TAX PLANNING | TRANSFER PRICING
 Case
 ECJ, 21 January 2010, C-311/08, SGI, EU:C:2010:26

 Decision
 Profit adjustment provisions that apply only in cross-border situations and are to the
disadvantage of taxpayers constitute discriminatory restrictions on the freedom of
establishment, …
 … but such restrictions can be justified based on (1) the need to ensure a balanced
allocation of taxing powers between Member States taken together with (2) the need to
combat tax avoidance.
 However, a national provision is proportional and hence in compliance with the freedom of
establishment if,
 it provides “for a consideration of objective and verifiable elements”;
 the taxpayer is given, “an opportunity, without being subject to undue administrative constraints, to
provide evidence of any commercial justification that there may have been for that transaction”;
and
 “where the consideration of such elements leads to the conclusion that the transaction in question
goes beyond what the companies concerned would have agreed under fully competitive
conditions, the corrective tax measure must be confined to the part which exceeds what would have
been agreed if the companies did not have a relationship of interdependence”.

71
TAX PLANNING | TRANSFER PRICING
 What is a “commercial justification”?
 Any transaction that is neither a sham nor abusive?
 Or does the arm’s length principle constitute an appropriate test by which to distinguish
artificial arrangements from genuine economic transactions? → England and Wales Court
of Appeal (Civil Division) of 18 February 2011, Test Claimants in the Thin Cap Group
Litigation v. HMRC, [2011] EWCA Civ 127

72
TAX PLANNING | TRANSFER PRICING
 ECJ, 31 May 2018, C-382/16, Hornbach-
Baumarkt, EU:C:2018:366
 German law → Adjustment, remuneration in
exchange for granting the guarantees
 ECJ
Hornbach AG
 Discrimination, but potentially justified with (DE)
regard preservation of the balanced allocation of
the power to tax between the Member States DE
(ECJ, 21 January 2010, C-311/08, SGI,
EU:C:2010:26) NL
 Proportionality
Hornbach BV Gratuitous
 Taxpayer must, inter alia, have opportunity to provide comfort
evidence of any commercial justification for an (NL)
letters
agreement on non-arm’s-length terms
 Includes economic reasons resulting from its position
as a shareholder of the non-resident company (e.g.,
„economic interest of Hornbach-Baumarkt AG itself in
the financial success of the foreign group companies, Third-party loan
in which it participates through the distribution of
profits, as well as by a certain responsibility of the
applicant in the main proceedings, as a shareholder,
in the financing of those companies“)

73
TAX PLANNING | “MATCHING RULES”

 Case
 ECJ, 5 July 2012, C-318/10, SIAT, EU:C:2012:415

 Decision 1929 Holding

 Discrimination (“special rule” v. normal
LUX Parent
deductibility) … Payment of
Co.
 … but possible justification by (1) the need to commission
combat tax avoidance (i.e., target wholly artificial
rrangements that are not genuine and proper), (2)
the need to ensure fiscal supervision (by allowing
proof that transactions are genuine and proper) NIG Sub Co. SIAT BE
and (3) to safeguard the balanced allocation of the
power to tax (by impeding fraudulent conduct), …
 … however, that rule is not proportionate as it “Special rule” →
requires taxpayers to proof that all transactions are Deductibility of
Joint Venture
genuine and proper and normal, “without the tax payments to low/no-
Co.
tax recipients only if
authority being required to provide even prima
these „relate to
facie evidence of tax evasion or avoidance” (since genuine and proper
only the level of foreign tax is taken into account) transactions and do
and hence does not meet the requirements of the not exceed normal
principle of legal certainty. limits“

74
CHAPTER IX
HORIZONTAL
DISCRIMINATION
HORIZONTAL DISCRIMINATION |
TAX TREATY LAW
 Case
 ECJ, 5 July 2005, C-376/03, D, EU:C:2005:424 (see also
ECJ, 12 December 2006, C-374/04, ACT Group
Litigation, EU:C:2006:773)

 Decision
 Rejection of most-favored nation treatment in tax treaty BE DE
law!
 The fact that the reciprocal rights and obligations in a tax
treaty “apply only to persons resident in one of the two
Contracting Member States is an inherent consequence of NL
bilateral double taxation conventions. It follows that a
taxable person resident in Belgium is not in the same
situation as a taxable person resident outside Belgium so
far as concerns wealth tax on real property situated in the  
Netherlands.” (ECJ, 5 July 2005, C-376/03, D,
Tax-free amount for wealth
EU:C:2005:424, para. 61)
tax in the source State?
 “A rule such as that laid down in” the BE-NL tax treaty
“cannot be regarded as a benefit separable from the
remainder of the vonvention, but is an integral part thereof
and contributes to its overall balance.” (ECJ, 5 July 2005,
C-376/03, D, EU:C:2005:424, para. 62)

76
HORIZONTAL DISCRIMINATION |
DOMESTIC LAW
 Case
 ECJ, 24 February 2015, C-512/13, Sopora, EU:C:2015:108
Entitlement to the 30%
 Decision flat-rate deduction for
extra-territorial
 Art. 45 TFEU does not preclude “national legislation […]


expenses?
by which a Member State provides that workers who resided in
another Member State prior to taking up employment in its
territory are to be granted a tax advantage consisting in the flat- AT
rate exemption of reimbursement of extraterritorial expenses in
an amount up to 30% of the taxable base, on condition that
those workers resided at a distance of more than 150 kilometres
from its border, unless — and this is a matter for the referring
court to ascertain — those limits were set in such a way that that
exemption systematically gives rise to a net [= clear] NL
overcompensation in respect of the extraterritorial expenses
actually incurred.”
 Horizontal comparison → “[H]aving regard to the wording of
Article 45(2) TFEU, which seeks to abolish all discrimination
 150 km
based on nationality ‘between workers of the Member States’,
BE
read in the light of Article 26 TFEU, the view must be taken that
that freedom also prohibits discrimination between non-resident
workers if such discrimination leads to nationals of certain
Member States being unduly favoured in comparison with
others” (para. 25). → Applicable for the other freedoms?

77
CHAPTER X
DOUBLE TAXATION
DOUBLE TAXATION | OVERVIEW
 Double Taxation and the Internal Market
 Ex-Art 293 EC (repealed by the Treaty of Lisbon), urged the
Member States “so far as is necessary, [to] enter into
negotiations with each other with a view to securing for the
benefit of their nationals [...] the abolition of double taxation
within the Community.”
 “Double taxation or the absence of taxation is incompatible
with the internal market” (ESC Opinion [1997] OJ C 296/37,
Appendix II)
 “[T]he fact that a taxable event might be taxed twice is the
most serious obstacle there can be to people and their
capital crossing internal borders” (Opinion of AG Ruiz- Inheritance Inheritance
Jarabo Colomer, C-376/03, D, EU:C:2004:663, para. 85) Tax of 50% Tax of 50%
 “Notwithstanding the absence of an applicable tax
convention, the two Member States are bound by the EC
Treaty principle of free movement within the Community to  Disparity?
avoid and eliminate double taxation, at least by imputing a  Discrimination?
tax paid in the other Member State on their own charge to − Different Treatment of
tax.” (Answer given by Mr Bolkestein on behalf of the Comparable Situations?
Commission to Written Question E-2287/99, [2000] OJ − Equal Treatment of Different
Situations?
C 225 E/87, and Petition 626/2000 by Mr Klaus Schuler [25
January 2007])  Quasi-Restriction?
 “Double Burden”?

79
DOUBLE TAXATION |
KERCKHAERT-MORRES
 Case (Grand Chamber)
 ECJ, 14 November 2006, C-513/04, Kerckhaert and
Morres, EU:C:2006:713  25% taxation of foreign
and domestic dividends
 See also, e.g., ECJ, 12 February 2009, C-67/08, Block,
 No credit but rather
EU:C:2009:92, ECJ, 16 July 2009, C-128/08, Damseaux,
deduction of foreign
EU:C:2009:471, ECJ, 19 September 2012, C-540/11, Levy
withholding tax
and Sebbag, EU:C:2012:581. – EFTA-Court, 7 May 2008,
E-7/07, Seabrokers, EFTA Court Report 2008, 174

 Decision Dividend Withholding Tax

 No prohibition of juridical double taxation, because it is no
problem of equal treatment of different situations (paras.
18-19) but rather parallel exercise of taxing jurisdiction FR Co.
(para. 20)
 Also, no criteria in EU law exist for the attribution of
competence between the Member States in relation to
elimination of double taxation (para. 22).

 Commission
 Communication on “Double Taxation in the Single Market”,
COM(2011) 712 final (11 November 2011)
 Recommendation of 15 December 2011 regarding relief for
double taxation of inheritances, [2011] OJ L 336/81

80
DOUBLE TAXATION | FUNDAMENTAL
FREEDOMS AND TAX TREATIES
 Fundamental Freedoms and Tax Treaties
 Member States “remain at liberty to determine the connecting factors for the allocation of fiscal
jurisdiction by means of bilateral agreements” (e.g., ECJ, 12 December 2006, C-374/04, ACT
Group Litigation, EU:C:2006:773, para. 81).
 The allocation of taxing rights between the contracting Member States in a tax-treaty is “neutral”
from the perspective of the fundamental freedoms, even if it is based on nationality of the
taxpayer (ECJ, 12 May 1998, C-336/96, Gilly, EU:C:1998:221).
 Member States are free to define who is treated as a resident and for how long, e.g., for
purposes of a “trailing tax”, even if this definition is based on nationality (ECJ, 23 February 2006,
C-513/03, van Hilten-van der Heijden, EU:C:2006:131).
 Permanent establishments may enjoy fictitious (unilateral) treaty entitlement, e.g., with respect to
the avoidance of economic double taxation and juridical double taxation in “triangular situations”
(ECJ, 21 September 1999, C-307/97, Saint-Gobain, EU:C:1999:438).
 Both, credit (with limitation) and exemption (with progressivity) are permissible methods to avoid
double taxation, but that both methods must be applied so to fully take into account family and
personal benefits (ECJ, 12 December 2002, C-385/00, De Groot, EU:C:2002:750; ECJ, 28
February 2013, C-168/11, Beker and Beker, EU:C:2013:117).
 There is no obligation to grant “most favored nation treatment” in tax treaties, i.e., to grant to one
non-resident the most beneficial treatment afforded to another non-resident under a tax treaty
(ECJ, 5 July 2005, C-376/03, D, EU:C:2005:424).

81
DOUBLE TAXATION | FUNDAMENTAL
FREEDOMS AND TAX TREATIES
 Fundamental Freedoms and Tax Treaties
 “Limitation-on-benefits”-clauses in tax treaties that deny treaty benefits based on foreign
ownership of a company resident in the other contracting State to avoid “treaty shopping” are
permissible (ECJ, 12 December 2006, C-374/04, ACT Group Litigation, EU:C:2006:773).
 A discriminatory withholding tax may be “neutralised”, i.e., “compensated”, by a (full) tax-treaty
credit in the residence State (ECJ, 14 December 2006, C-170/05, Denkavit Internationaal,
EU:C:2006:783; ECJ, 8 November 2007, C-379/05, Amurta, EU:C:2007:655; ECJ, 17
September 2015, C-10/14, C-14/14 and C-17/14, Miljoen, X and Société Générale,
EU:C:2015:608).
 There is no EU law prohibition of a “treaty override” (ECJ, 6 December 2007, C-298/05,
Columbus Container Services, EU:C:2007:754; ECJ, 19 September 2012, C-540/11, Levy and
Sebbag, EU:C:2012:581).
 There is an obligation to take into account “final losses” of foreign permanent establishments
which are, in principle, exempt from taxation in the head office’s State under a tax treaty (ECJ,
15 May 2008, C-414/06, Lidl Belgium GmbH, EU:C:2008:278).
 There is no obligation to grant a credit carry-forward in respect of withholding taxes that could not
be credited in the same period because of a credit limitation (ECJ, 10 February 2011, C-436/08
and C-437/08, Haribo and Salinen, EU:C:2011:61, paras. 166-172).
 Fiscal cohesion, on the level of justification, may be secured by a bilateral convention concluded
with another Member State (ECJ, 11 August 1995, C-80/94, Wielockx, EU:C:1995:271, paras.
23-25).

82
PART III
STATE AID
CONTENT
 Chapter I – Overview
 Chapter II – State Aid and Business Taxation
 Chapter III – State Aid and Rulings
 Chapter IV – State Aid Law as an Anti-BEPS-Instrument?

84
CHAPTER I
OVERVIEW
OVERVIEW | ARTICLE 107 TFEU
 To be qualified as State aid under
Art. 107(1) TFEU, a tax
measure must …
 … be granted by Member State
or though State resources,
 … afford an advantage,
 … favor certain undertakings or
the production of certain
goods (“selectivity”),
 … distort or threaten to distort
competition, and
 … be capable of affecting trade
between Member States.
 → Some automatic or discretionary exceptions (Art. 107(2) and (3) TFEU).

 Also applies to tax measures, e.g., to reductions in the tax base, total or partial
reduction in the amount of tax through exemption or credit, deferment, cancellation or
even special rescheduling of tax debt
 Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU, [2016] OJ C 262/1
(replaces Commission’s Notice on the application of the State aid rules to measures relating to direct
business taxation, [1998] OJ C 384/3)
 DG Competition Working Paper on State Aid and Tax Rulings (3 June 2016)

86
 OVERVIEW | GUIDELINES
 Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU, [2016] OJ C 262/1
(19 July 2016)
 Includes a Chapter on “Specific issues concerning tax measures” (Paras 156-184) zu
 Cooperative societies (Paras 157-160)
 Undertakings for collective investment (Paras 161-163)
 Tax amnesties (Paras 164-168)
 Tax rulings and settlements (Paras 169-176)
 Depreciation/amortisation rules (Paras 177-188)
 Fixed basis tax regime for specific activities (Paras 181-182)
 Anti-abuse rules (Para. 183)
 Excise duties (Tz 184)
 Replaces Commission’s Notice on the application of the State aid rules to measures relating to
direct business taxation, [1998] OJ C 384/3
 DG Competition Working Paper on State Aid and Tax Rulings (3 June 2016)
OVERVIEW | GUIDELINES

 Also:
 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of
Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis
aid, [2013] OJ L 352/1 (24 December 2013)
 Commission notice on the enforcement of State aid law by national courts, [2009] OJ C
85/1 (9 April 2009)
 Notice from the Commission – Towards an effective implementation of Commission
decisions ordering Member States to recover unlawful and incompatible State aid, [2007]
OJ C 272/4 (15 November 2007)
OVERVIEW | PROCEDURE
 Framework
 Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the
application of Article 108 of the Treaty on the Functioning of the European Union
(codification), [2015] OJ L 248/9.
 Commission notice on the enforcement of State aid law by national courts, [2009] OJ
C 85/1.
 Art 108 TFEU
 The Commission constantly monitors Member States’ rules (Art.108(1) TFEU)
 Member States are required to notify the Commission as to any plans to grant or alter
State aid under Art 108(3) TFEU):

89
OVERVIEW | PROCEDURE
 “Old” and “New” Aid
 “Existing Aid” (Art 108(1) TFEU) → Deemed legal as long as the Commission does not
conclude their that aid is not compatible with the internal market (e.g., ECJ, 18 November
2010, C-322/09 P, NDSHT, EU:C:2010:701, Rn 52)
 “New Aid” → Art 108(3) TFEU
 The Member State concerned may not put the measure into effect until a
Commission decision authorising that aid is taken (Art 108(3) last sentence TFEU),
i.e., such notifiable aid “shall not be put into effect before the Commission has
taken, or is deemed to have taken, a decision authorising such aid” (Art 3 of
Council Regulation 2015/1589)
 This “standstill clause” is directly effective and must be enforced by national courts
(→ Commission notice on the enforcement of State aid law by national courts,
[2009] OJ C 85/1)
 Commission learns about aid through notification, complaints or ex officio (e.g.,
from the press)

90
OVERVIEW | PROCEDURE
 Commission’s Procedure (Art. 108(1) and (2) TFEU)
 Preliminary examination (Art. 4 of Council Regulation 2015/1589)
 Decision …
 … that the measure does not constitute aid (Art 4(2))
 … that the measure does not to raise objections (Art 4(3))
 … to initiate the formal investigation procedure (Art 4(4))
 Decision within 2 months (otherwise fiction that the measure has been authorized;
Art 4(5) and (6))
 Formal investigation (Art 108(2) TFEU and Arts. 6-8 of Council Regulation
2015/1589)
 Decision that …
 … the measure (after modification) does not constitute aid (Art 9(2)),
 … that the aid is compatible with the internal market (“positive decision”), also under
conditions (“conditional decision”) (Art. 9 (3)), or
 … that aid is not compatible with the internal market (“negative decision”) (Art. 9(4))
 Litigation against Commission decision has no suspensive effect → Art. 278 TFEU
states that in principle actions are not to have suspensory effect, in so far as acts
adopted by the Union institutions enjoy a presumption of legality (e.g., GC, 27 February
2015, T-826/14 R, Spain v. Commission, EU:T:2015:126)

91
STATE AID | RECOVERY
 Negative Decision and Recovery
 Recovery → Commission shall decide that the Member State concerned shall
take all necessary measures to recover the aid from the beneficiary (“recovery
decision”), unless this would be contrary to a general principle of Union law
(Art. 16(1) of Council Regulation 2015/1589)
 Interest → Recovery includes compound interest (Art. 16(2) of Council
Regulation 2015/1589, and the Commission‘s Notice in [2007] OJ C 272/4, and
Arts 9, 11(2) of Regulation (EC) No 794/2004)
 Procedure → Recovery shall be effected without delay and in accordance with
the procedures under the national law of the Member State concerned
(Art 16(3))
 Limitation Period → The powers of the Commission to recover aid shall be
subject to a limitation period of 10 years (Art 17)
 Detailed overview → Notice from the Commission – Towards an effective
implementation of Commission decisions ordering Member States to recover
unlawful and incompatible State aid, [2007] OJ C 272/4 (15 November 2007)

92
STATE AID | RECOVERY
 Limits to Recovery
 General principles of Union law.(Art 16(1); e.g., principles of the protection of
legitimate expectation and of legal certainty) – But: A prudent business person
must check if aid has been notified (e.g., ECJ, 20 September 1990, C-5/89,
Commission/Germany, EU:C:1990:320) – Detailed discussion in GC, 15
November 2018, T-207/10, Deutsche Telekom AG, EU:T:2018:786
 Expiration of the 10-year-recovery-period (Art 17(3))
 Absolute impossibility (not, e.g., practical problems or even economic
impossibility such as insolvency proceedings, ECJ, 15 January 1986, 52/84,
Belgium/Commission, [1986] ECR 89)

93
STATE AID | RECOVERY
 Use of state funds also if a tax measure leads to an overall revenue generation
(e.g., because of attracting establishments; see implicitly ECJ, 15 December 2005,
C-66/02, Italiy/Commission, EU:C:2005:768)
 Recovery does not take into account that enterprises may have structured their
affairs in good faith and might have chosen alternative structures otherwise (e.g.,
ECJ, 15 December 2005, C-148/04, Unicredito, EU:C:2005:774, Rn 114 ff) – How
to get relevant information? Liability of advisors?
 Also: Distortions because of recovery? → Pt 134 European Parliament resolution
of 25 November 2015 on tax rulings and other measures similar in nature or effect ,
P8_TA(2015)0408 (25 November 2015)
STATE AID | RECOVERY

 Different tax rates in the Irish Air Travel Tax of

€ 2 für short distances from Dublin (300 km)
and € 10 for long distances (subsequent
decrease to € 3 for all cases)
€ 10
 Air lines‘ arguments
 Reference system = € 2 (or € 3), but not
€ 10
 The lower tax rate has been passed on to
customers
 € 10 tax violates the fundamental freedoms Dublin
 ECJ, 21 December 2016, C-164/15 P and
C-165/15 P, Aer Lingus and Ryanair, €2 300 km
EU:C:2016:990
 State aid
 Recovery of € 8

95
STATE AID | ART. 107(1) TFEU

State
Resources

Advantage

Material Measure applies only to certain (groups of) undertakings or certain

+ Selectivity sectors of the economy in a given Member State

Selectivtiy

Regional Measure favoring undertakings active in a part of the national territory.

+
Selectivity
Trade,
Competition

96
STATE AID | ART. 107(1) TFEU

State
Resources

Advantage De jure Legal criteria for granting a measure that is formally

reserved for certain undertakings only (e.g., those
having a certain size, active in certain sectors)
Material
+ Selectivity
Selectivtiy De facto Though formulated in general and objective terms, the
structure of the measure is such that its effects
significantlyfavour a particular group of undertakings –
Regional E.g., certain offshore enterprises in ECJ, 15 November
+ 2011, C-106/09 P and C-107/09 P, Commission and
Selectivity
Spain v. Gibraltar, EU:C:2011:732
Trade,
Competition

97
STATE AID | ART. 107(1) TFEU

State Reference  Framework against which the

Resources System selectivity of a measure is
assessed (→ derogation from the
normal rules).
+

Advantage De jure

Material
+ Selectivity
Selectivtiy De facto

Regional
+
Selectivity
Trade,
Competition

98
STATE AID | ART. 107(1) TFEU

State Reference
Referenz-  Examining whether a given
Resources System
system measure differentiates between
undertakings in derogation from
that system.
+ Derogation  External policy objectives – such
as regional, environmental or
Advantage De jure industrial policy objectives –
cannot be relied upon by the
Member States to justify the
Material differentiated treatment of
+ Selectivity
undertakings under a certain
regime (ECJ, 8 September
Selectivtiy De facto 2011, C-78/08 ua, Paint
Graphos, EU:C:2011:550)
 Runs parallel to the analysis of
the fundamental freedoms if the
Regional
+ measure benefits domestic via
Selectivity cross-border situations (AG
Kokott, 16 April 2015, C-66/14,
Trade, Finanzamt Linz/BFG,
Competition EU:C:2015:242, paras 102 et
seq.)

99
STATE AID | ART. 107(1) TFEU

State Reference  Justification, if a measure

Resources System derives directly from the intrinsic
basic or guiding principles of the
reference system or where it is
+ Derogation the result of inherent
mechanisms necessary for the
Advantage functioning and effectiveness of
De jure
the system.
 E.g., the need to fight fraud or
Justific- tax evasion, the need to take
Material
+ ation into account specific accounting
Selectivity requirements, administrative
Selectivtiy De facto manageability, the principle of
tax neutrality, the progressive
nature of income tax and its
redistributive purpose, the need
Regional to avoid double taxation, and the
+
Selectivity objective of optimising the
recovery of fiscal debts (see
Trade, also, e.g., ECJ, 8 September
Competition 2011, C-78/08 ua, Paint
Graphos, EU:C:2011:550)

100
STATE AID | ART. 107(1) TFEU

State Reference  Isolated, additional criterion?

Resources System (see, e.g., AG Kokott, 16 April
2015, C-66/14, Finanzamt
Linz/BFG, EU:C:2015:242,
+ Derogation paras. 108 et seq. – contra ECJ
and AG Wathelet in C-20/15 P
Advantage and C-21/15 P, World Duty Free
De jure
Group, formerly Autogrill
España SA)
Justific-  Not only abstract selectivity, but
Material
+ ation identification of a privileged
Selectivity enterprise (or group of
Selectivtiy De facto enterprises) based on a specific
characteristic.
Specificity

Regional
+
Selectivity
Trade,
Competition

101
CHAPTER II
STATE AID AND
BUSINESS TAXATION
EXAMPLE 1 | SPANISH GOODWILL
AMORTIZATION (WORLD DUTY FREE)
 Amortization of goodwill only in case of the Goodwill Amortization?
acquisition holding in a foreign company (no
 
ES Parent
amortization for domestic holdings) – 5% Co.
ownership threshold, 1 year holding period
 Three state aid proceedings against Spain
 Acquisition of direct EU holdings
 Acquisition of direct third country holdings
 Acquisition of indirect holdings
ES Sub. Co.

EU Sub. Co.
EXAMPLE 1 | SPANISH GOODWILL
AMORTIZATION (WORLD DUTY FREE)
Commission
Topic Case Decision of GC ECJ
Decision

Decision of 28 Oct.
2009, K(2009)8107 = Annulment by GC, 7
Acquisition Setting aside and
C 45/07 = [2011] OJ L 7/48 (11 November 2014, T-219/10,
1 of Direct EU referral back to the
SA.22309 Jan. 2011) – See also Autogrill España,
Holdings GC: ECJ, 21
[2007] OJ C 311/21 (21 EU:T:2014:939
December 2016, C-
Dec. 2007)
20/15 P and C-21/15
P, World Duty Free
Decision of 12 Jan.
Acquisition Annulment by GC, 7 Group SA, Banco
2011, K(2010) 9566) =
of Direct November 2014, T-399/11, Santander ua,
[2011] OJ L 135/1 (21
2 Third SA.22309 Banco Santander SA and EU:C:2016:981 –
May 2011) – See also
Country Santusa Holding SL, Grand Chamber!
[2007] OJ C 311/21 (21
Holdings EU:T:2014:938
Dec. 2007)

Decision of 15 Oct.
Pending as T-826/14 – No
2014, C(2014)7280 =
Acquisition interim measures
[2015] OJ L 56/38 (27
3 of Indirect SA.35550 (GC, 27 February 2015, —
Feb. 2015) – See also
Holdings T-826/14 R,
[2013] OJ C 258/8
Spain/Commission)
(7 Sept. 2013)
EXAMPLE 1 | SPANISH GOODWILL
AMORTIZATION (WORLD DUTY FREE)
 GC, 7 November 2014, T-219/10, Autogrill España, EU:T:2014:939, and GC, 7
November 2014, T-399/11, Banco Santander SA and Santusa Holding SL,
EU:T:2014:938
 Annulments of the Commission‘s decisions from October 2009 and January 2011
 No selectivity because it did not benefit “a particular category of undertakings” (citing
Gibraltar), no minimum investment amount
 Similarly Opinion of AG Kokott 16 April 2015, C-66/14, Finanzamt Linz/BFG, paras. 108
et seq.
 Contra Opinion of AG Wathelet, 28 July 2016, Joined Cases C-20/15 P and C-21/15 P,
Commission/World Duty Free Group, formerly Autogrill España SA (C-20/15 P), Banco
Santander SA, Santusa Holding SL (C-21/15 P), EU:C:2016:624

105
EXAMPLE 1 | SPANISH GOODWILL
AMORTIZATION (WORLD DUTY FREE)
 ECJ (Grand Chamber), 21 December 2016, C-20/15 P and C-21/15 P, World Duty
Free Group and Banco Santander SA und Santusa Holding SL,
EU:C:2016:981
 ECJ reversed and remanded GC decision
 Comparison between resident companies that held at least five percent of Spanish
companies (no goodwill deduction) with resident companies that held at least 5% of foreign
companies (goodwill deduction)
 Limited Gibraltar to its facts (the whole Gibraltar regime, rather than a derogating part,
constituted a scheme designed to confer selective advantages on offshore companies)
 In ordinary (derogation) cases, Commission need not show that (ex ante) a particular,
identifiable group benefits from the advantage

106
EXAMPLE 2 | AUSTRIAN GOODWILL
AMORTIZATION (FINANZAMT LINZ)
 Goodwill Amortisation as a Special Feature
within the Austrian Group Taxation Regime Goodwill Amortisation?
 Goodwill may be amortised over 15 years only in
the case where a holding is acquired in a domestic
company (i.e., not in a foreign EU company) and  AT Parent Co.

that company is included in a corporate group
(requires a holding of > 50%)
 Litigation → Reference to the CJEU whether this
regime is a violation of (1) the State aid rules
(Art 107 TFEU) and/or (2) the freedom of
establishment under Art. 49 TFEU (reference by the AT Sub Co.
Supreme Adminstrative Court, 30 January 2014,
2013/15/0186) → Case C-66/14
 Legislative Reaction → Repeal of the amortisation
EU Sub Co.
rule from 1 March 2014 onwards (Federal Gazette I
2014/13), with a special rule for old “1/15” amounts.
 Final decision by VwGH 10 February 2016,
2015/15/0001 (no state aid), and BMF-Info BMF-
010203/0178-VI/6/2016 (16 June 2016)

107
EXAMPLE 2 | AUSTRIAN GOODWILL
AMORTIZATION (FINANZAMT LINZ)
 Opinion of A.G. Kokott, 16 April 2015, C-66/14, Finanzamt Linz, EU:C:2015:242
(CJEU did not rule on the State aid issue)

Reference  “Normal Tax Regime” and Difference in Treatment

System
 Whole direct tax system (EStG + KStG)? → , no selectivtiy, although goodwill
amortisation can only be claimed by corporations, not by individuals
+  Corporate income tax (KStG)? → , no selectivtiy, although goodwill
Derogation amortisation can only be claimed by corporations in the group taxation system
 Group taxation regime (§ 9 KStG)? → , selective because (just as with the
Selectivity

fundamental freedoms) the acquisition of domestic and foreign holdings is

comparable
+
Justification  No justification based on principles of the Austrian tax system

+
Specificity  But: No group of companies that is privileged because of certain specific
characteristics, as the acquisition of domestic holdings is (1) not limited to certain
branches of business and is (2) potentially realizable for every company

108
 EXAMPLE 3 | GERMAN
RESTRUCTURING CLAUSE
 Exception from the cancellation of the loss carry-forward in case of a qualified
change of ownership by introducing a restructuring clause (“Sanierungsklausel”) in
§ 8c(1a) German Corporate Tax Act (KStG)
 Commission Decision of 26 January 2011, C 7/10, K(2011) 275 ([2011] OJ L 235/26
[10 September 2011])
 § 8c KStG is the reference system and the restructuring clause provides a selective
advantage and is not in compliance with the internal market (e.g., the “Temporary Union
framework for State aid measures to support access to finance in the current financial and
economic crisis”)
 Negative decision with recovery
 Also: Germany was asked to provide a list of enterprises with the overall amount of aid →
40 cases, overall amount: € 1,78 Mio (BT-DRs 17/5752, 4 [5 May 2011])
 EXAMPLE 3 | GERMAN
RESTRUCTURING CLAUSE
 German reaction
 Non-application of the restructuring clausel until its compatibility with state aid law is clear
(see initially BMF 30 April 2010, IV C 2 - S 2745-a/08/10005:002, and subsequently § 36
Abs 6 KStG as amended by BGBl I 2011, 2592 and BGBl I 2013, 1266)
 Action for annulment ([2011] OJ C 186/28 [25 June 2011]) rejected by the GC (18
December 2012, T-205/11, ECLI:EU:T:2012:704) because the action was brought (one day)
too late (confirmed by ECJ, 3 July 2014, C-102/13 P, EU:C:2014:2054)
 But: 14 actions for annulment brought by several companies and supported by
Germany (according to Art 278 TFEU no suspensive effect; see, e.g., E-002574/14,
[2014] OJ C 324/1 [18 September 2014])
EXAMPLE 3 | GERMAN
RESTRUCTURING CLAUSE
Enterprise GC Decision of the GC Case at ECJ

1 Heitkamp BauHolding T-287/11 4 Feb. 2016 (EU:T:2016:60) C-203/16 P, C-208/16 P

2 Cheverny Investments T-585/11 — —
3 Oppenheim T-586/11 — —
4 Wagon Automotive Nagold T-610/11 — —
5 Treofan Holdings T-612/11 — —
6 VMS Deutschland T-613/11 — —
7 Garner CAD Technic T-614/11 Removed (Order 27 Apr. 2016, EU:T:2016:271)
8 CB T-619/11 — —
9 GFKL Financial Services T-620/11 4 Feb. 2016 (EU:T:2016:59) C-219/16 P, C-209/16 P
10 SinnLeffers T-621/11 — —
11 Sky Deutschland T-626/11 — —
12 ATMvision T-627/11 — —
13 Biogas Nord T-628/11 — —
14 Biogas Nord Anlagenbau T-629/11 — —
EXAMPLE 3 | GERMAN
RESTRUCTURING CLAUSE
 GC dismissed the actions by two enterprises against the Commission decision
and confirms that the German restructuring clause is illegal state aid (GC, 4
February 2016, T-287/11, Heitkamp BauHolding, EU:T:2016:60, and T-620/11,
GFKL Financial Services, EU:T:2016:59)
 Main reasons:
 The reference system is § 8c Abs 1 KStG from which § 8c Abs 1a KStG is a selective
exception (loss carry-forward – cancellation of the carry-forward – exception based on the
“restructuring clause”), even if the exception confirms with the ability-to-pay-principle
 Selective advantage for the undertakings in difficulty because ...
 ... there is no similar exception for other cases where no risk of abuse exists ...
 ... the measure is not potentially open to all enterprises but only to those in difficulty
(distinguishing Autogrill)
 No justification because ...
 ... dealing with the financial and economic crisis or the restructuring of enterprises in
difficulty is not part of of the nature and general scheme of the German tax system
(ECJ, 18 July 2013, C-6/12, P Oy, EZ:C:2013:525, Rn 30)
 ... it is not apparent why ability-to-pay (i.e., loss carry-forward) should not likewise be
relevant for “healthy” enterprises
EXAMPLE 3 | GERMAN
RESTRUCTURING CLAUSE
 ECJ annuls GC decision
 Appeal with regard to a violation of 107 TFEU (e.g., C-203/16 P, C-208/16 P)
 ECJ, 28 June 2018, C-203/16 P, Dirk Andres, EU:C:2018:505, and ECJ, 28 June
2018,C-209/16 P, Lowell Financial Services, EU:C:2018:507
 Suggestion to set aside the judgment of the General Court in the Opinion of AG Wahl, 20
December 2017, C-203/16 P, Dirk Andres (administrator of Heitkamp BauHolding
GmbH), previously Heitkamp BauHolding GmbH, EU:C:2017:1017
 Reasons of the ECJ
 The regulatory technique used is not decisive for establishing selectivity – Exceptions
from the exception confirm the general rule
 Flawed determination of the reference system by the GC
 Also: It would be unclear which effects the unconstitutionality of the whole § 8c KStG has
on the state aid analysis (the German Constitutional Court found that provision, in part, to
violate the principle of equal treatment; BVerfG 29 March 2017, 2 BvL 6/11)
 SOME OPEN ISSUES
 Uncertainties with “Selectivity”
 Three-prong-test versus comparability analysis?
 Does Art 107(1) TFEU require that “certain undertakings” or “the production of
certain goods” are identified by properties which are specific to them, as a
privileged category ex ante?
 Yes → GC in Autogrill and Banco Santander and Opinion AG Kokott, 16 April
2015, C-66/14, Finanzamt Linz, EU:C:2015:242
 No → ECJ (Grand Chamber), 21 December 2016, C-20/15 P and C-21/15 P,
World Duty Free Group, EU:C:2016:981; Opinion of AG Wathelet, 28 July
2016, Joined Cases C-20/15 P and C-21/15 P, World Duty Free Group,
EU:C:2016:624
 Should all tax expenditures adopted by Member States then be regarded as state
aids and, as a result, need to be approved pursuant to Art 108(3) TFEU (e.g., general
R&D tax incentives etc)?
 Would this be compatible with the division of competences between the European
Union and the Member States? Would this amount to a transfer of the Member
States’ economic policy to the European Union?
 In the end, would EU Member States be placed at a competitive disadvantage with
third countries?
 SOME OPEN ISSUES
 Uncertainties with “Selectivity”
 Is international activity per se a criterion for selectivity? – Rejected by the
General Court in T-219/10, Autogrill España, EU:T:2014:939, and T-399/11,
Banco Santander SA und Santusa Holding SL, EU:T:2014:938
 Does the extension of illegal state aid to other taxpayers “remove” the state aid
character of a measure? – Rejected by, e.g., ECJ, 15 June 2006, C-393/04 und
C-41/05, Air Liquide, EU:C:2006:403, para. 45, but accepted if the disadvantage
is removed through the application of a fundamental freedom by Austrian
Supreme Adminsitrative Court, 10 Februray 2016, 2015/15/0001, ÖStZB
2016/59, 154.
 SOME OPEN ISSUES

 De Minimis-threshold (€ 200.000 in 3 years)?

 Relevance of the formal proceeding (regulation (EU) Nr. 1407/2013)?
 Characterization of a measure independent from individual cases (e.g., ECJ,
5 March 2005, C-172/03, Heiser, EU:C:2005:130, para. 34)
 Also: Would it violate the EU principle of equality if a general rule would only
apply to certain persons (i.e., those below the threshold)? → See Austrian
Supreme Administrative Court, 29 June 2005, 2005/14/0024, ÖStZB 2006/7, 12.
CHAPTER III
STATE AID AND RULINGS
RULINGS | OVERVIEW
 Improvements in the area of harmful business taxation and related areas
(Action 10 in the Action Plan to strengthen the fight against tax fraud and tax
evasion, COM(2012)722 [6 December 2012])
 “Tax Rulings”
 Examination of the the tax ruling practice of some Member States since June 2013,
extension of information enquires on tax rulings practice to all Member States (IP/14/2742
[17 December 2014])
 State aid proceedings with respect to individual rulings – Apple, Starbucks, Fiat, Amazon
 State aid proceedings with respect to general ruling practice – Belgian excess profit ruling
system (IP/15/4080 [3 February 2015] – Also: State aid proceedings in respect of certain
tax regimes (e.g., coordination centers) in the early 2000s.
 Proposal for a Council Directive amending Directive 2011/16/EU as regards mandatory
automatic exchange of information in the field of taxation, COM(2015)135 final, and
adoption as Council Directive (EU) 2015/2376 of 8 December 2015, [2015] OJ L 332/1

118
RULINGS | GENERAL INFORMATION
 European Parliament resolution of 25 November 2015 on tax rulings and other
measures similar in nature or effect, P8_TA(2015)0408 (25. 11. 2015)
 Statements by the Commission
 Paras 169 et seq. of the Commission’s Notice on the notion of State aid pursuant to Article
107(1) TFEU, [2016] OJ C 262/1 (19 July 2016)
 DG Competition Working Paper on State Aid and Tax Rulings (3 June 2016)

119
RULINGS | EXCHANGE OF
INFORMATION
 Automatic Exchange of Information
 Council Directive (EU) 2015/2376 of 8 December 2015, [2015] OJ L 332/1 (based on
propsal COM(2015)135 final)
 Automatic exchange of information on advance cross-border rulings and advance pricing
arrangements starting in 2017 (for rulings that have been issued after 31 December 2016
and certain older rulings)
 But
 “Information communicated to the Commission pursuant to this Directive shall be kept
confidential by the Commission in accordance with the provisions applicable to Union
authorities and may not be used for any purposes other than those required to determine
whether and to what extent Member States comply with this Directive” (Art 23a(1)), i.e., no
transfer of information from DG TAXUD to DG COMP.
 Limited access by the Commission, i.e., “[i]nformation as defined under points (a), (b), (h)
and (k) of paragraph 6 of this Article shall not be communicated to the European
Commission” (Art 8(8a) and Art 21(5)), e.g., the identification of the person, other than a
natural person, and where appropriate the group of persons to which it belongs, a
summary of the content of the advance cross-border ruling or advance pricing
arrangement, or the description of the set of criteria used for the determination of the
transfer pricing or the transfer price itself.

120
RULINGS | SPECIFIC CASES
 Administrative rulings that merely contain an interpretation of the relevant tax
provisions without deviating from the case law and administrative practice do not
give rise to a presumption of aid.
 However, state aid exists where a general rule is applied favorably, especially in
case of a deviation from objective criteria (ECJ, 26 September 1996, C-241/94,
France/Commission, [1996] ECR I-4551, paras 23-24)
 Advantage because of a deviation from arm‘s length (ECJ, 22 June 2006, C-182/03
and C-217/03, Belgium and Forum 187 ASBL/Commission, EU:C:2006:416, paras.
95-96)
RULINGS | SPECIFIC CASES
 Advance administrative rulings involve selectivity in particular where (see, e.g.,
Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU,
[2016] OJ C 262/1 (19 July 2016), and Para. 21 of the Commission’s notice on the
application of the State aid rules to measures relating to direct business taxation,
[1998] OJ C 384/3) ...
 … the tax authorities have discretion in granting administrative rulings;
 … the rulings are not available to undertakings in a similar legal and factual situation;
 … the administration appears to apply a more “favourable” discretionary tax treatment
compared with other taxpayers in a similar factual and legal situation;
 … the ruling has been issued in contradiction to the applicable tax provisions and has
resulted in a lower amount of tax
RULINGS | SPECIFIC CASES
MS MNE Procedure Issue Decision Case

T-778/16, Ireland/
SA.38373 – Long-term (15 years) application of the Negative decision with Commission,
IR Apple C(2014)3606 TNMM (65% or 20%) so that a certain profit recovery – IP/16/2923 T-892/16, Apple Sales
(11 June 2014) is achieved (28-38 Mio US$) (30 Aug. 2016) International et
al/Commission

T-760/15,
SA.38374 – Qualification as „toll manufacturer“ and Negative decision with Netherlands/
NL Starbucks C(2014)3626 TNMM (9-12%) with a specifically defined tax recovery – IP/14/663 Commission, T-
(11 June 2014) base and matching calculation of licence fees (21 Oct 2015) 636/16, Starbucks/
Commission

T-759/15, Fiat Chrysler

SA.38375 – Negative decision with Finance Europe,
Determination of a tax base of ca € 2,5 Mio
LUX Fiat C(2014)3627 recovery – IP/14/663 T-755/15,
(+/- 10%) on the basis of the TNMM
(11 June 2014) (21 Oct 2015) Luxembourg/
Commission

T-816/17,
SA.38944 – Long-term (10 years) application of the Negative decision with Luxembourg/
LUX Amazon C(2014)7156 TNMM (4-6% with revenue-based cap and recovery – IP/17/3701 Commission, T-
(7 Oct. 2014) floor) and matching calculation of licence fees (4 October 2017) 318/18, Amazon/
Commission

123
RULINGS | SPECIFIC CASES
 Apple – Negative decision with recovery – IP/16/2923 (30 Aug. 2016)
RULINGS | SPECIFIC CASES
 Apple – Negative decision with recovery – IP/16/2923 (30 Aug. 2016)
 In a speech given to the Irish Upper House on 4 October 2016, the Irish Minister for Finance
announced the primary arguments it will rely upon in its appeal against the EC’s Apple State
aid decision.
 The grounds to be relied upon are as follows:
 The absence of a favourable tax treatment granted to Apple by Ireland;
 The damage that being called into question may cause to Ireland’s credibility in the international tax
debate;
 The concern that the Commission is undermining the international tax principle of taxing value where it is
created;
 The fact that the concerned companies were not Irish tax residents;
 The concern expressed by the US Treasury regarding Apple’s US tax liability reduction;
 The contradiction of allowing other jurisdictions to tax the sums that Ireland is required to recover;
 The encroachment of Member States’ sovereignty in tax matters and the uncertainty it creates for
businesses; and
 The absence of any right by Ireland to the EUR 13 billion of unpaid taxes claimed by the EC’s Apple
State aid decision.
RULINGS | COMMISSION PRACTICE
State Tax Regime Date Proceeding OJ

Not published – Direct taxes are not C 36/37

BE Coordination Centers 2 May 1984
covered by state aid rules (!) (11 Mar. 1991)

Control and Coordination L 177/17

DE 5 Sept. 2002 K(2002) 3298 – No recovery
Centers (16 July 2003)

C 50/2001 – K(2002) 3741 – No L 153/40

LUX Finance Companies 16 Oct. 2002
recovery (20 June 2003)

C 49/2001 – K(2002) 3740 – No L 170/20

LUX Coordination Centers 16 Oct. 2002
recovery (9 July 2003)

L 180/52
NL Finance Activities 17 Feb. 2003 K(2003) 568 – No recovery
(18 July 2003)

C 54/2001 – K(2003) 569 – No L 204/51

IR Foreign Income 17 Feb. 2003
recovery (13 Aug. 2013)

L 282/25
BE Coordination Centers 17 Feb. 2003 K(2003) 564
(30 Oct. 2003)

Administration and L 23/1

FR 13 May 2003 K(2003) 1483 – No recovery
Logistic Center (28 Jan. 2004)
RULINGS | COMMISSION PRACTICE
State Tax Regime Date Proceeding OJ

L 23/14
BE US Sales Companies 24 June 2003 K(2003) 1868 – No recovery
(28 Jan. 2004)

1929 Holding L 366/47

LUX 19 July 2006 C 3/2006 – K(2006) 2956
Companies (21 Feb. 2006)

C 80/3
ES Patent Box 13 Feb, 2008 N 480/07
(1 Apr. 2008)

Group Interest Box L 288/26

NL 8 July 2009 C 4/07 – K(2009) 4511
(“Groepsrentebox”) (4 Nov. 2009)

C 278/9
LIE IP Box 1 June 2011 177/11/KOL (EFTA)
(22 Sept. 2011)

L 260/61
BE Excess profit exemption 11 Jan. 2016 SA.37667
(27 Sept. 2016)
RULINGS | PROBLEMS
 Para. 172 of the Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU,
[2016] OJ C 262/1 (19 July 2016):
RULINGS | PROBLEMS
 Para. 173 of the Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU,
[2016] OJ C 262/1 (19 July 2016):
RULINGS | PROBLEMS
 Para. 174 of the Commission’s Notice on the notion of State aid pursuant to Article 107(1) TFEU,
[2016] OJ C 262/1 (19 July 2016)
RULINGS | PROBLEMS
 Art 9 OECD MC and OECD Transfer Pricing Guidelines (TPG) as an independent
”reference systen”?
 See e.g., Paras 172-173 of the Commission’s Notice on the notion of State aid pursuant to
Article 107(1) TFEU, [2016] OJ C 262/1 (19 July 2016), and Pt 18 of the DG Competition
Working Paper on State Aid and Tax Rulings (3 June 2016)
 Comparison with independent enterprises versus comparision with domestic associated
enterprises versus comparision with other, cross-border associated enterprises?
 Relevance of the existence of domestic transfer pricing rules?
 Choice of the appropriate transfer pricing methode (e.g., TNMM instead of CUP)?
 Analysis based on “economic rationality”?
 Range versus exact price?
 Relevance for “safe harbors”?
 However, focus on „manifest breach of the arm‘s length principle“ (Pt 23 of the DG
Competition Working Paper on State Aid and Tax Rulings [3 June 2016])
RULINGS | PROBLEMS
 Political discussion between the US and the EU with regard to “retroactive taxation”
(i.e., recovery) and the “disproportionate targeting” of US MNEs
 Letter by Jacob Lew, Secretary of the Treasury, to Mr. Jean-Claude Juncker, President of
the European Commission (11. 2. 2016).
 Letter by Margrethe Vestager, Member of the European Commission, to Jacob Lew,
Secretary of the Treasury (29. 2. 2016)
 Treasury Department White Paper „The European Commission‘s Recent State Aid
Investigations of Transfer Pricing Rulings“ (24.8.2016)
 Current and future legal questions, e.g., regarding ...
 ... (indirect) foreign tax credits in the US? (Problems may include statute of limitations,
recovery outside the tax system) → Vice versa: Must a non-creditability be taken into
account in the recovery decision?
 ... punitive taxation of EU enterprises in the US under § 891 IRC („Senators Ask White
House to Consider Retaliatory Tax Measure on EU”, Wall Street Journal vom 15. 1. 2016)?
– Double tax rate “[w]henever the President finds that, under the laws of any foreign
country, citizens or corporations of the United States are being subjected to discriminatory
or extraterritorial taxes”.
 … possible impact of arbitration in the Transatlantic Trade and Investment Partnership
(TTIP) with respect to recovery of state aid?
CHAPTER IV
STATE AID LAW AS AN
ANTI-BEPS-INSTRUMENT?
 BEPS | PROBLEM AREAS
 Current discussion about the use of state aid law with regard to BEPS and numerous open questions
(e.g., which State would be to “blame” in case of double non-taxation?) – See, e.g., the discussion
between Rossi-Maccanico (75 Tax Notes Int‘l 857 [Sept. 8, 2014]) and Luja (76 Tax Notes Int‘l 453
[Oct. 27, 2014])
 Distinction between “real mismatches” because of disparities and “deliberate mismatches” →
Commission decision with regard to the Dutch group interest box K(2009) 4511, paras 110 et seq)
 State aid and BEPS?
 Are Member States free to design their tax systems or must they comply with certain “principles
of international taxation” (e.g., single taxation, taxation of active income in the source State, non-
avoidance)? → Reference system must be derived from domestic law.
 Is low-taxation suspicious to be state aid? → No selectivity even if some enterprises benefit
more than others (Commission decision with regard to the Dutch group interest box K(2009)
4511, para. 118)
 Is cross-border tax planning and tax arbitrage (e.g., through hybrid entities or instruments) per se
selective because it is only possible for multinational enterprises? → Factual selectivity?
 Is it possible to allocate a certain advantage derived from tax arbitrage to one Member State? →
No selectivity if a rule applies to domestic and cross-border activities (Commission decision with
regard to the Dutch group interest box K(2009) 4511, paras 110 et seq)
 BEPS | DOUBLE NON-TAXATION
 Decision to initiate the formal investigation procedure concerning alleged aid by Luxembourg to
McDonald’s (SA.38945, decision published in [2016] OJ C 258/11 [15 July 2016]) – Closed (no state
aid: IP/18/5831 [19 September 2018]!
 Double non-taxation → Luxembourg allocated royalties to a US branch and gave rulings on that
allocation (and exempted them under the tax treaty with the US) and the US did not tax those profits
(under domestic law)
 BEPS | DOUBLE NON-TAXATION
 Double non-taxation based on the application of a tax treaty with the exemption method is not
per se state aid, but may be state aid if the tax treaty is “misapplied”
 Several problems with the Commission‘s initial interpretation of the US-Luxembourg tax treaty
 The tax treaty does not mention the avoidance of double non-taxation as one of its aims.
 The tax treaty predates (1996) the change of the OECD MC following the Partnership
Report (1999, now Art 23A Para. 32.6 OECD MC).
 Art 23A Para. 32.6 OECD MC only deals with conflicts of qualification but not with
situations where a State might tax under the treaty but does not exercise that taxing right
under its domestic law.
 However, proceedings closed without the finding of state aid (IP/18/5831 [19 September 2018])
PART IV
EU CHARTER OF
FUNDAMENTAL RIGHTS
CONTENT
 Chapter I – Development of Human Rights Protection in the EU
 Chapter II – Application of the Charter and Taxation
 Chapter III – Conclusions

138
CHAPTER I
DEVELOPMENT OF
HUMAN RIGHTS PROTECTION
IN THE EU
 MILESTONES | 1950 – 1992
Development of “general principles”, starting with Stauder Explicit reference to the ECHR (Hauer
[29/69], Int. Handelsgesellschaft [11/70] and Nold [44/79]) – Following France‘s ratification in
[4/73]),originally as standards for the EC institutions, later 1974 all EC Member States also were parties
also for Member States (Wachauf [Rs. 5/88]) to the ECHR.

Rome (non- Declaration of

discrimination, Fundamental Rights
freedoms etc) and Freedoms of the
„Solange I“
Parliament ([1989] OJ
ECHR C 120/51)

1952 1964 1977 1986 1992

1950/ 1957
1969 1974 1979 1989
1953

„Solange II“
Art. 3 of the draft for a Supremacy:
Treaty on the European Costa/ENEL Joint Declaration
Political Community (EPC) (6/64) ([1977] OJ C 103/1) Maastricht
(Art F(2))

140
 MILESTONES | 1994 – 2017

Lisbon (Art 6 EUV) and Charter

Proclamation of the Charter of of Fundamental Rights ([2007]
Fundamental Rights ([2000] OJ OJ C 303/1, [2010] OJ C 83/389)
No accession to C 364/1) and references to the Charter and Explanations ([2007] OJ
the ECHR by the ECJ (e.g., Parliament/Council C 303/17), from 1 December 2009
(Opinion 2/94) [C-540/03]) (Protocol No. 30 for Poland and
the UK)

2010/
1997 2004 2014

1994/ 2000
2009
1996

Amsterdam Charter of
(Art F(1) EUV, No accession to
Fundamental Rights the ECHR
Art 117 EC Treaty, as Part II of the Treaty
Directives) (Opinion 2/13)
establishing a
Constitution for
Europe(TCE) ([2004]
OJ C 310/1)

141
“RIGHTS, FREEDOMS AND
PRINCIPLES”
 Art 6 TEU, Charter and Explanations

Charter als
Primary Law
(Kücükdeveci)

Art51(2) Charter

Art 51-53 Charter

Art 52(7) Charter

Opinion 2/13

Art 52(3) and (4)

Charter

142
UNION LAW
 General principles of Community law derived from common constituional principles
of the Member States since 1969 (29/69, Stauder)
 ECHR not part of Union law (e.g, Åkerberg Fransson), but essential for the
development of general principles (explicit since 1979: C-44/79, Hauer)
 Relationship between general principles and Charter rights (Art 6(3) TEU)
 Possible divergence between legal sources (e.g., Art 41 Charter)
 Uniformity through “horizontal clauses” → Art 52(2) Charter (“primary law clause”), Art 52(3)
Charter (“ECHR clause”) and Art 52(4) Charter (“principles clause”)

 Coherent
interpretation
 Relevance of
ratification,
reservation etc
with regard to
ECHR protocols?

143
INTERNAL MARKET VS FUNDAMENTAL
RIGHTS
 Internal Market vs Fundamental Rights
 Primacy (supremacy) of EU law (fundamental: 6/64, Costa/ENEL)
 Aim of human rights protection in Union law
 Consideration of the legal framework → “[A]rea of freedom, security and justice without
internal frontiers“ and establishment of the Internal Market (Art 3 TEU, Art 26 TFEU,
fundamental freedoms, competition etc), principle of loyal cooperation (Art 4(3) TEU)
(Wachauf, Opinion 2/13)
 Human rights protection should not interfere with the need to avoid a situation in which
the level of protection of fundamental rights varies according to the national law involved
in such a way as to undermine the unity, primacy and effectiveness of EU law
(Internationale Handelsgesellschaft, Melloni, Siragusa)
 Balancing between Internal Market and fundamental rights (Schmidberger)
 Primacy before favorability!

144
INTERNAL MARKET VS FUNDAMENTAL
RIGHTS
 Internal Market vs Fundamental Rights
 Overlaps between Union and national protection of fundamental rights and diverging
“density“ of protection (e.g., equality, property)
 Favorability in Art 53 Charter?

 But: Application of national human rights standards in the Member States only “provided that
the level of protection provided for by the Charter, as interpreted by the Court, and the
primacy, unity and effectiveness of European Union law are not thereby compromised”
(Melloni, Åkerberg Fransson) → Primacy before favorability!

145
FUNDAMENTAL RIGHTS AND
TAXATION | STEPS
 Steps
 Personal and objective scope
 Infringement
 Justification (Art 52(1) and (2) Charter)

Law,
proportionality

TFEU vs
Charter?

146
FUNDAMENTAL RIGHTS AND
TAXATION | CHARTER RIGHTS
 Title I: Dignity
 Title II: Freedoms
 Article 7: Respect for private and family life
 Article 8: Protection of personal data
 Article 15: Right to marry and right to found a family
 Article 16: Freedom to conduct a business
 Article 17: Right to property
 Title III: Equality
 Article 20: Equality before the law
 General principle of Union law (e.g., Ruckdeschel, Racke, EARL, Karlsson),
subordinated to special non-discrimination rules (Schmelz)
 E.g., neutrality in VAT (e.g., HE, Linneweber, Zimmermann, Jetair)
 Article 21: Non-discrimination
 Title IV: Solidarity

147
FUNDAMENTAL RIGHTS AND
TAXATION | CHARTER RIGHTS
 Title V: Citizens‘ Rights
 Article 41: Right to good administration
 General principle of Union law (e.g., Burban, Nölle, Kamino), but Art 41 only addesses
the Union and not the Member States (e.g., Cicala, Y. S., WebMindLicenses)
 Title VI: Justice
 Article 47: Right to an effective remedy and to a fair trial
 General principle of Union law (e.g., Johnston, Heylens, Allassini) → Art 13 ECHR
(extending to court procedure) and Art 6(1) EMRK (without the limitation to civil and
criminal matters)
 “Fair trial” → Also applicable in tax procedings
 Article 48: Presumption of innocence and right of defence
 Article 49: Principles of legality and proportionality of criminal offences and penalties
 Article 50: Right not to be tried or punished twice in criminal proceedings for the same
criminal offence
 General principle of Union law (e.g., Gutmann) → Art 4 7th protocol to the ECHR (e.g.,
not ratified by Germany) and territorial extension by Art 50 Chater (e.g., VAT fraud in
several Member States)

148
CHAPTER II
APPLICATION OF THE
CHARTER AND TAXATION
APPLICABILITY OF THE CHARTER
 Temporal Aspects
 Objective Aspects (Art. 51 GRC)
 Union itself (Art 6 TEU) and institutions, bodies, offices and agencies of the Union (→
COM(2010)573 [19 October 2010])
 Member States (central, regional, local bodies) “only when they are implementing Union law”
 Art 51(1):

150
“IMPLEMENTING UNION LAW”
 Binding on Member States “only when they are implementing Union law” (Art 51(1))
 = “[A]ct in the scope of Union law” (Explanations to Art 51 with reference to
Wachauf, ERT and Annibaldi) = “applicable in all situations governed by EU law”
(Åkerberg Fransson, Pfleger, WebMindLicenses) = “within the scope of EU law”
(Pfleger)
 Confirmation of case-law on the general principles (Pfleger, Åkerberg Fransson)
 Situations:

Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

151
SITUATION 1 | IMPLEMENTATION

Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

 Implementation of Directives or administration of Regulations (“agency situation”; 5/88,

Wachauf),
 Supremacy (primacy) of Union law, no “benchmarking” of Union law in light of national
fundamental rights (e.g., BVerfG 102, 157 [Bananenmarkt]; BVerfGE 118, 79
[Emissionshandel], BVerfGE 121, 1 [Vorratsdatenspeicherung]) → Primacy before favorability!
(C-399/11, Melloni)
 But: ECJ decides whether Union law is valid (see, e.g., C-293/12, C-594/12, Digital Rights
Ireland und Seitlinger ua), and domestic courts may refer that question to the ECJ → If Union
law (e.g., a Directive) is invalid, it falls away with ex tunc effect and domestic implementation –
which is no longer ”shielded” by supremacy – may then be tested against domestic
fundamental rights, e.g., by a domestic constitutional court

152
SITUATION 1 | IMPLEMENTATION
 So far the ECJ has exercised a low “density” of review, e.g., with respect to the
principle of equality →
 No comparability between non-taxpayers and taxpayers that use a building for private
pruposes with regard to the input VAT deduction for dual-use buildings (C-460/07, Puffer)
 No comparability of travel agencies and intermediaries because “the European Union
legislature considered that those two categories of travel agents were not in a comparable
situation” (C-599/12, Jetair)
 No extension of VAT exemptions to comparable situations (e.g., C-174/11, Zimmermann
[non-profit activities]; C-502/13, Commission/Luxembourg [no application of reduced VAT
rate for books to e-books])
 No concerns with regard to the country-specific exceptions in Art 370 et seq VAT-Directive
(see, however, Opionion of AG Kokott, C-144/13 ua, VDP Dental Laboratory)
 Interpretation in line with primary law (e.g., 218/82, Commission/Council)
 Also: No incompatibility if Directives leave Member States sufficient leeway to allow
for an implementation that is in line with primary law (e.g., Wachauf, Socridis).

153
SITUATION 1 | IMPLEMENTATION

 Example: Equal treatment in VAT law (reduction of the tax base under Art 90 VAT
Directive) – ECJ, 20 December 2017, C-462/16, Boehringer Ingelheim Pharma
GmbH & Co. KG, EU:C:2017:1006

Case 1: Public
Pharma Co. Pharmacy
Medicinal Insurance
products for
persons with Refund of the rebate → Rebate
public health reduction of the taxable
insurance amount
Rebate

Case 2: Private
Medicinal Pharma Co. Pharmacy
Insurance
products for
persons with
private health Refund → No reduction of the taxable amount
insurance (because the payment is outside the chain)

154
SITUATION 5 | NO SUFFICIENT NEXUS
WITH EU LAW
Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

 No sufficient nexus to EU law (C-309/96, Annibaldi), specifically if there is no obligation for

Member States following from EU law (C-206/13, Siragusa) or if there is only an abstract, non-
exercised competence of the Union (e.g., Art 115 TFEU) (C-309/96, Annibaldi)
 “[T]he concept of ‘implementing Union law’, asreferred to in Article 51 of the Charter, requires a
certain degree ofconnection above and beyond the matters covered being closely related
orone of those matters having an indirect impact on the other“ (e.g., C-206/13, Siragusa)
 Examples
 Taxation of a Belgian by Belgium for an activity in Belgium (C-457/09, Chartry)
 Different tax rates for different legal froms for agricultural activities (C-505/13, Yumer)
 Double punishment for failure to withhold wage tax in a purely domestic income tax case (C-497/14,
Burzio)
 Additional tax on pension income (C-122/15, C)

155
SITUATION 2 | RESTRICTIONS

Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

 Barrier-Barrier-Effect of fundamental rights → Effect of fundamental rights on the

justification of restrictions of the fundamental freedoms (C-260/89, ERT, and C-390/12,
Pfleger) → Reinforcement of the fundamental freedoms through fundamental rights! →
Problem of this higher standard in multi-polar situations.
 Barrier-Effect of fundamental rights → Protection of national fundamental rights may justify
a restriction of fundamental freedoms (C-112/00, Schmidberger: free movement of goods vs
free speech; C-36/02, Omega: freedom to provide services vs dignity; C-438/05, Viking Line:
freedom of establishment vs right to strike) → Problem of weighing Union and national
fundamental rights (see C-105/14, Taricco).

156
SITUATION 2 | RESTRICTIONS

 Example: Barrier-Effect of fundamental rights – ECJ, 12 June 2003, C-112/00,

Schmidberger

 Austrian agencies permit a truck-blockage (as

protest against transit) on an Austrian highway
 Free movement of goods versus protection of
freedom to assemble and free speech, both of
which are also general (though not limitless)
principles of Union law
 Balancing (= proportionality test) between impact
on the fundamental right versus impact on the
fundamental freedom

157
SITUATION 3 | LEEWAY

Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

 E.g., exercise of leeway in secondary EU law (e.g., C-384/04, Federation of Technological

Industries, C-84/09, X, C-20/00, Booker Aquaculture Ltd) or when there is sufficient nexus to EU
law, even if domestic law is not “implementing” it, e.g.,
 Surcharge and penalities to safeguard VAT collection (C-617/10, Åkerberg Fransson)
 National statutes of limitation for VAT offenses (C-105/14, Taricco)
 VAT collection in case of abuse (C-419/14, WebMindLicenses)
 Penalties in exchange of information procedures (C-682/15, Berlioz)
 Generelly, procedure to administer implemented EU law, e.g., in the VAT area (e.g., right to a hearing)
 Union fundamental rights versus national fundamental rights → Both apply, if the level of
protection provided for by the Charter, as interpreted by the Court, and the primacy, unity and
effectiveness of European Union law are not thereby compromised (C-399/11, Melloni; C-617/10,
Åkerberg Fransson)

158
SITUATION 3 | LEEWAY
 Example 1: Ne bis in idem (Art 50 Charter) – ECJ (Grand Chamber), 26 February
2013, C-617/10, Åkerberg Fransson

Åkerberg Fransson  Non-declation of revenues (for income tax and VAT) in 2004 and
2005 → Tax surcharges (5% to 40% of the unpaid amount) and
indictment for tax offenses (prison sentence of 6 months to 6 years)
 “Implementation” of EU law? → Yes (Member State is under an
obligation to take all legislative and administrative measures
appropriate for ensuring collection of all the VAT due on its territory
and for preventingevasion, protection of EU’s own ressources; Art 2,
Art 250(1) and Art 273 VAT Directive and Art 325 TFEU) → Contra
Member States, EU Commission and AG Cruz Villalón!
 Application of the ne bis in idem principle of Art 50 of the Charter to
a prosecution for tax evasion presupposes that the measures which
have already been adopted against the defendant by means of a
Fishing activities decision that has become final are of a criminal nature. → Engel
criteria (legal qualification of the offense, nature of the offense and
type and severity of the sanction) → Determination by the national
court.
 What happens if the ECtHR would subseqently decrease the level
of protection below the Engel criteria? → Pending as C-524/15,
Menci
159
SITUATION 3 | LEEWAY
 Example 2: Exchange of information → ECJ (Grand Chamber), 16 May 2017, C-
682/15, Berlioz, EU:C:2017:373, versus ECJ (Grand Chamber), 22 October 2013,
C-276/12, Sabou, EU:C:2013:678)

Tax Office 1 Tax Office 2

(Voluntary) Request for
Income tax Information under the DAC
proceedings
(gathering of  Travel expenses for transfer talsk to soccer clubs in other MS,
information) requests for information from the tax authorities of the Member
States concerned (without informing Mr. Sabou), disallowance
of deductions (because none of the clubs allegedly
Sabou approached knew either Mr Sabou or his agent)
(taxpayer)  Application of the principles/fundamental rughts of Union law,
especially the the right to be heard (pre-Charter)
 Distinguishing between the process of collecting information
and the contradictory tax proceedings → No right to be heard
in the former phase (because taxpayer can make use of his
rights in the tax proceedings)

160
SITUATION 3 | LEEWAY
 Example 3: Exchange of information → ECJ (Grand Chamber), 16 May 2017, C-
682/15, Berlioz, EU:C:2017:373, versus ECJ (Grand Chamber), 22 October 2013,
C-276/12, Sabou, EU:C:2013:678)

Tax Office 1 Tax Office 2

(Voluntary) Request for
Information under the DAC
Request for
information, financial
 Application of the Charter (Åkerberg Fransson) and of penalty because of
Art. 47 of the Charter (principle of effective judicial non-compliance
protection)
 Berlioz (third party) ≠ Sabou (taxpayer)
 Right to challenge the legality of that decision Berlioz
 National court must ... (third party =
holder of the
 ... be able to review the legality of the information order
information)
(includes verification that the requested information
manifestly has no “foreseeable relevance”).
 ... have access to the request for information
addressed to the requested Member State

161
SITUATION 3 | LEEWAY
 Example 4: “Cancellation” of national fundamental rights protection by EU law →
Art 4 ATAD and the German interest barrier – German Bundesfinanzhof, 14 October
2015, I R 20/15, BFHE 252, 44 (pending at the German Constitutional Court as 2
BvL 1/16)

 Constitutional concerns agains the national

interest barrier rule in light of the principle of
AT GmbH equality and the principle of ability to pay (BFH
→ BVerfG)
 Art. 4 ATAD (Directive (EU) 2016/1164) obliges
Member States to implement an interest barrier
Interest (30% of EBITDA) by 1 January 2019
 ATAD “shields” national implementation against
 Interest barrier national constitional scrutiny
DE GmbH
(§ 4h dEStG, § 8a (primacy/supremacy of EU law) → Validity of
dKStG) the ATAD?
 Deduction of  But: Art 4 ATAD is only a minimum standard
interest payments and Member States may be more lenient to
only up to 30% of taxpayers → Obligation of the Germany to fully
EBITDA exercise those options in light of domestic
constitutional law?

162
SITUATION 4 | CROSS-BORDER

Situation 4: Situation 2:
Cross-border Restrictions

Situation 5: Situation 3: Situation 1:

No suffiently strong Leeway Implementation
nexus with EU law

 It is unclear if the mere (unrestricted) exercise of a fundamental freedom already triggers the
applicaton of the Charter (unclear C-457/09, Chartry, and C-71/02, Karner; contra, e.g., German
Bundesfinanzhof, 19 June 2013, II R 10/12, BFHE 241, 402; pro, e.g, Austrian Supreme Court,
4 March 2013, 8 Ob 7/13g)
 Too broad? Intended? Consequences?

163
SITUATION 4 | CROSS-BORDER
 Example: Double taxation – German Bundesfinanzhof, 19 June 2013, II R 10/12,
BFHE 241, 402

 Inhertance = Capital movement

 Double taxation is not a prohibited restriction (e.g., C-
67/08, Block)
 But:
 Application of Art 17 Charter (right to property)?
→ Contra German Bundesfinanzhof, 19 June
2013, II R 10/12, BFHE 241, 402, because
inheritance taxation is not EU law but rather
national law undetermined by EU law.
Inheritance tax in Inheritance tax in  Also: Unclear consequences of (excessive)
State A State B double taxation within the sope of the ECHR

164
CHAPTER III
CONCLUSIONS
CONSEQUENCES
 Future impact of the Charter in the post-BEPS-world?
 Active obligation of States to fight tax avoidance to protect fundamental rights
and freedoms? (Committee on Economic, Social and Cultural Rights, General
comment No. 24 (2017) on State obligations under the International Covenant on
Economic, Social and Cultural Rights in the context of business activities,
E/C.12/GC/24 [10.8.2017], Rz 37)

166
PART V
DIRECT TAX DIRECTIVES
CONTENT
 Chapter I – Anti-Tax-Avoidance-Directive (ATAD)
 Chapter II – Parent-Subsidiary-Directive (PSD)
 Chapter III – Interest-Royalties-Directive (IRD)
 Chapter IV – Dispute Resolution

168
OVERVIEW | BACKGROUND
 Secondary EU Law → Directives (Art 115 TFEU)
 Taxpayers
 Anti-Tax-Avoidance-Directive (ATAD) (Directive (EU) 2016/1164, [2016] OJ L 193/1), as
amended by Directive (EU) 2017/952, [2017] OJ L 144/1 [7 June 2017])
 Parent-Subsidiary-Directive (Council Directive 2011/96/EU, [2011] OJ L 345/8, as
amended by Directive 2014/86/EU, [2014] OJ L 219/40, and Directive (EU) 2015/121,
[2015] OJ L 21/1)
 Merger Directive (Directive 2009/133/EC, [2009] OJ L 310/34)
 Interest-Royalties-Directive (Directive 2003/49/EC, [2003] OJ L 157/49) – Amending
proposal COM(2011) 714 final (11 November 2011)
 Dispute Resolution Directive (Directive (EU) 2017/1852, [2017] OJ L 265)
 Tax adminstrations
 Directive on Mutual Assistance (Directive 2011/16/EU, [2011] L 64/1, as amended by
Directive 2014/107/EU, [2014] OJ L 359/1, Directive (EU) 2015/2376, [2015] OJ L 332/1,
Directive (EU) 2016/881, [2016] OJ L 146/8, Directive (EU) 2016/2258, [2016] OJ L
342/1, and Directive (EU), [2018] OJ L 139/1)
 Directive on Recovery of Tax Claims (Directive 2010/24/EU, [2010] OJ L 84/1)
 Savings Interest Directive (Directive 2003/48/EC, [2003] OJ L 157/38, as amended by
Directive 2014/48/EU, [2014] OJ 111/50) – Repealed by Council Directive (EU)
2015/2060 of 10 November 2015, [2015] OJ L 301/1

169
OVERVIEW | BACKGROUND

Primary EU Law (TEU and TFEU)

(Fundamental Freedoms)
Primacy of Primacy of
EU Law EU Law

Secondary EU Law
(Directives)

Implementation

Double Taxation Conventions

Domestic Tax Law Lex Specialis

170
LEGAL CONTEXT | RELATIONSHIP TO
DOMESTIC LAW
 Example: Implementation of the Parent-Subsidiary-Directive into Domestic
Tax Law
 Parent-Subsidiary-Directive: 1 January 1992
 Enlargement 2004: 2003/123/EC: 1 January 2005
 Enlargement 2007: 2006/98/EC: 1 January 2007
 Recast 2011: 2011/96/EU: 18 January 2012
 Enlargement 2013: 2013/13/EU: 1 July 2013
 Amendments 2014 and 2015: 1 January 2016
 Directive-Conform Interpretation
 Direct Applicablilty
 Avoidance of Economic Double Taxation (Art 4)  ECJ, 12 February 2009, C-138/07,
Cobelfret, EU:C:2009:82, para. 65; ECJ, 4 June 2009, C-439/07, KBC Bank,
EU:C:2009:339, para. 48
 Prohibition of Withholding Taxation (Art 5)  ECJ, 17 October 1996, C-283/94 etc,
Denkavit, VITIC and Vormeer, EU:C:1996:387, paras. 37 et seq.

171
LEGAL CONTEXT | RELATIONSHIP TO
THE FUNDAMENTAL FREEDOMS
 Directives and Fundamental Freedoms
 Problem: Is the domestic implementation of a Directive “immunized” from scrutiny under
the freedoms if the domestic implementation is discriminatory?
 Unconditional protection by the freedoms?
 Erosion of the fundamental freedoms through Directives?
 Legal certainty for the Member States?
 Hypothetical non-acceptance by the Member States?
 Presumed conformance of primary and secondary EU Law?
 Three Situations
 Directive imposes an obligation to enact certain measures  No violation of the
freedoms (e.g., ECJ, 11 December 2003, C-322/01, DocMorris, [2003] ECR I-14887,
paras. 52-53)
 Directive prohibts certain measures  No recourse to farther reaching grounds of
justification under the freedoms by Member States (zB ECJ, 20 September 1988, 190/87,
Moormann, [1988] ECR 4689, paras. 10-11)
 Permissions, options  Parent-Subsidiary-Directive?

172
LEGAL CONTEXT | RELATIONSHIP TO
THE FUNDAMENTAL FREEDOMS
 Examples: Parent-Subsidiary-Directive and the Fundamental Freedoms
 Non-Regulation
 Subjective Scope of Application → ECJ, 18 June 2009, C-303/07, Aberdeen, [2009]
ECR I-5145, para. 28
 Objective Scope of Application → E.g., ECJ, 8 November 2007, C-379/05, Amurta,
[2007] ECR I-9569, paras. 18-24, and ECJ, 12 December 2006, C-374/04, ACT Group
Litigation, [2006] ECR I-11673, paras. 53-54
 Options
 Holding Costs (Art 4(2)) → ECJ, 18 September 2003, C-168/01, Bosal,
EU:C:2003:479, paras. 21-28, ECJ, 23 February 2006, C-471/04, Keller Holding,
[2006] ECR I-2107, para. 45, and ECJ, 2 September 2015, C-386/14, Groupe Steria,
EU:C:2015:524
 Choice of Method (Art 4(1) – Indirect Credit versus Exemption) → ECJ, 12 February
2006, C-446/04, FII Group Litigation, [2006] ECR I-11753, para. 46
 Specific Permission for a Specific Member State
 ECJ, 5 October 2004, C-475/01, Commission/Greece (“Ouzo”), [2004] ECR I-8923,
 E.g., withholding tax permission for Germany under Art 5(3) of the pre-amendment
version of the Directive (until 30 June 1996)

173
CHAPTER I
ANTI-TAX-AVOIDANCE-
DIRECTIVE
BEPS AND C(C)CTB | ANTI-TAX
AVOIDANCE DIRECTIVE
 Carve-out of BEPS-related topics from the CCCTB project for a “standalone”
directive
 Work of the Luxembourg Presidency in Council
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base
(CCCTB) – State of play (Doc. 14509/15 FISC 169 ECOFIN 916 (1 December 2015))
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base
(CCCTB) (Doc. 14544/15 FISC 171 (2 December 2015))
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base
(CCCTB) – Explanatory notes (Doc. 14544/15 ADD 1 FISC 171 (2 December 2015))
 Proposal for a Council Directive laying down rules against tax avoidance
practices that directly affect the functioning of the internal market
(COM(2016) 26 final (28 January 2016)) – The “Anti-Tax Avoidance Directive”
(“ATAD”, “Anti-BEPS-Directive”)
 Adoption of the Anti-Tax-Avoidance-Directive as Council Directive (EU)
2016/1164, [2016] OJ L 193/1, in June 2016
 Amended with regard to hybrids by Directive (EU) 2017/952, [2017] OJ L
144/1 (based on Proposal COM(2016)687)

175
ATAD | OVERVIEW
 Applicable to all EU corporate taxpayers and PEs of third-country corporate
taxpayers (Art 1)
 Definitions, e.g., of interest etc (Art 2)
 Only “minimum level of protection” (Art 3), i.e., Member States can go beyond
the rules of the Directive to protect their corporate tax bases
 Substantive rules of the Anti-Tax Avoidance Directive
 Limit interest deductions, i.e., for net interest expense > 30% EBITDA or > € 3 million (Art 4);
 Exit taxation rules for the cross-border transfer of assets, permanent establishments or a
company’s seat with a 5-year-instalment option inside EU/EEA (Art 5)
 General Anti Abuse Rule (GAAR) (Art 6);
 CFC rules based on control, low tax and certain types of income with carve-outs for EU/EEA based
on artificiality (Arts 7 and 8); and
 Hybrid mismatch rules for double deduction and deduction/no inclusion situations (Art 9).
 No switch-over clause! (Formerly Art 6 of the Commission’s proposal.)
 Implementation
 Until 31 December 2018 (Art 12(1))
 Exceptions for exit taxation (31 December 2019), interest deductions (1 January 2024, if a Member
State already has effective rules in place) and the old/amended hybrid rules, 1 January 2020/2022)

176
ATAD | INTEREST LIMITATION

Source: http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/key_measures/index_en.htm

177
ATAD | INTEREST LIMITATION
 Limitation → OECD BEPS Action 4
 Deductibility of “exceeding borrowing costs” only up to 30% of the taxpayer’s EBITDA (Art 4(1))
 Exceeding borrowing costs = interest expense > taxable interest revenues (Art 2(1), (2))
including economically equivalent costs/revenues (= OECD Action 4, para. 36)
 Single taxpayer or group-wide perspective (Art 4(1)(a) and (b) – Option for MS)
 Deductibility of “exceeding borrowing costs”
 Fixed Ratio Rule
 30% of taxpayer’s EBITDA (Art 4(1))
 EBITDA (Art 4(2) = Income subject to corporate tax + tax adjusted exceeding
borrowing costs + tax adjusted depreciation/amortization (+ impairments [?] – OECD
Action 4, para. 142) → “Tax EBITDA” – Unlike OECD Action 4, para. 78, no fractional
exclusion of income benefitting from a foreign tax credit.
 De minimis-Threshold → € 3 Mio of exceeding borrowing costs (Art 4(3)(a) – Option for MS)
 Standalone-Exception → Full deduction if taxpayer is a standalone entity (Art 4(3)(a) – Option for
MS) – Definition of associated enterprises in Art 2(4).
 Grandfathering-Exception → Loans concluded before 17 June 2016, unless subsequently
modified (Art 4(4)(a) – Option for MS)
 Public Infrastructure Exception → Loans used to fund EU long-term public infrastructure projects
(Art 4(4)(b) – Option for MS)

178
ATAD | INTEREST LIMITATION

 Deductibility of “exceeding borrowing costs”

 Group-Equity-Escape-Clause (Art 4(5)(a) – Option for MS)
 Taxpayer is a member of a consolidated group for financial accounting purposes (→
Definition in Art 4(8))
 Full deduction of exceeding borrowing costs if the taxpayer’s ratio equity:assets ≥
group’s ratio equity:assets (2% window)
 Group Ratio Rule = Group-EBITDA-Escape-Clause (Art 4(5)(b) – Option for MS)
 Taxpayer is a member of a consolidated group for financial accounting purposes (→
Definition in Art 4(8))
 Deduction of exceeding borrowing costs →
Group’s exceeding borrowing costs vis−à−vis third parties
∗Taxpayer’s EBITDA
Group’s EBITDA

179
ATAD | INTEREST LIMITATION

 Deductibility of “exceeding borrowing costs”

 Exclusion of financial untertakings Art 4(7) – Option for MS)
 Timing issues (Art 4(6) – Option for MS)
 Carry forward of exceeding borrowing costs without time limitation (Art 4(6)(a)) or
 Carry forward without time limitation and carry back for three years of exceeding borrowing costs (Art
4(6)(b)) or
 Carry forward of exceeding borrowing costs without time limitation and carry forward of unused
interest capacity for a maximum of five years (Art 4(6)(c))

180
ATAD | EXIT TAXATION

Source: http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/key_measures/index_en.htm

181
ATAD | EXIT TAXATION
 Exit State
 Tax on market value (→ Art 5(6)) less tax value (Art 5(1)) in cases of …
 … transfer of assets from head office to foreign permanent establishment.
 … transfer of assets from permanent establishment to foreign head office or permanent
establishment.
 … transfer of residence of the taxpayer (except for assets that remain effectively connected with a
permanent establishment in the exit State).
 … transfer of the business carried on by a permanent establishment.
 Always: Exit State must lose taxing right!
 Exclusion of short-term transfers (Art 5(7))
 Deferral
 Instalment payments of the tax over 5 years if exit to EU Member State or EEA Member State with
recovery of tax claims (Art 5(2) – DMC and Verder LabTec)
 Interest (Art 5(3))
 Guarantee if there is a demonstrable and actual risk of non-recovery (Art 5(3))
 Discontinuation of the deferral, e.g., if assets are sold, assets are transferred to a third country etc
(Art 5(4))
 Import State
 Step-up to market value (Art 5(5))

182
 ATAD | EXIT TAXATION
 Excursus: Relationship between exit taxes and tax treaties
 No Step-Up → Threat of double taxation, but MAP (Para 67 of Final Report of Action 6)
 Timing → OECD MC Update 2014 → Art. 13 OECD MC covers the whole capital gain (Art 13
Para 3.1 OECD MC Comm)
ATAD | GAAR

Source: http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/key_measures/index_en.htm

184
ATAD | GAAR
 Article 6

185
ATAD | CFC RULE

Source: http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/key_measures/index_en.htm

186
ATAD | CFC RULE

 Controlled Foreign Company (CFC) Rule → OECD BEPS Action 3

 CFC = Entity or permanent establishment under the following conditions (Art 7(1))
 taxpayer (+ associated enterprises) holds directly or indirectly > 50% voting rights or >
50% capital or > 50% profits entitlement (Art 7(1)(a)) and
 actual corporate tax paid on profits is lower than the difference between the hypothetical
corporate tax in the taxpayer’s state and the actual corporate tax (Art 7(1)(b))
 Inclusion in the tax base of …
 … certain non-distributed income (e.g., interest, royalties, dividends, capital gains,
financial leasing income, insurance, banking income) unless the (EU or EEA) CFC
carries on a substantive economic activity (supported by staff, equipment, assets and
premises) (Art 7(2)(a)) or
 … the non-distributed arising from non-genuine arrangements which have been put in
place for the essential purpose of obtaining a tax advantage (Art 7(2)(b))
 Certain exclusions from the CFC rule (Art 7(3) and (4) – Option for MS)
 Calculation of CFC income → Art 8

187
ATAD | HYBRID MISMATCHES

 Hybrid mismatches → Art 9 fully amended by ATAD 2 (Directive (EU) 2017/952,

[2017] OJ L 144/1 [7 June 2017]) – Implementation before 2020 (with exception
for reverse hybrid entities, 2022)

Source: http://ec.europa.eu/taxation_customs/taxation/company_tax/anti_tax_avoidance/key_measures/index_en.htm

188
CHAPTER II
PARENT-SUBSIDIARY-
DIRECTIVE
OVERVIEW | CROSS-BORDER PROFIT
DISTRIBUTIONS
 Economic Double Taxation
 Corporate Level Tax in one State and
Shareholder Level Tax in the other State
 Solutions
 Usually no solution in DTCs (but:
participation privileges)
 Extension of the domestic integration
system to cross border-dividends 
Freedom of Capital Movement
 Prohibition of economic double taxation
 Parent-Subsidiary-Directive (Art 4)

190
OVERVIEW | CROSS-BORDER PROFIT
DISTRIBUTIONS
 Juridical Double Taxation
 Source State (= State of residence of the
distributing company) levies a withholding tax
(e.g., 25%), i.e., a tax on the foreign
shareholder, and the Residence State of the
shareholder taxes the dividends received
 Solutions
 Reduction of withholding taxes by the
Source State and credit by the Residence
State → DTCs (Art 10, 23 OECD-MC)
 Extension of the domestic system to cross
border-dividends → Freedom of Capital
Movement
 Prohibition of source taxation → Parent-
Subsidiary-Directive (Art 5 and EU-Swiss
Agreement)

191
OVERVIEW | OBJECTIVE
 Objective
 Removal of tax barriers concerning the distribution of profits within a group of companies
 Twofold approach
 Relief from juridical double taxation through exemption from withholding taxation on
the subsidiary level  Art 5
 Relief from economic double taxation through either exemption or indirect tax credit on
the parent level  Art 4

192
OVERVIEW | LEGAL SOURCES
 Directive and Amendments
 Original Version – Council Directive 90/435/EEC of 23 July 1990 on the common system
of taxation applicable in the case of parent companies and subsidiaries of different
Member States, [1990] OJ L 225, p. 6, with correction in [1990] OJ L 266, p. 20 (proposal
KOM(69)6 endg.)
 2003 Amendment – Council Directive 2003/123/EC of 22 December 2003 amending
Directive 90/435/EEC on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States, [2004] L 7, p. 41 (proposal
COM(2003)462 final)
 Enlargement – Council Directive 2011/96/EU of 30 November 2011 on the common
system of taxation applicable in the case of parent companies and subsidiaries of different
Member States (recast), [2011] OJ L 345, p. 8 (proposal COM(2010) 784 final)
 Hybrid Loans – Council Directive 2014/86/EU of 8 July 2014 amending Directive
2011/96/EU on the common system of taxation applicable in the case of parent companies
and subsidiaries of different Member States, [2014] OJ L 219, p. 40 (proposal
COM(2013)814 final)
 Anti-Abuse – Council Directive (EU) 2015/121 of 27 January 2015 amending Directive
2011/96/EU on the common system of taxation applicable in the case of parent companies
and subsidiaries of different Member States, [2014] OJ L 21/1 (proposal COM(2013) 814
final)

193
OVERVIEW | STRUCTURE
 Art 1 – Scope of Application and Anti-Abuse
 Art 2 – Definition of “company of a Member State” and “permanent establishment”
 Art 3 – Definition of “parent” and “subsidiary” company
 Art 4 – Avoidance of economic double taxation on the parent level (exemption or
indirect credit) and inclusion of hybrid entities
 Art 5 – Avoidance of juridical double taxation on the subsidiary level (prohibition of
withholding taxation)
 Art 6 – Prohibition of withholding taxation in the parent‘s country
 Art 7 – Exclusion of prepayments and certain measures for the avoidance of
double taxation from the definition of taxation at source
 Art 8 – Deadline for implementation
 Art 11 – Directive is addressed to the Member States

194
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where
the permanent establishment is situated
d. to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
companies of the same Member State of
which they are subsidiaries

195
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where
the permanent establishment is situated
d. to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
companies of the same Member State of
which they are subsidiaries

196
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
(→ Art 3(1)(a)(ii))
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where
the permanent establishment is situated
d. to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
companies of the same Member State of
which they are subsidiaries

197
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where
the permanent establishment is situated
d. to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
companies of the same Member State of
which they are subsidiaries

198
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where

d.
the permanent establishment is situated
to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
?
companies of the same Member State of
which they are subsidiaries

199
SCOPE OF APPLICATION | ARTICLE 1

 Art 1 — Each Member State shall apply

this Directive
a. to distributions of profits received by
companies of that State which come from
their subsidiaries of other Member States
b. to distributions of profits by companies of
that State to companies of other Member
States of which they are subsidiaries
c. to distributions of profits received by
permanent establishments situated in that
State of companies of other Member
States which come from their subsidiaries
of a Member State other than that where
the permanent establishment is situated
d. to distributions of profits by companies of
that State to permanent establishments
situated in another Member State of
companies of the same Member State of
which they are subsidiaries ?
200
DEFINITIONS | ARTICLE 2

 “Company of a Member State” – For the purposes of this Directive “company

of a Member State” shall mean any company which:
 takes one of the legal forms listed in the Annex to the Directive  Art 2(a)(i)
 No analogous application to comparable legal forms that are not mentioned in the
Annex  ECJ, 1 October 2009, C-247/08, Gaz de France, EU:C:2009:600 (concerning
the French SAS, which was introduced in 1992)
 according to the tax laws of a Member State is considered to be resident in that State for
tax purposes and, under the terms of a double taxation agreement concluded with a third
State, is not considered to be resident for tax purposes outside the Union  Art 2(a)(ii)
 Art 4(3) OECD-MC (before 2017): Place of effective management  Avoids benefits
for third countries!
 is subject to one of the taxes listed in Art 2(a)(iii) and Annex I B, without the possibility
of an option or of being exempt
 Excludes (quasi) subjectively exempt companies but does not establish a criterion of
effective taxation! Also if company is subject to tax, but is “not actually liable to pay that
tax”
 E.g., ECJ, 18 June 2009, C-303/07, Aberdeen Property Fininvest Alpha Oy,
EU:C:2009:377 (exempt SICAV); ECJ, 8 March 2017, C-448/15, Wereldhave,
EU:C:2017:180 (FIIs subject to a zero rate)

201
DEFINITIONS | ARTICLE 2

 “Permanent Establishment”
 “Permanent establishment” means …
 … a fixed place of business situated in a
Member State through which the business
of a company of another Member State is
wholly or partly carried on …
 … in so far as the profits of that place of
business are subject to tax in the Member
State in which it is situated by virtue of the
relevant bilateral tax treaty or, in the
absence of such a treaty, by virtue of
national law.
 Interpretation
 Art 5(1) OECD MA (not: Art 5(3) and (4)
OECD MC)
 „Subject-to-tax“ Clause? – Effective
taxation? All income of the permanent
establishment? Dividends?

202
PARENT AND SUBSIDIARY | ARTICLE 3

 Minimum Holding Requirement  Art 3(1)

 Liberalization
 20% from 1 January 2005 to 31 December 2006
 15% from 1 January 2007 to 31 December 2008
 10% since 1 January 2009
 Main Features
 Directly in the foreign subsidiary or indirectly in a domestic subsidiary via a permanent
establishment in another Member State
 Capital or voting rights (Art 3(2)(a))
 Not: Usus fructus  ECJ, 22 December 2008, C-48/07, Les Vergers du Vieux Tauves
SA [2008] ECR I-10627 (but: non-discrimination under fundamental freedoms)

203
PARENT AND SUBSIDIARY | ARTICLE 3

 Minimum Holding Period  Art 3(2)(b)

 Member States shall have the option of “not applying this Directive to companies of that
Member State which do not maintain for an uninterrupted period of at least two years
holdings qualifying them as parent companies or to those of their companies in which a
company of another Member State does not maintain such a holding for an uninterrupted
period of at least two years.”
 Usually 1 year
 Differentiation for purposes of Art 4 and Art 5 possible

204
PARENT AND SUBSIDIARY | ARTICLE 3

 Minimum Holding Period  Art 3(2)(b)

 Timing Issues
 Is it necessary that the minimum holding period is already fulfilled at the time of the
distribution or
 is it sufficient that the minimum holding period is completed after the distribution?
 ECJ, 17 October 1996, C-283/94 etc, Denkavit, VITIC and Vormeer, EU:C:1996:387
 Minimum Holding Period need not be fulfilled at the moment of the distribution, as long
as the holding is maintained for the holding period  Use of the present tense in Art
3(2) (“do not maintain”) and goal and purpose of the Directive
 Member States may safeguard the minumum holding period through other means
(e.g., guarantee, refund procedure)
 Relation to Art 1(10) Interest-Royalties-Directive?  Option to not apply the directive
“where the conditions set out in Article 3(b) have not been maintained for an
uninterrupted period of at least two years.”

205
 PARENT AND SUBSIDIARY | ARTICLE 3
 Excursus: Timing Issues

 Acquisition of a qualifying holding (e.g., 10%)

 Accession of the subsidiary‘s State to the EU
 Change of the legal form of the subsidiary

 “Compartmentalization?” Relevance of the date of distribution or of

the generation of underlying profits?
 Relevance of holding periods (e.g., 1 year)? What if the holding
period is completed after the distribution (ECJ, 17 October 1996, C-
283/94 etc, Denkavit)?
Dividend

1 2 3 4 5

Accrual of  Effects of a subsequent

Profits
 increase of a qualifying holding (e.g., from 10% to 15%)?
 decrease of a holding (e.g., from 10% to 5%)? Conseil d‘Etat 15 December
2014 SA Technicolor.

206
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 Options for Member States
 Exemption at the Parent Level  Art 4(1)(a)  Capital Import Neutrality
 No Netting with Losses  ECJ, 12 February 2009, C-138/07, Cobelfret,
EU:C:2009:82; ECJ, 4 June 2009, C-439/07, KBC Bank, EU:C:2009:339
 Indirect Tax Credit at the Parent Level  Art 4(1)(b)  Capital Export Neutrality
 Direct Applicability?  , ECJ, 12 February 2009, C-138/07, Cobelfret, EU:C:2009:82;
ECJ, 4 June 2009, C-439/07, KBC Bank, EU:C:2009:339
 “Distributions of profits” in Art 1 and 4
 Transfer of wealth from the subsidiary to the parent that reduces the subsidiary‘s capital
and is based on an equity investment of the parent
 Examples: Dividends, constructive distributions, reclassified interest payments, but
excluded are capital gains liquidating distributions (Art 4(1), but likely not for Art 5)

207
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 ECJ, 12 February 2009, C-138/07, Cobelfret, EU:C:2009:82

Income (20)
+ Dividend 200
= Tax Base 1 180
DRD (95% of the Dividend [= 190], but
./. 180
Parent Co. Loss limited to Base 1 [= 180])
= Tax Base 2 0

Dividend
I.e., loss-carry forward would
effectively be limited because of the
receipt of an “exempt” dividend!
Subsidiary Co.

208
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 “Fairness Tax” and “Surtax” Shareholders
 Additional tax, e.g., in Belgium and
France on (re)distributed profits on
the level of the parent company 3%
 Violates Art. 4(3)
 ECJ, 17 May 2017, C-365/16, AFEP, Dividend 2
EU:C:2017:378 (for France)
 ECJ, 17 May 2017, C-68/15, X, Parent Co. 0%
EU:C:2017:379 (for Belgium)

Dividend 1

Subsidiary Co. CIT

209
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 Where a parent company or its permanent
establishment, by virtue of the association
of the parent company with its subsidiary,
receives distributed profits, the State of
the parent company and the State of its
permanent establishment shall, except
when the subsidiary is liquidated, either:
 [Exemption:] refrain from taxing
such profits to the extent that such profits are not deductible by the subsidiary, and
tax such profits to the extent that such profits are deductible by the subsidiary; or,
 [Indirect Credit:] tax such profits while authorising the parent company and the
permanent establishment to deduct from the amount of tax due that fraction of the
corporation tax related to those profits and paid by the subsidiary and any lower-tier
subsidiary, subject to the condition that at each tier a company and its lower-tier subsidiary
meet the requirements provided for in Articles 2 and 3, up to the limit of the amount of the
corresponding tax due.

210
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 [Indirect Credit:] tax such profits while authorising the
parent company and the permanent establishment to
deduct from the amount of tax due that fraction of
the corporation tax related to those profits and paid
by the subsidiary and any lower-tier subsidiary, subject
to the condition that at each tier a company and its
lower-tier subsidiary meet the requirements provided for
in Articles 2 and 3, up to the limit of the amount of
the corresponding tax due.

211
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 Action 14 of the EU Action Plan to Strengthen the Fight against Tax Fraud and Tax
Evasion calls for a revision of the Parent-Subsidiary-Directive with regard to hybrid
loans → OECD BEPS Action 2
 Amendment of the Parent-Subsidiary-Directive by Council Directive 2014/86/EU of 8 July
2014, [2014] OJ L 219/40 (based on Proposal COM(2013) 814 final [25 November 2013])
 Background: “In as far as payments under a hybrid loan arrangement are qualified as a tax
deductible expense for the debtor in the arrangement, Member States shall not exempt such
payments as profit distributions under a participation exemption” (Report of the Code of Conduct
Group of 25 May 2010, Doc. 10033/10, FISC 47, par. 31 [access to the public restricted]).
 Stakeholder‘s consultation concerning an amendment of the Parent-Subsidiary-Directive with respect
to hybrid loan structures, D.1 (2013) (27 March 2013)
 Amendment of Art 4(1)(a) of the Parent-Subsidiary-Directive (to be implemented until
31 December 2015):

212
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 Cost deduction (Art. 4(3))
 Each Member State shall retain the
option of providing that any charges Tax-
relating to the holding and any losses effective
resulting from the distribution of the write-down
of the
Parent Co.
profits of the subsidiary may not be
value of
deducted from the taxable profits of the
the
parent company.
holding?
 Where the management costs relating
to the holding in such a case are fixed
as a flat rate, the fixed amount may not Dividend
exceed 5 % of the profits distributed by
the subsidiary.
Subsidiary Co.

Decrease in value, e.g., because of

the distribution

213
ECONOMIC DOUBLE TAXATION |
ARTICLE 4
 Financing Costs
 Art 4(3)  “Each Member State shall
retain the option of providing that any
charges relating to the holding and any Deduction of Financing
losses resulting from the distribution of Costs for Subsidiary?
the profits of the subsidiary may not be
deducted from the taxable profits of the
parent company. Where the
 NL Parent Co.

management costs relating to the
holding in such a case are fixed as a
NL Sub Co.
flat rate, the fixed amount may not
exceed 5 % of the profits distributed by
the subsidiary.”
 Typically, only 95% of the profit
distribution are exempt from taxation EU Sub Co.
 But: No justification for iscriminatory
taxation → E.g., ECJ, 18 September
2003, C-168/01, Bosal,
EU:C:2003:479

214
JURIDICAL DOUBLE TAXATION |
ARTICLE 5
 Prohibition of Withholding Taxation  Art 5
 “Profits which a subsidiary distributes to its parent company shall be exempt from
withholding tax.”
 Withholding taxation versus assessment?
 No relevance of the form of taxation  E.g., ECJ, 26 June 2008, C-284/06, Burda,
EU:C:2008:365
 But: Deviating wording of Art 1(1) of the Interest-Royalties-Directive  Exemption from
source State taxation, “whether by deduction at source or by assessment”
 Exemption at source (no refund procedure)  Neutrality and simplification! → Unlike
under the fundamental freedoms (e.g., Denkavit Internationaal, Amurta) “neutralization” is
not relevant”
 Timing Issues
 Date of distribution, not generation of underlying profits , is relevant  ECJ,
17 October 1996, C-283/94 etc, Denkavit, VITIC and Vormeer, EU:C:1996:387
 Prerequisites of the Directive have to be fulfilled at the time of the distribution (e.g.,
10%, accession of a new Member State, reduction of holding requirements)
 No „compartmentalization“!

215
JURIDICAL DOUBLE TAXATION |
ARTICLE 5
 Prohibition of Withholding Taxation  Art 5
 Definition of “Withholding Tax ”
 The term withholding tax contained in Art 5 is not limited to certain specific types of
national taxation.
 The nature of a tax, duty or charge must be determined under Union law, according to
objective characteristics, irrespective of its classification under national law.
 Autonomous interpretation, negative delimitation in Art 7 (i.e., does not cover an
advance payment or prepayment (précompte) of corporation tax).
 Three characteristics …
 … the chargeable event for the tax is the payment of dividends or any other income
from shares,
 … the taxable amount is the income from those shares, and
 … the taxable person is the holder of the shares.
 Is taxation of the subsidiary a taxation of the parent company?  See ECJ,
4 October 2001, C-294/99, Athinaïki Zythopiia, EU:C:2001:505
 But: Directive does not restrict the taxation of the subsidiary  See ECJ,
26 June 2008, C-284/06, Burda, EU:C:2008:365
 Special situation: Act of Accession for Estonia

216
ANTI-ABUSE | ARTICLE 1
 Action 15 of the EU Action Plan to Strengthen the Fight against Tax Fraud and Tax
Evasion calls for a review of anti-abuse provisions in EU legislation
 Amendment of the Parent-Subsidiary-Directive by Council Directive (EU) 2015/121 of 27
January 2015, [2014] OJ L 21/1 (based on Proposal COM(2013) 814 final [25 November
2013])
 Mandatory minimum standard of anti-abuse in the Parent-Subsidiary-Directive (to be
implemented until 31 December 2015):

217
ANTI-ABUSE | EQIOM
 ECJ, 7 September 2017, C-6/16, Eqiom, EU:C:2017:641 -
See also ECJ, 20 December 2017, C-504/16 and C-613/16,
Campsores
Deister Holding and Juhler Holding, EU:C:2017:1009, (Switzerland)
and ECJ, 14 June 2018, C-440/17, GS, EU:C:2018:437
 Under French law, there is no withholding tax exemption for
dividends distributed to a legal person controlled directly or 100%
indirectly by one or more residents of non-EU-MS, unless that
Waverley Star
legal person provides proof that the principal purpose or one of
(Cyprus)
the principal purposes of the chain of interests is not to benefit
from the exemption.
 Issues 99%
 Violation of Art. 5 (withholding tax exemption) in light of
Enka
Art 1(2) (anti-abuse reservation) of the Parent-Subsidiary (Luxembourg)
Directive (PSD)?
 Violation of the freedom of establishment under Art 49
TFEU? 100% Dividend

Equiom
(France).

218
ANTI-ABUSE | EQIOM
 Parent-Subsidiary-Directive (PSD)
 Withholding tax exemption under Art 5(1) PSD and exception
Campsores
under Art 1(2) PSD (application of domestic or agreement-based
(Switzerland)
provisions required for the prevention of fraud and abuse), which
is to be interpreted narrowly
 Requirement of necessity under Art 1(2) PSD, i.e., the specific
100%
objective must be to prevent conduct involving the creation of
wholly artificial arrangements which do not reflect economic Waverley Star
reality, the purpose of which is unduly to obtain a tax advantage (Cyprus)
(Cadbury Schweppes)
 Control by non-resident shareholders does not indicate the
99%
existence of a purely artificial arrangement, also “principal
purpose condition” does not safe the French rule, because the tax Enka
authorities are not even required to provide even prima facie (Luxembourg)
evidence of fraud and abuse

100% Dividend

Equiom
(France).

219
ANTI-ABUSE | EQIOM
 Freedom of Establishment (Art 49 TFEU)
 Exclusion of freedom of capital movement based on the factual
Campsores
size of the holding (100%) (Switzerland)
 Discrimination → Difference in treatment between profit
distributions to foreign parent companies (directly or indirectly
controlled by non-EU shareholders) and resident parent 100%
companies (also directly or indirectly controlled by non-EU
Waverley Star
shareholders), with both groups being comparable
(Cyprus)
 Justification and Proportionality → Objective of combating fraud
and tax evasion, “whether it is relied on under Article 1(2) of the
Parent-Subsidiary Directive or as justification for an exception 99%
to primary law, has the same scope. Therefore, the findings set
out [with regard to Art. 1(2) PSD] also apply with regard to that Enka
freedom.” (Luxembourg)

100% Dividend

Equiom
(France).

220
ANTI-ABUSE | EXAMPLE 1
 The “Extra Percent”

Acquisition of
0,01% in EU Co.

Stock Company Stock Company

9,99% 10,0%

PSD:  PSD:  (?)

EU Co.

221
ANTI-ABUSE | EXAMPLE 2
 “Tax Motivated” Reorganization

Reorganization

Co-operative Stock Company

Dividend

EU Co.

222
ANTI-ABUSE | ARTICLE 1
 Interposition

Interpostion

EU Co.

Dividend

EU Co.

223
ANTI-ABUSE | EXAMPLE 4
 Third-Country Relations

US Co.
Interposition

US Co.
EU Co.

Dividend

EU Co.

224
CHAPTER III
INTEREST-ROYALTIES-
DIRECTIVE
OVERVIEW | OBJECTIVE
 Objective
 Part of the Tax Package to Tackle Harmful Tax Competition
 Avoidance of double taxation through removal of withholding taxes on interest and royalty
payments made between associated companies of different Member States → Art 1(1)
 Safeguard effective taxation at the level of the beneficial owner → Art 3

 Legal Text
 Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable
to interest and royalty payments made between associated companies of different Member
States, [2003] OJ L 157, p. 49.
 Amending Proposal COM(2011)714 final (e.g., reduction of holding requirement from 25%
to 10%)

226
OVERVIEW | STRUCTURE
 Art 1 – Scope of Application and Procedure
 Art 2 – Definition of “interest” and “royalties”
 Art 3 – Definition of “company,” “associated company” and “permanent
establishment”
 Art 4 – Exclusion of payments as interest or royalties
 Art 5 – Fraud and abuse
 Art 6 – Transitional rules for various Member States
 Art 7 – Deadline for implementation
 Art 8 – Review – See Report COM(2009)179 final.
 Art 9 – Delimitation clause for the application of domestic or agreement-based
provisions which go beyond the provisions of this Directive and are designed to
eliminate or mitigate the double taxation of interest and royalties
 Art 10 – Entry into force
 Art 11 – Addressees

227
SCOPE OF APPLICATION | ARTICLE 1

 Exemption from source-taxation of

 interest payments (Art 2(a))
 royalty payments (Art 2(b))

 Interest or royalty payments “arising” in a Member

State shall be exempt from any taxes imposed on
those payments in that State (“source State”;
Art 1(2)), whether by deduction at source or by
assessment, provided that the beneficial owner of
the interest or royalties (Art 1(4) and (5)) is
 a company of another Member State (Art 1(4)
→ Art 3(a))
 or a permanent establishment situated in another Member State of a company
of a Member State (Art 1(5) and (8), Art 3(c)).
 A payment made by a company of a Member State or by a permanent
establishment situated in another Member State shall be deemed to arise in
that Member State (i.e., the “source State” → Art 1(2) and (3))

228
SCOPE OF APPLICATION | ARTICLE 1
 Precedence of the PE → Art 1(6)
 “Where a permanent establishment of a company of a Member State is treated as the
payer, or as the beneficial owner, of interest or royalties, no other part of the company
shall be treated as the payer, or as the beneficial owner, of that interest or those royalties
for the purposes of this Article.”
 Exemption at source
 Refund procedure only if certain procedural requirements set forth in Art 1(11) to (13) are
not fulfilled
 Associated Company requirement → Art 1(7) → Art 3(b)
 The exemption (Art 1(1)) requires that “the company which is the payer, or the company
whose permanent establishment is treated as the payer, of interest or royalties is an
associated company of the company which is the beneficial owner, or whose permanent
establishment is treated as the beneficial owner, of that interest or those royalties”.

229
SCOPE OF APPLICATION | ARTICLE 1

 Art 3(b) → Two companies are “associated” if …

 … either company has a direct minimum holding of 25% in the capital (or voting rights) of
the other company (Parent-subsidiary relationship), or
 … a third company has a direct minimum holding of 25% in the capital (or voting rights) of
two other companies (Common control – sister companies).
 Minimum Holding Period → Art 1(10)
 Member States have the option not to exempt in cases where companies are associated
for less than two years → “A Member State shall have the option of not applying this
Directive to a company of another Member State or to a permanent establishment of a
company of another Member State in circumstances where the conditions set out in Article
3(b) have not been maintained for an uninterrupted period of at least two years.”

230
SCOPE OF APPLICATION | ARTICLE 1

Payment Between
Parent and
Subsidiary

Payments Between
Sister Companies

231
SCOPE OF APPLICATION | ARTICLE 1

Permanent
Establishment as Payor

Permanent
Establishment as
Beneficial Owner

232
INTEREST AND ROYALTIES | ARTICLE 2
 Interest → Art 2(a)
 “Interest” means “income from debt-claims of every kind, whether or not secured by
mortgage and whether or not carrying a right to participate in the debtor's profits, and in
particular, income from securities and income from bonds or debentures, including
premiums and prizes attaching to such securities, bonds or debentures; penalty charges
for late payment shall not be regarded as interest;”
 See also Art 11(3) OECD-MC
 Royalties → Art 2(b)
 “Royalties” means “payments of any kind received as a consideration for the use of, or the
right to use, any copyright of literary, artistic or scientific work, including cinematograph
films and software, any patent, trade mark, design or model, plan, secret formula or
process, or for information concerning industrial, commercial or scientific experience;
payments for the use of, or the right to use, industrial, commercial or scientific equipment
shall be regarded as royalties.”
 See also Art 12(2) OECD-MC

233
DEFINTIONS | ARTICLE 3
 Art 3(a) → “Company of a Member State”
 Taking the legal form listed in the Annex to the Directive → Art 3(a)(i)
 Resident in that Member State and not, because of a DTC concluded with a third state,
considered to be resident for tax purposes outside the Community → Art 3(a)(ii)
 Subject to one of the taxes listed in Art 3(a)(iii) and not exempt from tax. → Art 3(a)(iii)
 Art 3(c) → “Permanent establishment”
 “[A] fixed place of business situated in a Member State through which the business of a
company of another Member State is wholly or partly carried on.”

234
EXCLUSIONS | ARTICLE 4
 Option to exclude certain Interest Payments from the Benefits of the
Directive → Art 4(1)
 … payments which are treated as a distribution of profits or as a repayment of capital
under the law of the source State → Art 4(1)(a)
 … payments from debt-claims which carry a right to participate in the debtor's profits →
Art 4(1)(b)
 … payments from debt-claims which entitle the creditor to exchange his right to interest for
a right to participate in the debtor's profits → Art 4(1)(c)
 … payments from debt-claims which contain no provision for repayment of the principal
amount or where the repayment is due more than 50 years after the date of issue →
Art 4(1)(d)
 Arm‘s Length Standard → Art 4(2)
 “Where, by reason of a special relationship between the payer and the beneficial owner of
interest or royalties, or between one of them and some other person, the amount of the
interest or royalties exceeds the amount which would have been agreed by the payer and
the beneficial owner in the absence of such a relationship, the provisions of this Directive
shall apply only to the latter amount, if any.” → Application of Parent-Subsidiary-Directive?
 See also Art 11(6) and Art 12(4) OECD-MC

235
FRAUD AND ABUSE | ARTICLE 5
 Fraud and Abuse
 “This Directive shall not preclude the application of domestic or agreement-based
provisions required for the prevention of fraud or abuse.”
 “Member States may, in the case of transactions for which the principal motive or one of
the principal motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this
Directive or refuse to apply this Directive.“

236
EXCLUSIONS | OVERVIEW
Proposal Proposal Directive Proposal Proposal
COM(90)571 COM(1998)67 2003/49/EC COM(2003)841 COM(2011)714

Beneficial
Ownership    — —
Requirement

Subject-to-  for  for

Effective- companies, , also for , also for
companies,
Taxation-   for companies companies
 for permanent
Requirement permanent
establishments
establishments

Exclusion of
Certain    — —
Payments

Fraud and
   — —
Abuse

Non-Applicatio
n in Cases of
Low-Taxation    — —
etc

237
CHAPTER IV
DISPUTE RESOLUTION
OVERVIEW
 Transfer Pricing and EU Law → Arbitration Convention – Convention
90/436/EEC on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises, [1990] OJ L 225, 10, as amended
 Dispute Resolution → Dispute Resolution Directive – Council Directive (EU)
2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the
European Union, [2017] OJ L 265

239
TRANSFER PRICING | JOINT TRANSFER
PRICING FORUM
 Codes of Conduct and Guidelines
 Code of Conduct on the Implementation of the Arbitration Convention
 Code of conduct for the effective implementation of the Convention on the elimination of double
taxation in connection with the adjustment of profits of associated enterprises, [2006] OJ (C 178), 8. 
Proposal COM(2004) 297 final
 Revised Code of Conduct for the effective implementation of the Convention on the elimination of
double taxation in connection with the adjustment of profits of associated enterprises, [2009] OJ (C
322), 1.  Proposal COM(2009) 472 final (Working Documents in SEC(2009)1168 and
SEC(2009)1169)
 Code of Conduct on Transfer Pricing Documentation
 Resolution of the Council and of the representatives of the governments of the Member States,
meeting within the Council, of 27 June 2006 on a code of conduct on transfer pricing documentation
for associated enterprises in the European Union (EU TPD), [2006] OJ (C 176), 1.  Proposal
COM(2005) 543 final (Working Document in SEC(2005)1477)
 Guidelines for Advance Pricing Agreements within the EU
 Communication on the work of the EU Joint Transfer Pricing Forum in the field of dispute avoidance
and resolution procedures and on Guidelines for Advance Pricing Agreements within the EU,
COM(2007) 71 final (Working Document SEC(2007)246)
 (Draft) Council Conclusions in Dok. 9904/07 FISC 84 (25 May 2007) (agreement in Dok. 10493/07
PV/CONS 31 ECOFIN 254 [21 June 2007]): “The Council recognises the work done by the JTPF as
an important step forward and notes the commitment of Member States to follow the Guidelines and
implement them in their national administrative practices as far as legally possible.”
TRANSFER PRICING | JOINT TRANSFER
PRICING FORUM
 Other Reports, e.g.,
 Guidelines on Low Value Adding Intra-Group Services and Potential Approaches to
non-EU Triangular Cases
 Commission Communication on the work of the EU Joint Transfer Pricing Forum in the period April
2009 to June 2010 and related proposals 1. Guidelines on low value adding intra-group services and
2. Potential approaches to non-EU triangular cases, COM(2011)16 final
 See also Council conclusions in Dok. 8480/11 FISC 28 (31 March 2011)
 Small and Medium Enterprises and Transfer Pricing
 Commission Communication on 1. the Report on Small and Medium Enterprises and Transfer Pricing
and 2. the Report on Cost Contribution Arrangements on Services not creating Intangible Property
(IP), COM(2012)516 final
 Report on Small and Medium Enterprises and Transfer Pricing, JTPF/001/FINAL/2011/EN (4 March
2011)
 Cost Contribution Arrangements on Services not creating Intangible Property (IP)
 Commission Communication on 1. the Report on Small and Medium Enterprises and Transfer Pricing
and 2. the Report on Cost Contribution Arrangements on Services not creating Intangible Property
(IP), COM(2012)516 final
 Report on Cost Contribution Arrangements on Services not creating Intangible Property (IP),
JTPF/008/FINAL/2012/EN (June 2012)
TRANSFER PRICING | FUNDAMENTAL
FREEDOMS
 ECJ, 21 January 2010, C-311/08, SGI, [2010] ECR I-487
 Profit adjustment provisions that apply only in cross-border situations and are to the
disadvantage of taxpayers constitute discriminatory restrictions on the freedom of
establishment, …
 … but such restrictions can be justified based of the need to ensure a balanced allocation
of taxing powers between Member States taken together with the need to combat tax
avoidance.
 However, a national provision is proportional and hence in compliance with the freedom of
establishment if,
 it provides “for a consideration of objective and verifiable elements”;
 the taxpayer is given, “on each occasion on which there is a suspicion that a transaction goes beyond
what the companies concerned would have agreed under fully competitive conditions, […] an
opportunity, without being subject to undue administrative constraints, to provide evidence of any
commercial justification that there may have been for that transaction”; and
 “where the consideration of such elements leads to the conclusion that the transaction in question
goes beyond what the companies concerned would have agreed under fully competitive conditions,
the corrective tax measure must be confined to the part which exceeds what would have been agreed
if the companies did not have a relationship of interdependence”.
TRANSFER PRICING | FUNDAMENTAL
FREEDOMS
 ECJ, 21 January 2010, C-311/08, SGI, [2010] ECR I-487
 What is a “commercial justification”?
 Any transaction that is neither a sham nor abusive? Or does this phrase mean nothing else than an
opportunity to prove that the arrangement satisfied, in whole or in part, the arm’s length test, so that
indeed the arm’s length principle would constitute an appropriate test by which to distinguish artificial
arrangements from genuine economic transactions?
 The latter approach was endorsed by the England and Wales Court of Appeal (Para. 57 of England
and Wales Court of Appeal (Civil Division) of 18 February 2011, Test Claimants in the Thin Cap Group
Litigation v. HMRC, [2011] EWCA Civ 127), noting that “[l]egislation that involves the application of the
arm’s length test, as embodied in Article 9 of the OECD Model Convention, does not unlawfully
interfere with [Art. 49 TFEU], provided the taxpayer is given an adequate opportunity to present his
case to the tax authority that the transaction in question was on arm’s length terms, and may challenge
the decision of the tax authority before the national court, and, secondly, that the effect of the
legislation is limited to those aspects of the advantage conferred by the taxpayer company that do not
satisfy that test.”
 Case on the application of transfer pricing in relation to transactions between resident and
non-resident companies → Hornbach-Baumarkt AG
TRANSFER PRICING | FUNDAMENTAL
FREEDOMS
 ECJ, 31 May 2018, C-382/16, Hornbach-
Baumarkt, EU:C:2018:366
 German law → Adjustment, remuneration in
exchange for granting the guarantees Hornbach AG
 ECJ (DE)

 Discrimination, but potentially justified with regard

preservation of the balanced allocation of the DE
power to tax between the Member States (ECJ, NL
21 January 2010, C-311/08, SGI, EU:C:2010:26)
 Proportionality Hornbach BV Gratuitous
 Taxpayer must, inter alia, have opportunity to provide (NL) comfort
evidence of any commercial justification for an letters
agreement on non-arm’s-length terms
 Includes economic reasons resulting from its position
as a shareholder of the non-resident company (e.g.,
„economic interest of Hornbach-Baumarkt AG itself in Third-party loan
the financial success of the foreign group companies,
in which it participates through the distribution of
profits, as well as by a certain responsibility of the
applicant in the main proceedings, as a shareholder, in
the financing of those companies“)

244
ARBITRATION CONVENTION |
OBJECTIVE
 Objective of the Arbitration Convention Parent
 Binding elimination of double taxation in transfer
pricing cases (also in relation to permanent
establishments) by agreement between the contracting Transactions at
states including, if necessary, by reference to the Arm‘s Length?
opinion of an independent advisory body (i.e., the
arbitration panel)
 Multi-phase process designed to achieve a solution
within a three-year timeframe

Subsidiary
ARBITRATION CONVENTION | STATUS
 Arbitration Convention
 Convention 90/436/EEC on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises, [1990] OJ L 225, 10, as amended →
Originally: Proposal for a Council Directive, COM(76)611 final, withdrawn in [1997] OJ C 2,
p. 6.
 Following lenghty ratification procedures, applicable in all 351 bilateral relationships
between the 27 EU Member States since 2010
 Interpretation
 Part of the acquis communautaire, but no jurisdiction of the ECJ
 Art 3(2) of the Arbitration Convention refers to double tax agreements for the definition
of undefined terms, unless the context requires otherwise → I.e., no solution if there is
no DTC, if the DTC does not define the term, or if the DTC refers to domestic law →
The Arbitration Convention does not apply to double taxation caused by disputes
concerning its interpretation (e.g., the term “enterprises” or “permanent establishment”)!
ARBITRATION CONVENTION | SCOPE

 Scope of Application
 The Arbitration Convention applies in cases of (likely) double taxation because of arm’s
length profit adjustments between related enterprises of different Contracting States
(Art. 1(1)), including situations involving EU permanent establishments of enterprises of
Contracting States (Art. 1(2)),and also where the price adjustment has no current tax effect
for any (or all) enterprises due to losses (Art. 1(3)).
 The Code of Conduct recommends that the Arbitration Convention’s scope should cover EU
triangular transfer pricing cases and thin capitalization.
 The Convention is, however, not applicable to cases
 between enterprises carried on by residents of the same Member State, unless a permanent
establishment in another Member State is involved (Art. 1(2));
 between enterprises of which one is resident in a non-Member State, even if the latter’s permanent
establishment within a Contracting State is concerned;
 where a permanent establishment in a non-Member State is involved;
 or where two EU permanent establishments of the same non-Member State enterprise are
concerned.
ARBITRATION CONVENTION | SCOPE
 Scope of Application
 The taxes covered are the domestic ‘taxes on income’ of corporations and individuals
(Art. 2(1)), with examples of existing taxes listed in Art. 2(2).
 The territorial scope of the Convention is identical to the scope of Art. 52 TEU with the
exception of certain French overseas territories, the Faroe Islands and Greenland
(Art. 16); the territorial scope hence does not extend to territories covered by Art. 355
TFEU (such as, e.g., Gibraltar).
ARBITRATION CONVENTION |
PRINCIPLES
 Principles of Application
 The principles for profit adjustments and attribution of profits set out in Art 4 are nearly
literal renditions of (old) Art 7(2) and Art 9(1) OECD MC, i.e., the arm’s length standard:
 Art 4(1) replicates the wording of Art 9(1) OECD MC and sets the standard for adjustments between
separate enterprises, also where permanent establishments are involved.
 Art 4(2) uses the language Art 7(2) OECD MC before the full implementation of the ‘Authorized OECD
Approach’ (‘AOA’) in the 2010 revision and – unlike Art 7(2) OECD MC – without making reference to
former Art. 7(3); it sets the standard for transactions between a head office and its permanent
establishment.
ARBITRATION CONVENTION |
PRINCIPLES
 Principles of Application
 The Arbitration Convention contains only two rules of substantive tax law, i.e.,
 the arm’s length standard as principle for profit adjustments and attribution of profits set out in Art 4
and understood as advocated by the OECD, and
 the elimination of double taxation under Arts 12 and 14.
 Instead of mandating corresponding adjustments to the tax base (as in Art 9(2) OECD
MC), Art 14 of the Convention considers double taxation as eliminated if either the profits
are included in the computation of the taxable profits in one State only or if a tax credit is
granted for the additional tax charged to the associated enterprise by the adjusting State
as a consequence of the revised transfer price.
ARBITRATION CONVENTION | PHASES

 Overview
 If no satisfactory solution can be reached by the competent authority domestically (Art 5),
the Arbitration Convention foresees a mutual agreement procedure between the States
involved (Art 6(2)) and, if they fail to reach an agreement that eliminates double taxation,
an arbitration procedure (Art 7).
 Phases
 Domestic Proceedings (Art. 5)
 Mutual Agreement Procedure (Phase I) (Art 6(2))
 Arbitration Procedure (Phase II) (Art 7)
 Elimination of Double Taxation (Phase III) (Art 12)
ARBITRATION CONVENTION | PHASES
 Exclusions
 The Contracting States are, however, not required to initiate or continue a mutual
agreement or arbitration procedure where
 the complaint does not appear to be well-founded (Art 6(2));
 if one of the enterprises is (charged to be) liable to a – judicial or administrative –
adjustment-related ‘serious penalty’ (Art 8(1) and (2));
 or if, under domestic law, the Contracting State involved is not allowed to derogate
from judicial decisions, unless the enterprise involved has allowed the time provided
to for appeal against the profit adjustment to expire or withdrawn such appeal before a
decision has been delivered (Art 7(3)).
ARBITRATION CONVENTION | PHASES
 Multi-Phase Process: Domestic Proceedings (Art 5)
 A Contracting State shall inform the taxpayer of the intention to make a transfer pricing
adjustment in due time to give it ‘the opportunity to inform the other enterprise so as to
that other enterprise the opportunity to inform in turn the other Contracting State’ (Art 5).
 Unless the enterprises involved and the other Contracting State agree to that adjustment
(Art. 5), the taxpayer affected by a re-allocation of profits has the right to present its case
to the competent authority of the Contracting State of which it is an enterprise or in which
its permanent establishment is situated (Art. 6(1)).
 This application must be made “within three years of the first notification of the action
which results or is likely to result in double taxation within the meaning of Article 1”
(Art 6(1)).
ARBITRATION CONVENTION | PHASES

 Multi-Phase Process: Mutual Agreement Procedure (Phase I) – 2 years

 If no satisfactory uni- or bilateral solution can be reached, the Arbitration Convention
foresees a (mandatory) mutual agreement procedure between the States involved
(Art. 6(2)). – The enterprises involved are not parties to that procedure and have no right
to be present at competent authority discussions.
 Under Art. 6(2), “[a]ny mutual agreement reached shall be implemented irrespective of any
time limits prescribed by the domestic laws of the Contracting States concerned”.
 A mutual agreement that eliminates double taxation should be reached “within two years
of the date on which the case was first submitted to one of the competent authorities in
accordance with Article 6 (1)” (Art. 7(1)).
 The two-year period starts on the later of either (1) the date on which the competent
authority receives the request or (2) the date of the tax assessment notice.
 There are two exceptions:
 If the case has also been submitted to a court of tribunal, the two-year period starts
with the date on which the judgment of the final court of appeal was given (Art 7(1)).
 The competent authorities may by mutual agreement and with the agreement of the
associated enterprises concerned waive the two-year time limit (Art 7(4)).
ARBITRATION CONVENTION | PHASES

Number of cases reported under the EU AC. This graph shows the evolution of reported pending cases under EU
AC’s mutual agreement proceedings at the end of each year from 2004 to 2014. Due to the existence of
discrepancies in the number of cases reported by the Member States until 2011, a minimum and a maximum
number of cases is shown. See, e.g., JTPF/008/2015/EN (October 2015) for an explanation of the methodology of
counting “initiated” and “completed” cases and various deviations by individual Member States.
ARBITRATION CONVENTION | PHASES

Number of cases pending under the EU AC in each Member State by the end of 2014. This graph shows the
number reported pending cases under EU AC’s mutual agreement proceedings in each Member State at the end of
2014, where each Member State reported cases originating from or received by it, i.e., a total of 1.280 reported
cases, implying approximately 640 initiated bilateral cases. This data is taken from JTPF/012/2013/EN (August
2013).
ARBITRATION CONVENTION | PHASES

Requests for mutual agreement proceedings under the EU AC received by tax administrations from 2000 to 2014.
This graph shows the evolution of requests received by tax administrations for proceedings under the EU AC each
year from 2000 to 2014. Due to the existence of discrepancies in the number of cases reported by the Member
States in the statistics until 2011, a minimum and a maximum number of requests is shown. See for data on 2004
to 2011 JTPF/013/2012/EN (June 2012), and for data on 2012 JTPF/012/2013/EN (August 2013).
ARBITRATION CONVENTION | PHASES

Cases pending by the end of 2011 itemized by year of request. This graph shows the number of total pending
cases by the end of 2011 itemized by the year in which the request has been received, where each Member State
reported cases originating from or received by it. Due to the existence of discrepancies in the number of cases
reported by the Member States, a minimum and a maximum number of requests is shown. This data is taken from
JTPF/013/2012/EN (June 2012). Later statistics by the JTPF do not itemize cases by the year in which the request
has been received.
ARBITRATION CONVENTION | PHASES
 Multi-Phase Process: Arbitration Procedure (Phase II) – 6 months (12 months)
 If the competent authorities fail to reach an agreement within the time frame under Art 7,
the Contracting States are required to set up an advisory commission, i.e., an arbitration
panel (Art 7). – The advisory commission should be established ‘no later than six months
following expiry of the period referred to in Article 7’.
 Arts 9 and 10 set out rules as to the composition of the advisory commission and
procedure, with the competent authorities being at liberty to agree on additional rules
of procedure (Art. 11(2)).
 The enterprises involved are not parties to that procedure. However, they can or must
provide any information, evidence or documents and have the right or obligation be
heard or to appear before the commission (Art 10).
 Arbitration Decision
 Panel decides by simple majority vote (Art 11(2)).
 Opinion within six months from the date on which the matter was referred to it (Art 11).
 The advice must be based on the principles of Art 4 of the Convention, i.e., the arm’s
length principle (Art 11(1)), hence excluding decisions ex aequo et bono.
ARBITRATION CONVENTION | PHASES

 Multi-Phase Process: Elimination of Double Taxation (Phase III) – 6 months

 Within six months following the advice of the arbitration committee, the competent
authorities must issue a decision eliminating double taxation (Art 12(1))
 The decision does not have to follow the advice of the advisory commission, yet it must
be in line with Art 4 of the convention, i.e., it must be in conformity with the arm’s-length
principle.
 If they fail to reach agreement, they shall be obliged to act in accordance with the
committee’s opinion (Art 12(1)).
ARBITRATION CONVENTION | PHASES

Number of cases that are pending two years after the date of their initiation by the end of 2014. This graph shows
the number of cases by the end of 2014 that are pending two years after the date they were initiated in the different
Member States, where each Member State reported cases originating from or received by it, i.e., a total of 520
reported cases, implying approximately 260 bilateral cases. According to the Revised Code of Conduct, the two-
year period starts on the latest of the following dates: (1) the date of the tax assesment notice, i.e. a final decision
of the tax administration on the additional income or equivalent; (2) the date on which the competent authority
receives the request and the minimum information as stated under point 5(a) of the Revised Code of Conduct.
Thus, if the tax assessment notice was not yet issued when the case was initiated, the two year period starts after
initiation, i.e., at the day of the tax assessment notice. This data is taken from JTPF/008/2015/EN (October 2015).
 ARBITRATION CONVENTION | PHASES

Reasons why cases are still pending two years after initiation by the end of 2014. This graph itemizes the reasons why
cases are still pending two years after initiation by the end of 2014. These include: (1) cases where the two year point
has not been reached under the Revised Code of Conduct, i.e., because no assessment notice has been issued at the
time of initiation; (2) cases pending before Court, i.e., cases where the two-year period has not yet expired because of
Article 7(1) 2nd sentence and Article 7(3) EU AC; (3) cases where the time limit has been waived with agreement of
the taxpayer according to Article 7(4) EU AC; (4) cases which are to be sent to arbitration, i.e., cases for which the
two-year period has expired, but which have not yet been referred to an advisory commission; (5) cases that have
been referred to an advisory commission and awaiting its opinion; (6) cases where a settlement has been agreed in
principle awaiting exchange of closing letters or final signed minutes, i.e., cases where Competent Authorities have
agreed in a mutual agreement proceeding or where the advisory commission has delivered its opinion and the six-
month period where Competent Authorities can deviate has not yet expired; and (7) other reasons. This data is taken
from JTPF/008/2015/EN (October 2015).
DISPUTE RESOLUTION DIRECTIVE |
CORPORATE TAX REFORM
 Corporate Tax Reform Package: Dispute Resolution
 Proposal for a Council Directive on Double Taxation Dispute Resolution
Mechanisms in the European Union (COM(2016)686 final)
 Adopted by the Council on 2 October 2017 (Dok. 9806/17 FISC 118 ECOFIN
472) → Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute
resolution mechanisms in the European Union, [2017] OJ L 265
 To be implemented by Member States by 30 June 2019. Directive shall apply to
any complaint submitted from 1 July 2019 onwards relating to questions of
dispute relating to income or capital earned in a tax year commencing on or
after 1 January 2018.

263
 DISPUTE RESOLUTION DIRECTIVE |
SCOPE
Not limited to double taxation (but a Member State may deny access to
the dispute resolution procedure under Art 6 on a case by case basis where DTCs and EU
a question of dispute does not involve double taxation (Art 16(7)). Arbitration
Convention.

Not included VAT, inheritance taxes, might

Indivduals and corporations. raise issues with regard to the notion of
income.

264
DISPUTE RESOLUTION DIRECTIVE |
HIGHLIGHTS
 Dispute Resolution
 Member States have a legal obligation to take conclusive and enforceable
decisions under the improved dispute resolution mechanism
 Taxpayers faced with tax treaty or EU Arbitration Convention disputes can
initiate a procedure whereby the Member States in question must attempt to
resolve the dispute amicably within two years
 If at the end of the two-year period no solution has been found, the competent
authority of each Member State must set up an Advisory Commission to
arbitrate
 If the competent authorities fail to set up the Advisory Commission to arbitrate,
the taxpayer can bring an action before the national court to do so in their place

265
DISPUTE RESOLUTION DIRECTIVE |
STRUCTURE
 Complaint by an affected person within 3 years (Art 3)
 Member State decision on the complaint within 6 months
 Accept complaint → Mutual agreement procedure to reach agreement within 2
years (Art 4)
 Reject complaint, e.g., for lack of information lack of dispute (Art 5)
 Dispute resolution by the Advisory Commission upon affected person‘s request if
complaint was rejected only by one Member State or if no agreement could be
reachted (Art 6) – Alternatively: Appointments by competent courts or national
appointing body (Art 7)
 Composition of the Advisory Commission (Art 8, 9)
 Note: Alternative Dispute Resolution Commission (Art 10)
 Procedural rules, costs etc (Art 11, 12 and 13)

266
DISPUTE RESOLUTION DIRECTIVE |
STRUCTURE
 Opinion of the Advisory Commission or Alternative Dispute Resolution Commission
within 6 months (+ 3 months) (Art 14)
 Final decision by the Member States within 6 months (Art 15) → May deviate from
the opinion of the Advisory Commission or Alternative Dispute Resolution
Commission, but the latter becomes binding if no agreement is reached
 Interaction with national proceedings and derogations (Art 16)
 Special provisions for individuals and smaller undertakings (Art 17)
 Publicity (Art 18)

267
EXCURSUS | ECJ AS ARBITRATION
COURT (AUSTRIA V. GERMANY)
 ECJ (Grand Chamber), 12 September 2017, C-648/15,
Austria v. Germany, EU:C:2017:664
 ECJ as arbitration court under Article 25(5) of the Austro-
AT Bank Co.
German Convention → Article 273 TFEU (dispute related to
the subject matter of the treaties) 
 Interest on “Genussscheine” (annual payment at a fixed Interest on
percentage, but reduction in cases of losses and “Genuss-
subsequent making up) scheine”
 Austria: Art. 11(1) DTC → Exclusive taxing right in the
residence State.
 Germany: Art. 11(2) DTC (exception from para. 1, inter
alia, for “debt-claims with participation in profits”) →
Unlimited taxing right in Germany (and credit in Austria)
DE Bank Co.

268
EXCURSUS | ECJ AS ARBITRATION
COURT (AUSTRIA V. GERMANY)
 ECJ (Grand Chamber), 12 September 2017, C-648/15,
Austria v. Germany, EU:C:2017:664
 ECJ’s reasoning in substance
AT Bank Co.
 No reference to Art. 3(2) DTC but rather autonomous
treaty interpretation based on the methods proper to
international law (i.e., Vienna Convention) Interest on
 Exceptions in Art. 11(2) DTC → Commonality that the “Genuss-
remuneration is supposed to vary according to the scheine”
annual profits of the issuer
 As an exception Art. 11(2) DTC must be interpreted
narrowly, also because the application of Art. 11(2) DTC
“implies double taxation, the detrimental effects of which
on the proper functioning of the internal market are
mitigated only by the offsetting rule laid down in DE Bank Co.
Article 23(1)(b) and (2)(b) of that convention”
 “Debt-claims with participation in profits” do not include
Genussscheine where the (fixed) remuneration is merely
reduced or suspended when its payment would lead to a
loss, with an adjustment being made subsequently in the
course of the following beneficial financial years

269
PART VI
RECENT EU LEGISLATION
AND INITIATIVES
CONTENT
 Chapter I – Overview
 Chapter II – Exchange of Information
 Chapter III – Tax Good Governance
 Chapter IV – Taxation of the Digital Economy

271
CHAPTER I
OVERVIEW
CURRENT DEVELOPMENTS |
OVERVIEW
 Action Plan to Strengthen the Fight against Tax Fraud and Tax Evasion
(December 2012) → Commission’s Communication on An Action Plan to
strengthen the fight against tax fraud and tax evasion, COM(2012) 722 final (6
December 2012)
 Tax Transparency Package (March 2015) → Commission’s Communication on
tax transparency to fight tax evasion and avoidance, COM(2015) 136 final (18
March 2015)
 Action Plan on Corporate Taxation (June 2015) → Commission’s
Communication on A Fair and Efficient Corporate Tax System in the European
Union: 5 Key Areas for Action, COM(2015) 302 final (17 June 2015)
 Anti-Tax Avoidance Package (January 2016)
 Fight against Tax Evasion and Avoidance (July 2016) → Communication on
further measures to enhance transparency and the fight against tax evasion and
avoidance, COM(2016)451 (5 July 2016)
 Corporate Tax Reform Package (October 2016)

273
CURRENT DEVELOPMENTS |
OVERVIEW
 Action Plan to Strengthen the Fight against Tax Fraud and Tax Evasion
(December 2012) → Commission’s Communication on An Action Plan to
strengthen the fight against tax fraud and tax evasion, COM(2012) 722 final (6
December 2012)
 34 concrete Actions, including …
 Administrative Cooperation → Mandatory automatic exchange of information in the field
of taxation in the Directive on Mutual Assistance – Proposal COM(2013) 348 final (12 June
2013), adopted as Directive 2014/107/EU of 9 December 2014, [2014] OJ L 359/1
 Aggressive Tax Planning → Recommendation C(2012)8806 final (6 December 2012)
 Third Countries and Good Tax Governance → Recommendation C(2012)8806 final (6
December 2012)
 Hybrid Loans → Amendment of the Parent-Subsidiary-Directive – Proposal
COM(2013)814 final (25 November 2013), adopted as Directive 2014/86/EU of 8 July
2014, [2014] OJ L 219/40 → OECD BEPS Action 2
 Anti-Abuse Provisons in EU Legislation → Amendment of the Parent-Subsidiary-
Directive – Proposal COM(2013)814 final (25 November 2013), adopted as Directive (EU)
2015/121 of 27 January 2015, [2015] OJ L 21/1.

274
CURRENT DEVELOPMENTS |
OVERVIEW
 Tax Transparency Package (March 2015) → Commission’s Communication on
tax transparency to fight tax evasion and avoidance, COM(2015) 136 final (18
March 2015)
 Transparency on Tax Rulings → Amending the Directive on Mutual Assistance –
Proposal COM(2015) 135 final (18 March 2015), adopted by Council on 6 October 2015
(Doc. 12774/15 FISC 122 ECOFIN 752)
 Other Tax Transparency Initiatives
 Assessing possible new transparency requirements for multinationals → Specifically
“Country-by-country reporting” (“CBCR”) → OECD BEPS Action 13
 Reviewing the Code of Conduct on Business Taxation → Action Plan on Corporate
Taxation → OECD BEPS Action 5
 Quantifying the scale of tax evasion and avoidance (“tax gap”)
 Repealing the Savings Tax Directive (in light of the extended Directive on Mutual
Assistance) → Proposal COM(2015) 129 final (18 March 2015), adopted as Directive
(EU) 2015/2060 ([2015] OJ L 301/1)

275
CURRENT DEVELOPMENTS |
OVERVIEW
 Action Plan on Corporate Taxation (June 2015) → Commission’s
Communication on A Fair and Efficient Corporate Tax System in the European
Union: 5 Key Areas for Action, COM(2015) 302 final (17 June 2015)
 Re-launching the Common Consolidated Corporate Tax Base (CCCTB)
 Ensuring fair taxation where profits are generated → CCCTB, CoC, double non-taxation
in EU legislation (i.e., in the Interest-Royalties-Directive and the Parent-Subsidiary-
Directive), transfer pricing framework in the EU, linking preferential regimes to where value
is generated (i.e., for “patent boxes”) → OECD BEPS Action 5
 Creating a better business environment → Greater coordination between Member States
on tax policy, along with measures to reduce administrative burden, compliance costs and
tax obstacles in the internal market, specifically by (1) enabling cross border loss offset
(with recapture) and (2) improving double taxation dispute resolution mechanisms
 Increasing transparency → E.g., adopt a common approach to non-cooperative tax
jurisdictions, specifically by (1) publishing an EU-wide list of third country non-cooperative
tax jurisdictions and (2) coordinating possible counter-measures towards non-cooperative
tax jurisdictions
 Improving EU coordination – Specifically by (1) coordination on tax audits and (2)
reforming the Code of Conduct for Business Taxation and the Platform on Tax Good
Governance

276
CURRENT DEVELOPMENTS |
OVERVIEW
 Anti-Tax Avoidance Package (January 2016)

Chapeau Communication (COM(2016) 23 final)

Revised
Proposal for an Anti-
Administrative
Tax Avoidance
Cooperation Directive
Directive
Recommendation on – CbC-Reporting Communication on
(COM(2016) 26 final)
Tax Treaties (COM(2016) 25 final) External Strategy
– Adopted as Council
(C(2016) 271 final) – Adopted as Council (COM(2016) 24 final)
Directive (EU)
Directive (EU)
2016/1164, [2016] OJ
2016/881,
L 193/1
[2016] OJ L 146/8

Staff Working Document (SWD(2016) 6/2) and Study on Aggressive Tax Planning

277
CURRENT DEVELOPMENTS |
OVERVIEW
 Adopted as Directive (EU) 2016/1164, [2016] OJ L  Sets new good governance standards in tax matters
193/1 (EOI, AEOI, CoC, BEPS Standard, anti-money
laundering)
 Five mandatory measures, but “minimum standard”
 Announces work on a common EU system for
 Reflects (1) G20/OECD BEPS Actions, (2) Council
assessing, screening and listing third countries (“EU
work on the CCCTB, and (3) Parliament’s resolution
blacklist”)
on tax avoidance (P8_TA(2015)0457)
 Links EU funds and tax good governance

Chapeau Communication (COM(2016) 23 final)

Proposal for an Anti- Revised Administrative
Recommendation on Communication on
Tax Avoidance Cooperation Directive
Tax Treaties External Strategy
Directive – CbC-Reporting
(C(2016) 271 final) (COM(2016) 24 final)
(COM(2016) 26 final) (COM(2016) 25 final)

Staff Working Document (SWD(2016) 6/2) and Study on Aggressive Tax Planning

 Recommends EU-adjustment of the PPT-rule  Adopted as Directive (EU) 2016/881, [2016] OJ L

 Recommends to adopt new Art 5 OECD MC 146/8
 Addresses OECD BEPS Actions 6, 7 and 15  Requires country-by-country reporting and exchange
of those reports

278
CURRENT DEVELOPMENTS |
OVERVIEW
 Fight against Tax Evasion and Avoidance (July 2016) → Communication on
further measures to enhance transparency and the fight against tax evasion and
avoidance, COM(2016)451 (5 July 2016)
 Harness the link between Anti Money Laundering and Tax Transparency rules → Tax
authorities must be given access to the data provided under the E’'s anti-money laundering
rules (e.g., customer due diligence information and the information in their national
beneficial ownership registries) — Proposal for a Council Directive amending Directive
2011/16/EU as regards access to anti-money-laundering information by tax authorities,
COM(2016)452 (5 July 2016)
 Improve Information Exchange on Beneficial Ownership → Currently pilot project
(launched by UK, Germany, Spain, Italy and France) to exchange information on the
ultimate beneficial owners of companies and trusts
 Increase Oversight of Enablers and Promoters of Aggressive Tax Planning → The
Commission will explore the best way to increase oversight and ensure that effective
disincentives apply for promoters and enablers of aggressive tax planning schemes →
OECD BEPS Action 12
 Promote higher tax good governance standards worldwide → Development of the “EU
black list”
 Improve the protection of whistle-blowers

279
CURRENT DEVELOPMENTS |
OVERVIEW
 Corporate Tax Reform Package (25 October 2016)

Chapeau Communication (COM(2016) 682 final)

C(C)CTB

Proposal for a Proposal for a

Council Directive Proposal for a Council Directive to
on Double Taxation Proposal for a Council Directive on amend the ATAD with
Dispute Resolution Council Directive on a Common regard to hybrid
Mechanisms in the a Common Corporate Consolidated mismatches with third
European Union Tax Base Corporate Tax Base countries
(COM(2016) 686 (COM(2016) 685 (CCCTB) (COM(2016) 687
final) final) (COM(2016) 683 final)
final)

280
C(C)CTB | STATUS QUO
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base
(CCCTB), COM(2011) 121 final (16 March 2011)
 Impact Assessment in SEC(2011)315 and Summary in SEC(2011)316
 Work on the level of Council on the tax base (under the Danish, Lithuanian and Hellenic
Presidencies) and on international and BEPS-related aspects and issues of the financial
sector (under the Italian Presidency) → Compromise text in Doc. 15756/14 FISC 197 and
15756/14 FISC 197 ADD 1 (19 November 2014)
 Structure of the Commission’s proposal:
One single set of profit determination rules for EU groups of Only corporations, not
companies that opt for the common system. Optionality and “All-In”. individuals or partnerships!

Common Consolidated Corporate Tax Base

Profits and losses of all group members are aggregated into one
No intention to harmonize
singe overall group tax base, including irrelevance of intra-group
tax rates!
transactions. → Sharing mechanism (formulary apportionment)

 Main goals → (1) Reduction of compliance costs (no transfer pricing), (2) elimination of
double taxation (base sharing mechanism), and (3) elimination of over-taxation (i.e., automatic
cross-border loss relief)

281
C(C)CTB | ACTION PLAN ON
CORPORATE TAXATION
 Re-launch of the Common Consolidated Corporate Tax Base (CCCTB)
 Commission’s Communication on A Fair and Efficient Corporate Tax System in the
European Union: 5 Key Areas for Action, COM(2015) 302 final (17 June 2015)
 CCCTB as a holistic solution to profit shifting in the BEPS-context → Highly effective in
“tackling profit shifting and corporate tax abuse in the EU”, as a CCCTB would (1) remove
mismatches between national tax systems, (2) remove the possibility to manipulate
transfer pricing, (3) address the “debt bias”, (4) introduce transparency as to the effective
tax rate in each jurisdiction, (5) allow Member States to implement a common approach
towards third countries, (6) reinforce the link between profit creation and taxation, (7)
enable a common adoption of BEPS measures (e.g., definition of permanent
establishments, CFC rules)
 New proposals
 Proposal for a Council Directive on a Common Corporate Tax Base (COM(2016) 685 final)
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base
(CCCTB) (COM(2016) 683 final)

282
OTHER LEGISLATION | OVERVIEW
 New Directives
 Double Taxation Dispute Resolution Mechanisms in the European Union Council Directive
(EU) 2017/1852 of 10 October 2017, [2017] OJ L 265)
 Mandatory Disclosure of Potentially Aggressive Cross-Border Tax Planning Arrangements
(Council Directive (EU) of 25 May 2018, [2018] OJ L 139/1)
 Proposals
 Re-launch of the Common Consolidated Corporate Tax Base (CCCTB)
 Proposal for a Council Directive on a Common Corporate Tax Base (COM(2016) 685 final)
 Proposal for a Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) (COM(2016)
683 final)
 Taxation of the Digitalized Economy
 Long-Term Solution → Proposal for a Council Directive laying down rules relating to the corporate
taxation of a significant digital presence, COM(2018) 147 and Annexes, and Commission
Recommendation of 21.3.2018 relating to the corporate taxation of a significant digital presence,
C(2018)1650
 Short-Term Solution → Proposal for a Council Directive on the common system of a digital services tax
on revenues resulting from the provision of certain digital services, COM(2018)148
 Whistleblower Protection
 Proposal for a Directive of the European Parliament and of the Council on the protection of persons
reporting on breaches of Union law, COM(2018)218

283
CHAPTER II
EXCHANGE OF INFORMATION
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION
■ Council Directive 2011/16/EU of 15 February 2011 on administrative
cooperation in the field of taxation and repealing Directive 77/799/EEC,
[2011] L 64/1 (based on proposal COM(2009)29 [2 February 2009])
■ Automatic exchange of information with effect from 1 January 2015,
where information is available, in respect of five non-financial categories
of income and capital, i.e., for
 income from employment,
Step 1 – Certain  director’s fees,
Types of Non-  life insurance products not covered by other Directives,
Financial
 pensions, and
Income (2011)
 ownership of and income from immovable property.
■ Implementation (computerized format) → Commission Implementing
Regulation (EU) 2015/2378, [2015] OJ L 332/19
■ Also: First Report of the Commission AEFI expert group on the
implementation of Directive 2014/107/EU for automatic exchange of
financial account information (March 2015)

285
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION

■ Council Directive 2014/107/EU of 9 December 2014, [2014] OJ L 359/1

(based on Proposal COM(2013) 348 final [12 June 2013]) →
Implementation of the OECD’s Common Reporting Standard (CRS)
Step 2 – ■ Automatic exchange of information with effect from 1 January 2016/17
Financial (without the requirement of “availability”) for financial information, i.e.,
Information  interest, dividends and similar types of income,
(2014)  sale proceeds from the sale of financial assets,
 account balances.
■ Implementation (computerized format) → Commission Implementing
Regulation (EU) 2015/2378 of 15 December 2015, [2015] OJ L 332/19

286
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION
■ Relation to Savings Interest Directive? → Repeal of the Savings Interest Directive by
Council Directive (EU) 2015/2060 of 10 November 2015, [2015] OJ L 301/1 (based
on proposal COM(2015)129 [18 March 2015]) (aligned with entry into force of Council
Directive 2014/107/EU)
■ Savings Interest Agreements with Third countries - Negotiations/agreements for
amending protocols with

Council Decision Text of the Council Decision

In force
on Signing Protocol in the OJ on Conclusion
Step 2 –
(EU) 2015/860, [2015] OJ L (EU) 2015/2400, [2015] OJ L
Financial Switzerland [2015] OJ L 333/12 1 Jan. 2017
136/5 — COM(2015)150 333/10 — COM(2015)151
Information
(2014) Liechten- (EU) 2015/1994, [2015] OJ L
[2015] OJ L 339/3
(EU) 2015/2453, [2015] OJ L
1 Jan. 2016
stein 290/16 — COM(2015)394 339/1 – COM(2015)395

(EU) 2016/1392, [2016] OJ L (EU) 2016/1830, [2016] OJ L

Monaco [2016] OJ L 225/3 1 Jan. 2017
225/1 — COM(2016)200 280/1 – COM(2016)201

(EU) 2016/242, [2016] OJ L (EU) 2016/1751, [2016] OJ L

Andorra [2016] OJ L 268/40 1 Jan. 2017
45/10 – COM(2015)632 268/38 – COM(2015)631

(EU) 2015/2469, [2015] OJ L (EU) 2016/828, [2016] OJ

San Marino [2015] OJ L 346/3 1 Jan. 2016
346/1 – COM(2015)519 L 140/1 — COM(2015)518

287
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION
■ Council Directive (EU) 2015/2376 of 8 December 2015, [2015] OJ L 332/1
(based on proposal COM(2015)135 [18 March 2015]) → OECD BEPS
Action 5
■ Exchange of basic information on advance cross-border rulings and
advance pricing arrangements with effect from 1 January 2017
■ Applies for cross-border rulings and advance pricing arrangements that were
issued, amended or renewed
 after 31 December 2016 or
Step 3 – Tax  within a period beginning five years before 1 January 2017, but for those issued,
Rulings amended or renewed
(2015)  between 1 January 2012 and 31 December 2013 only if they are still valid on 1 January
2014,
 between 1 January 2014 and 31 December 2016 irrespective of whether they are still
valid or not, and
 before 1 April 2016, Member States may exclude such ruling if it concerns a particular
person or a group of persons (excluding those conducting mainly financial or investment
activities) with a group wide annual net turnover of less than € 40 million.
■ Does not apply in a case where an advance cross-border ruling exclusively
concerns and involves the tax affairs of one or more natural persons.
■ Part of the Tax Transparency Package (COM(2015) 136)

288
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION
■ Council Directive (EU) 2016/881 of 25 May 2016, [2016] OJ L 146/8 (based on
proposal COM(2016)25 [28 January 2016]) → OECD BEPS Action 13
■ Exchange of country-by-country reports with effect from 1 January 2017.
■ Member States must take the necessary measures to require certain taxpayers to
file a country-by-country report.
■ The relevant competent authority shall then, by means of automatic exchange,
Step 4 – communicate the report to any other Member State in which, on the basis of the
Country-by- information in the country-by-country report, one or more of the group entities are
Country either resident for tax purposes, or are subject to tax with respect to the business
Reporting carried out through a permanent establishment .
(2016) ■ Consistency with
 Tax Transparency Package (COM(2015) 136)
 Action Plan on a Fairer Corporate Tax System (COM (2015) 302)
■ Also: Commitment by 44 States on the OECD level (as of 30 June 2016),
electronic format for exchange (22 Mar. 2016)
■ Next step: Public CbC-Reporting in the EU? → Commissions Proposal to change
the accounting directive COM(2016)198 (12 Apr. 2016), Council Dok. 15243/16
(19 December 2016)

289
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION

■ Directive (EU) 2016/2258, [2016] OJ L 342/1 (based on proposal

COM(2016)452 [6 December 2016])
Step 5 – Access ■ Tax authorities must be given access to the data provided under the EU's
to Anti-Money- anti-money laundering rules (e.g., customer due diligence information and
Laundering the information in their national beneficial ownership registries)
Information ■ Concerns especially situations where the Account Holder is an
(2016/17) intermediary structure (i.e. a Passive Non-Financial Entity), as the
Financial Institutions shall look through that entity and identify and report
its controlling persons (beneficial owners in anti-money-laundering
terminology).

290
ADMINISTRATIVE COOPERATION |
AUTOMATIC EXCHANGE OF
INFORMATION

■ Council Directive (EU) of 25 May 2018, [2018] OJ L 139/1 (based on

proposal COM(2017)335 [21 June 2017]) → OECD BEPS Action 12
■ Mandatory Disclosure of Potentially Aggressive Cross-Border Tax
Planning Arrangements from 1 July 2020 (but reporting obligation already
for arrangements between 25 June 2018 and 1 July 2020) – "Early"
Step 6 – disclosure to the tax authorities”
Aggressive Tax  All cross-border schemes that include at least one indicator –
Planning (2018) “hallmark” – are reportable → General and specific ”hallmarks”, some
combined with a “main benefit test”
 Sharing by AEoI with all Member States
 Broad definition of intermediaries, which bear the primary reporting
obligation with possible shift to taxpayers (e.g., professional privilege)
 Penalties for no reporting to be fixed nationally

291
CURRENT DEVELOPMENTS | PUBLIC
CBC-REPORTING
 Disclosure of income tax information by certain undertakings and branches
 Commission Proposal COM(2016)198 (12 April 2016) (amending the
Accounting Directive)
 European Parliament P8_TA(2017)0284 (4 July 2017)
 For large companies (consolidated turnover of or exceeding EUR 750 Mio)

292
CURRENT DEVELOPMENTS | PUBLIC
CBC-REPORTING
 Information to be provided for each jurisdiction (with some exceptions)
 the name of the ultimate undertaking and, where applicable, the list of all its subsidiaries, a
brief description of the nature of their activities and their respective geographical location ;
 the number of employees on a full-time equivalent basis ;
 fixed assets other than cash or cash equivalents;
 the amount of the net turnover, including a distinction between the turnover made with
related parties and the turnover made with unrelated parties ;
 the amount of profit or loss before income tax;
 the amount of income tax accrued (current year) which is the current tax expense
recognised on taxable profits or losses of the financial year by undertakings and branches
resident for tax purposes in the relevant tax jurisdiction;
 the amount of income tax paid which is the amount of income tax paid during the relevant
financial year by undertakings and branches resident for tax purposes in the relevant tax
jurisdiction; and
 the amount of accumulated earnings.
 details of public subsidies received and any donations made to politicians, political
organisations or political foundations;
 whether undertakings, subsidiaries or branches benefit from preferential tax treatment, from
a patent box or equivalent regimes.

293
TRANSPARENCY | WHISTLEBLOWER
 Proposal for a Directive of the European Parliament and of the Council on the protection
of persons reporting on breaches of Union law, COM(2018)218
 Relevant for corporate taxation

 (Likely) also covers (non-harmonized) national corporate tax law (Pt 17 of the
Preamble, TAXE2 considerations in P8_TA(2016)0310) and Impact Assessment
SWD(2018)116):

294
CHAPTER III
TAX GOOD GOVERNANCE
THIRD COUNTRIES AND GOOD
GOVERNANCE | TRANSPARENCY
 Action 7 of the EU Action Plan to Strengthen the Fight against Tax Fraud and Tax Evasion
calls for a recommendation regarding minimum standards of good governance in tax
matters for third countries → Recommendation regarding measures intended to
encourage third countries to apply minimum standards of good governance in tax
matters, C(2012)8806 final (6 December 2012)
 Contains …
 … a list of minimum standards of good governance (transparency and effective exchange of information,
no harmful tax measures in the area of business taxation)
 … measures against third countries
not complying with these standards
 … measures in favor of third
countries complying with these
standards
 … measures in favor of third
countries which are committed
to comply with these standards
 Implementation is monitored
through the “Platform on Tax
Good Governance”.

296
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Annex to the Commission’s Communication on a Fair
and Efficient Corporate Tax System in the
European Union: 5 Key Areas for Action, COM(2015)
302 final ANNEX 1 (17 June 2015)
 Recommendation regarding measures intended to
encourage third countries to apply minimum standards
of good governance in tax matters, C(2012)8806 final
(6 December 2012) → “Platform on Tax Good
Governance” (Member States’ independent national
blacklists) → EU-wide list of third country non-
cooperative tax jurisdictions (covers countries that
were identified by at least 10 Member States) that will
be further amended on a periodic basis.
 The list offers Member States a transparent tool to
compare their national lists and adjust their respective
approaches to non-cooperative tax jurisdictions as
necessary.

297
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Information on third countries listed by Member States for tax purposes
available online (as of 31 December 2015)*

* At http://ec.europa.eu/taxation_customs/business/company-tax/tax-good-governance/tax-good-governance-world-seen-eu-countries_en/

298
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Communication on an External Strategy for Effective
Taxation, COM(2016)24 final (28 January 2016)
 New EU listing process to identify and address third
country jurisdictions that fail to comply with tax good
governance standards.
 Three-step process for establishing this EU list:
 Scoreboard (November 2016) → Pre-assessment of all
third country jurisdictions based on neutral selection and
risk indicators (economic ties with the EU, financial activity,
stability factors, risk factors)
 Communication and Screening (2017, 92 jurisdictions have
received a letter in January 2017) → Member States to
decide, with the help of the Scoreboard, on the relevant
third country jurisdictions to screen against tax good
governance criteria (e.g., transparency, fair tax
competition, BEPS implementation, level of taxation)
 Listing (end of 2017) → Once the screening process is
complete, third country jurisdictions that refused to
cooperate or engage with the EU regarding tax good
governance concerns should be put on the EU list.
 Goal: Member States should apply common
counter-measures against third countries on the EU list.

299
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Council Conclusions on the criteria for and process leading to the
establishment of the EU list of non-cooperative jurisdictions for tax purposes,
[2016] OJ C 461/2
 Criteria for screening jurisdictions with a view to establishing an EU list of non-cooperative
jurisdictions
 Tax transparency criteria
 Fair taxation
 Implementation of anti-BEPS measures
 Guidelines for the process of screening of jurisdictions with a view to establishing an EU list
of non-cooperative jurisdictions for tax purposes

300
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
Commitment to the OECD Automatic Exchange of Information (AEOI)
standard (Common Reporting Standard — CRS) (and, in the future,
at least a “Largely Compliant” rating)
At least a “Largely Compliant” rating by the Global Forum with respect
Tax transparency to the OECD Exchange of Information on Request (EOIR) standard
criteria OECD Multilateral Convention on Mutual Administrative Assistance
(MCMAA) in Tax Matters or network of exchange agreements (EOIR,
AEOI)
(Future criterion with regard to the future global exchange of
beneficial ownership information)
No preferential tax measures that could be regarded as harmful
according to the code of conduct for business taxation and no
Fair taxation facilitation of offshore structures or arrangements aimed at attracting
profits which do not reflect real economic activity in the jurisdiction.
Commitment to the OECD anti-BEPS minimum standards and their
Implementation of anti-
consistent implementation (and, in the future, a positive assessment)
BEPS measures

301
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Council Conclusions for the EU Black List ([2017] OJ C 438/5)
 Annex I on non-cooperative jurisdictions (“black list”) → 17 jurisdictions
 Annex II on commitments to implement tax good governance principles (“gray list”) → 47
jurisdictions
 Annex III on defensive measures (in non-tax and tax areas)
 E.g., monitoring and increased audits risks and substantive countermeasures (e.g., non
deductibility of costs; CFC rules; withholding tax measures; participation exemption
limitation; switch-over rules; tax documentation/reporting/disclosure requirements;
rebuttable presumptions (burden of proof))
 Criterion for disclosure of tax planning structures under Directive (EU) 2018/822
 Annex IV on the further process and de-listing
 Various adaptations ([2018] OJ C 29/2, [2018] OJ C 100/5, [2018] OJ C 191/1, [2018] OJ C
191/1, [2018] OJ 359/3, [2018] OJ C 403/4, [2018] OJ C 441/3, and [2019] OJ C 114/2)
 Currently 15 jurisdictions on the „black list“
 Currently 34 jurisdictions on „grey list“

302
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 1 (ABl C 438/5 [2017])

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

303
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 2 ([2018] OJ C 29/2)

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

304
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 3 ([2018] OJ C 100/5, consoldated in [2018] OJ C 191/1)

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

305
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 4 ([2018] OJ C 191/1)

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

306
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 5 ([2018] OJ 359/3)

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

307
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 6, Namibia removed from “black list“ by [2018] OJ
C 403/4

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

308
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 7, removals from the grey list by [2018] OJ C 441/3

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

309
THIRD COUNTRIES AND GOOD
GOVERNANCE | “BLACK LIST”
 Evolution of the “Black List” – Step 8, additions to the black list ad removals from the grey list
by [2019] OJ C 114/2

Source: https://ec.europa.eu/taxation_customs/sites/taxation/files/eu_list_update_12_03_2019_en.pdf

310
CHAPTER IV
TAXATION OF THE DIGITAL
ECONOMY
DIGITAL ECONOMY | BEPS ACTION 1
DIGITAL ECONOMY | BEPS ACTION 1
 While the digital economy does not generate unique BEPS issues, some of its key
features exacerbate BEPS risks.
 Addressed through other recommendations under other Actions, e.g.,
recommendations on …
 … modification of the list of exceptions to the definition of Permanent Establishment (PE)
regarding preparatory or auxiliary activities as they relate to a digital environment and
introduction of new anti-fragmentation rules to deny benefits from these exceptions through
fragmentation of certain business activities (Action 7);
 … modification of the definition of a PE to address artificial arrangements through certain
“conclusion of contracts” arrangements (Action 7);
 … a correlative update to the OECD Transfer Pricing Guidelines (Actions 8-10); and
 … changes to controlled foreign company (CFC) rules to address identified challenges of
the digital economy (Action 3).
 Action 6

Action 7
Action 1 (paras 215 et seq) Action 1 (paras 213-214)

Action 1 (para 219)

Action 1 (paras 220 et seq)

Action 1 (paras 223-224)

DIGITAL ECONOMY | ISSUES

Action 1 (paras 225 et seq)

Action 3

Action 1 (paras 234 et seq)

DIGITAL ECONOMY | FACTS

Source: COM(2017)547 final (21 September 2017)

DIGITAL ECONOMY | FACTS

Source: COM(2017)547 final (21 September 2017) – But see: Matthias Bauer, Digital Companies
and Their Fair Share of Taxes: Myths and Misconceptions, ECIPE Occasional Working Paper 03/2018.
DIGITAL ECONOMY | MODEL 1

Advertisement

Fee (e.g.,
per click)

“Free“
services
User
data
DIGITAL ECONOMY | MODEL 2

Delivery

Order, user data

318
BACKGROUND | STATUS
 OECD BEPS Action 1 (October 2015) and Interim Report
(March 2018) – Digitalisation of the economy, instead of the
“digital economy” – Delivery of final report by 2020, with
2019 update.
 UN Committee of Experts, The digitalized economy: selected
issues of potential relevance to developing countries,
E/C.18/2017/6 (8 August 2017); Tax consequences of the
digitalized economy, E/C.18/2017/CRP.23 (10 October
2017); Art 12 UN MC Update 2017
 European Union
 Political Statement – Joint Initiative on the Taxation of Companies
Operating in the Digital Economy” (9 September 2017)
 Informal ECOFIN meeting in Tallinn on 16 September 2017 and
Council conclusions on “Responding to the challenges of taxation
of profits of the digital economy”, Doc. 15175/17 FISC 320
ECOFIN 1064 (30 November 2017)
 Commission’s Communication “A Fair and Efficient Tax System in
the European Union for the Digital Single Market”, COM(2017)547
final (21 September 2017), and concrete proposals in March 2018
 Unilateral Action (e.g., DPT, MAAL, Indian equalisation levy,
Italian “web tax” etc)
BACKGROUND | OECD 2018 INTERIM
REPORT
 Tax Challenges Arising from
Digitalisation – Interim Report 2018 (16
March 2018)
 Chapter 1. Introduction to the Interim Report on the
tax challenges arising from digitalisation
 Chapter 2. Digitalisation, business models and value
creation – Factors, value creation (chain – network –
shop)
 Chapter 3. Implementation and impact of the BEPS
package
 Chapter 4. Relevant tax policy developments
 Chapter 5. Adapting the international tax system to the
digitalisation of the economy – Nexus and profit
allocation!
 Chapter 6. Interim measures to address the tax
challenges arising from digitalisation
 Chapter 7. Special feature – Beyond the international
tax rules: The impact of digitalisation on other aspects
of the tax system
 Chapter 8. Conclusion to the Interim Report on the tax
challenges arising from digitalisation

320
DIGITAL ECONOMY | OECD
 Unilateral reactions (OECD Interim Report, paras 341 et seq.)

Specific
Alternative PE
Withholding Taxes Turnover Taxes regimes for large
thresholds
MNEs

 Sectoral taxes, such

as for advertisement
 Broader royalty
(e.g. Hungary)  Diverted Profits Tax
definitions (instead
 Significant economic  Levy on digital (e.g. UK and
of Art 7) (e.g., UK
presence test (e.g. transactions (e.g., Australia)
proposal)
Israel, Slovak Italy)  PE avoidance (e.g.
 Technical service
Republic, India)  Equalisation levy UK DPT, Austrialia‘s
fees (e.g., Art 12 UN
 Virtual service PE (e.g. India) MAAL)
MC)
(e.g. Saudi Arabia,  Tax on online and  Disallowance of
 New withholding
India) physical distribution deductions (e.g., US
taxes, e.g., on online
of audio-visual BEAT)
advertising
content (e.g., France
– „YouTube tax“)
DIGITAL ECONOMY | OECD
Cross-jurisdictional scale Reliance on intangible Data, user participation and
Factor
without mass assets network effects

Data, user participation, network

effects and user-generated
Digitalisation has allowed content are commonly observed
businesses in many sectors to in the business models of more
locate various stages of their Digitalised businesses are highly digitalised businesses.
production processes in often characterised by Search engines and social media
different countries and access investment in intangible businesses rely heavily on
Issue customers around the globe. assets, including brand gathering data about users’
Digitalisation also allows some names, patented inventions, preferences in order to sell
highly digitalised enterprises to trade secrets and algorithms. highly targeted advertising
play a significant economic role services to businesses. Network
in a country without any, or only effects occur when the
limited, physical presence. usefulness of a service grows
exponentially with the number of
users.

Impacting the distribution of

Significant progress under
taxing rights over time by If considered a source of value
BEPS project, but often
reducing the number of creation, could pose challenges,
difficult to determine how to
Challenge jurisdictions where a taxing right as such a concept of value
allocate income from
can be asserted over the creation is currently not captured
intangibles among different
business profits of an MNE. by the existing tax framework.
parts of an MNE group.
DIGITAL ECONOMY | OECD
 Need for change?
 Disagreement on whether there is a problem with the existing nexus rules (which
determine when a country has taxing rights) or profit attribution rules (which determine
how much of a business’ profits can be taxed in that country).

Group 1 Group 2 Group 3

A second group of countries A third group of countries

The first group of countries
considers that the nexus and considers that the BEPS Project
views the lack of recognition of
profit attribution rules may no has addressed concerns
user contribution to value
longer be adequate. These associated with double non-
creation as a shortcoming of the
countries consider that the taxation (while acknowledging
international tax system, but
problems are not limited to the that the full implications cannot
considers that it can be
digital economy. Some, but not yet be assessed). Countries in
addressed through targeted
all, of these countries reject user this third group are generally
changes to the existing tax
contribution as a significant satisfied with existing
framework.
driver of value creation. international tax rules.
DIGITAL ECONOMY | OECD
 User-created value?
 Some countries are concerned that businesses can generate significant profits from the
contribution of users, but have little or no physical presence in the country where those
users are located (e.g., UK HM Treasury, Corporate tax and the digital economy: position
paper update, 2018; Australian Treasury Discussion Paper, The digital economy and
Australia’s corporate tax system, October 2018)

User data User-generated content Network effects

Users contribute to digital

Data collected from consumers
economy businesses in a As more users participate in a
allows advertising to be targeted
variety of ways, including, for particular online platform, it
specifically to consumers that
example, providing reviews, becomes more attractive to
are likely to be interested in the
ratings, photographs or live businesses to participate (and
advertised goods or services,
biographical updates. This vice versa), which can in turn
thereby increasing the value of
content adds credibility and see the platform attract more
these advertising services to
trust, and attracts additional users or businesses.
businesses.
users.

 Other countries take the position that sourcing data from users is not an activity to which
profit should be attributed, as user’s contributed data, content and other information is
similar to any other input sourced from an independent, third party
DIGITAL ECONOMY | EU

 OECD Interim Report → No consensus, no recommendations

 Commission’s Communication “A Fair and Efficient Tax System in the European
Union for the Digital Single Market”, COM(2017)547 final (21 September 2017),
 “Prototypes” of the new business models (e.g., Amazon, Google)
 Existing inspirations? (e.g., Art 12A UN Model 2017)
 Policy challenges
 Where to tax? (nexus) – How to establish and protect taxing rights in a country where
businesses can provide services digitally with little or no physical presence despite
having a commercial presence?
 What to tax? (value creation) – How to attribute profit in new digitalised business models
driven by intangible assets, data and knowledge?
 Options
 Significant economic presence: “virtual” permanent establishments → “Long-
term” solution (OECD, EU) – CC(C)TB?
 Withholding tax for digital transactions → “Quick fix”
 Equalisation levies → “Quick fix”
DIGITAL ECONOMY | EU

 OECD Policy Note (January 2019) and Consultation (March 2019)

 Pillar 1: Broader challenges of the digitalised economy → Revised profit
allocation rules and revised nexus rules → Virtual PE, marketing intangibles,
user created value
 Pillar 2: Remaining BEPS issues → Anti-BEPS rules → Inbound and
outbound minimum taxatio
DIGITAL ECONOMY | EU

Commission’s Communication “Time to establish a modern, fair and efficient taxation

standard for the digital economy” (COM(2018)146 and Annex)

Long-Term Solution: Short-Term Solution:

Significant Digital Presence Digital Services Tax

Proposal for a Council

Directive on the common
system of a digital services tax
Proposal for a Council
Commission Recommendation on revenues resulting from the
Directive laying down rules
of 21.3.2018 relating to the provision of certain digital
relating to the corporate
corporate taxation of a services, COM(2018)148 –
taxation of a significant digital
significant digital presence, Failed to reach consensus
presence, COM(2018) 147
C(2018)1650 in December 2018, reduced
and Annexes
to online advertising and
eventually rejected by
Council in March 2019

Impact Assessment SWD(2018)81 and SWD(2018)82

327
A FINAL POINT ON NEXUS | WAYFAIR
 US Supreme Court, 21 June 2018, South Dakota v. Wayfair, Inc., 17-494.
DST | OVERVIEW

Source: https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en
DST | POLICY OBJECTIVES
 Generally: “Equalisation tax on turnover of digitalised companies” – The “amounts
raised would aim to reflect some of what these companies should be paying in
terms of corporate tax”.
 Place of profit taxation ≠ place of value creation, “notably in the case of
business models heavily reliant on user participation” (≠ consumption)
 Misalignment between “input obtained by a business from users” and
establishment or attribution – Relevance of “user contributions”? Active and/or
passive?
 What is ”value creation”? Data/user participation and/or algorithms?
Consumption? Is it relevant for profit taxation? Where does it happen and to
what extent?
 DST as proxy for taxing user’s ”barter transactions”?
 Political pressure, erosion of corporate tax bases, perceived unfairness (doubtful as
to the urgency to act Opinion SEC(2018)162 of 21 March 2018)
 No consensus on either merit or need of equalization taxes in the OECD‘s interim
report of March 2018 (paras 403 et seq.), but some considerations on the design
of interim measures (paras 412 et seq.)
DST | POLICY OBJECTIVES
 DST as an “interim” solution → 3% tax on revenues stemming from the supply of
certain digital services from “[1 January 2020]” (without a sunset-clause)
 DST includes both foreign and domestic transactions and companies (Pt 25 of
the Preamble)
 Alleviates concerns with regard to the fundamental freedoms (intra-EU)
 Nevertheless, is it a disguised restriction on international trade under WTO
rules? (Between 120-150 companies would be affected by the DST, 50% of
them from the US, due to business models and threshold of > € 750 million.)
 Expected revenues: € 5 bn. (other estimations around € 1,8 bn.; approx. € 30-85
m. for Austria), unclear compliance costs (Opinion SEC(2018)162 of 21 March
2018)
 However, broader economic questions, e.g., impact on investment, innovation,
welfare and growth, distortion of consumer choices and business decisions,
benefits the older over digital technology
DST | LEGAL BASIS
 Proposal based on Article 113 TFEU → Harmonization concerning “other forms of
indirect taxation” if necessary for the Internal Market
 Is the DST an “indirect tax”? → DST taxpayers = supposed bearers of the tax?
What is the economic incidence of the DST? Is it “cost increasing”? Irrelevance
of the counterparty of the monetization of the user data/input.
 Is it a “harmonization”? → Unlike Art 401 VAT Directive, the DST would not
legally (!) exclude similar other national taxes.
 Is it necessary fo the Internal Market? → Is the danger of potential distortions
by different national measures enough? Is it sufficient that unilateral measures
are in place or planned in 11 EU Member States? In any event, can non-
discriminatory, destination-based unilateral taxes lead to relevant distortions of
the Internal Market?
DST | LEGAL BASIS
 Compatibility with EU law and tax treaties?
 Is it incompatible with the EU VAT system?
 DST is not a “turnover tax” barred by Art 401 VAT Directive (C-475/03, Banco
Populare di Cremona) and moreover on the same legal level as the VAT
Directive. – But: DST potentially as part of VAT base?
 Why not narrow DST‘s scope and integrate it in the VAT system (e.g., place
of supply rules, higher rates, partial denial of input VAT deduction)?
 Is it a tax within the meaning of Article 2(2), (4) OECD-MC? (Or should it be
one?)
 Tax on “elements of income”? Gross basis, but lump-sum expenses taken
into account via the 3% rate (taking into account “different profit margins”; Pt.
35 of the Preamble)?
 Would be no issue if it were a “real EU tax”, as it would then not be “imposed
on behalf of a Contracting State” under Article 2 OECD-MC.
DST | NEXUS AND SCOPE
 Source? Residence? Market? → Location of users (Articles 5, 6 DST) = place of
taxation → IP address or other form of geolocation (Article 5(5) DST)
 Subjective Scope → Entities = “legal person“ or “legal arrangement” that carries
on business through either a company or a structure that is transparent for tax
purposes (Articles 2, 4 DST) = service providers
DST | NEXUS AND SCOPE
 Material Scope
 ”Ring fencing” of certain services with perceived value creation by users
(“targeted scope”), i.e., (remotely rendered) services “which would not be able
to exist in their current form without user involvement” (user data, engagement
of users in multi-sided platforms, i.e., “network effects”, facilitation of
transactions of goods and services)
 Revenues from three categories of “taxable services“ (Article 3 DST) with
some explicit exclusions and some “vagueness” and room for interpretation:
 Category 1: Placing of advertisements on a digital interface (Article 3(1)(a)
DST), not collection of user data or use for own business purposes
 Category 2: Making available multi-sided digital interfaces (“intermediation
services”) (Article 3(1)(b) DST; exclusive of, e.g., financial, investment and
crowdfunding services), but not, e.g., underlying transactions, e-commerce,
or supply of digital content or communication services (Art 3(4) DST: “sole or
main purpose”)
 Category 3: Transmission of user data (Article 3(1)(c) DST)
DST | NEXUS AND SCOPE
Location in a Member State
Service Revenue Proportion
(IP or geolocation)

Number of times an
Placing of advertisements
Advertising appears on user‘s advertisement has appeared
on a digital interface
device (Art 5(2)(a) DST) on users‘ devices (Art 5(3)(a)
(Article 3(1)(a) DST)
DST)

Number of users having

concluded underlying
User‘s device for concluding
transactions (Art 5(3)(b)(i)
underlying supply of goods or
Making available multi-sided DST) – Irrelevance of place of
services (Art 5(2)(b)(i) DST)
digital interfaces underlying transaction
(“intermediation services”) (Art 5(4)(a) DST)!
(Article 3(1)(b) DST)
User‘s device for opening
Number of users holding an
account in other cases
account (Art 5(3)(b)(ii) DST)
(Art 5(2)(b)(ii) DST)

Number of users from whom

Data generated from the user
Transmission of user data data transmitted has been
having used a device
(Article 3(1)(c) DST) generated (Art 5(4)(c) DST) –
(Art 5(2)(c) DST)
Irrelevance of tax period!
DST | NEXUS AND SCOPE

Source: G. Kofler, C. Schlager & G. Mayr, Taxation of the Digital Economy: A Pragmatic Approach
to Short-Term Measures, ET 2018, 123.
DST | THRESHOLD
 Worldwide revenues > € 750 million and taxable EU revenues > € 50 million at
a consolidated level (Article 4 DST) → Also proposed by the OECD Interim Report
(paras 454-455)
 Reasons for first threshold (> € 750 million) → “strong market positions”,
“capacity to attract high volume of users”, “opportunity of engaging in aggressive
tax planning lies with larger companies”, “legal certainty”
 Resons for second threshold (> € 50 million) → “significant digital footprint at
Union level”, Union-level “disregard[s] differences in market size”
 Issues
 Impact on start-ups, business creation, and small businesses more
generally?
 Equality concerns regarding the double threshold? → Comparison between
large enterprises with relatively small digital revenues versus smaller
entprises with purely digital revenue? Similar validity of thresholds for
procedural (e.g., CbCR) and substantive tax rules (e.g., DST, CCCTB)?
DST | BASE AND RATE
 Base → Gross revenues, net of VAT and other similar taxes (Article 3(2), 6 DST)
 Rate → 3% (Article 8 DST)
 Should achieve “an appropriate balance between revenues generated by the
tax and accounting for the differential DST impact for businesses with different
profit margins” (Pt. 35 of the Preamble)
 Issues: Overtaxation as compared with profit taxation, relevance of business
model and level of market, etc
 Unrelieved double taxation with regard to profit taxation? → No credit, but
expectation “that Member States will allow businesses to deduct the DST paid
as a cost from the corporate income tax base in their territory, irrespective of
whether both taxes are paid in the same Member State or in different ones” (Pt.
27 of the Preamble) → Revenue shifts between Member States!
 Cascading effects if taxable services are incoporated into a taxable onwards
supply. → Partly addressed, e.g., by Article 3(3) DST
DST | BASE AND RATE

Source: M. Bauer, Five Questions about the Digital Services Tax to Pierre Moscovici, ECIPE
OCCASIONAL PAPER • 04/2018.
DST | COLLECTION
 Withholding? Assessment?
 Identification, annual DST return – Complex procedural arrangements, including
OSS (Articles 9-19 DST) and administrative cooperation (Articles 20-23 DST)
 “Trust-based” tax collection and enforcement?
DIGITAL PRESENCE | OVERVIEW

Source: https://ec.europa.eu/taxation_customs/business/company-tax/fair-taxation-digital-economy_en
DIGITAL PRESENCE | POLICY
OBJECTIVES
 Starting point: “New international rules are needed specific to the challenges
raised by the digital economy in order to determine where the value of businesses
is created and how that value should be attributed for tax purposes. These new
rules would entail reform of the existing international tax rules on the definition of a
permanent establishment and the profit attribution applicable to digital activities.“
 Nexus and profit attribution
 Global (OECD) versus regional (EU)
 EU-internal treaty override versus respect for third-country tax treaties →
Commission Recommendation of 21.3.2018 relating to the corporate taxation of
a significant digital presence, C(2018)1650
 Tansposition/application: 1 January 2020
 Goal: “[I]mprove the resilience of the internal market as a whole in order to address
the challenges of taxation of the digitalised economy.“
 No consensus in the OECD‘s interim report of March 2018, ongoing discussion
about nexus and profit allocation (paras 370 et seq.)
DIGITAL PRESENCE | OVERVIEW
 Directive applies to entities irrespective of where they are resident for corporate tax
purposes, whether in a Member State or in a third country (Art 2), but no third-
country treaty override → Commission Recommendation of 21.3.2018 relating to
the corporate taxation of a significant digital presence, C(2018)1650
 Entity = Any legal person or legal arrangement that carries on business through
either a company or a structure that is transparent for tax purposes → Subject
to corporate tax! Also associated entities!
 Definition of significant digital presence (Art 4) and profits attributable to or in
respect of the significant digital presence (Art 5)
DIGITAL PRESENCE | NEXUS
Nexus = “Significant digital presence” (Art 4(3))

“Digital services” defined in Art 3(5) and Annex II (and

Business carried on through it consists wholly or partly exclusions in Annex III) – Does not include the sale of
of the supply of digital services … goods or services which is facilitated by using the
internet or an electronic network.

“Digital interface“ defined in Art 3(2) → E.g. websites

… through a digital interface …
and applications

… and one or more of the following conditions is met: Generally, “user” = individual or business (Art 3(4))

 the annual proportion of total revenues resulting

“Revenues“ defined in Art 3(6), proportion defined in
from the supply of those digital services to users
Art 5(7)
located in that Member State exceeds € 7 million;

Location → Device to access the digital interface

 the number of users of one or more of those digital
through which the digital services are supplied (Art
services who are located in that Member State in
4(4)), determined by reference to the IP address or
that tax period exceeds 100.000;
geolocation (Art 4(6))

 the number of business contracts for the supply of

any such digital service that are concluded in that Definition of business contract and location (=
tax period by users located in that Member State corporate residency or PE) in Art 4(5)
exceeds 3.000.
DIGITAL PRESENCE | ATTRIBUTION
 Fiction of a separate and independent enterprise (Art 5(2))
 Determination of profits attributable to or in respect of the significant digital presence
shall be based on a functional analysis (Art 5(3))
 The economically significant activities performed by such presence through a digital
interface shall be taken into account. → Activities undertaken by the enterprise through a
digital interface related to data or users shall be considered economically significant
activities.
 Due account shall be taken of the economically significant activities performed by the
significant digital presence which are relevant to the development, enhancement,
maintenance, protection and exploitation of the enterprise’s intangible assets (Art 5(4)
 Economically significant activities include (Art 5(5)
 the collection, storage, processing, analysis, deployment and sale of user-level data;
 the collection, storage, processing and display of user-generated content;
 the sale of online advertising space;
 the making available of third-party created content on a digital marketplace;
 the supply of any digital service not listed in the previous points.
 Profit split (Art 5(6)) → The splitting factors may include expenses incurred for
research, development and marketing as well as the number of users and data
collected per Member State.
DIGITAL PRESENCE | CCCTB
 Digital PEs and „data“ → Report of the EU Parlament on the CCCTB(A8-
0051/2018, 1.3.2018)
QUESTIONS?

Univ.-Prof. DDr. Georg Kofler, LL.M. (NYU)

Institute for Fiscal Law, Tax Law and Tax Policy
Johannes Kepler University Linz
Altenberger Str. 69, 4040 Linz, Austria JOHANNES KEPLER
Tel: +43/732/2468-7481 UNIVERSITÄT LINZ
Altenberger Straße 69
Mail: georg.kofler@jku.at 4040 Linz, Österreich
Web: www.steuerrecht.jku.at/gwk www.jku.at
Facebook: facebook.com/jkutax