Chapter 1 — Introductory remarks
The Internal Market, also referred to as ‘Single Market’ or ‘Common Market’, allows individuals to move and conduct their business freely within the 28 European Union’s Member States territories. By removing regulatory barriers to trade between countries, and aiming to merge into one uniform European market, it has already created incentives for many entrepreneurs to extent their activity abroad, making them more competitive in today’s global economy.
Nevertheless, an integral part of any cross-border business is the additional compliance cost, which consists of expenditures for adjusting to the different national requirements such as legislation or regulation. The co-existence of different systems in the European Union (hereinafter ‘EU’) is one of the factors that influence whether economic activity will be pursued in a particular Member State or not.
One of compliance costs that need to be considered, before setting up business in another Member State, is direct taxation. Tax burdens are an essential part of the operating expenses of every business. All Member States are sovereign in relation to their tax policy. Each national government has the power to impose and set taxes and its rates. Nonetheless, the effect of EU law on national legislation is becoming increasingly complex. EU law impacts substantially on the way in which domestic tax laws are being interpreted and applied.
Therefore, the main goal of this work is to lay out a concise introduction to the corporate taxation in the European Union.
The scope of the thesis
Due to the extent of the subject, for the purpose of this work I have chosen only three main aspects in which rules of the Internal Market have the greatest influence on a national tax legislation of every Member State. Prof. Schön refers to them as ‘the three pillars of the European Tax Law’W. Schön, Taxaing Multinationals in Europe, Tax Law and Public Finance No. 2012—11, p. 3.. These are, respectively, fundamental freedoms, secondary legislation and state aid discipline.
The study begins with a comprehensive overview of the basic principles and concepts of EU law and its relevance in the field of direct taxation. Following that, I will describe the impact of fundamental freedoms on Member States’ tax provisions.
Afterwards, I will focus on the three main directives that regulate certain aspects of corporate taxation of multinationals.
1) the Parent-Subsidiary Directive (2011),Council Directive 2011/96/EU of 30 November2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (recast). which states that cross-border intercompany dividends shall not be subject to withholding taxation in the source country and be exempt or subject to an indirect tax credit in the residence country,
2) the “Interest and Royalty Directive” (2003),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. which provides that cross-border interest and royalty payments within a corporate group shall not be subject to withholding taxation in the source country; and
3) the “Merger Directive” (2009),Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States (codified version). which provides tax-free rollover of latent gains in the case of particular cross-border transactions (mergers, splits, exchange of shares etc.).
The thesis also incorporates the rising significance of the state aid discipline and harmful tax competition which will be discussed in a separate chapter in the light of recent cases and the Commission’s activities.
In the end, you can expect to find a short description of projects that have been already started in connection with further harmonisation of direct taxation within the Internal Market that might gain importance in the near future and a brief summary emphasising what needs to be considered before expanding business to other EU Member States, in relation to corporate taxation.
The paper is planned to include only subjects relevant to corporate structures (legal entities/companies) and not necessarily applicable for businesses conducted by natural persons.
The intent of this work was to describe direct implications for corporate taxation that results from establishing Internal Market and its rules. Therefore, I will not include EU law issues related to transfer pricing and to the EU law norms enhancing cooperation among tax authorities (such as Mutual Assistance Directive, Recovery Assistance Directive, Savings Directive).
The territorial scope of thesis is limited to Member States of the European Union, therefore the issues discussed here that are also applicable to the countries belonging to the European Economic Area (EEA), are excluded.
In preparation for the subject, I have used foreign literature, analysed case law of the Court of Justice of the European Union, and gathered views from the representatives of various doctrines which were available mostly thanks to the study period done abroad at University of Antwerp.
Chapter 2 — Basic concepts and principles of the EU Tax law
Introduction to basic concept of the EU Tax law
Discussing EU law and its relevance to the subject of corporate taxation, it is worth distinguishing the most important features that apply in this sphere. Thus, I will start by describing on the sources of EU law and then elaborate more on the Internal Market, basic freedoms and its relevance for corporate taxation.
Sources of EU law
The foundation of EU laws are Treaty on European Union and Treaty on the Functioning of the European Union (hereinafter ‘TEU’ and ‘TFEU’ respectively), both commonly referred to as ‘founding treaties’, which entered into force on 1st December 2009.Treaty of Lisbon, Article 6 (2).
In both treaties there is no explicit reference to direct taxation (unlike in case of indirect taxes)See Art. 113 of TFEU. Moreover, Article 114 of the TFEU even explicitly excludes taxation from its scope of
application. Thus, each Member State has its own national tax system and due to their sovereignty they are free to determine the taxable base as well as the tax rate in the area of direct taxes (the principle of autonomy)M. Lang, P. Pistone, J. Schuch, and C. Staringer, Introduction to European Tax Law: Direct Taxation, Spiramus Press, Second edition, 2010, p. 43.. The EU Tax law, the double tax conventions concluded by each Member State, and the national tax systems of particular Member State itself are separate legal systems. These different part of tax law, however, are in a strong interaction with each other.M. Helminen, EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 4. They all need to have their reflection into the national legal system of the Member State concerned. Therefore both the TEU and the TFEU, as the sources of primary law, apply with regard to the direct taxes despite the lack of an express reference.
For the full understanding of the relevance of primary law in relation to corporate taxation, it is necessary to elaborate on about the most important principles that derive from the Treaties and case law of the Court of Justice of European Union (hereinafter the ‘CJEU’)After the entry of Lisbon Treaty the terms such as ‘European Court of Justice’ or ‘Community law’ were renamed as the ‘Court of Justice of the European Union’ and ‘Union law’ accordingly. In the following, to avoid confusion I will be using the terminology introduced in the Lisbon Treaty..
The Nature of EU law system
The genesis of today’s fundamental European law principles has its roots in early 1960s” judicial activism, which have shaped how we conceive the authority of EU law.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 201. Firstly, by the Van Gen en Loos case, in which the Court held that EC Treaty (now the TFEU) constitutes more than an international agreement between Member States. It limits their sovereignty and creates a new, sui generis, system of law. The Court recognized that the provisions of the Treaty are directly effective and they do not need to be implemented into the domestic law in order to be applicable by Member States and their nationalsECJ, Case 26/62 Van Gend en Loos v Nederlandse Administratie der Belastingen  ECR 1..
By this landmark case, the direct applicability of EU law principle (direct effect principle) was established. The nationals of the Member States can invoke directly, before tax authority
and tax court of the Member State concerned, on the provisions contained in the Treaties, without any special implementation in the national law of that Member State, in their individual tax matter.
It was taken further in the Costa v ENEL case, which established that in conflict of the national legislation with the European law, the latter prevails.ECJ, Case 6/64 Costa v ENEL  ECR 585. The Court held that provisions of the Treaty would be meaningless if the Member States could unilaterally nullify its effects by means of legislative measure. Therefore establishing primacy of the EU law principle (supremacy principle), which is applicable ex officio to every national court and administration.Unless it leads to more lenient tax consequences for the taxpayer (the principle of the most lenient provision).
The economic integration of the Member States and the creation of an internal market are the most important objectives of the founding treaties.Art. 3 (3) of TEU Thus obstacles, including the tax obstacles, in the way of the principles established in the treaties must be abolished. Member States oblige themselves to pursue objectives set therein (principle of the sincere cooperation)Art. 4(3) of TEU. From that assumption derives another EU principle, imposing on the Member States the obligation to implement special measures into their national legislation to ensure existence of legal remedies law available to their citizens (effectiveness principle). Together with equivalence principle, which stipulates that it must be equally available to rely on the EU law as on national law, they ensure that EU law actually has effect in the legal orders of the Member States. Although, neither of them are mentioned in any Treaty provision specifically.
It is worth to emphasise that the purpose of the founding treaties is not to totally harmonize the tax laws of the Member States, but rather to influence them only to the extent that is necessary for the realization and the functioning of the internal market. Therefore, the competences of EU are limited only to these which are being expressly assigned to it in the Treaties (principle of conferral)Art. 5 (1—2) of TEU, and even such, the use of Union competences must be applied in conformity with the principles of subsidiarity and proportionality.
In accordance with subsidiarity principle, in areas which do not fall within its exclusive competence, the Union shall act only if (and in so far as) the objectives of the proposed action cannot be sufficiently achieved by the Member States, but can be better achieved at Union levelArt. 5 (3) of TEU. The reason behind that principle is to ensure that powers are exercised as close to the citizen as possible.
The principle of proportionality stipulated in Article 5 (4) of the TEU, implies that Union actions must not go beyond what is necessary for the attainment of the objectives of the founding treaties. The measures used and the objectives pursued must be in the right proportion to each otherM. Helminen, EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 14.
These legal principles mentioned above are considered to form a part of the primary EU law and they play an important role in the development, application and interpretation regarding to any field of law, not limited to corporate tax law.M. Helminen, EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 13.
When discussing legal principles deriving from primary law, it should not be forgotten that the other principles of EU order could also play a role in the corporate taxation, such as principle of flexibility, procedural autonomy of Member States and fundamental rights which are common for all Member States (human rights, no retroactivity, ne bis in idem, legal certainty, pacta sunt servanda, protection of good faith, and others).
Nonetheless, they fall outside of the scope of this work. Analysing them would overlap with other subject, not related to the one meant to be discussed here, such as the constitutional rule of law principle. Therefore, it was considered unnecessary to develop the topic in more detail. Although, principles inseparably associated with the concept of Internal Market, such as non-discrimination principle and basic freedoms, are intentionally not discussed here (even though they also derive from primary law). Special attention will be paid to these concepts in the separate sub-chapter.
Another aspect of corporate taxation in European Union is extended within the concept of the so-called ‘Secondary law’, which consists of legal instruments issued by the EU institutions based on the authorization given to them by founding treaties.
The central provision sets out the types of legislative acts is Article 288 TFEU. It lists as legal instruments: regulations, directives, decisions (as binding instruments of EU law), recommendations and opinions (which serves as soft law instruments). However, this list is not exhaustive. The international agreements with non-EU states, are also regarded as secondary legislation, binding both the Union and the Member States.See D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 112 and Art. 216 (2) TFEU.
As was mentioned previously, the Union competence is based on the principle of conferral. TFEU divides these competences into three categories: area of exclusiveSee art. 3 TFEU, sharedSee art. 4 TFEU, and supplementary competencesSee art. 6 TFEU. Taxation affects cross-border trade, investment, and economic activity in general. Thus, it clearly falls into the scope of the ‘Internal Market’ area which, according to Article 4(2) TFEU, is within share competence of the EU. It indicates that a Member State may act (legislate and adopt legally binding acts in that area) only to the extent that the Union has not exercised its competence.See art. 2(2) TFEU Both Union and Member State are competent, but whenever the Union exercises its power, the Member State loses its competence in that respect.B. Terra and P. Wattel, European Tax Law, Wolters Kluwer, Sixth edition, 2012, p. 9. What is the relevance of this in area of corporate taxation?
EU institutions, in order to issue legal instruments concerning taxation matters, need the specific legal basis covered by the treaty. However, there is no express mention of direct taxation in the treaties.See 2.2.1. in this work Therefore the only legal basis for the possible harmonisation in the field of direct taxation to rely on is the one that directly affects the functioning of the Internal Market.See Art. 115 TFEU The Council — acting unanimously in accordance with special legislative procedure and after consulting the European Parliament and the Economic and Social Committee, can issue directives for the approximation of laws, including tax legislation.
Directives are binding upon Member States as to the result to be achieved, but they leave to the national authorities the choice of form and methods of implementation. If the domestic legislation of the Member State differs from the provisions of directive, the Member State concerned is obliged to adopt amendments, in order to comply with EU law. It is not necessary to repeat the exact wording of a directive in national legislation. Member States must only ensure that the legal situation in their country is sufficiently precise and clear and that all citizens are in the position to know about their rights and obligations based on the directive concerned.M. Helminen in EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 23
If the transposing legislation is not in conformity with EU law, then according to the previously discussed principle of direct effect, taxpayers may rely upon provisions of Directive in front of national court or authority. Contrary to the situation regarding treaty provisions, there are several other conditions which need to be fulfilled before direct effect to directive can truly be awarded. Firstly, the provision in the directive must be sufficiently clear, precise and unconditional. Secondly, the deadline for the transposition of the directive must have expired. Finally, the Member State must have defaulted, i.e. no transposition measures were adopted, or directive was incorrectly or partially adopted.See C-62/00, Marks&Spencer, par. 25—32 and Case 8/81 Becker, par. 53. Till now, there are only three Council directives on corporate taxation resulting in removing obstacles in Internal Market issued in accordance with the authorization based on art. 115 of TFEU
(approximation of laws), or its former version art. 94 of EC Treaty (Parent-Subsidiary DirectiveCouncil Directive 2011/96/EU of 30 November2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different member states (recast)., Merger DirectiveCouncil Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States (codified version)., Interest-Royalty DirectiveCouncil 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.). All of them will be addressed in more detail in the fourth chapter.
Nevertheless, doctrine argues that beside art. 115 of TFEU there is also possibility to rely on the provision of art. 116 of TFEU as legal basis for issuing directives concerning direct taxation.As argues Prof. M. Helminen in EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 21 Prerequisite for its application is that Commission must find that the difference between national law of Member States is distorting the conditions of competition within the Internal Market. If, after consultation with the Member States concerned, there is no result in agreement to eliminate the distortion in question, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure shall issue necessary directives.See Art. 116 TFEU However, this hypothetical idea was never introduced in practice.
Regulations are the most centralising of all Union instruments and are used whenever there is a need of uniformity. They have general application and from the date that they enter into force, they automatically form a part of domestic legal order of each Member State and require no further transposition.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 112 However, for the reasons stated above, namely lack of legal basisHowever so called ‘flexibility clause’ incorporated in art. 352 TFEU may allow to issue regulations concerning direct taxation in future., there is no single EU regulation entirely devoted to direct taxation.
Recommendations and other measures
Recommendations and other soft law instruments (i.e. opinions, guidelines, communications) have no binding force. However, this does not deprive them from their relevance. Issued by the European Commission, they are taken into account both by CJEU and national courts of the Member States when interpreting EU law.Good example of significance is shown in C-322/88, Grimaldi, par. 18—19. Therefore, even with their non-binding character, they should be seriously considered by Member States while performing their fiscal competence. By doing so, it would certainly reduce a number of cases that is being referred to CJEU under the infringement proceedings.See Art. 258—259 TFEU
Interpretation of EU law
The role of the Court of Justice of the European Union
The Court of Justice of the European Union and its judgements have a central role in the interpretation of EU law. Its strong position has been developing since its landmark decision in 1963 (Van Gen en Loose case) till this day. Why has the judiciary body gained such importance in shaping the legal framework of the EU? The main task of the Court’s judgements is to guarantee that the Member States interpret EU law consistently. However, the general wording of treaties and directives provisions, that has been issued throughout the entire history of the European Community, left a lot of space for judicial activism. Thus, in order to ensure the effectiveness of EU legal order, the CJEU took the highly pro-Union (in that time pro-Community) interpretation which ultimately gained the strong position it has today. Many of the principles and general rules stemming from Court’s decisions felt controversial at the time, but now are regarded as the backbone of the EU’s legal system.F. Hosson, „On the Controversial Role of the European Court in Corporate Tax Cases” (2006) 34 Intertax, Issue 6/7, p. 296
Regarding the field of corporate taxation, the CJEU becomes involved following either an infringement procedure initiated by the Commission (and possibly by a Member State)See Art. 258—259 TFEU., or the request of a national jurisdiction for a preliminary ruling concerning the interpretation of EU law.J. Malherbe e.a., The impact of the rulings of the European Court of Justice in the area of direct taxation, European Parliament Committee on Economic and Monetary Affairs, 2008, p. 22.
The preliminary ruling procedure
The CJEU has a jurisdiction to issue preliminary rulings concerning the interpretation of treaties and the validity and interpretation of acts of the institutions, bodies, offices or agencies of Union.Art. 267 TFEU. As stated above, the aim of that endowment is to ensure the uniform application of EU law throughout all Member States. There are two circumstances when a national court is obliged to refer: when it considers that an EU measure may be invalid, as only the Court of Justice has the power to
declare that, or where the point of EU law is necessary to decide the dispute in hand and there is no other judicial remedy available in national law.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 186 However, from mandatory reference procedure there are two exceptions that have been forged, inter alia in the CILFIT caseCase 283/81, CILFIT and Lanificio di Gavardo SpA v Ministry of Health, 1982., where the CJEU recognized the national court’s discretion in deciding whether or not it is necessary to refer to the EU Court in the preliminary ruling procedure. National courts against whose decision there is no judicial remedy are not compelled to refer if either the doctrine act clair or acte éclairé applies. If it is clear as to what the EU law stands for, then the Member State court is allowed to interpret national legislation in the light of EU law without having to make any reference (act clair). The latter however applies when a materially identical matter has already been decided by the Court of Justice (acte éclairé).D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 188
In other circumstances, the national court or tribunal may request the Court of Justice to give preliminary ruling whenever a question concerning the application or interpretation of EU law is raised and it believes that ruling is necessary for delivering such decisionArt. 267 (2) TFEU. This procedure enables national courts to function as European courts, and represent a means for protection of individual rights deriving from EU law.
The infringement procedure
The infringement procedure serves as an instrument for an effective functioning of EU, empowering Commission to take an action against Member State whenever it believes that it is in the conflict with EU law. It applies not only to the legal measures issued by Member State concerned but also administrative practices that are in non-compliance with treaty provisions.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 338.
If the Member State does not agree with the Commission’s view and does not take any action, the dispute will be solved by the CJEU. After finding that Member State indeed defaulted and has failed to fulfil its obligation under the Treaties, it may impose fines in order to ensure compliance.Art. 260 TFEU.
In the field of direct taxation, the Court of Justice is faced primarily with questions referred to it for a preliminary ruling. However, as it will be discussed further, the gaining significance of the state aid discipline in recent time cause increase in the number of infringement procedures launched by the Commission against Member States potentially not complying with EU law.
Binding force of judgements of the CJEU
The judgement given by the Court of Justice binds the referring national court.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 192—193. However the question arises, whether the binding force of Court’s judgements extends to other Member States? The so-called doctrine of stare decisis or precedent does not exist formally in EU law. Although, if the judgement only bound the parties concerned, it would be highly unsatisfactory for the development of EU legal order.Ibidem. Thus, in the ICC case, the Court ruled that if the judgement declares an EU measure invalid, then its effect extends to all courts and authorities in Union.Case 66/80, International Chemical Corp. v Amministrazione Finanze, 1981, par. 10—13.
In the Kühne case, the Court held that a judgement interpretation of EU law bounds all national administrative authorities in Union.Case C-453/00, Kühne and Heitz v Productschap voor Pluimvee en Eieren, 2004, par. 21—27. The term ‘authorities’ should be viewed as comprising national judges as well, which was confirmed in the following case law of Court of Justice. Case C-212/04, Adeneler, 2006, par. 122.Therefore, whenever the CJEU issues a judgement, Member States need to accept all the consequences of the Court’s rulings and to implement them into their national law as soon as possible, in accordance with general principles of EU legal order, such as effectiveness and equivalence.
Methods of interpretation
The CJEU use the same methods of interpretation that is being applied by judges in relation to their domestic legislation in every Member State, taking into the account the fundamental principles of EU law (such as primacy of EU law, subsidiarity, prohibition of abuse etc.). The starting point for every interpretation done by the CJEU is the wording of legal act (literal interpretation), but considering the lofty goals of EU founding treaties, the teleological interpretation often take precedence over the literal meaning of the text. Which is understandable taking into account effectiveness principle discussed before.
Internal Market and basic freedoms
Introduction to the concept of the Internal Market
The most basic idea of European Community (disregarding the more noble goals such as peace, justice and brotherhood etc.) was the fiscal idea.B. Terra and P. Wattel, European Tax Law, Wolters Kluwer, Sixth edition, 2012, p. 10. Establishment of the Common Market, was meant to help reinforce the economic position of countries in
Europe after Second World War. Thus, the early focus of
Community began with customs union and then elimination of trade barriers and finally creation of the so-called ‘Internal Market’.
In accordance with the Article 26 (2) TFEU, the concept of the ‘Internal Market’ means ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provision of the Treaties.’ Although, the Article does not mention it, the Internal Market also encompasses in its scope the fair competition and approximation of national laws.B. Terra and P. Wattel, European Tax Law, Wolters Kluwer, Sixth edition, 2012, p. 35. It is “the legal successor” over the concept of the ‘Common Market’, used in the previous treaties. The four freedoms, together with general non-discrimination principle, constitute by far the most important factor that influences the shape of corporate taxation in European Union.As was mention earlier in the matter of direct taxation the positive integration plays for now rather small role. In principle any differences are prohibited in taxation between cross-border and comparable domestic situations.
The impact on corporate taxation will be the subject of future analysis in Chapter three, but before that, it is necessary to lay out some groundwork. In order to achieve that, it is worth elaborating shortly on all these principles and how they can be applied.
The Article 18 of the TFEU is a general provision prohibiting any discrimination based on the nationality. It implies that all EU citizens who find themselves in the same situation enjoy the same treatment, unless there is an exception provided in the founding treaties. So as to be effective, the general conditions for application must be met, namely, the EU nationality status and cross-border situation. According to the Article 20 of the TFEU, every person holding the nationality of a Member State is a citizen of the Union. In relation to incorporated entities, it applies if the company was formed in accordance with the law of a Member State and is having their registered office, central administration or principal place of business within the Union. They are granted with the same level of protection as natural persons.See Art. 54 TFEU
Another prerequisite of application of the Art. 18 TFEU, in addition to EU citizen status, is cross-border situation — within the territory of Internal Market. Discrimination of taxpayer in its own Member State, in principle, will be excluded from the scope of the possible application of the treaty provisions.
The discrimination occurs when different rules are applied to nationals of different Member States or by application the same rules to nationals of different Member States, with the consequence that one is subject to worse treatment.M. Helminen in EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 59 The good example for the latter is a different tax treatment based on the residence criteria, which, according to settled case law, constitutes indirect discrimination based on the nationality (the residence requirement is easier to fulfil by nationals of that particular Member State, than for the nationals of others Member States)See C-155/09, Commission v. Greece..
The fundamental freedoms
As stated above, the Internal Market is inseparably connected with the abolition of obstacles to the fundamental freedoms. Tax treatment in a Member State may be in conflict with EU law if it constitutes a restriction on free movement of goodsArticle 34 TFEU,
free movement to provide servicesArticle 56 TFEU, free movement of capital and paymentsArticle 63 TFEU, and free movement of persons (which includes free movement of EU citizensArticle 21 TFEU, free movement of workersArticle 45 TFEU
and freedom of establishmentArticle 49 TFEU).
The application of these freedoms is much broader from the one incorporated in Article 18 of the TFEU. Although, the prerequisites concerning EU nationality and cross-border situation condition apply in the same manner, the free movement rules consist of not only the prohibition of discrimination, but also restrictions on the freedom that do not constitute discrimination. The fundamental freedoms in relation to the principle of non-discrimination should be understood as leges speciales (according to the latin maxim lex specialis derogate legi generali).M. Lang, P. Pistone, J. Schuch, and C. Staringer, Introduction to European Tax Law: Direct Taxation, Spiramus Press, Second edition, 2010, p. 48.
What is understood behind the concept of ‘restriction’?
The CJEU in its settled case law, points out that all national measures that in anyway prohibit, impede or render less attractive the exercise of the basic freedoms are regarded as restrictions.Case C-55/94, Gebhard, par. 37; Joined Cases C-369/96 and C-376/96, Arblade, par. 33. In relation to corporate taxation that would be a case if, for example, the Member State forbids or fines the taxpayer for establishing subsidiary in another Member State.
The free movement of workers and free movement of EU citizens shall not be examined in this paper, because its scope mostly affects natural persons — not corporations. The freedom of establishment in the following chapters should be viewed as establishing legal entities in other Member States, and not in ‘self-employment of individuals’ context.
Balancing free movement against other interests
After establishing that the difference in treatment in
comparable situations exists, it should be examined whether it is justified or not. The principle of non-discrimination and fundamental freedoms are not absolute. They can be limited on certain grounds. This sub-chapter will be devoted to such derogations and their review by the Court of Justice of the European Union.
Permissible obstacles to free trade
Why are there any derogations to principle of non-discrimination and basic freedoms in the first place? Isn’t the rule with no exceptions better from the legal certainty point of view?
As it is rather controversial issue it is worth examining painstakingly. The establishment of the rule with no margin of error and absolute application deprives the flexibility of legal norm, even when the goal is just and fair. Limitations to the free movement serves as an instrument to protect some important national interests and public goods, like education, health care etc. On the other hand, they can also be used to disguise protectionism.D. Chalmers, Gareth Davies and Giorgio Monti, European Union Law, Cambridge University Press, Third Edition, 2015, p. 892. For that reason they are strictly reviewed by the CJEU.
The range of public goods that treaty protects is now very broad. Although, the TFEU explicitly provides only public policy, public security and public health as the grounds for the justification of direct discriminatory measuresUnfortunately for which relevance in corporate taxation is quite modest., the Court of Justice extended its scope to the reasons that are not being expressly mentioned in the treaty. In its landmark Cassis de Dijon caseCase 120/78, Rewe-Zentral (Cassis de Dijon), 1979, par.8., the Court held that an infringement of the basic freedoms may also be justified by the general grounds of public interest, provided that they are not applied in a discriminatory manner (mandatory requirements doctrine). In its subsequent case law the list of acceptable and non-acceptable reasons has broaden up, and has been called by doctrine as the ‘rule of reason’ principle.M. Helminen in EU Tax Law — Direct Taxation, IBFD, 2015 edition, p. 134
The rule of reason principle
The rule of reason states that any overriding reason in the public interest can be relied upon as a justification for the restriction of freedoms, if it has objective that is in accordance with the TFEU. Nevertheless, the Court is obligated to critically examine whether they are truly necessary, or whether the goals could be achieved by less restrictive means. It has to be emphasised that the measure concerned must be appropriate to ensure the attainment of the objective in question and that it does not go beyond what is necessary in order to attain it (proportionality principle).Ibidem, p. 135. Member State cannot rely on the rule of reason principle if it is inconsistent in protection of a particular interest or less restrictive measure can be adopted.
With regard to the field of corporate taxation, analysing the established case law of CJEU, one is able to distinguish which reasons can and which cannot be accepted as justification for a tax treatment constituting a restriction on one of the basic freedoms.
Justifications accepted by the CJEU
Cohesion of the Tax system
One of the reasons that has been accepted as a justification for restrictive tax treatment by the CJEU was safeguarding of the fiscal cohesion of the national tax system which was mentioned for the first time in the Bachmann caseCase C-204/90, Bachmann, par.21—28.. In principle, ‘the cohesion’ used in this context shall be viewed as a concept designed to avoid double taxation or to ensure that income is taxed, but only once.M. Lang, P. Pistone, J. Schuch, and C. Staringer, Introduction to European Tax Law: Direct Taxation, Spiramus Press, Second edition, 2010, p. 66.
In the Wannsee case, the EU Court accepted that argument. The case concerned the German tax law, in which the parent company established therein was allowed to take into account losses incurred by a permanent establishment situated in Austria. However, when the permanent establishment made profits, the German system obligated the taxpayer to reintegrate of those losses, which would lead to double taxation, once in Austria and then in Germany.Case C-157/07, Krankenheim Ruhesitz am Wannsee-Seniorenheimstatt GmbH, 2008, par. 42 and following. Unnecessary taxation significantly hinders or at least make less attractive the exercise of the basic freedom and therefore distort functioning of the Internal Market. The Court, however, held that the reintegration of losses is the logical complement of the deduction of losses previously granted and, therefore, can be justified by the argument of the cohesion of the German tax system.M. Lang, P. Pistone, J. Schuch, and C. Staringer, Introduction to European Tax Law: Direct Taxation, Spiramus Press, Second edition, 2010, p. 67.
Another example of possible justification accepted in corporate taxation context is the territoriality principle.
It stipulates that country can tax a person subject to a limited tax liability (non-resident) only to the income that has been generated in that state (on the territory of that state). The principle of territoriality can be used as justification by a Member State to deny the deduction of foreign losses of persons subject to limited tax liability, if foreign profit is not taxed there either.Case C-250/95, Futura Participations, 1997. However, the territoriality argument may only be used to deny benefits to persons subject to limited tax liability. Under different circumstances, for example such as like in the Manninen case, the Court denied the territoriality argument by holding that this principle does not preclude the granting of a tax credit to a person fully taxable in Finland in respect of dividends paid by companies established in other Member State.Case C-319/02, Manninen, 2004, par 38.