EU Tax Law – Direct Taxation 2021

Preface xvii
Abbreviations and Terms xix

Chapter 1 EU Tax Law as Part of the Legal System 1
1.1. Concepts 1
1.2. Relation to other legislation 3
1.2.1. Competences 3
1.2.2. Separateness and interaction 6
1.2.3. The primacy of EU law 7
1.2.4. Tax consequences 9
1.2.5. Direct effect and application 11
1.3. Primary law 12
1.3.1. The founding treaties and the accession treaties 12
1.3.2. Fundamental rights 15
1.3.3. Legal principles of EU law 15
1.4. Secondary law 21
1.4.1. Concept 21
1.4.2. Directives 22
1.4.2.1. Authorization to issue directives 22
1.4.2.2. Impact of the directives 23
1.4.2.3. Directives on direct taxes 25
1.4.3. Recommendations and other measures 26
1.5. International conventions 28
1.5.1. Connection to EU law 28
1.5.2. Tax treaties between EU Member States 28
1.5.2.1. Right to conclude tax treaties 28
1.5.2.2. Primacy of EU law 29
1.5.2.3. Most favoured nation 30
1.5.3. Tax treaties with third countries 32
1.5.3.1. Right to conclude tax treaties 32
1.5.3.2. Primacy of EU law 33
1.5.4. Other treaties with non-Member States 35
1.5.4.1. EEA Agreement 35
1.5.4.2. Other conventions 36
1.6. Harmful tax competition and forbidden state aid 37
1.6.1. Harmful tax competition 37
1.6.1.1. Concept 37
1.6.1.2. Measures against harmful tax competition 37
1.6.1.3. Prevention of tax evasion 38
1.6.2. Prohibition of state aid 41
1.7. Elimination of international double taxation 47
1.7.1. Legal basis 47
1.7.2. Tax treaties and directives 48
1.7.3. Obligation to take into account taxes levied in another Member State 50
1.8. Interpretation of EU law 58
1.8.1. EU law method of interpretation 58
1.8.2. EU law-consistent interpretation of domestic law 59

Chapter 2 Non-Discrimination and Basic Freedoms 63
2.1. Discrimination based on nationality 63
2.1.1. General conditions for application 63
2.1.2. Concept of discrimination 65
2.1.3. Comparable situation or different situation 68
2.1.3.1. Comparability analysis 68
2.1.3.2. Different situation 68
2.1.3.3. Comparable situation 70
2.1.3.4. Resident companies of different states 71
2.2. Basic freedoms 72
2.2.1. General conditions for application 72
2.2.2. Free movement of goods 80
2.2.2.1. Applicable norms 80
2.2.2.2. Relevance to direct taxation 81
2.2.3. Free movement of EU citizens 81
2.2.4. Free movement of workers 84
2.2.4.1. General conditions for application 84
2.2.4.2. Different tax treatment on the basis of residence 87
2.2.4.2.1. Employment in several states 87
2.2.4.2.2. Most income from employment state 88
2.2.4.2.3. Small part of income from employment state 92
2.2.4.3. Social security contributions 94
2.2.5. Freedom of establishment 96
2.2.5.1. Relevance and scope of application 96
2.2.5.2. Undertakings in a comparable situation 102
2.2.5.2.1. Permanent establishments 102
2.2.5.2.2. No permanent establishment 106
2.2.5.3. Dividend taxation systems 107
2.2.5.3.1. Permanent establishment 107
2.2.5.3.2. Foreign-source dividends 108
2.2.5.3.3. Non-resident dividend recipient 112
2.2.5.4. Thin capitalization and interest deduction limitations 116
2.2.5.5. Group taxation systems 118
2.2.5.5.1. Need for cross-border balancing of profits and losses 118
2.2.5.5.2. Permanent establishments 121
2.2.5.5.3. No permanent establishment 122
2.2.6. Free movement of capital and payments 130
2.2.6.1. Primary rule 130
2.2.6.2. Exceptions 134
2.2.6.3. Relations to non-Member States 135
2.2.6.4. Right to capital in companies 140
2.2.7. Freedom to provide services 140
2.2.7.1. Scope of application 140
2.2.7.2. Cases on direct taxes 143
2.2.8. Overlapping scope of application 145
2.2.8.1. Freedom of establishment or free movement of capital? 145
2.2.8.2. Free movement of capital or services? 150
2.2.8.3. Freedom of establishment/free movement of capital or free movement of workers? 151
2.2.8.4. Free movement of capital or goods? 152
2.2.8.5. Simultaneous application 152
2.3. Justifications for discrimination or restrictions 153
2.3.1. Rule of reason 153
2.3.2. Effectiveness of fiscal supervision and the recovery of tax debt 156
2.3.3. Anti-avoidance purpose 157
2.3.3.1. Tax planning versus tax avoidance 157
2.3.3.2. CFC regimes as an example 163
2.3.4. Balanced allocation of taxing rights 166
2.3.5. Coherence of the national tax system 168
2.3.6. Territoriality 172
2.3.7. Need to prevent double use of losses 173
2.3.8. Treatment in the other state 174
2.3.9. Non-EU and non-EEA States 174

Chapter 3 Corporate Tax Directives 177
3.1. EU Parent-Subsidiary Directive 177
3.1.1. Background 177
3.1.2. Scope of application 178
3.1.2.1. Profit distributions between subsidiary and parent companies residing in different Member States 178
3.1.2.2. Profit distributions connected with a permanent establishment 180
3.1.2.3. Company of a Member State 184
3.1.2.4. Permanent establishment 187
3.1.2.5. Parent and subsidiary company 188
3.1.2.6. Profit distribution 190
3.1.2.7. Other requirements 191
3.1.2.8. EEA and other non-Member States 192
3.1.3. Tax treatment 192
3.1.3.1. Tax treatment in the dividend recipient’s state 192
3.1.3.1.1. Elimination of double taxation in the parent company state 192
3.1.3.1.2. Exemption or credit in the parent company state or in the permanent establishment state 193
3.1.3.1.3. Treatment of hybrid subsidiaries in the parent company state 196
3.1.3.1.4. Treatment of subsidiaryrelated costs in the parent company state 198
3.1.3.2. Tax treatment in the subsidiary state 199
3.1.3.2.1. No withholding tax 199
3.1.3.2.2. Withholding tax 200
3.1.4. Tax-avoidance situations 201
3.2. EU Interest-Royalty Directive 205
3.2.1. Background and force 205
3.2.2. Tax treatment 206
3.2.2.1. Tax consequences 206
3.2.2.2. Administrative prerequisites 208
3.2.2.3. Repayment of a tax levied in conflict with the directive 210
3.2.3. Intra-EU cross-border payment 210
3.2.4. Qualifying companies 217
3.2.4.1. Company of a Member State 217
3.2.4.2. Permanent establishment 221
3.2.4.3. Associated companies 222
3.2.4.4. Beneficial owner 225
3.2.5. Source state 227
3.2.6. The concepts of interest and royalty 229
3.2.6.1. Interest 229
3.2.6.2. Royalty 229
3.2.6.3. Payments outside the scope of the directive 230
3.2.7. Tax-avoidance situations 231
3.3. EU Merger Directive 233
3.3.1. Background and force 233
3.3.1.1. Force 233
3.3.1.2. Relevance of the directive 234
3.3.2. Scope of application 235
3.3.2.1. Reorganizations covered 235
3.3.2.2. Company from a Member State 236
3.3.2.3. Merger 239
3.3.2.4. Division 244
3.3.2.5. Transfer of assets 248
3.3.2.6. Exchange of shares 250
3.3.3. Tax treatment of mergers, divisions and transfers of assets 253
3.3.3.1. Applicable provisions 253
3.3.3.2. Deferral of capital gains taxation 254
3.3.3.3. Carry-over of provisions and reserves 257
3.3.3.4. Takeover of losses 257
3.3.3.5. Holdings of the receiving company in the transferring company 259
3.3.3.6. Tax exemption of the shareholders 259
3.3.3.6.1. Situations covered 259
3.3.3.6.2. Situations not covered by the tax exemption 261
3.3.3.7. Transfer of a permanent establishment 263
3.3.4. Transfer of registered office of a European Company or European Cooperative Society 264
3.3.4.1. Background and relevance 264
3.3.4.2. Transfer of registered office 265
3.3.4.3. Tax consequences 266
3.3.5. Tax avoidance 268
3.3.5.1. Artificial tax-avoidance arrangements 268
3.3.5.2. Other situations 272
3.3.6. Employee representation 273
3.4. Anti-Tax Avoidance Directive 273
3.4.1. Background, relevance and implementation 273
3.4.2. Personal scope of the directive 275
3.4.3. Interest deduction limitation rule 275
3.4.3.1. Different limitations on interest deductions 275
3.4.3.2. EBITDA-based fixed ratio rule 276
3.4.3.3. Voluntary de minimis rule 277
3.4.3.4. Voluntary exclusions 278
3.4.3.5. Voluntary group ratio rule 280
3.4.3.6. Voluntary carry-forward and carry-back 281
3.4.4. Exit taxation provision 282
3.4.4.1. Exit taxation 282
3.4.4.2. Transfers covered 282
3.4.4.3. Exclusion of temporal transfers 284
3.4.4.4. Deferral of payment 284
3.4.4.5. Tax value in the receiving country 286
3.4.4.6. Estonia 286
3.4.5. General anti-abuse rule 287
3.4.6. Controlled foreign company rule 288
3.4.6.1. Functioning and structure of the rule 288
3.4.6.2. Entities treated as CFCs 289
3.4.6.3. The CFC tax base 290
3.4.6.4. Computation of the CFC income 292
3.4.7. Hybrid mismatch rule 294

Chapter 4 EU Company Forms and the Future of Corporate Taxation 303
4.1. Introduction 303
4.2. European Company and European Cooperative Society 304
4.2.1. Formation 304
4.2.1.1. Company law 304
4.2.1.2. Tax treatment 306
4.2.2. Tax treatment of a European Company or a European Cooperative Society 311
4.2.2.1. Relevance of the SE Regulation and the SCE Regulation 311
4.2.2.2. National tax laws 312
4.2.2.3. Tax treaties 313
4.2.2.4. Founding treaties and directives 315
4.2.2.5. Tax-related problems 316
4.3. European Economic Interest Grouping 316
4.3.1. Company law 316
4.3.2. Tax treatment 317
4.4. Future of corporate taxation in the European Union 318
4.4.1. Need for development 318
4.4.2. From CCCTB to BEFIT 319
4.4.3. Alternatives 320
4.4.4. Significant digital presence and digital services tax 322

Chapter 5 Transfer Pricing 325
5.1. Relevance 325
5.2. Code of Conduct on transfer pricing documentation 327
5.2.1. Background and purpose 327
5.2.2. General principles 329
5.2.2.1. Rights and obligations of enterprises 329
5.2.2.2. Rights and obligations of Member States 331
5.2.3. Content of documentation 332
5.2.3.1. General principles 332
5.2.3.2. Master file 334
5.2.3.3. Country-specific documentation 335
5.3. Advance pricing agreements 336
5.3.1. Background and purpose 336
5.3.2. Binding effect 337
5.3.3. Prerequisites for an advance pricing agreement 339
5.3.4. Conduct of the advance pricing agreement process 340
5.3.4.1. Preliminary negotiations and informal application 340
5.3.4.2. Formal application 341
5.3.4.3. Evaluation and negotiations 344
5.3.4.4. Formal advance pricing agreement 345
5.4. Arbitration Convention 347
5.4.1. Relevance, force and interpretation 347
5.4.1.1. Relevance 347
5.4.1.2. Force 349
5.4.1.3. Interpretation 350
5.4.2. Scope of application 351
5.4.2.1. Elimination of double taxation 351
5.4.2.2. Double taxation caused by a transfer pricing adjustment 351
5.4.2.3. Enterprise of a contracting state 353
5.4.2.4. Serious penalty 355
5.4.2.5. Taxes covered by the Arbitration Convention 355
5.4.2.6. Competent authority 355
5.4.2.7. Territorial scope of application 356
5.4.3. Arm’s length principle and transfer pricing adjustment 356
5.4.4. Notification of a transfer pricing adjustment 358
5.4.5. Mutual agreement procedure 359
5.4.5.1. Institution of proceedings 359
5.4.5.2. Notifications and information request 360
5.4.5.3. Starting the negotiations 360
5.4.5.4. Negotiations 362
5.4.5.5. Agreement and implementation 364
5.4.6. Arbitration procedure 365
5.4.6.1. Starting the procedure 365
5.4.6.2. Advisory commission 367
5.4.6.3. Rights and obligations within the arbitration procedure 370
5.4.6.4. Opinion of the advisory commission 371
5.4.6.5. Costs 372
5.4.7. Correction of tax assessment 373
5.4.7.1. Abolition of international double taxation 373
5.4.7.2. Suspension of tax collection 374

Chapter 6 Mutual Assistance and Recovery of Tax Claims 377
6.1. Directive on Administrative Cooperation 377
6.1.1. Background and relevance 377
6.1.2. Scope of application 381
6.1.3. Types of information exchange 383
6.1.3.1. Automatic exchange of information 383
6.1.3.2. Automatic exchange of information on reportable cross-border arrangements 389
6.1.3.2.1. Introduction 389
6.1.3.2.2. Reportable cross-border arrangements 390
6.1.3.2.3. Reporting obligation 395
6.1.3.2.4. Automatic exchange of information 400
6.1.3.2.5. Penalties 402
6.1.3.3. Exchange on request 402
6.1.3.4. Spontaneous exchange of information 405
6.1.3.5. The exchanging authority 407
6.1.4. Limits for exchange of information 408
6.1.5. Disclosure of information 411
6.1.6. Presence in the requested state 413
6.1.7. Notification of tax decisions 413
6.1.8. Simultaneous controls 415
6.1.9. Joint audits 416
6.1.10. Consultations 417
6.2. Recovery Directive 418
6.2.1. The norms and scope of application 418
6.2.1.1. Norms 418
6.2.1.2. Taxes on income and capital 419
6.2.2. Competent authorities 420
6.2.3. Types of assistance 420
6.2.3.1. Exchange of information 420
6.2.3.2. Notification of documents 422
6.2.3.3. Recovery 423
6.2.3.4. Precautionary measures 427
6.2.4. Limits to the obligation to assist 428
6.2.5. Periods of limitation 429
6.2.6. Use of languages 430
6.2.7. Disclosure of information and documents 430
6.2.8. Costs linked to recovery 431

Chapter 7 Legal Remedies 433
7.1. National legal remedies 433
7.2. Tax treaties 438
7.2.1. Mutual agreement procedure 438
7.2.2. Arbitration Convention 439
7.3. Dispute Resolution Mechanisms Directive 439
7.3.1. Objective and scope 439
7.3.2. Interpretation 441
7.3.3. Complaint 442
7.3.4. Mutual agreement procedure 446
7.3.5. Dispute resolution by the advisory commission 447
7.3.6. The alternative dispute resolution commission 453
7.3.7. Procedural rules 454
7.3.8. The opinion and the final decision on the dispute 457
7.3.9. Interaction with national proceedings 460
7.3.10. Special provisions for individuals and smaller undertakings 462
7.4. EU Court 463
7.4.1. Tasks of the EU Court 463
7.4.2. Preliminary rulings 465
7.4.3. Actions 468
7.4.3.1. Actions against a Member State 468
7.4.3.2. Infringement procedure 469
7.4.3.3. Actions of Member States 471
7.4.4. Costs 471
7.5. Effects of EU Court judgments 472
7.5.1. Repayment of taxes paid in conflict with EU law 472
7.5.2. Liability for damages 474
7.5.3. Consequences of the failure to comply with an

EU Court judgment 476
References 479
Bibliography 479
EU Court cases (listed chronologically) 548
European Court of Human Rights 562
EFTA Court 563
EU Court cases (listed alphabetically) 563

Index 577