Anti-abuse measures in the area of direct taxation
The Commission invites the Member States to revise their direct taxation anti-abuse regulations, taking into consideration the principles of the European Court of Justice. It also encourages them to find coordinated and constructive solutions in this area.
Commission Communication of 10 December 2007 to the Council, the European Parliament and the European Economic and Social Committee entitled "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 - Not published in the Official Journal].
The notion of "anti-abuse regulations" covers numerous laws, measures and practices in the Member States. This Communication calls for a more targeted and better coordinated application of these rules. It aims to establish a just balance between the public interest in tackling abuse and the need to avoid restrictions on cross-border activities within the European Union. It also seeks to coordinate the application of anti-abuse measures in relation to third countries, in order to protect the tax bases of the Member States.
Restricted to the area of direct taxation, this Communication makes a distinction between the application of national anti-abuse measures within the EU and with third countries. It analyses the principles laid down by the Court of Justice of the European Communities (CJEC) to stimulate debate between the Member States and stakeholders with the aim of:
- establishing common definitions of the notions of abuse and purely artificial arrangements;
- improving cooperation to detect and neutralise fraudulent fiscal practices;
- exchanging best practices compatible with Community law;
- reducing overlaps, which can result in unintended non-taxation;
- improving coordination of anti-abuse measures in cases involving third countries.
Tax evasion and abuse
The CJEC has ruled that any person normally in a situation covered by Community law can lose the rights to which they are entitled - in respect of Community legislation - if they seek to abuse this system. The cases envisaged are exceptional: abuse only exists when, despite formal compliance with the conditions fixed by the applicable Community measures, the objective of these measures is not attained and there is an intention to gain an advantage resulting in artificial creation of the conditions for obtaining this advantage. The CJEC has applied this doctrine in relation to Community legislation on export subsidies and VAT.
In its case law on direct taxation, the CJEC has also ruled that the need to prevent tax evasion or abuse can constitute a compelling reason, of general interest, for justifying a restriction of fundamental liberties. The notion of tax evasion is however limited to "purely artificial arrangements of which the aim is to evade tax legislation" in the Member State concerned. To be lawful, national tax regulations must be proportionate and specifically aimed at preventing "purely artificial arrangements".
Purely artificial arrangements
The CJEC has identified certain factors which do not in themselves constitute artificial arrangements. Thus, if a person liable for tax establishes a subsidiary in another Member State or carries out activities in this other Member State from the territory of his Member State of origin, this does not necessarily constitute tax evasion. Aiming to minimise one's tax burden is a valid commercial process, provided that the measures taken to this effect do not result in artificial transfer of profits.
Artificial arrangements must be detected via a comparative analysis of form and substance. In assessing the substance, verifiable elements should be used such as the location of management structures, physical presence of the establishment and the corresponding commercial risk.
National regulations may set out criteria targeting situations with a high probability of abuse. Implementation of these presumption criteria can strengthen legal security in favour of the person liable for tax whilst facilitating fiscal administration.
To avoid penalising lawful activities, an individual approach must be taken by the tax authorities whereby each person liable for tax who is presumed to have created a purely artificial arrangement must be able to justify the measures that he has taken. The findings of the tax authorities must be subject in principle to independent legal scrutiny.
Application of anti-abuse regulations
The Member States must be able to manage effective tax systems and avoid any undue erosion of their tax base attributable to abuse or unintended non-taxation. However, to avoid restricting the exercise of rights held by individuals and economic operators pursuant to Community legislation, the anti-abuse measures must be specifically targeted at artificial arrangements designed to bypass legislation. Moreover, solutions which, to avoid any accusation of discrimination, apply anti-abuse measures designed to tackle cross-border tax evasion to situations which are strictly controlled at national level, should be prohibited, as they are counter-productive in terms of economic efficiency and run contrary to the interests of the internal market.
Application of anti-abuse regulations in third countries
Application of anti-abuse measures in cases involving third countries (cases where only the free circulation of capital applies) is generally less affected by the provisions of Community law. The EC Treaty does not oblige the Member States to avoid all discrimination in regard to establishing their nationals outside the Community or establishing nationals from third countries in a Member State. Consequently the question of discrimination does not arise in the case of a dependant company or a creditor/shareholder residing in a third country, i.e. the situations most frequently targeted by anti-abuse regulations against cross-border tax evasion.
Directives on corporation tax apply to companies established in the Member States. They aim to remove tax obstacles to cross-border reorganisations and to payment of dividends, interest and fees. On the other hand, they do not facilitate arrangements intended to avoid withholding of tax on payments in favour of non-European entities. The best way of stopping these practices is a uniform and coordinated application of measures to fight tax evasion and strengthen administrative cooperation between the Member States and with non-EU partners.