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IP/07/1878

Brussels, 10 December 2007

Direct Taxation: The European Commission calls for a more targeted and better coordinated application of Member States' anti-abuse rules

(see MEMO/07/558)

The European Commission has today adopted a Communication inviting Member States to carry out a general review of their anti-abuse rules in the direct tax area, in light of the principles flowing from relevant ECJ case law, – and to explore possible coordinated solutions in this field. In order to prevent tax abuse, Member States have implemented anti-abuse rules with the aim of preventing economic operators from eroding the tax base in their territory by diverting their income to other countries. Member States' existing anti-abuse rules often do not properly take into consideration the freedoms of the Treaty and are therefore increasingly challenged. In the framework of an EU-coordinated approach in direct taxation (IP/06/1827), the Commission is willing to assist Member States in bringing their anti-abuse rules in line with EC law requirements and to explore the scope for constructive and coordinated responses to the challenges faced by Member States.

László Kovács, Commissioner responsible for Taxation and Customs Union said: "The recent rulings by the European Court of Justice in this field clearly show that Member States need to urgently carry out a critical review of their existing anti-abuse rules. I understand that Member States need to ensure that their tax bases are not unduly eroded because of abusive and overtly aggressive tax planning schemes but we cannot tolerate disproportionate obstacles to cross-border activity within the EU. I invite Member States, in order to strike the proper balance, together to explore the potential and scope for possible coordinated solutions".

The obvious catalyst for the need to address issues related to the application of anti-abuse rules lies with the development of the European tax law. Over the past few years the European Court of Justice has handed down a number of important rulings in this area (e.g. Eurowings, Lankhorst-Hohorst, Cadbury-Schweppes, Thin Capitalisation GLO)[1] in which it has clarified the limitations on the lawful use of anti-avoidance rules. These must not be framed too broadly but be targeted at wholly artificial arrangements, i.e. situations where there is no genuine establishment or more generally where there is a lack of commercial underpinning.

The rulings have a significant impact on the existing rules which have not been formulated with the Community constraints in mind.

While it is important to ensure that there are no undue obstacles to the exercise of the rights conferred upon individuals and economic operators by Community law provisions, Member States also need to be able to operate effective tax systems and prevent their tax bases from being unduly eroded because of abuse and inadvertent non-taxation. The Commission therefore considers that there is an urgent need:

  • to strike a proper balance between the public interest of combating abuse and the need to avoid disproportionate restrictions on cross-border activity within the EU; and
  • for better coordination of the application of anti-abuse measures in relation to third countries in order to protect Member States' tax bases.

With the present Communication the Commission wishes to prompt a more general debate on constructive, coordinated, responses to the challenges faced by Member States. Moreover, and notwithstanding the guidance laid down by the ECJ to date, there remains scope for exploring the practical application of the relevant principles beyond the circumstances of the particular contexts in which they arose.

The Commission therefore wishes to invite the Member States and other stakeholders to work with it to promote a better understanding of the implications for Member States' tax systems.

Background

Abuse occurs only where the purpose of tax law is defeated despite formal observance of the conditions laid down in the tax law, and there is an intention to obtain an advantage by artificially creating the conditions for obtaining it.

Tax avoidance or abuse needs to be distinguished from tax fraud which involves deliberate unlawful behaviour which is generally punishable by law (e.g. submission of deliberately false statements or fake documents).

The Communication is presented within the framework of the coordination initiative launched by the Commission in December 2006 (IP/06/1827). In the 2006 Communication, the Commission outlined ways in which coordination and cooperation between the Member States could enable them to attain their tax policy goals and protect their tax bases while observing their EC Treaty obligations and ensuring the elimination of double taxation.


[1] Cases: C-294/97, C-324/00, C-196/04 and 524/04, respectively.


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