Freedom of investment between EU and
non-EU Member States and its impact on
corporate income tax systems within
the European Union
Dr. D.S. Smit LL.M.
The Research Question
• Starting point: international economic integration
within the European Union
• Free movement of persons, services & capital
(“freedom of investment”)
• Huge impact on Member States’ company tax
regimes within the EU
• International economic integration does not stop,
however, at the borders of the EU
• European Commission (2006): “European
openness”
• Article 63 TFEU: free movement of capital
between Member States and between Member
States and third countries
• Various Association, Partnership and
Cooperation Agreements with third countries
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The Research Question
• Research question:
• What is and should be the impact of the
European free movement provisions on
Member States’ company income tax
systems in the relations between Member
States and non-Member States?
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Scope of the Study
• Focus on 6 corporate income tax measures in an
international context*):
• Direct third country investments between EU and nonEU Member States:
*)
1 Withholding taxes
2 Limitations on the deduction
of interest expenses
3 Relief for double taxation
4 CFC-legislation
•
5 Loss compensation
6 Transfer of business assets
NonEU
EU
EU
NonEU
Indirect third country investments between EU and non
EU Member States through an EU intermediary:
NonEU
EU
EU
EU
EU
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NonEU
Benchmark
• Freedom of investment implies international tax
neutrality
• Inter-nations neutrality:
• International tax neutrality can be best achieved
if taxation does not adversely influence the
relation between taxes and public goods to the
disadvantage of transnational investment
• Boils down, in its ultimate implications, to
source-state based taxation
• Neutrality considerations may be constrained by
taxpayer equity considerations
• Striking match with CJEU case law relating to
freedom of investment:
• Economic concept
• Implies a genuine economic link with the
territory of a Member
State through the exercise
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of a genuine economic activity
Structure and Conclusions of the Study
• H1: Research question and acknowledgements
• H2: Benchmark
• H3: Dividing line between EU Member States and
non-EU Member States
• Position of associated and dependent territories:
(part of a) Member State or third country?
• Conclusion: third country to the extent not bound
to apply the Treaty provision at stake
• H4: Relevant positive integration between the
Member States
• H5: Relevant negative integration between the
Member States
• Conclusion: significant
impact on Member States
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company tax systems
Structure and Conclusions of the Study
• H6: Access to freedom of investment vis-à-vis third
countries
• Conclusion: The bigger the investment, the lower
the protection (benchmark of “definite influence”)
• H7: Discrimination and justification grounds under
freedom of investment vis-à-vis third countries
• Conclusion: More room to successfully rely on
justification grounds
• H8: Temporal scope of freedom of investment vis-àvis third countries
• Conclusion: Limits the protection under the free
movement of capital under Article 63 TFEU
• Extends the protection under the APC
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Agreements
Structure and Conclusions of the Study
• H9: Indirectly held third country investments
(intermediate companies & dual resident
companies)
• No protection in case of tax avoidance
• Benchmark: Intermediate company has no
genuine economic link with the economy of
Member State
• Requirement of proportionality: taxpayer
must still be allowed to provide proof to the
contrary
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Structure and Conclusions of the Study
• H10: Recommendations & conclusions
• Amendment of existing tax Directives
• Definition of “third countries”
• Common relief for double taxation for
income from third country investments
• Common CFC-provision for third
country investments with no genuine
economic link or subject to special tax
regime
• Common WHT system in case of
intermediate EU companies with no
genuine economic
link
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Closing
• Thank you for your attention…!
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