BEPS and EU Law
Selected points of attention
Prof. Edoardo Traversa, UCLouvain
of Counsel, Liedekerke (Brussels)
European Banking Federation
Annual Tax Conference
Brussels, 2 February 2016
Faculté de droit et de criminologie
Institut pour la recherche interdisciplinaire en sciences juridiques
Centre de recherche interdisciplinaire "Droit, entreprise et société" - Jean Renauld CRIDES
Index
• I. EU taxation prior to BEPS: objectives and instruments
• II. Implementation of BEPS in EU law: capita selecta
–
–
–
–
–
Interest deductions
Abuse of EU and international law
CFC rules
Transfer pricing
[Exit taxation]
• III. Post-BEPS EU Taxation: new objectives ? new instruments?
I. EU taxation prior to BEPS:
objectives and instruments
Objectives of EU tax law and policy
Achievement of the Internal market
-
Freedoms of movement and non discrimination
Approximation of domestic tax systems : Coordination/Harmonization
Prevention of international double taxation: VAT and direct tax directives
Prohibition of fraud and abuse
-
Limitation of the benefits of EU law to genuine economic activities
Right of the Member States to fight fraudulent and abusive practices
-
obligation to do so if EU financial interests are at stake
II. The implementation of BEPS in EU law: capita
selecta
–
–
–
–
–
Interest deductions
Abuse of EU and international law
CFC rules
Transfer pricing
[Exit taxation]
1. Interest deductions: EU law context
– Relief from (economic) double taxation in an intra-group context for certain items of
income
• Interest and Royalties and Parent-Subsidiary Directive (dividends)
– No distinction made under EU law between “interest” (income from debt-claims of every
kind, whether or not secured by mortgage and whether or not carrying a right to
participate in the debtor's profits) and “distribution of profits” : possible mismatches in
case of hybrids
– Domestic anti-abuse on interest deductibility rules have to be compatible with EU law
• Lankhost-Hohorst) (C-324/00) ; Lasertec (C-492/04); Test Claimants in the Thin Cap Group Litigation (C524/04); NV Lammers & Van Cleeff (C-105/07) ; Itelcar - Automóveis (C-282/12) (third country context –
in absence of shareholding)
Interest deductions
• No EU regime on interest deductibility in Interest/royalty directive (see ECJ, Scheuten
Solar Technology GmbH v Finanzamt Gelsenkirchen-Süd, C-397/09)
• Reference to EU Law in the BEPS Action 4 Final Report (October 5, 2015)
 “It would also be extremely difficult for European Union (EU) Member States to apply withholding
taxes on interest payments made within the European Union due to the Interest and Royalty
Directive” (p. 20)
 “EU law requirements imposed on Member States of the European Union have been considered,
and in particular the need for recommended approaches to be in accordance with EU treaty
freedoms, directives and State aid Regulations” (p.22, with reference to Annex A)
Interest deductions
Anti Tax avoidance Directive Proposal
(28 January 2016- COM/2016/026)
• Characteristics
- Ratio for deductibility of “borrowing costs” is limited to
- 30 percent of a taxpayers’ earnings before interest, tax, depreciation and amortisation (EBITDA) or
- to EUR 1 million, whichever is higher.
- Special rules are provided to calculate the ratio for companies belonging to group
- Financial and insurance undertakings are excluded from this interest limitation rule.
• Similar to regimes existing in some Member States, in particular Germany, Italy,
and Spain and in accordance with BEPS recommendations
• Increase international double taxation of interest, contrary to the objective of the
existing EU interest and royalties directive?
2. Abuse of law:
Pre-BEPS trend in the EU
• Prevention of abuse as an exception to freedoms of movement
– Abusive practices by taxpayers (Halifax, Cadbury Schweppes, ICI)
• “objective” and “subjective” dimension
• Wholly artificial arrangements set up to circumvent tax legislation
– Prevention of abuse as balanced allocation of taxing powers and right to tax profits
generated through an economic activity undertaken on the territory
• Test Claimants in Class IV of the ACT Group Litigation (C-374/04), Oy AA (C-231/05), X
Holding BV (C-337/08), Felixstrowe (C-80/12), …
• Compare with the justification based on the reduction of tax revenues (see for example
Persche, C-318/07)
• Similarity with the base erosion and profit shifting concept
• Provisions in EU directives enabling member States to adopt domestic anti-abuse measures
Abuse of law in the EU after BEPS
– Anti-BEPS Directive Proposal of 28 January 2016, article 7
“1. Non-genuine arrangements or a series thereof carried out for the essential purpose of
obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax
provisions shall be ignored for the purposes of calculating the corporate tax liability. An
arrangement may comprise more than one step or part.
2.For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as
non-genuine to the extent that they are not put into place for valid commercial reasons
which reflect economic reality.
3.Where arrangements or a series thereof are ignored in accordance with paragraph 1, the
tax liability shall be calculated by reference to economic substance in accordance with
national law.”
See also Council Directive (EU) 2015/121 of 27 January 2015 amending Directive 2011/96/EU (ParentSubsidiary Directive)/ Discussions on the inclusion of an anti-abuse rule in the Interest-Royalties Directive
(2003/49/EC)/Report on BEPS Action 6 (LOB Clauses and principal purpose test clause)
Abuse of law in the EU after BEPS
- Recommendation of 28 January 2016 (C(2016) 271)
General anti-avoidance rule based on a principal purpose test in tax treaties
- “Notwithstanding the other provisions of this Convention, a benefit under
this Convention shall not be granted in respect of an item of income or capital if it
is reasonable to conclude, having regard to all relevant facts and
circumstances, that obtaining that benefit was one of the principal purposes
of any arrangement or transaction that resulted directly or indirectly in that
benefit, unless it is established that it reflects a genuine economic activity
or that granting that benefit in these circumstances would be in accordance
with the object and purpose of the relevant provisions of this Convention.”
 Compare with the OECD recommendations in BEPS Action 6 Report
3. CFC rules
- Restriction to the freedom of establishment and to the free movement of capital (if not
limited to controlling shareholding)
- See CJUE, Cadbury Schweppes (C-196/04); CFC and Dividend GLO (C-201/05); Commission v. UK ( C-112/14)
- Justification only if it «specifically targets wholly artificial arrangements which do not reflect
economic reality and whose sole purpose is to avoid the tax normally payable on the profits
generates by activities carried out on national territory »
- Appreciated on the basis of « objective factors (…) with regards in particular to the extent to
which the CFC physically exists in terms of premises, staff and equipment »
CFC rules, BEPS Action 3 Final report and EU law
- “CFC rules within the European Union” (1.2.2., p. 17seq.) : proposed solutions
- “(…)substance analysis that would only subject taxpayers to CFC rules if the CFCs did not
engage in genuine economic activities” – see para. 81seq.
- “Applying CFC rules equally to both domestic subsidiaries and cross-border subsidiaries”
- “Applying CFC rules to transactions that are “partly wholly artificial” – see para. 97
(preference of transactional over entity approach)
- “Designing CFC rules to explicitly ensure a balanced allocation of taxing power”
- Is the CJEU approach to artificiality compatible with the OECD recommendations on CFC
applicable to pure investment activities ?
- Compare with the EFTA Court in Olsen (joined cases E-3/13 and E-20/13)
CFC rules in the proposal for a
Anti-Tax Avoidance Directive of 28 January 2016
- Inclusion of CFC income in the profits of an EU company if
-
More than 50% of voting rights, capital or entitlement to profts
General tax regime lower than 40% of the effective tax rate of the residence country
More than 50% of the total income composed of financial income or intragroup services (financial
institutions : only if more than 50% comes from the EU company or associated entreprises)
- If the CFC is located in EU or EEA Member States, those rules shall apply
-
establishment of the entity is wholly artificial or
the entity engages, in the course of its activity, in non-genuine arrangements
- Rules on the computation of CFC income
4. Transfer pricing
- Transfer pricing rules based on the arm’s length principle are adequate and proportionate
to justify a restriction to the fundamental freedoms, even if they do not specifically target
wholly artificial arrangements constituting abusive practices under EU law
- See CJUE, SGI (C-311/08), Thin Cap GLO (C-524/04)
- Influence of revamped OECD Transfer pricing guidelines in the line of the Report on Actions
8,9 and 10 on future CJUE case-law?
- State aid and transfer pricing : affaire à suivre…
5. Exit taxation in the Anti Tax Avoidance Directive
Proposal of 28 January 2016
- Compulsory taxation “at an amount equal to the market value of the
transferred assets, at the time of exit, less their value for tax purposes”
- Possibility of deferred payment (instalments over at least 5 years with
interest) in intra EU and EEA situations
- the Member State of destination shall accept the market value established by
the Member State of origin of the taxpayer or of the permanent
establishment as the starting value of the assets for tax purposes.
=> Correct implementation of the National Grid Indus case-law of the Court of
Justice of the European Union?
Faculté de droit et de criminologie
Institut pour la recherche interdisciplinaire en sciences juridiques
Centre de recherche interdisciplinaire "Droit, entreprise et société" - Jean Renauld CRIDES
III. Post-BEPS EU Taxation
New objectives ? New instruments?
New objectives?
• Level playing field, non-discrimination and substance
– Genuine vs artificial economic activities
• Prevention of double taxation and prevention of double non taxation
• Removing obstacles in the internal market vs. strengthening domestic tax systems
– Territoriality
New instruments?
• Common Consolidated Corporate Tax Base
– Changes to 2011 proposal and postponement of the work on consolidation
– First legislative step focusing on international anti-BEPS aspects (January 2016)
– Risk or opportunity for the relaunch of the process
• EU anti-avoidance measures
• Tax transparency and good tax governance (Country-by-country reporting and external
strategy for effective taxation towards third countries)
• Coordinated approach on domestic anti-avoidance measures
– Linking preferential regimes to where value is generated : implementation of the “modified nexus
approach”
– Permanent establishments (Commission recommendation of 28 January 2016)
State aid policy as the ultimate anti-BEPS
deterrent?
• Competition policy as a parallel track to counter base erosion and profit shifting in the EU?
• Role of the arm’s length principle in State aid
• Impact of double non taxation on the existence of an aid : responsibility of “correcting”
disparities/mismatches
• What will be the position of the EU Courts?
What impact on the international tax position of EU Member States if BEPS does not bring all
its promises?