Direct taxation: Personal and company taxation
The field of direct taxation is not directly governed by European Union rules. Nevertheless, a number of directives and the case law of the Court of Justice of the European Union (CJEU) establish harmonised standards for taxation of companies and private individuals. Moreover, actions have been taken to prevent tax evasion and double taxation.
Legal basis
The EU Treaty makes no explicit provision for legislative competences in the area of direct taxation. Legislation on the taxation of companies has usually been based on Article 115 of the Treaty on the Functioning of the European Union (TFEU), which authorises the Union to adopt directives on the approximation of laws, regulations or administrative provisions of the Member States which directly affect the internal market; these require unanimity and the consultation procedure.
Article 65 TFEU (free movement of capital) allows Member States to distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested. However, in 1995, the CJEU ruled (in Case C-279/93) that Article 45 TFEU is directly applicable in the field of taxation and social security: that article stipulates that freedom of movement for workers entails ‘the abolition of any discrimination based on nationality [...] as regards employment, remuneration and other conditions of work and employment’. Articles 110-113 TFEU require Member States to enter into negotiations on the abolition of double taxation within the EU. Article 55 TFEU forbids discrimination between the nationals of Member States as regards participation in the capital of companies. Most of the arrangements in the field of direct taxation, however, lie outside the framework of EU law. An extensive network of bilateral tax treaties involving both Member States and third countries covers the taxation of cross-border income flows.
Objectives
Two specific objectives are the prevention of tax evasion and the elimination of double taxation. In general terms, a degree of harmonisation of company taxation is justified in order to prevent distortions of competition (in particular in connection with investment decisions), to prevent ‘tax competition’ and to reduce the scope for manipulative accounting.
Results
A. Company taxation – measures to eliminate tax obstacles in the single market
Proposals to harmonise corporation tax have been under discussion for several decades (1962: Neumark report; 1970: Van den Tempel report; 1975: proposal for a directive on the alignment of tax rates between 45% and 55%). In 1980, the Commission stated that the attempt at harmonisation was probably doomed to failure (COM(80)0139), and concentrated on measures to complete the internal market: in the ‘Guidelines on corporation tax’ of 1990 (SEC(90)0601), three proposals were adopted, namely the Merger Directive (90/434/EEC – now 2009/133/EC), the Parent Companies and Subsidiaries Directive (90/435/EEC – now 2011/96/EU), and the Arbitration Procedure Convention (90/436/EEC). The fate of the 1991 proposal for a directive on a common system of taxation applicable to interest and royalty payments made between parent companies and subsidiaries in different Member States illustrates the often protracted nature of the negotiations with the Member States: despite being revised and receiving a favourable opinion from Parliament, the Commission withdrew it as a result of the failure to reach agreement in the Council. A new version appeared in 1998 as part of the ‘Monti package’ and was subsequently adopted as Directive 2003/49/EC.
In 1996, the Commission launched a new approach to taxation. In the field of company taxation, the main result was the Code of Conduct for Business Taxation, adopted as a Council resolution in 1998. The Council also established a Code of Conduct Group (known as the ‘Primarolo Group’) to examine cases of unfair business taxation. In 2001, the Commission prepared ‘an analytical study of company taxation in the European Community’ (SEC(2001)1681). The accompanying Commission communication (COM(2001)0582) noted that the main problem faced by companies was that they had to adapt to different national regulations in the internal market. In 2011, the Commission presented a proposal for a ‘common consolidated corporate tax base’ (CCCTB). Under the CCCTB, companies would benefit from a system with a central contact point to which they could submit their tax refund claims. They would also be able to consolidate all their profits and losses made in the EU. Member States would retain full responsibility for setting their own rates of corporate tax. In April 2012, the European Parliament adopted its position on this proposal, but no agreement was reached in the Council. In June 2015, to give fresh impetus to the negotiations in the Council, the Commission came up with a strategy for re-launching the CCCTB proposal in 2016. The Commission opted for a two-step process, separating the common base and consolidation elements, with two interconnected legislative proposals: on a common corporate tax base (CCTB) and on a common consolidated corporate tax base (CCCTB). While it would call for the introduction of the CCCTB to be compulsory, there would be provisions for phasing it in. The revamped proposal, adjusted to take account of work by the Organisation for Economic Co-operation and Development (OECD), could also address tax avoidance by closing regulatory gaps between the national systems and thus putting a stop to common tax avoidance arrangements. Parliament adopted its opinions on both proposals in March 2018, but the negotiations in the Council were again inconclusive.
In September 2023, the Commission adopted a proposal entitled ‘Business in Europe: Framework for Income Taxation (BEFIT)’, which will provide a single corporate tax rulebook for the EU, based on apportionment and a common tax base. It will reduce compliance costs for businesses that operate in more than one Member State and make it easier for national tax authorities to determine which taxes are due. The proposal replaces the pending proposals for a CCTB and a CCCTB. After being adopted by the Council, the proposal should come into force on 1 July 2028. Also in September 2023, the Commission published two other proposals for Council directives: one on transfer pricing and one for a head office tax system for small and medium-sized enterprises. Parliament adopted its opinions on both proposals in April 2024. After being adopted by the Council, the two proposals should enter into force in January 2026.
B. Fair taxation, tax transparency and measures to combat tax avoidance and harmful tax competition
In the course of the 2008 financial crisis, attention turned to combating tax avoidance and to the equitable taxation of companies. Increased transparency is seen as one of the ways of achieving this, as evidenced in the Tax Transparency Package of March 2015, which included the Council Directive on the automatic exchange of information on tax rulings between Member States (Directive (EU) 2015/2376) and the communication on tax transparency to fight tax evasion and avoidance. In 2015, the Commission adopted an action plan for a fair and efficient corporate tax system in the European Union, with provisions for reforming the corporate tax framework in order to combat tax abuses, ensure sustainable revenue and support an improved environment for business in the internal market. In January 2016, the Commission proposed a package of measures to combat tax avoidance, which included a proposal for a Council directive to combat tax avoidance practices with an immediate impact on the functioning of the internal market; known as the anti-tax avoidance directive (ATAD), it was adopted in July 2016. This was followed in October 2016 by a proposal for a Council directive amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (ATAD 2), which was adopted in May 2017. In December 2021, the Commission proposed a Council directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (ATAD 3 or ‘Unshell’). The latter is still under negotiation in the Council, despite Parliament adopting a positive opinion in January 2023.
Still on the issue of transparency, the Commission proposed an amendment to Directive 2013/34/EU as regards disclosure of income tax information by certain undertakings and branches (‘public country-by-country reporting’). The proposal was adopted in November 2021, following an agreement between Parliament and the Council. It requires multinational enterprises to disclose publicly certain parts of the information submitted to the tax authorities.
To enhance the exchange of information, the Directive on Administrative Cooperation (DAC) was introduced in 2011 and has been amended several times in recent years, most recently in October 2023 by DAC 8, in order to address the exchange of information on crypto-assets and e-money. It was previously amended by DAC 7 in March 2021. This amendment was aimed at ensuring that Member States automatically exchange information on the revenues generated by sellers on digital platforms, whether the platform is located in the EU or not. Prior to that, the most recent changes were made through DAC 6, adopted in May 2018, following a request for a legislative proposal in Parliament’s resolution (TAXE 2). This directive includes a requirement for intermediaries, such as consultants, lawyers or tax advisors, to report certain tax arrangements to local tax authorities, which should then automatically exchange the information collected across the EU.
Besides transparency, the EU is working to make sure that current taxation rules are fit for the digital age. The transition to a digital economy has led to a growing disconnect between where value is created and where tax is paid. Discussions on modernising international corporate taxation started a decade ago in the G20, and have been supported by the OECD.
In March 2018, the European Commission proposed new rules to ensure fair taxation of digital activities in the EU. The package consisted of two legislative proposals to (1) reform corporate tax rules so profits are taxed where companies have a significant digital presence and (2) develop an interim tax for revenues from digital services (digital services tax), which Parliament supported.
Discussions at OECD level continued in parallel and on 8 October 2021, members of the OECD/G20 Inclusive Framework on BEPS (base erosion and profit shifting) agreed on the Two-Pillar solution, which is an approach to addressing the tax challenges arising from the digitalisation of the economy. Given the progress made at global level, the 2018 Commission proposals are now on hold. If a global solution and agreement are reached in these negotiations and effectively implemented, the proposals would become obsolete.
The Two-Pillar solution will ensure that the largest and most profitable multinational enterprises will be subject to a minimum effective tax rate of 15% and re-allocate profits to countries worldwide in the following way:
Pillar One creates a new tax nexus to reallocate and tax corporate profits where value is created and where customers are located, regardless of a physical presence in the country. On this basis, the Commission proposed on 22 December 2021 ‘the next generation of EU own resources’, which includes an own resource equivalent to 15% of the share of the residual profits of in-scope companies, which are to be reallocated to EU Member States. The proposals do not include extensive details, not least because the OECD is still working on practical implementation aspects of the pillar design. Recently, however, in October 2023, the OECD published the Multilateral Convention (MLC) to Implement Amount A of Pillar One. This reflects the current consensus achieved among members of the OECD/G20 Inclusive Framework (IF) on BEPS. More recently, in February 2024, the IF released the report on Amount B of Pillar One to simplify transfer pricing rules and conforming changes to the Commentary of the OECD Model Tax Convention. Pillar One needs to be signed and will only enter into force when at least 30 jurisdictions accounting for a critical mass of in-scope multinationals ratify the MLC.
Pillar Two introduces a global 15% minimum effective tax, and for this the Commission published a proposal for a Council directive concerning a global minimum level of taxation for multinational groups on 22 December 2021.
The EU adopted its Pillar Two Directive at the end of 2022 and Member States were obliged to implement the rules by 31 December 2023 (some Member States have however opted to apply the derogation provided by the Pillar Two Directive, allowing for a delay in implementation). The adoption of the directive means that minimum tax rules have become part of EU law.
Finally, the Council regularly updates the EU list of non-cooperative jurisdictions for tax purposes.
C. Personal taxation
1. Income tax
The taxation of individuals who work in, or draw a pension from, one Member State but live or have dependent relatives in another has always been a contentious issue. With bilateral agreements, double taxation can generally be avoided, but this has not resolved issues such as the application of different forms of tax relief available in the country of residence to income in the country of employment. In order to ensure equal treatment between residents and non-residents, the Commission put forward a proposal for a directive on the harmonisation of income tax provisions with respect to freedom of movement (COM(1979)0737), on the basis of which taxation in the country of residence would have been the rule. Following its rejection by the Council, this proposal was withdrawn, and the Commission merely issued a recommendation on the principles that should apply to the tax treatment of non-residents’ income. In addition, proceedings were brought against some Member States for discrimination against non-national employees. In 1993, the CJEU ruled (in Case C-112/91) that a Member State cannot treat non-nationals from another Member State less favourably in terms of the collection of direct taxes than it does its own nationals (see Case C-279/93). In general, integration in the field of personal direct taxation can be said to have been furthered more by CJEU rulings than by legislative proposals. In October 2017, the Council adopted a directive (Directive (EU) 2017/1852) aiming to improve existing double taxation dispute resolution mechanisms in the EU.
2. Taxation of bank and other interest paid to non-residents
In principle, taxpayers are required to declare income from interest. In practice, the free movement of capital and banking secrecy have offered scope for tax evasion. Some Member States impose a withholding tax on interest income. In 1989, the Commission proposed the introduction of a common system of withholding tax on interest income, levied at the rate of 15%. This proposal was then withdrawn and replaced by a new one to ensure minimum effective taxation of savings income in the form of interest payments (with a tax rate of 20%). Following lengthy negotiations, a compromise was reached, and Council Directive 2003/48/EC on the taxation of interest income was adopted. It has since been replaced by the more far-reaching Directive 2014/107/EU, which, together with Directive 2011/16/EU, provides for comprehensive exchanges of information between tax authorities. In June 2023, the Commission presented a proposal for a Council directive on faster and safer relief of excess withholding taxes (‘FASTER’) to make withholding tax procedures in the EU more efficient for cross-border investors and national administrations.
Role of the European Parliament
On tax proposals, Parliament’s role is generally confined to the consultation procedure. However, in addition, Parliament’s role is to encourage the Commission to submit new legislative proposals for fairer, greener and more efficient taxation. Therefore, the European Parliament acts also as an agenda-setter for EU tax policy and provides a platform for discussion on international taxation.
Specifically, the creation of the Subcommittee on Tax Matters (FISC) in September 2020 was an important step in further strengthening the role of the European Parliament in international tax debates. FISC was set up to continue the fight against tax avoidance, to strengthen financial transparency and to facilitate the smooth running of the single market. The Subcommittee regularly engages with national parliaments, academics, tax administrations and civil society through public hearings, exchanges of views, missions to Member States and third countries, and the EU Tax Symposium.
For more information on this topic, please see the website of the Subcommittee on Tax Matters (FISC).
Jost Angerer