Brussels, 10/12/2007 (Agence Europe) - On Monday 10 December, the Commission adopted a communication to launch a debate on the application in the EU of national measures to tackle abuses of corporation tax. The Commission, aware of the need to combat tax evasion, nevertheless believes that dialogue is needed to align these measures with the fundamental freedoms set out in the European Treaty and the specific case law of the European Court of Justice. “The recent rulings by the European Court of Justice …clearly show that member states need to urgently carry out a critical review of their existing anti-abuse rules,” said European Taxation Commissioner László Kováks in a press release.
The communication concentrates on two specific types of anti-abuse rules applied by member states: provisions on Controlled Foreign Corporations (CFC) and those on thin capitalisation. In the first case, the main purpose is to prevent resident companies attempting to avoid domestic taxation by diverting income to subsidiaries in low-tax countries. In the second, a subsidiary of a thin capitalised company can attract funding, either through a loan or capital investment, from a parent company established in another member state. With taxation of interest being lower than that of dividends, debt financing “is considerably more attractive in a cross-border context,” the Commission says. The anti-abuse rules put in place by the EU seek, then, to block practices by some companies to avoid taxation.
The Commission notes the Court's recent case law which indicates that national anti-tax evasion rules must be targeted on wholly artificial arrangements which have no commercial justification. The Court also details the criteria for detecting abusive practices. Under the terms of the “Cadbury/Schweppes” ruling (case C-196/04), the establishment of a company in a member state is to be regarded as genuine and not a mere “letterbox” subsidiary when the company develops real economic activities based on an evaluation of objective factors such as the existence of premises, staff and equipment (see EUROPE 9263). The “Thin Cap” ruling (case C-524/04) sets out the conditions authorising the imposition of tax restrictions on financing arrangements between related companies (see EUROPE 9387).
Within the framework of the debate which it hopes to have with member states and economic operators, the Commission considers that “it would be worthwhile exploring the practical application of those principles to different types of business activities and structures”, and even “establishing a non-exhaustive inventory of fact patterns that generally indicate the presence of an artificial arrangement”. It would also be “regrettable”, it says, if member states were to extend their anti-abuse measures designed to curb cross-border tax avoidance “to purely domestic situations where no possible risk of abuse exists”. It recommends administrative cooperation between national tax administrations to avoid cases of involuntary non-taxation and to draw up “coordinated solutions” to detect situations where mismatches between member states' legislations are exploited abusively.
At the end of 2006, the Commission argued for the coordination of national direct taxation systems and considered the issues related to exit taxation and cross-border compensation of losses (see EUROPE 9331). (M.B.)