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Basics of EU Law

The course, titled "International Law and Taxation: European Direct Tax Law," is taught by Prof. Daniel W. Blum, LL.M (NYU) at the University of Torino, scheduled for June 16-18, 2025. The slides are based on materials prepared by Prof. Rita Szudoczsky and Prof. Nevia Cicin-Sain from the Institute for Austrian and International Tax Law. The course objectives include understanding European Tax Law fundamentals and its interplay with domestic and tax treaty law, covering both material and procedural aspects. The material aspect focuses on the legal sources of European Tax Law and the impact of the CJEU’s jurisprudence, including primary and secondary EU Law. The procedural aspect involves understanding EU law instruments provided by secondary EU legislation for EU tax administrations to enforce national tax law.

History of the European Union and Basics of EU Law

The history includes key milestones such as the 1951 European Coal and Steel Community, the 1957 Treaty of Rome establishing the European Economic Community and the European Atomic Energy Community, the 1992 Maastricht Treaty creating the European Union, the 2002 introduction of the Euro, and the 2009 Treaty of Lisbon which includes the EU Treaty (TEU), the Treaty on the Functioning of the European Union (TFEU), and the Charter of Fundamental Rights of the EU.

Sources of EU Law

EU Primary Law originates from the Member States and includes the TEU, TFEU, Charter of Fundamental Rights of the EU, and General Principles of the Union’s Law. EU Secondary Law originates from the institutions of the European Union, as defined in Art. 288 TFEU, including regulations (generally applicable and binding), directives (binding as to the result to be achieved), and decisions, recommendations, and opinions.

Supremacy of EU Law

EU law, as established in the Costa v Enel case (15 July 1964), is superior to the national laws of Member States and applies to all EU acts with a binding force. National law must be interpreted in light of EU law, including constitutional law, and any national law contrary to EU law must be disregarded, although it is not void and may be applied in purely national situations.

Direct Applicability/Effect of EU Law

Direct applicability of Primary Law, as seen in the Van Gend en Loos case (Case 26/62, 5 February 1963), means that EU law directly creates rights for individuals, not only obligations for Member States. Individuals can invoke these rights before national and European courts. This raises questions about whether it applies only to the advantage or also to the detriment of taxpayers, and the role of the anti-abuse doctrine as EU Primary Law. Direct applicability of Directives occurs when there is no or late transposition into domestic law due to the failure of a Member State, provided that secondary legislation contains a sufficiently precise provision stipulating a benefit for the taxpayer.

Enforcement of EU Law

Enforcement includes the Infringement Procedure (Art. 258 TFEU), where the Commission can ask a Member State to change its legislation if it does not meet the requirements of EU law, and can bring the matter before the Court of Justice if the Member State does not comply. The Preliminary Ruling Procedure (Art. 267 TFEU) designates the CJEU as the sole court to decide about the validity of EU law; national courts may ask the CJEU about the interpretation of the Treaties or the validity and interpretation of acts of the Union's institutions. A national court of last instance is obliged to ask the CJEU for a preliminary ruling if the question is decisive, except in cases of acte claire or acte éclairé.

EU Legislative Competences in Taxation

The Principle of Conferral (Art. 5 TEU) dictates that the Union acts only within the limits of competences conferred upon it by the Member States in the Treaties. The use of Union competences is governed by the principles of subsidiarity and proportionality. EU legislative competence in taxation is focused on the Internal Market; EU institutions can intervene in taxation if national tax measures create obstacles to the internal market (art. 4(2)(a) TFEU). Art. 3 TEU states that the Union shall establish an internal market, and Art. 26 TFEU specifies that the internal market shall comprise an area without internal frontiers ensuring the free movement of goods, persons, services, and capital.

EU Legislative Competences in Taxation

Potential legal bases for harmonizing legislation include Art. 179 for removing fiscal obstacles to research, Art. 191(2) and Art. 192(2)(a) for green taxes (requiring unanimity), Art. 113 for the approximation of laws in indirect taxation (requiring unanimity), and Art. 115 for harmonizing direct tax laws necessary for the establishment and functioning of the internal market (requiring unanimity).

Positive and Negative Integration

Positive integration involves the adoption of common harmonizing rules at the EU level by the EU legislature, replacing existing national rules with supranational law. Negative integration establishes limits in the exercise of national tax sovereignty, based on the interpretation of prohibitions laid down in the TFEU, such as fundamental freedoms and state aid.

Tax Obstacles to Internal Market

Tax obstacles to the internal market include juridical and economic double taxation, high compliance burden, and information asymmetries. The policy standpoint balances reducing obstacles for taxpayers against ensuring tax revenue for Member States.

Direct Taxation

So far, direct taxation has only fragmented harmonization, based on Art. 115 TFEU which requires unanimity. Corporate tax directives meant to further the internal market include the Parent Subsidiary Directive (exempting certain dividend payments), the Interest & Royalty Directive (exempting certain interest and royalty payments), the Merger Directive (abolishing certain tax obstacles to cross-border mergers), the Anti-Tax Avoidance Directive (requiring implementation of minimum anti-abuse rules), and the Global Minimum Tax Directive (ensuring a global minimum taxation of 15%). Directives also facilitate cooperation between tax authorities, such as the Directive on Administrative Cooperation (DAC), the Directive on the Recovery of Tax Claims, and the Directive on dispute resolution in tax matters.

Exchange of Information and Dispute Resolution

Indirect taxation is comprehensively harmonized in the EU under Art. 113 TFEU, requiring unanimity for legislation concerning turnover taxes, excise duties, and other forms of indirect taxation. Key directives include the Value Added Tax Directive and the Excise Duty Directive. The EU also operates as a customs union under the Common Customs Code.

The Parent Subsidiary Directive (PSD)

The Parent Subsidiary Directive (PSD) represents a step toward a harmonized Corporate Tax Law, initially proposed in 1969 and later formalized as Council Directive 90/435/EEC of 23 July 1990. Amended by various Council Directives and recast in 2011 as 2011/96/EU, with recent changes including Council Directives 2014/86/EU and 2015/121/EU, its aims include creating conditions like those in an internal market, eliminating disadvantages such as double taxation, facilitating the grouping together of companies, and, more recently, avoiding double non-taxation. Measures include exemption or indirect tax credit for inbound dividends and no withholding tax on outbound dividends, as well as taxation in case of a deduction. The directive ensures that corporate profits are taxed at least once, either at the level of the distributing subsidiary or the receiving parent.

Persons Covered under PSD

For a company to fall under the scope of the PSD (Art. 2), three conditions must be cumulatively met: the legal form must be listed in the Annex to the PSD, the company must be a resident of that state (without being a tax treaty resident in a non-EU MS), and it must be subject to the taxes listed in the Annex to the PSD without having the option to be exempt. Usually, EU companies are in scope, but special legal forms, especially investment funds and hybrid entities, must be examined more closely.

Facts of the Case: Gaz de France SAS

Gaz de France SAS, a French company, faced a German withholding tax on a profit distribution from its German subsidiary. The legal background involves Art. 2(a) PSD, which covers companies that take one of the forms listed in Annex I, Part A, but SAS was not yet added to the list at the relevant time. The ECJ noted that point (f) of the annex provides an exhaustive list, and SAS was not included at the time.

Facts of the Case: Wereldhave Belgium

Wereldhave Belgium paid a dividend to its shareholders, Wereldhave International NV and Wereldhave NV, established in the Netherlands. These shareholders are subject to corporate income tax at a zero rate, provided that all profits are paid to their shareholders. Art. 2(c) PSD requires companies to be subject to tax without the possibility of being exempt. The ECJ determined that the Dutch shareholders are subject to corporate income tax but not liable to pay it, and therefore do not fall within the meaning of a “company of a Member State.”

Other Key Aspects of PSD

The PSD requires a minimum holding of 10%, with an option for Member States to set a minimum holding requirement of up to 2 years. Benefits should be granted before the minimum holding period elapses, with subsequent reimbursement if the condition is not met. The PSD does not apply to portfolio shareholdings. It includes a separate PE definition in Art. 2.b), which is not identical with the OECD Model, defining a PE as “…a fixed place of business of a company of another MS through which the business of a company is wholly or partly carried on…” This definition mirrors Art 5 (1) OECD MC but does not reference agency PE (Art. 5 (3) OECD MC). An EU PE of a non-EU company is not covered. Similar wording to the OECD MC does not necessarily imply identical interpretation, due to autonomous characterization by the CJEU. The directive also includes a subject-to-tax requirement (Art. 7 OECD MC). Profit distributions between EU companies in different MSs are covered, including when the PE is the recipient, but it does not apply to distributions to third States or wholly domestic situations. The exemption method is applied only “to the extent that such profits are not deductible by the subsidiary,” and the parent State is obliged to “tax such profits to the extent that such profits are deductible by the subsidiary,” raising issues of “Directive shopping.”

Anti-Abuse Measures and Legal Consequences

Prior to 2015, Art 1 (2) PSD referenced domestic anti-abuse doctrines as the basis for denying benefits of the PSD. The scope includes an arrangement or series of arrangements where the main purpose is to obtain a tax advantage that would defeat the object or purpose of the PSD, and the arrangement is not genuine, lacking valid commercial reasons. If these conditions are met, Member States shall not grant the benefits of the PSD.

Eqiom (C-6/16) and Deister Juhler (C-504/16) CJEU Case Law on Abuse with Respect to PSD

French law denied reduction of withholding tax if a dividend was paid to a company ultimately held by a third-state resident unless the taxpayer proves that the tax benefit was not the main purpose of the structure. The CJEU ruled that the necessity to prevent tax abuse can justify denying PSD benefits, but the measure must be proportionate, not going beyond what is necessary to ensure the justifying purpose. Anti-abuse measures should target “wholly artificial arrangements” (Cadbury-doctrine). General assumptions of abuse, such as low taxation or owner residence in a third state, are disproportionate if tax authorities fail to provide prima facie evidence of abuse, and holding companies are not per se “wholly artificial.” Opinion GA Kokott (C-116/6) regarding Danish Beneficial Ownership Cases stated that there is no direct application of Art 1 (2) PSD without a domestic rule transposing it, and the BO of Art 10 OECD-MC cannot be seen as a sufficient transposition. General domestic tax principles might suffice, with no relevance of the OECD-BO concept. Abuse is indicated by a lack of information exchange and failure to reflect economic reality, with the principal objective being to obtain a tax advantage, and the conduit nature of the dividend recipient consistent with the Cadbury doctrine. The CJEU rejected the Kofoed argument.

The Interest and Royalty Directive (IRD)

The Interest and Royalty Directive (IRD), initially Council Directive 2003/49/EC of 3 June 2003, aims to ensure single taxation of intra-group interest and royalties at the level of the recipient. However, the risk of double taxation is lower than with dividends, as interest and royalties are deductible (with exceptions), and withholding tax may be waived under domestic or tax treaty law. Single taxation may exist even without the IRD. As with the PSD, three conditions must be met for a company to fall under the scope of the IRD (Art. 3): the legal form must be listed in the Annex to the IRL, the company must be a resident of that state (without being a tax treaty resident in a non-EU MS), and it must be subject to the taxes listed in the IRD without being exempt. EU companies are usually in scope, but deviations may occur with specific entity forms like investment funds. This applies only to interest and royalty payments between associated companies, meaning at least 25% holding, with a direct holding requirement. There is an option for requiring a 2-year minimum holding period.

Definitions

Interest, as defined in Art. 2(a) IRD, means “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 in particular, income from securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; penalty charges for late payment shall not be regarded as interest.” This mirrors Art. 11(3) OECD MC. Royalties, as defined in Art. 2(b) IRD, are “payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and software, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; payments for the use of, or the right to use, industrial, commercial or scientific equipment shall be regarded as royalties.” This also mirrors Art. 12 OECD MC.

Anti-Tax-Avoidance Directive (ATAD)

The Anti-Tax-Avoidance Directive (ATAD) is part of global coordination to curb tax avoidance and aggressive tax planning, stemming from the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which started in 2013. The BEPS project resulted in reports on 15 action points with recommendations to be implemented into domestic laws and tax treaties, aiming to prevent double non-taxation, exploitation of differences between tax systems, shifting profits from economic activity locations to low-tax countries, and reinforcing anti-avoidance rules. The EU implemented these recommendations at the Union level through Council Directive (EU) 2016/1164 of 12 July 2016, which lays down rules against tax avoidance practices that directly affect the functioning of the internal market. This directive includes compulsory minimum anti-avoidance rules for MSs. ATAD includes five key anti-avoidance rules: Interest deduction limitation, Exit tax, CFC, Anti-hybrid rules, and GAAR.

Interest Deduction Limitation

Art 4 ATAD states that “Exceeding borrowing costs shall be deductible in the tax period in which they are incurred only up to 30 percent of the taxpayer's earnings before interest, tax, depreciation, and amortization (EBITDA),” with the objective of limiting the base eroding effect of interest payments via a non-discriminatory rule against base stripping.

Exit Tax

Exit taxes ensure that a state can tax accumulated hidden reserves upon the transfer of assets to another jurisdiction, designed to tax unrealized capital gains when a taxpayer changes residence, transfers business assets cross-border, or transfers the entire business cross-border, altering taxing rights. These taxes ensure correct allocation of taxing rights. Triggering events include the transfer of assets from a head office to a PE in another MS or a 3rd country, the transfer of assets from a PE to a head office or another PE, a transfer of residence, and a transfer of a business carried on by a PE. Payment can be made in installments over 5 years (interests might be charged), only if the destination state is another EU MS or party of EEA Agreement who signed an agreement on assistance in the recovery of taxes. A MS may require a bank guarantee if there is a demonstrable risk of non-recovery.

ATAD CFC Rule

The ATAD CFC rule targets schemes that shift intangible assets or capital to subsidiaries in low tax jurisdictions, resulting in the CFC realizing all return on the intangible asset or capital, which is not repatriated to the parent. Establishing a CFC requires control over the subsidiary, defined as holding more than 50% of voting rights/capital/rights to profits in the CFC, and a low level of taxation in the third country or Member State where the subsidiary is tax resident, with the actual CIT paid by the CFC being less than half of the CIT which would have been paid in the MSs of the taxpayer. ATAD provides some flexibility to implement CFC rules, with options like Model A (targeting specific categories of income) and Model B (limited to income artificially diverted to the CFC). There’s an exception where the controlled foreign company carries on a substantive economic activity supported by staff, equipment, assets, and premises. Double taxation is eliminated through deduction of income previously included in the tax base upon distribution by the CFC, or through a credit given by the MS of the taxpayer for the tax paid by the CFC.

Anti-Hybrid Rules and ATAD GAAR

Anti-Hybrid rules, which are highly complex under ATAD I and II, aim to ensure single taxation and limit cross-border tax arbitrage opportunities, primarily in cases of Deduction/Non-Inclusion and Deduction/Deduction. Measures include denying deduction or requiring inclusion, limited to transactions between associated enterprises or marketed arbitrage products. The ATAD GAAR states that a Member State shall ignore an arrangement put into place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law if the arrangement is not genuine, lacking valid commercial reasons that reflect economic reality. Where arrangements are ignored, the tax liability shall be calculated in accordance with national law.

Global Minimum Taxation

Global Minimum Taxation aims to ensure a minimum taxation of 15% per jurisdiction of profits of an MNE. Operationally, it's implemented through Council Directive 2022/2523, to be transposed by 31.12.2023 and applied from January 1, 2024, targeting MNEs with a global consolidated turnover of at least EUR 750 million. It uses Top-up-Taxation mechanisms, including the Income Inclusion Rule (IIR), Qualified Domestic Minimum Top-up Tax (QDMTT), and Undertaxed Profits Rule (UTPR), with computation of GloBE Income and Effective Tax Rate starting from financial reporting and using jurisdiction blending.

Directive on Administrative Cooperation

The Directive on Administrative Cooperation (DAC) addresses the challenges arising from EU citizens and businesses operating across national borders, where direct taxation is not harmonized. It aims to enable tax authorities in the EU to cooperate more closely in applying taxes correctly and combating tax fraud and tax evasion. DAC, specifically Directive 2011/16/EU, replaced Directive 77/799/EEC, establishing the legal basis for administrative cooperation in direct taxation in Europe (DAC 1). DAC lays down rules and procedures for Member States to exchange information foreseeably relevant to the administration and enforcement of domestic tax laws, with a minimum standard allowing MSs to cooperate on a larger scale. It covers all taxes except VAT, excise, customs, and social security contributions, and includes automatic exchange of information and mutual assistance in the recovery of taxes based on Council Directive 2010/24/EU.

Fundamental Freedoms

Fundamental freedoms are a cornerstone of the internal market, based on the principle of non-discrimination and include four key freedoms: Goods (Art. 28 seq. TFEU), Persons (Art. 45 seq. (workers), Art. 49 seq. (establishment)), Services (Art. 56 seq.), and Capital (Art. 63 seq.). The freedom of persons includes the free movement of workers, the freedom of establishment, and the right to move and reside freely in other MSs (Art. 21 TFEU). The freedom of services applies broadly to any activity for remuneration not governed by provisions relating to goods, capital, and persons. The freedom of capital applies not only to intra-Community situations but also vis-à-vis third States and is objective, not depending on the nationality of the capital owner (Art. 63(1) TFEU). It encompasses freedom of payments (Art. 63(2) TFEU).

Fundamental Freedom Test

The escape from applying free movement of capital in third-country situations as in intra-EU situations includes a grandfathering clause (Art. 64(1) TFEU), allowing existing restrictions to be maintained if they were in place by 31.12.1993. The test applied by the ECJ includes assessing the scope (which freedom applies?), discrimination/restriction (comparison of cross-border and domestic situations), overt and covert discrimination, objective comparability, justification grounds based on public interest, and proportionality. This proportionality involves assessing suitability and necessity, identifying the material scope, territorial scope, and assessing objective comparability, in light of the aim of national legislation.