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.

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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 non-EU

Member States:

• Indirect third country investments between EU and non-EU Member States through an EU intermediary:

Non-EU

Non-EU

Non-EU

Non-EU

EU

EU

EU EU

EU

EU

*)1 Withholding taxes2 Limitations on the deduction of interest expenses3 Relief for double taxation4 CFC-legislation5 Loss compensation6 Transfer of business assets

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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 of a genuine economic activity

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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

company tax systems

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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-à-

vis third countries• Conclusion: Limits the protection under the free

movement of capital under Article 63 TFEU• Extends the protection under the APC

Agreements

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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…!