COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 25.11.1998 
COM(1998) 595 final 
COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
FIRST ANNUAL REPORT ON THE IMPLEMENTATION OF THE CODE OF 
CONDUCT FOR BUSINESS TAXATION AND FISCAL STATE AID 
PROGRESS REPORT ON THE WORK CONCERNING THE TAXATION OF INCOME 
FROM SAVINGS AND A COMMON SYSTEM OF TAXATION FOR INTEREST AND 
ROYALTY PAYMENTS BETWEEN ASSOCIATED COMPANIES 
1998 COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 25.11.1998 
COM(1998) 595 final 
COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
FIRST ANNUAL REPORT ON THE IMPLEMENTATION OF THE CODE OF 
CONDUCT FOR BUSINESS TAXATION AND FISCAL STATE AID 
PROGRESS REPORT ON THE WORK CONCERNING THE TAXATION OF INCOME 
FROM SAVINGS AND A COMMON SYSTEM OF TAXATION FOR INTEREST AND 
ROYALTY PAYMENTS BETWEEN ASSOCIATED COMPANIES 
1998 

1. INTRODUCTION 
1. A new global approach to taxation issues was first presented by the Commission in 
April 1996 at the informal ECOFIN Council in Verona. The objective was to place 
taxation issues in the broader context of Community policies and, in particular, to 
propose consideration of the economic and social disadvantages arising from the 
absence of tax co-ordination in the Union. 
2. Discussions took place in this new global framework in 1996 and 1997 in a high 
level Taxation Policy Group consisting of personal representatives of Finance 
Ministers of Member States. The Commission Communication "A package to 
tackle harmful tax competition in the European Union" drew on those discussions, 
and, on the basis of that Communication, the Council, on 1 December 1997, adopted 
conclusions concerning tax policy, and in particular concerning a package of three 
tax measures'. 
3. The tax package aims at achieving the objectives of reducing the continuing 
distortions in the Single Market, preventing excessive losses of tax revenue and 
encouraging tax structures to develop in a more employment friendly way. In 
reaching these conclusions, the Council emphasised the respective spheres of 
competence of the Member States and the Community resulting from the Treaty. In 
addition, it acknowledged the positive effects of fair competition and the need to 
consolidate the competitiveness of the European Union and the Member States at an 
international level, whilst noting that tax competition may also lead to tax measures 
with harmful effects. 
Conclusions of the ECOFIN council meeting on 1 December 1997 concerning taxation policy 
(98/C 2/01 ); OJ of 06.01.1998 n° C 2 page 1. 
1 
4. The Council and the Representatives of the Governments of Member States, 
meeting within the Council, agreed to a Resolution on a code of conduct for 
business taxation. The Council also agreed on a text on the taxation of income from 
savings. The Commission undertook 
• to submit rapidly proposals for Directives on the taxation of savings and on 
interest and royalty payments between companies, and 
• to publish guidelines on the application of state aid rules to measures relating to 
direct business taxation. 
5. In order to ensure the even and effective implementation of the Code of Conduct, 
the Council invited the Commission to report to it annually on the implementation 
of the Code and on the application of fiscal State aid. The Council further asked the 
Commission to submit each year, together with the report on the implementation of 
the Code, a progress report on the work concerning taxation of savings and interest 
and royalty payments between companies. This Communication contains the first 
annual report of the Commission. 
2. THE IMPLEMENTATION OF THE CODE OF CONDUCT FOR BUSINESS TAXATION AND 
FISCAL STATE AID 
2.1 THE CODE OF CON DUCT 
6. The Code of Conduct covers measures which provide for a significantly lower 
(including zero) effective level of taxation than normally applies in the Member 
State concerned and which affect, or may affect, in a significant way the location of 
business activity within the Community. Such a level of taxation may operate by 
virtue of the nominal tax rate, the tax base or any other relevant factor. The Code 
provides for a number of criteria to be taken into account when assessing whether 
such measures which fall within the scope of the Code are harmful, in the light of 
the effects they may have within the Community. 
7. In agreeing to the Code of Conduct on business taxation Member States committed 
themselves to: 
• refrain from introducing any new harmful tax measures (standstill) 
• re-examine their existing laws and established practices and amend such laws or 
practices as necessary with a view to eliminating any harmful measures as soon 
as possible taking into account the Council's discussions following the review 
process (rollback); 
• inform each other of existing and proposed tax measures which may fall within 
the scope of the Code; 
• establish a group to assess the tax measures that fall within the scope of the Code 
and to oversee the provision of information on those measures, and 
• promote the adoption of principles aimed at abolishing harmful tax measures in 
third countries and in territories to which the Treaty does not apply. In particular, 
Member States with dependent and associated territories or which have special 
responsibilities or taxation prerogatives in respect of other territories committed 
themselves, within the framework of their constitutional arrangements, to 
ensuring that these principles are applied in those territories. 
The Code of Conduct Group (Business Taxation) was established by the ECOFIN 
Council on 9 March 19982 to assess the tax measures that may fall within the scope 
of the Code of Conduct and to oversee the provision of information on those 
measures. By common accord Mrs Primarolo (UK Financial Secretary to the 
Treasury) was appointed as Chair for the Group for a two year period. Two sub­
groups, chaired by Mrs Primarolo and Mr Nolz (Director General of the Austrian 
Ministry of Finance), were established3 to undertake a preliminary examination of a 
range of potentially harmful measures that the Code of Conduct Group had agreed 
to assess first and report back to the main group. These measures fall within the 
categories of intra group services and financial services and offshore companies. 
All Member States have contributed to the exchange of information process by 
providing details of the tax measures which might fall under the scope of the Code 
of Conduct. These have been categorised as intra group services, financial services 
and offshore centres, other sector specific measures, regional incentives, and other 
measures. The Commission has co-ordinated and facilitated the provision of this 
information. Where appropriate, Member States have subsequently provided 
detailed information, in terms of relevant legislation, administrative practices and 
detailed explanations regarding measures falling within the work of the two sub­
groups. The Commission compiled summaries of all the measures to be reviewed by 
the two sub-groups to provide basic information on the benefits they provide and the 
conditions attached. 
2 Council Conclusions of 9 March 1998 concerning the establishment of the Code of Conduct group 
(business taxation) (98/C 99/01); OJ of 01.04.1998 n° C 99 page 1. 
3 Council Conclusions of 6 July 1998 concerning the establishment of sub-groups to the Code of 
Conduct Group. 
10. Member States have, to the knowledge of the Commission, refrained from 
introducing any new tax measures which are harmful within the meaning of the 
Code. Some proposed new measures have been referred to the Code Group for 
future consideration. The Commission notes that some measures which might fall 
within the scope of the Code have already been withdrawn or are being phased out 
in some Member States. 
11. The Code of Conduct group will be making an interim report to the Council on 
I December 1998 setting out in more detail progress reached so far in the 
assessment of the measures which might fall within the scope of the Code. 
12. In the context of promoting the adoption of principles aimed at abolishing harmful 
tax measures on as broad a geographical basis as possible, it should be noted that the 
OECD Council in April 1998 adopted a report on Harmful Tax Competition and the 
G7 has also demonstrated its commitment to the further work on harmful tax 
competition. The OECD report provides for a set of guidelines for dealing with 
harmful preferential regimes in OECD Member countries, for the development of an 
OECD tax haven list and for the establishment of a Forum on Harmful Tax Practices 
to oversee the implementation of the recommendations in the report. 
2.2 FISCAL STATE AID 
13. Some of the tax measures covered by the Code of Conduct on business taxation may 
fall within the scope of the provisions on state aid in Articles 92 to 94 of the Treaty. 
In the framework of the Code of Conduct the Commission committed itself to 
publish guidelines on the application of the state aid rules to fiscal aids. The 
guidelines were discussed with experts from the Member States and a notice 
including them was subsequently adopted by the Commission on 
II November 19984. 
4 Commission notice on the application of the state aid rules to measures relating to direct business 
taxation, SEC (1998) 1800 final. 
14. The guidelines aim at clarifying the application of the state aid rules to cases relating 
to direct business taxation. They form part of a wider objective of clarifying and 
reinforcing the application of the state aid rules in order to reduce distortions of 
competition in the Single Market. 
15. The Commission will, on the basis of the guidelines set out in the notice, examine 
the tax aid plans notified to it and any tax aid implemented in the Member States 
and will review existing systems. The Commission will take account of all specific 
circumstances in each individual case. 
3. PROGRESS ON WORK CONCERNING THE TAXATION OF SAVINGS AND INTEREST AND 
ROYALTY PAYMENTS BETWEEN COMPANIES 
3.1 TAXATION OF SAVINGS 
16. The Commission adopted in May 1998s a proposal for a directive on savings. The 
proposal is based on the key elements agreed by the ECOFIN Council on 
1 December 1997 and takes into account the discussions in the Taxation Policy 
Group in February 1998. The Commission proposed the co-existence of a 
withholding tax of 20% and a system for providing information to tax authorities of 
other Member States. 
17. The proposal was presented to the Council in June. The Austrian Presidency has 
taken negotiations forward in the Council and several meetings of the Council 
financial questions group have been arranged to discuss different aspects of the 
proposal. 
Proposal for a Directive to ensure a minimum of effective taxation of savings income in the form of 
interest payments within the Community, COM(1998) 295 final - O.J. of 08.07.1998 n° C212 
page 13. 
18. The European Parliament and the Economic and Social Committee have begun their 
examination of the proposal for a Directive. It is foreseen that the opinions of both 
institutions will be adopted in early 1999. 
19. In order to preserve the competitiveness of the financial markets of the Community 
in the global context, equivalent measures to ensure a minimum of effective taxation 
should be adopted as widely as possible. At the informal meeting of the ECOFIN 
Council in September the importance of the third country problem was emphasised. 
It was agreed that this question should be tackled rapidly and the Commission was 
invited to present outlines for solutions. The Commission services are presently 
finalising this document on the basis of a wide-ranging discussion held at the 
Taxation Policy Group on 12 November 1998. 
3.2. TAXATION OF INTEREST AND ROYALTY PAYMENTS BETWEEN COMPANIES 
20. The Commission presented in March 1998 a proposal for a directive on a common 
system of taxation applicable to interest and royalty payments made between 
associated companies of different Member States6. The proposal aims at eliminating 
obstacles to cross-border co-operation between companies from different Member 
States, such as a possible double taxation of such payments. 
21. The negotiations at technical level in the Council started under the UK Presidency 
and continued under the Austrian Presidency, which pursued the negotiations in 
order to make as much progress as possible towards an early adoption. 
22. The Economic and Social Committee gave a favourable opinion on 1 July 19987. 
The European Parliament gave a favourable opinion on 16 September 1998. 
6 Proposal for a Directive on a common system of taxation applicable to interest and royalty payments 
made between associated companies of different Member States; COM(1998) 67 final of 04.03.1998 -
O.J. of 22.04.1998 n° C 123 page 9. 
7 O.J. of 14.09.1998 n°C 284. 
4. CONCLUSIONS 
23. At its meeting in Cardiff on 15 and 16 June 1998, the European Council reaffirmed 
its commitment to fostering tax efficiency and discouraging harmful tax 
competition. In this context, the European Council welcomed the establishment of 
the Code of Conduct Group and its intention to present a preliminary report to the 
Council by the end of 1998. 
24. Ministers expressed their firm commitment to a rigorous implementation of the tax 
package at the informal meeting of the ECOFIN Council in Vienna in September 
1998. They gave high priority to the implementation of the Code of Conduct and 
agreed to aim at concrete results with regard to the taxation of savings by the end of 
the German Presidency. 
25. The Council is asked to 
• take note of this first annual report on the implementation of the Code of Conduct 
and fiscal state aids; 
• take note of this progress report on the work concerning taxation of savings and 
interest and royalty payments between companies; 
• confirm the objective of reaching concrete results in the negotiations on the 
proposal for a Directive on the taxation of income from savings by the end of 
June 1999; 
• set the objective of reaching concrete results in the negotiations on the proposal 
for a directive on interest and royalty payments between associated companies 
for the end of June 1999; and 
• reaffirm its commitment to a rapid implementation of the Code of Conduct and, 
within the context of the package to tackle harmful tax competition, ask the Code 
of Conduct Group to endeavour to complete the assessment of the measures 
which might fall within the scope of the Code by the end of June 1999. 

ISSN 0254-1475 
COM(98) 595 final 
DOCUMENTS 
EN 09 06 01 16 
Catalogue number : CB-CO-98-710-EN-C 
Office for Official Publications of the European Communities 
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