Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - Co-ordinating Member States' direct tax systems in the Internal Market
Date: 2006-12-19
Institutions: European Commission
Subjects: basis of tax assessment, corporation tax, double taxation, fiscal policy, personal income tax, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 19.12.2006 
COM(2006) 823 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE 
EUROPEAN PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE 

Co-ordinating Member States' direct tax systems in the Internal Market 

EN 

   EN 

 
 
 
  
TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

4. 

Introduction .................................................................................................................. 3 

Key principles for co-ordinated tax systems................................................................ 4 

Key principles .............................................................................................................. 4 

Removing discrimination and double taxation ............................................................ 5 

Preventing non-taxation and abuse .............................................................................. 6 

Reducing compliance costs and simplifying procedures ............................................. 6 

Towards co-ordinated solutions ................................................................................... 6 

Conclusion.................................................................................................................... 8 

EN 

2 

   EN 

 
1. 

INTRODUCTION 

Member States have to face new challenges. The main purpose of national tax systems is to 
provide an adequate level of revenue to finance public expenditure. Globalisation of business 
and private activities put the competitiveness of tax systems at pressure. As Community law 
currently stands, Member States remain largely free to design their direct tax systems so as to 
meet  their  domestic  policy  objectives  and  requirements.  Dealing  with  the  interaction  of 
multiple  tax  systems  poses  a  challenge  for  the  internal  market.  Tax  systems  also  represent 
basic  democratic  choices  on  how  such  funds  should  be  equitably  raised  and  how  income 
should  be  distributed.  However,  national  tax  rules  designed  solely  or  primarily  with  the 
domestic situation in mind may give rise to inconsistent tax treatment when applied in a cross-
border context.  

An  individual  or  corporate  taxpayer  who  is  in  a  cross-border  situation  may  suffer 
discrimination  or  double  taxation  or  face  additional  compliance  costs1.  This  creates  a 
disincentive  for  individuals  who  wish  to  work  or  invest  in  other  Member  States.  It  also 
constitutes  a  barrier  to  cross-border  establishment,  activity  and  investment  by  companies, 
deterring them from taking full advantage of the Internal Market2. These  problems are only 
partly  addressed  through  unilateral  action  by  the  Member  States  or  through  their  existing 
bilateral tax treaties. Fiscal barriers to cross-border activity and investment remain and have 
been  the  subject  of  extensive  litigation  over  the  last  few  years  as  taxpayers  have  sought  to 
challenge Member State rules on the basis of the Treaty freedoms3. 

The  Commission  believes  that  one  systematic  way  to  address  the  underlying  tax  obstacles 
which  exist  for  corporate  taxpayers  operating  in  more  than  one  Member  State  is  to  provide 
multinational groups with a common consolidated corporate tax base (CCCTB) for their EU-
wide  activities.  The  Commission  has  therefore  announced  its  intention  to  present  a 
comprehensive legislative proposal for a CCCTB in 2008. However, there also continues to 
be  a  need  for  more  targeted  measures  to  address  the  most  urgent  problems  in  the  short  to 
medium term. In addition, there are issues which will remain even if a CCCTB is introduced, 
for example because CCCTB would not cover individual taxpayers and would not necessarily 
apply  to  all  corporate  taxpayers  and/or  Member  States  and  because  there  will  be  a  need  to 
address the interaction between the CCCTB and other aspects of direct tax systems.  

1 

2 

3 

The main company tax obstacles to cross-border economic activity in the Internal Market are described 
in the study Company taxation in the Internal Market (SEC(2001)1681, 23.10.2001, part III, pages 223-
305. 
The  Commission,  in  a  detailed  economic  study  (SEC  [2001]1681,  annexed  to  the  Communication 
Towards an Internal Market without tax obstacles, COM [2001]582), identified several tax obstacles to 
cross-border trade in the Internal Market and some steps which could be taken to remove them. In the 
area  of  financial  services,  other  tax  obstacles  have  also  been  identified  by  the  "FISCO"  expert  group 
(see  the  Communication  Clearing  and  Settlement  in  the  European  Union  –  The  way  forward,  COM 
[2004]312) which advises on the removal of fiscal compliance barriers to the clearing and settlement of 
cross-border securities transactions within the EU. 
The current limits of national tax policies in an integrated Internal Market have been shown in several 
decisions  of  the  European  Court  of  Justice  (see,  only  in  2006,  judgements  of  the  Court  in  cases  C-
520/02 Turpeinen, C-196/04 Cadbury Schweppes, C-386/04 Centro di Musicologia Stauffer, C-290/04 
Scorpio,  C-346/04  Conijn,  C-152/03  Ritter-Coulais  ,  C-471/04  Keller  Holding  and  C-365/04 
Bouanich). 

EN 

3 

   EN 

 
                                                 
Therefore  there  remains  a  need  to  ensure  that  unharmonised  national  tax  systems  work 
together  properly,  both  in  order  to  overcome  the  abovementioned  obstacles,  but  also  to 
prevent an erosion of Member States' tax bases. It has become increasingly apparent that the 
lack of co-ordination between direct tax systems may also lead to unintended non-taxation or 
abuse  and,  hence,  erosion  of  tax  revenues,  interfering  with  the  ability  of  Member  States  to 
operate efficient and balanced tax systems. This may impact on the sustainable financing of 
Member States' social models4. 

Thus,  this  Communication  is  directed  at  co-ordinating  and  improving  the  performance  of 
unharmonised direct tax systems. Whereas harmonisation results in the creation of a common 
body  of  Community  legislation  which  supersedes  national  laws,  co-ordination  builds  on 
domestic systems to render them compatible with the Treaty and with each other. The aim of 
co-ordination is not to replace existing national tax systems by a uniform Community system 
but to ensure that such national systems can be made to work seamlessly together.  

As  the  Commission  underlined  in  its  contribution  to  the  Hampton  Court  summit,  there  is  a 
need to look closely at making current tax systems  perform better across the  EU. Improved 
co-operation between Member States and better co-ordination of their rules will significantly 
improve the performance of their tax systems. Member States will be better placed to attain 
their tax policy goals and protect their tax base while ensuring elimination of discrimination 
and  double  taxation  for  the  benefit  of  individuals  and  business.  Tax  systems  will  thereby 
contribute  more  effectively  to  the  success  of  the  Internal  Market,  to  improved  growth  and 
employment, and to enhanced competitiveness of EU business at the global level in line with 
the renewed Lisbon strategy5. 

2. 

KEY PRINCIPLES FOR CO-ORDINATED TAX SYSTEMS 

2.1. 

Key principles 

Coherent and co-ordinated tax treatment implies: 

•  Removing discrimination and double taxation,  

•  Preventing inadvertent non-taxation and abuse, and 

•  Reducing the compliance costs associated with being subject to more than one tax system. 

Co-ordinating initiatives may take a variety of forms ranging from concerted unilateral action 
by  Member  States,  at  one  end  of  the  spectrum,  to  collective  action  in  the  form  of  a 
Community  instrument  at  the  other.  In  some  cases  it  may  be  sufficient  for  Member  States 
unilaterally to implement commonly agreed solutions, e.g. changes to domestic rules in order 
to remove discrimination. In other cases unilateral action may not be sufficient, and bilateral 
action through tax treaty provisions or collective action through a Community instrument may 
be  needed.  This  is  particularly  so  where  instances  of  double  taxation  or  unintended  non-
taxation arise from mismatches between Member State rules. There is also a need for better 
co-ordination  of  arrangements  between  Member  States  and  third  countries  in  certain  areas, 

4 

5 

COM(2005)525  final,  3.11.2005,  European  values  in  the  globalised  world:  Contribution  of  the 
Commission to the October meeting of Heads of State and Government. 
COM(2005)532 final, 25.11.2005, The contribution of tax and customs policies to the Lisbon strategy 

EN 

4 

   EN 

 
                                                 
particularly in relation to anti-avoidance measures, in order to safeguard Member States' tax 
bases.  

A major concern for Member States, particularly in the light of the sharp increase in litigation 
by  taxpayers  over  the  last  few  years,  is  to  ensure  that  their  tax  rules  comply  with  the 
requirements  of  Community  law.  By  assisting  Member  States  to  eliminate  discrimination, 
such initiatives should help to ensure compliance with their Treaty obligations and minimise 
the disruption which may result from litigation. 

2.2. 

Removing discrimination and double taxation 

Removing  fiscal  discrimination  is  a  basic  requirement  of  Community  law.  A  Member  State 
may treat cross-border situations differently from domestic situations only if this is justified 
by  a  difference  in  the  taxpayer’s  circumstances. Over  the  years  it  has  become  apparent  that 
there  are  numerous  aspects  of  Member  States'  rules  that  conflict  with  the  Treaty,  including 
rules on taxation of gains (e.g. exit taxes), dividend taxation (e.g. withholding taxes), group 
taxation (e.g. lack of cross-border loss relief), taxation of branches and anti-avoidance rules. 
Yet, despite a substantial body of case law of the European Court of Justice (ECJ), it is not 
always easy to understand how the broadly expressed Treaty freedoms apply in the complex 
area  of  tax  law.  Much  of  the  case  law  is  recent,  it  continues  to  evolve  and  it  generally 
concerns  particular  tax  provisions  of  individual  Member  States.  It  is  not  always  easy  for 
taxpayers,  tax  administrations  and  national  courts  to  understand  the  full  implications  of 
rulings or place them in a broader framework.  

In the Commission's view there is a need for guidance on the principles flowing from the case 
law  and  how  these  apply  to  the  main  areas  of  direct  taxation.  Such  guidance  will  promote 
greater legal certainty for the benefit of taxpayers, tax authorities and national courts. 

However,  that  is  only  a  starting  point.  It  is  necessary  to  find  solutions  which  will  ensure 
coherent  cross-border  tax  treatment.  Experience  has  shown  that  it  is  not  always  possible  to 
implement  the  non-discrimination  obligation  coherently  or  in  an  optimal  way  by  unilateral 
measures.  Member  States  have  in  some  cases  responded  unilaterally  by  removing  domestic 
tax advantages or by extending requirements for cross-border situations to domestic situations 
in  circumstances  where  this  was  not  desirable  in  tax  policy  terms.  This  runs  counter  to  the 
interests  of  the  Internal  Market  and  undermines  the  competitiveness  of  Member  State 
economies.6  The  Commission  proposes  to  present  a  number  of  initiatives  to  assist  Member 
States  in  finding  co-ordinated  solutions  which  will  allow  them  to  achieve  their  tax  policy 
goals while complying with the requirements of Community law. 

The elimination of double taxation in the Internal Market is expressly contemplated by Article 
293 of the EC Treaty. International double taxation is a major obstacle to cross-border activity 
and investment within the EU. Its elimination is therefore a basic objective and principle of 
any  co-ordinated  solution.  International  double  taxation  arises  by  definition  because  of  a 
taxpayer being subject to more than one tax jurisdiction. It is a classic example of an obstacle 

6 

See §68 in AG Geelhoed's Opinion of 29 June 2006, C-524/04 Test Claimants in the Thin Cap Group 
Litigation v. Commissioners of Inland Revenue: "Such an extension of legislation to situations falling 
wholly outwith its rationale, for purely formalistic ends and causing considerable extra administrative 
burden for domestic companies and tax authorities, is quite pointless and indeed counterproductive for 
economic efficiency. As such, it is anathema to the internal market". 

EN 

5 

   EN 

 
                                                 
to  the  Internal  Market  arising  from  a  lack  of  co-ordination  between  national  tax  systems 
which can be solved only by co-operation between Member States. 

2.3. 

Preventing non-taxation and abuse 

Hiatuses between tax systems due to a lack of co-ordination may also lead to unintended non-
taxation and provide scope for abuse. Non-taxation and abuse are equally detrimental to the 
interests  of  the  Internal  Market  because  they  undermine  the  fairness  and  the  balance  of 
Member  States’  tax  systems.  This  problem  can also be addressed by better co-ordination of 
Member States' rules and improved co-operation with respect to enforcement. This will be an 
essential  element  of  the  Commission's  initiatives,  and  the  Commission  proposes  to  examine 
this area together with Member States in a working group in the near future depending on the 
progress of relevant ECJ case law. 

2.4. 

Reducing compliance costs and simplifying procedures 

The existence of multiple tax systems means multiple sets of compliance requirements. The 
need to relieve multinational companies from having to comply with up to 25 Member State 
systems, together with the transfer pricing rules allocating the tax base between them, was a 
key  factor  in  the  Commission’s  decision  to  work  towards  a  CCCTB  for  companies.  At  the 
same time the Commission has sought, through the work done by the Joint Transfer Pricing 
Forum, to explore the scope for easing transfer pricing compliance burdens. It is desirable to 
explore more generally the ways in which cross-border compliance costs can be reduced and 
procedures  simplified  for  taxpayers,  including  SMEs  and  individuals,  notably  through 
improved administrative co-operation between Member States. 

3. 

TOWARDS CO-ORDINATED SOLUTIONS 

The Commission considers that the above objectives can often best – and sometimes only – be 
met  by  co-ordination  between  Member  States.  The  Commission  has  today  issued  two 
Communications in specific areas where it considers there to be a need for concerted action.  

The  first  Communication  concerns  the  area  of  exit  taxes.  The  area  of  exit  taxes,  which 
includes taxes on transfers of assets to another jurisdiction, illustrates the need for proper co-
ordination  Member  States’  tax  rules  reinforced  by  effective  co-operation  on  enforcement.  It 
follows  from  the  principle  of  non-discrimination  as  interpreted  in  ECJ  case  law  that  cross-
border situations may not be treated less favourably than comparable domestic situations. In 
the case of exit taxes, the ECJ has ruled out the possibility of immediate collection of such 
taxes on unrealised gains in cross-border situations if there is no such taxation in comparable 
domestic situations7. The ECJ also ruled that tax deferral may not be made subject to certain 
conditions,  such  as  the  requirement  of  a  bank  guarantee  or  the  appointment  of  a  fiscal 
representative. Without proper co-ordination and effective co-operation on enforcement there 
is, however, a risk that any gain realised on the disposal of assets will escape taxation or be 
subject  to  double  taxation  because  of  a  mismatch  in  the  taxing  rights  provided  for  under 
domestic and bilateral tax treaty provisions or because the necessary information or means of 
collection to properly enforce the tax claims is lacking. In the Communication on exit taxes 
the Commission has made a number of specific proposals as to how Member States can better 

7 

Case C-9/02 Hughes de Lasteyrie du Saillant v. Ministère de l'économie, des Finances et de l'Industrie, 
OJ C 94, 17.04.2004, p.5 

EN 

6 

   EN 

 
                                                 
co-ordinate their rules in this area so as to eliminate unlawful discrimination while avoiding 
double  taxation  or  double  non-taxation.  It  has  also  identified  certain  areas  where  more 
detailed work needs to be done. The Communication is of importance for both corporate and 
individual taxpayers. 

The  second  Communication  concerns  cross-border  loss  relief  for  companies  and  groups.  In 
the  absence  of  such  relief  there  is  the  risk  that  profits  and  losses  of  group  companies  or 
different  establishments  of  a  company  become  stranded  in  different  jurisdictions,  with  the 
consequence that a group or a company pays tax on an amount which exceeds its total EU-
wide  results.  This  plainly  creates  a  disincentive  for  cross-border  business  activity  and 
undermines the competitiveness of EU companies and groups. The CCCTB, if adopted, would 
provide  for  comprehensive  EU-wide  consolidation  of  results  for  groups  covered  by  the 
regime.  The  Communication  is  aimed  at  more  immediate  co-ordination  of  Member  States' 
rules. It builds on recent case law of the ECJ, in particular the ECJ's judgment in the Marks & 
Spencer case, and promotes a minimum standard for cross-border loss relief involving relief 
for losses of subsidiaries at the level of the parent company. 

Co-operation  between  Member  States  is  plainly  essential  in  areas  such  as  the  above,  where 
mismatches  between  Member  States'  systems  give  rise  to  double  taxation  or  double  non-
taxation.  However,  even  in  cases  where  it  is  possible  for  Member  States  to  implement 
solutions  by  unilateral  measures,  it  may  be  preferable  to  seek  common  solutions.  The 
Commission  considers  that  anti-avoidance  rules,  such  as  Controlled  Foreign  Companies 
(CFC) rules8, are one such area. As recent case law has shown, this is a delicate area where 
there is a need to strike a proper balance between the interest in combating abuse effectively 
within  the  EU  and  the  need  to  avoid  disproportionate  restrictions  on  cross-border  activity 
which are contrary to Community law. There is also an urgent need for better co-ordination of 
the application of such rules in relation to third countries in order to protect Member States' 
tax bases. 

The  Commission  plans  to  issue  a  further  communication  next  year  on  anti-abuse  rules.  As 
explained  above,  there  is  an  urgent  need  in  this  area  to  find  balanced  solutions  which  meet 
Member States' needs while complying with Community law requirements. 

Mismatches may also arise, for example, in relation to the qualification by Member States of 
debt and equity. One Member State may consider a transaction to be a contribution of equity 
rather  than  a  loan  and  therefore  not  treat  the  income  from  the  capital  as  taxable,  whereas 
another  Member  State  may  consider  the  loan  to  be  debt  and  allow  the  interest  paid  as  a 
deduction for the company paying the interest. This may result in a deduction in one Member 
State without corresponding taxation in another Member State. Another area concerns the use 
of  hybrid  entities,  i.e.  entities  which  are  regarded  as  a  corporate  body  (opaque)  by  one 
Member State and as non-corporate (transparent) by another Member State; this difference in 
qualification  by  Member  States  may  lead  to  double  exemptions  or  double  deductions.  The 
Commission  is  also  actively  considering  the  need  for  initiatives  in  other  areas  such  as 
withholding  taxes,  taxation  of  branches  and  inheritance  taxes.  It  is  keen  to  explore  with 

8 

The  main  purpose  of  CFC  rules  is  to  prevent  resident  companies  from  avoiding  domestic  tax  by 
diverting  income  to  subsidiaries  in  countries  with  a  (significantly)  lower  level  of  taxation.  Typically, 
CFC  rules  provide  that  the  profits  earned  by  a  controlled  foreign  subsidiary  may  be  attributed  to  its 
domestic parent company and taxed in the hands of the latter in the same way as its own profits.  

EN 

7 

   EN 

 
                                                 
Member States, market operators and other interested parties, where appropriate, further areas 
in which there is a particular need for such initiatives. 

The Commission considers that, in addition to such specific initiatives, better co-ordination of 
Member States tax systems involves the need to devise a more general solution for taxpayers 
who  find  themselves  subject  to  double  taxation  because  of  conflicts  in  taxing  rights.  The 
Arbitration  Convention,  whose  operation  the  Commission  is  committed  to  improving,  is 
limited  to  disputes  relating  to  transfer  pricing.  The  Commission  proposes  to  explore  with 
Member  States  the  scope  for  an  efficient  and  generalised  binding  dispute  resolution 
mechanism to deal more generally with problems of international double taxation within the 
EU.  Such  a  mechanism  would  be  of  real  benefit  to  taxpayers  in  cross-border  situations, 
particularly individuals and SMEs. 

4. 

CONCLUSION  

Appropriate co-ordination and co-operation between Member States can enable them to attain 
their tax policy goals and protect their tax bases, while ensuring elimination of discrimination 
and double taxation and reducing compliance costs. Tax systems will thereby contribute better 
to the success of the Internal Market and help enhance the competitiveness of EU business at 
the global level in line with the renewed Lisbon strategy. 

The  Commission  is  willing  to  assist  Member  States  in  developing  the  principles  for  co-
ordinated  solutions  set  out  in  this  Communication  and  in  improving  the  practical 
arrangements for administrative co-operation. Specifically, it proposes to come forward with a 
series  of  initiatives  covering  key  areas  of  direct  taxation  such  as  those  described  above, 
together  with  a  more  general  initiative  designed  to  ensure  effective  elimination  of 
international double taxation within the EU. 

The success of these initiatives will depend on Member States' willingness to co-operate and 
to invest in co-ordinated solutions. A failure to act could only further impair Member States' 
ability  to  protect  their  tax  revenues  and  lead  to  further  litigation  concerning  individual 
provisions. The Commission therefore calls on Member States to examine the proposals made 
in  this  Communication  and  in  the  two  Communications  on  cross-border  losses  and  exit 
taxation presented today, and to work together with it to deal quickly and effectively with the 
issues raised therein. 

This  initiative  is  designed  to  be  of  immediate  benefit  for  all  taxpayers  in  cross-border 
situations,    helping  to  complete  the  Internal  Market  in  parallel  with  the  initiatives  already 
launched, in particular the work on establishing a CCCTB. The Commission calls on Member 
States,  market  operators  and  EU  institutions  to  embrace  the  prospects  offered  by  this 
initiative.  

The Commission invites the Council, the European Parliament and the Economic and Social 
Committee to give their opinion on this Communication. 

EN 

8 

   EN