Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee - The application of anti-abuse measures in the area of direct taxation – within the EU and in relation to third countries
Date: 2007-12-10
Institutions: European Commission
Subjects: EU law - national law, European Economic Area, European Union, European accounting system, administrative cooperation, fiscal policy, tax avoidance, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 10.12.2007 
COM(2007) 785 final 

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

The application of anti-abuse measures in the area of direct taxation – within the EU 
and in relation to third countries 

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1. 

INTRODUCTION  

In its Communication on the co-ordination of the Member States' (MSs') direct tax systems in 
the  Internal  Market1,  the  Commission  outlined  ways  in  which  coordination  and  cooperation 
between the MSs could enable them to attain their tax policy goals and protect their tax bases 
while observing their EC Treaty obligations and ensuring the elimination of double taxation. 
In some areas such coordination is plainly essential. In others, unilateral remedies are possible 
but it may nevertheless be preferable to seek common solutions, even where at first sight the 
MSs'  vested  interests  in  those  areas  might  not  always  appear  to  be  concurring.  The 
Commission has a legal obligation to ensure that MSs observe their EC Treaty obligations but 
also  a  political  responsibility  to  seek  and  promote  constructive  solutions  to  that  end.  With 
regard to the application of anti-avoidance rules the Commission considers that, in particular 
in the light of some recent European Court of Justice (ECJ) decisions, there is an urgent need  

•  to strike a proper balance between the public interest of combating abuse and the need to 

avoid disproportionate restrictions on cross-border activity within the EU; and 

•  for  better  coordination  of  the  application  of  anti-abuse  measures  in  relation  to  third 

countries in order to protect MSs' tax bases. 

With  that  in  mind,  the  present  Communication  analyses  the  principles  flowing  from  the 
relevant  ECJ  case  law  with  a  view  to  prompting  a  more  general  debate  on  appropriate 
responses  to  the  challenges  faced  by  MSs  in  this  area.  The  Communication  is  therefore 
intended  to  provide  a  framework  for  further  discussion  with  MSs  and  stakeholders  with  a 
view to exploring the scope for coordinated solutions in this area. 

The notion of "anti-abuse rules" covers a broad range of rules, measures and practices. Some 
MSs apply a general concept of abuse based on legislation or developed in case law. Others 
apply more specific anti-abuse provisions, such as Controlled Foreign Corporation (CFC) and 
thin capitalisation rules which aim to protect the domestic tax base from particular types of 
erosion. Other types of specific anti-abuse provisions include switch-over from exemption to 
credit  method  in  certain  cross-border  situations  (where  foreign  source  income  has  been 
subject  to  a  low  or  preferential  tax  rate)  and  provisions  explicitly  targeted  at  passive 
investment  in  other  countries.  Many  MSs  apply  a  combination  of  general  and  specific  anti-
abuse rules. Anti-abuse rules are also envisaged in the EC corporate tax directives. 

As regards the compatibility of national anti-abuse measures with EC law, a distinction has to 
be  drawn  between  their  application  within  the  Community  (where  the  four  fundamental 
freedoms apply) and their application vis-à-vis third countries (where only the free movement 
of  capital  applies)2.  The  application  of  anti-abuse  rules  in  respect  of  third  countries  is 
therefore discussed separately in chapter 4. 

1 
2 

COM(2006)823, 19.12.2006. 
It may be noted that the application of certain anti-abuse provisions in tax treaties with third countries 
could indirectly also affect the freedom of establishment of companies resident in other MSs.  

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The present Communication focuses only on the area of direct taxation. It should of course be 
noted that the Commission pursues an active policy as regards anti-avoidance schemes in the 
field  of  indirect  taxation,  and  particularly  as  concerns  VAT.  This  policy  is  decisively 
influenced  by  the  greater  degree  of  harmonization  in  the  indirect  tax  field  and  the  fact  that 
Directive  2006/112/EC3  includes  specific  rules  and  procedures  allowing  MSs  to  fight 
avoidance and to take measures against evasion. In this respect the Commission works closely 
with MSs and, through special working groups, has taken a proactive role in tackling abuses.  

2. 

DEFINITIONS AND KEY PRINCIPLES FROM ECJ CASE LAW 

Avoidance and abuse 

The ECJ has held that a person who would otherwise be in a situation covered by Community 
law  may  forfeit  his  Community  law  rights  where  he  seeks  to  abuse  them.  Such  cases  are 
exceptional:  an  abuse  occurs  only  where,  despite  formal  observance  of  the  conditions  laid 
down in the relevant Community rules, their purpose is not achieved and there is an intention 
to obtain an advantage by artificially creating the conditions for obtaining it.4 The ECJ has in 
particular applied the doctrine to the Community legislation on export refunds and VAT. 

In its case law on direct taxation the ECJ has, in addition, held that the need to prevent tax 
avoidance  or  abuse  can  constitute  an  overriding  reason  in  the  public  interest  capable  of 
justifying  a  restriction  on  fundamental  freedoms5.  The  notion  of  tax  avoidance  is  however 
limited  to  "wholly  artificial  arrangements  aimed  at  circumventing  the  application  of  the 
legislation  of  the  MS  concerned".  In  order  to  be  lawful  national  tax  rules  must  be 
proportionate and serve the specific purpose of preventing wholly artificial arrangements. 

Wholly artificial arrangements 

Prompted by arguments raised by MSs the ECJ has identified several factors which do not of 
themselves  suffice  to  constitute  abusive,  i.e.  wholly  artificial  arrangements.  It  has  held,  for 
instance, that the mere fact that a subsidiary is established in another MS cannot, of itself, be 
treated  as  giving  rise  to  tax  avoidance6  and  that  the  fact  that  the  activities  carried  out  by  a 
secondary  establishment  in  another  MS  could  just  as  well  be  pursued  by  the  taxpayer  from 
within  the  territory  of  its  home  MS  does  not  warrant  the  conclusion  that  there  is  a  wholly 
artificial arrangement7. The ECJ has also expressly confirmed that it is quite legitimate for tax 
considerations to play a role in the decision on where to establish a subsidiary8. The objective 
of  minimising  one's  tax  burden  is  in  itself  a  valid  commercial  consideration  as  long  as  the 
arrangements entered into with a view to achieving it do not amount to artificial transfers of 
profits. In so far as taxpayers have not entered into abusive practices, MSs cannot hinder the 
exercise of the rights of freedom of movement simply because of lower levels of taxation in 
other MSs9. This is the case even in respect of special favourable regimes in the other MSs' 
tax  systems10.  Distortions  to  the  location  of  business  activities  due  to  state  aid  that  is 

3 
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8 
9 
10 

OJ L 347, 11.12.2006, p. 1–118. 
Emsland-Stärke C-110/99, #52-53; Halifax C-255/02, #74-75. 
Eg. Lankhorst, C-324/00, #37.  
ICI, C-264/96, #26. 
C-196/04, #69. 
Cadbury, #37.  
Eurowings, C-294/97, #44.  
Cadbury, #36-38.  

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incompatible with the EC Treaty and to harmful tax  competition do not entitle MSs  to take 
unilateral  measures  intended  to  counter  their  effects  by  limiting  freedom  of  movement11; 
rather  they  need  to  be  resolved  at  source  through  the  appropriate  judicial  or  political 
procedures. Obviously, anti-abuse measures must themselves, too, comply with the EC treaty 
provisions on state aid12. The Commission will continue to monitor the application of the EC 
Treaty  state  aid  rules  and  to  lend  its  support  to  the  work  undertaken  in  the  Council  by  the 
Code of Conduct Group. 

In order for anti-abuse rules to be justified, they must be confined to situations in which there 
is a further element of abuse. In its recent case law the ECJ has given more explicit guidance 
on the criteria for detecting abusive practices, i.e. wholly artificial arrangements. In Cadbury, 
the ECJ held that an establishment is to be regarded as genuine where, based on an evaluation 
of objective factors which are ascertainable by third parties, in particular evidence of physical 
existence in terms of premises, staff and equipment, it reflects economic reality, i.e. an actual 
establishment carrying on genuine economic activities and not a  mere "letterbox" or "front" 
subsidiary13.  In  Thin  Cap14  the  issue  was  not  whether  the  establishment  of  the  taxpayers 
concerned  was  genuine  but  whether  the  MS  concerned  could  impose  tax  restrictions  on 
financing arrangements between related companies. The ECJ confirmed that the fact that the 
terms and conditions of financial transactions between related companies resident in different 
MSs  deviate  from  those  that  would  have  been  agreed  upon  between  unrelated  parties 
constitutes an objective and independently verifiable element for the purpose of determining 
whether  the  transaction  in  question  represents,  in  whole  or  in  part,  a  purely  artificial 
arrangement.  Legislation  framed  on  that  basis  was  proportionate  on  condition  that  the 
taxpayer  was  given  the  opportunity  to  provide  evidence  of  any  commercial  justification  for 
the arrangement. 

The detection of a wholly artificial arrangement thus amounts in effect to a substance-over-
form  analysis.  Application  of  the  relevant  tests  in  the  context  of  EC  Treaty  freedoms  and 
corporate  tax  directives  necessitates  an  evaluation  of  their  objectives  and  purposes  against 
those underlying the arrangements entered into by their prospective beneficiaries (taxpayers). 
In  the  context  of  corporate  establishment  there are  inevitably  difficulties  in  determining  the 
level  of  economic  presence  and  commerciality  of  arrangements.  Objective  factors  for 
determining  whether  there  is  adequate  substance  include  such  verifiable  criteria  as  the 
effective place of management and tangible presence of the establishment as well as the real 
commercial risk assumed by it. However, it is not altogether certain how those criteria may 
apply in respect of, for example, intra-group financial services and holding companies, whose 
activities generally do not require significant physical presence.  

The ECJ has clarified the permitted scope of certain types of anti-avoidance rules and set out 
a number of criteria to assess the genuineness of establishment and the commercial character 
of  arrangements  entered  into  by  taxpayers.  While  the  application  of  the  principles  flowing 
from  the  case  law  will  ultimately  depend  on  the  facts  of  particular  cases,  the  Commission 
nevertheless considers that it would be worthwhile exploring the practical application of those 

11 
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13 
14 

Eg. AG Léger in Cadbury, #55-60. 
See, Commission Notice of 11 November 1998, OJ C 384/98, in particular #13. 
#67-68. 
C-524/04. 

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principles  to  different  types  of  business  activities  and  structures15.  It  proposes  to  do  so 
together with the MSs and would also welcome input from the business community.  

Proportionality  

It  follows  from  Cadbury  and  Thin  Cap  that,  for  the  purposes  of  determining  whether  a 
transaction represents a purely artificial arrangement, national anti-abuse rules may comprise 
'safe harbour' criteria to target situations in which the probability of abuse is highest. Indeed, 
the  Commission  shares  the  view  of  Advocate  General  (AG)  Geelhoed  who,  in  Thin  Cap, 
opined  that  the  setting  out  of  reasonable  presumptive  criteria  contributes  to  a  balanced 
application of national anti-abuse measures as it is in the interest of both legal certainty for the 
taxpayers, and workability for tax authorities16. 

However,  in  order  to  ensure  that  genuine  establishments  and  transactions  are  not  unduly 
sanctioned  it  is  imperative  that  where  the  existence  of  a  purely  artificial  arrangement  is 
presumed,  the  taxpayer  is  given  the  opportunity,  without  being  subject  to  undue 
administrative constraints, to produce evidence of any commercial justification that there may 
be for that arrangement. The extent to which the onus to demonstrate that their transactions 
served bona fide business purposes can be placed on the taxpayer can only be determined on a 
case-by-case basis. In this regard the Commission considers that burden of proof should not 
lie  solely  on  the  side  of  the  taxpayer  and  that  account  should  be  taken  of  the  general 
compliance capacity of the taxpayer and of the type of arrangement in question. It is equally 
vital  in  the  interest  of  proportionality  that  the  result  of  the  relevant  assessment  by  the  tax 
authority can be made subject to an independent judicial review. Moreover, the adjustments to 
the taxable income as a result of the application of the anti-abuse rules should be limited to 
the extent that is attributable to the purely artificial arrangement. With regard to intra-group 
transactions that means adherence to the arm's length principle, i.e. the commercial terms as 
would have been agreed upon between unrelated parties. However, this, in the Commission's 
view  should  not  prevent  MSs  from  imposing  penalties  on  taxpayers  who  have  made  use  of 
abusive schemes to avoid tax. 

3. 

APPLICATION OF ANTI-ABUSE RULES WITHIN THE EU/EEA 

General 

MSs need to be able to operate effective tax systems and prevent their tax bases from being 
unduly  eroded  because  of  inadvertent  non-taxation  and  abuse.  At  the  same  time,  it  is 
important to ensure that there are no undue obstacles to the  exercise  of the rights conferred 
upon individuals and economic operators by Community law provisions. Anti-abuse measures 
must therefore be accurately targeted at wholly artificial arrangements designed to circumvent 
national legislation (or Community rules as transposed into national legislation). This is also 
the case with regard to the application of anti-abuse rules in relation to EEA States (except for 

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16 

In this respect it might also be worth exploring the scope for establishing a non-exhaustive inventory of 
fact  patterns  that  generally  indicate  the  presence  of  an  artificial  arrangement  –  by  way  of  example, 
incorporation of a secondary establishment which purports to provide goods or services from another 
jurisdiction  without  any  real  substance  or  physical  operation  therein,  or  more  generally,  types  of 
arrangements  which  serve  no  business  purpose  (or  which  might  be  even  contrary  to  general  business 
interests, if not entered into for the purpose of avoiding tax). 
#66. 

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situations where there is no adequate information exchange relationship with the EEA State 
concerned).  In  order  to  ensure  that  such  rules  are  not  disproportionate  to  the  objective  of 
curbing abuse and to guarantee legal certainty, adequate safeguards must be provided so that 
taxpayers have the opportunity to provide evidence of any commercial justifications that there 
may be for their arrangements.  

In  the  Commission's  view  it  would  be  regrettable  if,  in  order  to  avoid  the  charge  of 
discrimination, MSs extended the application of anti-abuse measures designed to curb cross-
border  tax  avoidance  to  purely  domestic  situations  where  no  possible  risk  of  abuse  exists. 
Such unilateral solutions only undermine the competitiveness of the MSs' economies, and are 
not  in  the  interest  of  the  Internal  Market.  Indeed,  as  AG  Geelhoed  observed  in  Thin  Cap17 
such  an  extension  "…is  quite  pointless  and  indeed  counterproductive  for  economic 
efficiency.” Moreover, it remains debatable whether such extensions can successfully bring all 
restrictive measures into line with MSs' EC Treaty obligations.  

Lack  of  concerted  interaction  between  MSs'  tax  systems  may  result  in  unintended  non-
taxation  and  provide  scope  for  abuse,  thus  undermining  their  fairness  and  balance. 
Mismatches  may  arise,  for  example,  in  relation  to  the  qualification  of  debt  and  equity.  One 
MS  may  consider  a  transaction  to  be  an  equity  injection  and  thereby  exempt  the  income 
derived  from  it  (as  profit  distribution),  whereas  another  MS  may  consider  the  same 
transaction to be a loan and allow tax deductibility for the consequent payments (as interest). 
This may result in a deduction in one MS without corresponding taxation in another MS. The 
same is true of hybrid entities, i.e. entities which are regarded as corporate bodies by one MS 
and  as  transparent  entities  by  another.  This  difference  in  qualification  may  lead  to  double 
exemptions or double deductions. Such problems are best tackled at source, by reducing the 
occurrence of mismatches. Failing that, it is desirable to improve administrative co-operation 
to  detect  situations  in  which  such  mismatches  are  exploited  abusively.  The  Commission 
proposes to discuss these issues with MSs in more detail to examine what scope there is for 
possible coordinated solutions in this area. 

Administrative co-operation on fraudulent tax schemes and specific cases of abuse can be of 
key importance in ensuring the effectiveness of anti-abuse measures. Tax avoidance schemes 
are  often  highly  complex  and  can  involve  operations  in  many  different  MSs  and  third 
countries, which makes it increasingly difficult for MSs to detect and combat such schemes 
on their own. Moreover, targeted anti-abuse measures involve a high burden of proof for tax 
administrations,  which  makes  co-operation  between  them  all  the  more  important.  It  would 
also appear useful for MSs to share best practices developed at national level.  

Common types of anti-abuse rules in MSs' tax legislation 

CFC rules. The main purpose of CFC rules is to  prevent resident companies from avoiding 
domestic tax by diverting income to subsidiaries in low tax countries, and – as the ECJ has 
recognised – CFC rules are in general apt to achieve that purpose. The scope of CFC rules is 
generally defined by reference to criteria regarding control, effective level of taxation, activity 
and  type  of  income  of  the  CFC,  and  they  typically  provide  that  profits  of  a  CFC  may  be 
attributed to its domestic parent company and subjected to current taxation in the hands of the 
latter. Under CFC rules, the profits of a subsidiary receive different tax treatment for the sole 
reason that the subsidiary is resident in another State. That difference in treatment constitutes 

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#68. 

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discrimination unless there is an objective, relevant difference of situation such as to justify it. 
Equally,  the  inclusion  of  the  profits  of  a  foreign  subsidiary  in  the  taxable  profits  of  the 
resident parent company constitutes an obstacle to the ability of the latter to establish itself in 
other MSs by way of subsidiaries.  

Short  of  abolishing  CFC  rules  altogether  or  refraining  from  applying  them  within  the 
EU/EEA, it is therefore necessary to ensure that the CFC rules are targeted at wholly artificial 
arrangements  only.  Their  scope  may  be  narrowed  by  way  of  various  exceptions,  such  as 
acceptable  distribution  policy,  exempt  (genuine  industrial  or  commercial)  activities,  public 
quotation,  etc.,  but  above  all,  it  is  crucial  that  taxpayers  are  given  the  opportunity  to 
demonstrate, under judicial review, that their transactions served bona fide business purposes.  

The limits on the permitted scope of CFC-type rules are without prejudice to the application 
of transfer pricing rules, which may be used more generally to target non-commercial pricing 
arrangements between associated companies. CFC rules may therefore continue to perform a 
useful function as an adjunct to rules on corporate residence and transfer pricing in so far as 
they provide a means of combating the more artificial types of tax planning, i.e. diversion of 
(paper) profits to controlled companies which are not genuinely established in other MSs or 
EEA  States.  MSs  must  however  ensure  that  such  measures  are  not  applied  in  respect  of 
secondary establishments in other MSs and EEA States engaged in genuine business activities 
and do not go beyond what is necessary to achieve their avowed purpose of tackling artificial 
profit shifting.  

Thin capitalisation rules. There are many different approaches to the design of thin cap rules 
which  reflect  the  different  views  and  legal  traditions  of  MSs.  However,  the  background  to 
these rules is similar. Debt and equity financing attract different tax consequences. Financing 
a  company  by  means  of  equity  will  normally  result  in  a  distribution  of  profits  to  the 
shareholder in the form of dividends, but only after taxation of such profits at the level of the 
subsidiary. Debt financing will result in a payment of interest to the creditors (who can also be 
the  shareholders),  but  such  payments  generally  reduce  the  taxable  profits  of  the  subsidiary. 
Dividend and interest may also attract different withholding tax consequences. The difference 
in treatment between debt and equity financing under national tax law (and at bilateral level), 
as a result of which the source state's taxing rights on interest are generally more limited than 
those  on  dividends,  make  debt  financing  considerably  more  attractive  in  a  cross-border 
context and can therefore lead to the erosion of the tax base in the state of the subsidiary.  

By abolishing their thin cap rules altogether or by carving out dealings with lenders resident 
in other MSs and EEA States from their scope, the difference in treatment between resident 
subsidiaries  according  to  the  seat  of  their  parent  company  within  the  EU/EEA  would  be 
removed.  The  Commission  is  of  the  opinion  that  MSs  should,  however,  be  able  to  protect 
their  tax  bases  from  artificial  erosion  through  structured  debt  financing,  also  within  the 
EU/EEA. Following Lankhorst, some MSs have tried to avoid the charge of discrimination by 
extending  the  application  of  their  thin  cap  rules  to  cover  also  purely  national  relations.  As 
discussed above, this is not desirable development.  

In Thin Cap the ECJ acknowledged that measures to prevent thin capitalisation are not per se 
impermissible. Their application must however be confined to purely artificial arrangements. 
This may be achieved by ensuring that the terms of the debt financing arrangements between 
related  companies  remain  within  the  limits  of  what  would  have  been  agreed  upon  between 
unrelated  parties  or  that  they  are  based  on  otherwise  valid  commercial  reasons.  The 
Commission considers that the principles laid down by the ECJ in relation to thin cap rules 

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also  apply  to  transfer  pricing  rules,  which  are  essential  to  the  continued  existence  of 
individual national tax systems. MSs cannot operate effective tax systems unless they are able 
to ensure that their tax bases are not eroded through non-commercial arrangements between 
associated companies.  

4. 

APPLICATION OF ANTI-ABUSE RULES IN RELATION TO THIRD COUNTRIES 

CFC  rules  determine  the  tax  treatment  of  the  profits  of  a  foreign  company  controlled  by  a 
resident. As such rules are directed at, and thus only affect resident shareholders with definite 
influence  over  a  foreign  company  (usually  a  parent  in  a  corporate  group)  their  centre  of 
gravity  lies  with  the  ability  of  companies  (and  as  the  case  may  be,  individuals)  to  establish 
themselves,  through  subsidiaries,  in  other  countries.  Similarly,  MSs'  thin  cap  rules  are 
directed  exclusively  at  group  debt  financing  arrangements,  i.e.  they  are  only  applied  in 
situations  where  a  foreign  shareholder  holds  a  substantial  participation  in  the  resident 
subsidiary.  Thus,  the  centre  of  gravity  in  respect  of  thin  cap  rules  also  lies  clearly  with  the 
freedom of establishment and as in the case of CFC rules their application is therefore to be 
examined solely from the perspective of Article 43 of the EC Treaty18.  

As  Community  law  does  not  require  MSs  to  avoid  discrimination  in  relation  to  the 
establishment of their nationals outside the Community, or the establishment of third-country 
nationals  in  a  MS19  the  issue  of  discrimination  does  not  arise  in  the  cases  of  a  controlled 
company  or  a  creditor/shareholder  resident  in  a  third  country.  MSs  should  therefore  not  be 
precluded from applying CFC and thin cap rules in relation to third countries. Community law 
does  not  impose  any  particular  requirements  on  the  legitimacy  of  the  application  of  such 
legislation to transactions outside the EU20.  

However, should the application of those rules not be confined to situations and transactions 
between companies in a corporate group (or otherwise related parties where one has definite 
influence over the other) and to the extent that this was the case, they would need to comply 
with Article 56 of the EC Treaty, and also in relation to third countries, be applied to wholly 
artificial  arrangements  only  (with  the  exception  of  situations  where  there  is  no  adequate 
information exchange relationship with the third country concerned). 

The  corporate  tax  directives  only  apply  to  companies  incorporated  in  the  MSs  and  their 
overall  objective  is  to  create  within  the  Community  conditions  analogous  to  those  of  an 
internal market by removing tax obstacles to cross-border reorganisations and to payments of 
dividends, interest and royalties. It would therefore not appear to fall within their ambit to, for 
instance,  facilitate  arrangements  intended  to  avoid  withholding  taxes  on  payments  to  non-
European entities, if such structuring does not serve any commercial purpose. In this regard it 
may  be  noted  that  such  avoidance  constructions  are  best  curbed  by,  if  not  uniform,  at  least 
well co-ordinated application of anti-avoidance measures.  

The Commission considers that, in particular in respect of application of their anti-avoidance 
rules  to  international  tax  avoidance  schemes,  the  MSs  should,  in  order  to  protect  their  tax 

18 
19 

20 

Lasertec, C-492/04, #20.  
As the ECJ noted in ICI : " (…), when deciding an issue concerning a situation which lies outside the 
scope of Community law, the national court is not required, under Community law, either to interpret its 
legislation in a way conforming with Community law or to disapply that legislation (…)" #34 
Their application may however be precluded by the relevant Double Tax Convention.  

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bases, seek to improve the coordination of anti-abuse measures in relation to third countries. 
Such  co-ordination  can  usefully  consist  of  administrative  co-operation,  (e.g.  exchange  of 
information  and  sharing  of  best  practices).  The  Commission  would  also  encourage  MSs, 
where appropriate, to enhance administrative co-operation with their non-EU partners. 

5. 

CONCLUSIONS 

The  ECJ  has  handed  down  a  number  of  important  judgments  in  this  area  in  which  it  has 
clarified  the  limitations  on  the  lawful  use  of  anti-avoidance  rules.  The  judgments  will 
undoubtedly have a significant impact on the existing rules which have not been formulated 
with  these  constraints  in  mind.  It  is  in  particular  clear  that  rules  must  not  be  framed  too 
broadly  but  be  targeted  at  situations  where  there  is  no  genuine  establishment  or  more 
generally where there is a lack of commercial underpinning.  

There  is  therefore  a  need  for  a  general  review  by  MSs  of  their  anti-avoidance  rules.  The 
Commission  is  willing  to  support  and  assist  MSs  in  conducting  such  reviews.  In  the 
Commission's  view,  while  the  ECJ  has  laid  down  clear  criteria  which  must  be  applied  to 
individual facts, there remains scope for exploring the practical application of those principles 
more generally beyond the circumstances of the particular contexts in which they arose. The 
Commission  therefore  invites  the  MSs  and  other  stakeholders  to  work  with  it  to  promote  a 
better understanding of the implications for MSs' tax systems. The Commission is also keen 
to  explore  the  scope  for  specific  co-ordinated  solutions  in  more  detail  in  close  co-operation 
with MSs with a view to:  

•  developing  common  definitions  for  abuse  and  wholly  artificial  arrangements  (to  provide 

guidance on the application of those concepts in the area of direct tax);  

•  improving administrative co-operation so as to more effectively detect and contain abuse 

and fraudulent tax schemes;  

•  sharing  best  practices  that  are  compatible  with  EC  law,  in  particular  with  a  view  to 

ensuring proportionality of anti-abuse measures; 

•  reducing potential mismatches resulting in inadvertent non-taxation; and 

•  ensuring better coordination of anti-abuse measures in relation to third countries. 

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

EN 

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   EN