CFE’s Tax Top 5 – 21 NOVEMBER 2022

EU Finance ministers approved last week the revised Code of Conduct on Business Taxation, setting out stricter criteria for evaluation of harmful tax regimes. The revised code of conduct introduces scrutiny on ‘tax features of general application’, thus expanding the existing focus on ‘preferential measures’.

Per the revised rules, when assessing whether a tax feature of general application of a Member State is harmful, the evaluation will focus on tax features of general application which are not accompanied by appropriate anti-abuse provisions, and which lead to double non-taxation or allow the double or multiple use of tax benefits in relation to the same expense, income or transactions. The Code also introduces scrutiny on the tax measures of general application of the tax system that affect the location of business activity in the European Union.

Some of the tax measures covered by the Code will fall within the scope of the provisions on State aid (Articles 107 – 109 TFEU). Given that application of primary Union law takes precedence, in cases where the Commission has initiated state aid proceedings, the Code of Conduct Group shall suspend its examination of the tax measures until the end of that state aid procedure.

Commenting, the Czech Finance Minister and Chair of ECOFIN, said: “We confirmed today our commitment to a fairer tax environment in the EU by reinforcing the rules we apply when tackling harmful tax practices in an evolving economy. Our experts in taxation constantly look out for harmful tax practices. Since starting its work in 1997, the code of conduct group succeeded in eliminating around 140 harmful tax practices within the EU. The code of conduct of business taxation has not been amended since 1997 and today´s agreement further improves its effectiveness also in the light of the recent international tax reform”, said Zbyněk Stanjura, Minister of Finance of the Czech Republic, currently presiding with the Council.

The Grand Chamber of the Court of Justice of the European Union annulled the General Court judgment in the joined C-885/19 P | Fiat Chrysler Finance Europe v Commission and C-898/19 P | Ireland v Commission, concerning State aid in a form of preferential taxation allegedly granted by Luxembourg to Fiat Finance.

According to the Court of Justice, the General Court committed an error of law in the application of Article 107(1) TFEU by failing to take account of the requirement arising from the case-law, according to which, in order to determine whether a tax measure has conferred a selective advantage on an undertaking, it is for the Commission to carry out a comparison with the tax system normally applicable in the Member State concerned, following an objective examination of the content, interaction and concrete effects of the rules applicable under the national law of that State. The General Court was wrong to endorse the approach consisting in applying an arm’s length principle different from that defined by Luxembourg law, confining itself to identifying the abstract expression of that principle in the objective pursued by the general corporate income tax in Luxembourg and to examining the tax ruling at issue without taking into account the way in which the said principle has actually been incorporated into that law with regard to integrated companies in particular.

By dismissing the Commission’s understanding of the benchmark, the Court left Member states with more freedom to choose the reference framework under which they might adopt rules or administrative practices deviating from common rules without falling foul of the State aid prohibition in primary Union law.

Legal commentators have noted, however, that not all is lost for the Commission’s scrutiny of discriminatory and/or preferential taxation in Member states given that in paragraph 122 of the judgment the Court states: “the parameters laid down by national law are manifestly inconsistent with the objective of non-discriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system, by systematically leading to an undervaluation of the transfer prices applicable to integrated companies or to certain of them, such as finance companies, as compared to market prices for comparable transactions carried out by non-integrated companies”.

CFE Conference “Targeting the “Bad Apples”: Enablers of Tax Avoidance”; Zagreb, 2 December 2022