1. The legal basis and justification of EC measures regarding company law and direct taxation

Corporate Taxation in the EC:
The Process of Corporate Tax Harmonisation in the EC
2001 Dr Jean-Philippe Chetcuti. All Rights Reserved.

1. Introduction: The legal basis and justification of EC measures regarding company law and direct taxation

What is the legal basis for the recent EC [i] measures regarding direct taxation and company law measures?  What legislative means does the Treaty contemplate and what is the role of legislative bodies in the evolving process of corporate and direct tax harmonisation?

1.1. Treaty limits on direct taxation

The EC Treaty does not provide for the harmonisation of direct taxation.  MSs are merely obliged to abide by the principles of Community Law in the exercise of their direct-taxing sovereignty.[ii]  Thus, taxation by MSs must not:

impede the freedom of movement of persons, businesses and capital and the freedom to provide cross-border services as guaranteed by the treaty[iii];

distort conditions of competition through the provision of tax breaks and reliefs to national businesses in the form of state aid as opposed to general measures of taxation[iv]; or

infringe the central principle of EC law prohibiting discrimination on the grounds of nationality in areas falling within the scope of the treaty.[v]

In fact, the cases involving discriminatory direct taxation that have come before the Court of Justice have mainly been concerned with free movement, either of employees entitled to freedom from discrimination in terms of remuneration and other conditions of work, or of businesses the freedom of individuals and companies to set up in business in another MS or provide cross-border services in another MS under the same conditions as local businesses.  These freedoms constitute specific applications of the general principle against discrimination on the grounds of nationality.[vi]

1.2. The Single European Act

The Community shall adopt measures with the aim of progressively establishing the internal market over a period expiring on 31 December 1992,

The internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of this Treaty.[vii]

The Single European Act poses a great challenge to the MSs of the EC.  As the Treaty suggests, the concept of an internal market depends on the free movement of goods[viii], the free movement of persons[ix], the right of establishment[x], the supply of services[xi] and the free movement of capital[xii].  It is on these provisions that proposed measures for corporate tax harmonisation are sought to be made.

1.3. Legislative means and the role of the legislative bodies

Article 249 (ex-Art. 189) of the Treaty lays down the legislative means available to fulfil the objectives of the Treaty and these are regulations, directives, decisions and opinions.[xiii]  The Commission contributes to the legislative process by acting as the initiating institution.  The European Parliament merely delivers its opinions on the measures proposed by the Commission.  It is the Council, the legislative body of the EC, that actually adopts Community measures.

1.3.1. The Commission

The Commission consists of 17 members, at least one but no more than two nationals of each MS.[xiv]  Article 213(2) of the Treaty provides that the members of the Commission shall be completely independent in the performance of their duties.  Proposals made by the Commission are sent to the European Parliament which has the power to amend proposals of the Commission.

1.3.2. The European Parliament

The European Parliament (EP) consists of members who are elected in the MSs.  The number of representatives per MS is determined in the act concerning the election of the representatives of the EP.[xv]  The primary function of the EP is to deliver opinions on proposals and to submit amendments to proposals.  The EP may amend proposals submitted by the Council or reject the position of the Commission.  An amendment passed by the EP is first sent to the Commission which decides whether or not to include the amendment in the proposal.  If it does not amend the proposal, it is sent to the Council for adoption.  A proposal that is rejected by the Parliament may still be sent to the Council if the Commission chooses to do so.  If the Council seeks to amend the proposal, it is sent back to the Parliament for its opinion.[xvi]

1.3.3. The Council

The Council is the legislative body which adopts community measures and is composed of representatives from the MSs.  The Council may adopt proposals by majority, qualified majority,[xvii]or unanimous decision, depending on the subject matter.  If the European Parliament has rejected the position of the Commission, then the Council may only adopt the proposal of the Commission by unanimous decision.[xviii]  The Council may amend the proposal of the Commission, but only unanimously.[xix]

1.4. Treaty Basis

Figure I. Table of enabling treaty provisions

EC measures



Arts. 93 and 94

Capital duties

Arts. 93 and 94

Parent/Subsidiary Directive

Art. 94

Mergers Directive

Art. 94

EC Arbitration Convention


rt. 293

Proposed directive on interest/royalties

Art. 94

Proposed directive on the taking into account of losses

Art. 94

EEIG regulation

Art. 308

Proposed European company regulation

Art. 95

Proposed European company directive

Art. 44

Company law directives

Art. 44(2)(g).

A variety of Articles can be used as the basis for EC measures as can be witnessed from the table above.

Article 93 of the EC Treaty provides the legal foundation for measures harmonising indirect taxation in the Community.  In terms of this Article, the Council shall adopt provisions for the harmonisation of legislation in the form either of regulations or of directives.  In effect, regulations are instruments more of unification than of harmonisation as they take immediate effect as law in each and every MS.  The choice of the regulation for harmonisation measures in matters of taxation is not popular with MSs; a regulation does not allow national parliaments to modify its scope or add provisions to it.  On the other hand, directives, such as the Sixth Directive of 17 May 1977, are implemented by the national legislator but, considering their detailed form, leave only limited scope for national legislative discretion.[xx]

The provisions of the Treaty of Rome[xxi] that provide the legal framework for the actions of the EC in respect of company law and direct taxation are different from those utilised for VAT purposes.[xxii]  The EC measures that form the basis for VAT and capital duties are formed by Articles 90 93 of the Treaty of Rome. These Articles apply to turnover taxes, excise duties and other forms of indirect taxation.  Directives regarding VAT and capital duties are issued on the basis of Article 93 and/or Article 94 of the Treaty.

Article 94 provides the legal authority for harmonising direct taxes and only provides for directives.  Direct tax issues are only tackled by regulation when they constitute an accessory provision among the non-tax rules of some (corporate, etc.) regulation.[xxiii]

To date only three Directives have been adopted, only one of which (90/435 on parent/subsidiaries) is fully operative and has significant bearing on international tax practice. The second one (90/434 on mergers) is only partially implemented. The third one (77/799 on mutual administrative assistance) deals with procedures to fight tax evasion but receives, in that common fight, limited application beyond that already promised by existing bilateral agreements.

Article 293 of the EC Treaty provides for still another instrument where it requires MSs to come or to try to come to a common agreement concerning a given (tax) subject matter throughout the Community so as to achieve its goals. However, to date only one convention (90/436 on arbitration) has been concluded on this basis in the field of direct taxation. The national governments may like the legal instrument as it is, in essence, their collective decision-making, not that of a Community institution. By the same token it is less effective than a directive. Indeed, since the entry into effect in 1995 of the arbitration convention, not a single decision has been handed down, principally because to date in most MSs the national arbitration commission is still not established under the Convention.

1.5. Legal basis of the Merger and Parent-subsidiary Directives

The Mergers Directive[xxiv]and the Parent-subsidiary Directive[xxv] are based on Article 94 of the Treaty, which addresses the approximation of laws and reads as follows:

The Council shall, acting unanimously on a proposal from the Commission, issue directives for the approximation of such provisions laid down by law, regulation or administrative action in Member States as directly affect the establishment or functioning of the common market.

The European Parliament and the Economic and Social Committee shall be consulted in the case of directives whose implementation would, in one or more Member States, involve the amendment of legislation.

This Article makes it clear that measures concerning direct taxation require the unanimous adoption of the Council and that on such matters, the Council is obliged to consult the European Parliament and the Economic and Social Committee.[xxvi]

1.6. Legal basis and instrument of the Arbitration Convention

The Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (hereinafter, the Arbitration Convention)[xxvii] is based on Article 293 of the Treaty that reads as follows:

Member States shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals:

– the protection of persons and the enjoyment and protection of rights under the same conditions as those accorded by each State to its own nationals;

– the abolition of double taxation within the Community;

– the mutual recognition of companies or firms within the meaning of the second paragraph of Article 48,[xxviii] the retention of legal personality in the event of transfer of their seat from one country to another, and the possibility of mergers between companies or firms governed by the laws of different countries;

– the simplification of formalities governing the reciprocal recognition and enforcement of judgments of courts or tribunals and of arbitration awards.

Article 293 thus provides the legal framework for establishing a tax treaty for the avoidance of double taxation.  MSs are also presented with the option of reaching agreement on mutual recognition of specific legal entities; only a limited number of legal entities are recognised for the purposes of the Parent-subsidiary Directive.[xxix]  Some argue that even the content of the Mergers Directive could have been realised through negotiations on the basis of Article 293.[xxx]

Article 94 of the Treaty also provides a legal basis for the Proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between parent companies and subsidiaries in different MSs[xxxi]and the Proposal for a Council Directive concerning arrangements for the taking into account by enterprises of the losses of their permanent establishments and subsidiaries situated in other MSs.[xxxii]

1.7. EC company law

Article 54(3)(g) of the Treaty provides for the coordination of safeguards to protect the interest of members and others in companies and other profit-making firms.  It therefore provides a basis for EC company law directives such as the Proposed Tenth Council Directive[xxxiii], the Council Regulation on the European Economic Interest Grouping (EEIG)[xxxiv] and the Proposal for a Council Regulation on the Statute for a European company (Societas Europea)[xxxv], which measures are relevant to the adoption of EC direct taxation measures.  Based on the said Article, the Proposed Tenth Council Directive concerns international mergers of specifically listed types of public limited companies and its adoption is necessary to enable complete utilization of all possibilities in the Mergers Directive.

In respect of taxation, the Regulation on the EEIG lays down that: the profits and losses resulting from the activities of a grouping shall be taxable only in the hands of its members.[xxxvi]  Article 308 of the Treaty, on which the latter regulation is based, provides that if action by the Community should prove necessary to attain, in the course of the operation of the common market, one of the objectives of the Community and this Treaty has not provided the necessary powers, the Council can take the appropriate measures acting unanimously on a proposal from the Commission and after consulting the European Parliament.[xxxvii]  Unlike Article 293, Article 308 may only be applied if this Treaty has not provided the necessary powers.

Article 95 provides an exception to Article 94 and constitutes the basis for the Proposed Regulation on the Statute for the European company.  The Council may adopt proposals from the Commission by a qualified majority, provided these proposals do not relate to fiscal provisions, provisions on the free movement of persons, or provisions on the rights and interest of employed persons.  The accompanying Proposed Directive on employees involvement[xxxviii] is based on Article 54 of the Treaty, which deals with the right of establishment.  The Proposed Regulation on the Statute for a European company contains a specific provision, Article 133, for the tax treatment of losses suffered by permanent establishments of a European company in another MS.

The legal effect of adopted measures depends only on the form of the measure (regulation or directive), rather than the Article it is based on.  The factors that determine the choice of the measure to be taken are the precise wording of the Treaty and probably the type of voting required to adopt the measure, i.e. majority or qualified majority, or unanimous. bullet-red.png

2. The economic justification of tax harmonisation in the EC