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Freedom of investment between EU and non-EU Member States and its impact on corporate income tax systems within the European Union Dr. D.S. Smit LL.M. The Research Question. Starting point: international economic integration within the European Union

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Freedom of investment between EU and non-EU Member States and its impact on corporate income tax systems within the European Union Dr. D.S. Smit LL.M.

the research question
The Research Question
  • Starting point: international economic integration within the European Union
    • Free movement of persons, services & capital (“freedom of investment”)
    • Huge impact on Member States’ company tax regimes within the EU
  • International economic integration does not stop, however, at the borders of the EU
    • European Commission (2006): “European openness”
    • Article 63 TFEU: free movement of capital between Member States and between Member States and third countries
    • Various Association, Partnership and Cooperation Agreements with third countries
the research question1
The Research Question
  • Research question:
    • What is and should be the impact of the European free movement provisions on Member States’ company income tax systems in the relations between Member States and non-Member States?
scope of the study
Scope of the Study
  • Focus on 6 corporate income tax measures in an international context*):
    • Direct third country investments between EU and non-EU Member States:
    • Indirect third country investments between EU and non-EU Member States through an EU intermediary:

Non-EU

EU

*)

1 Withholding taxes

2 Limitations on the deduction of interest expenses

3 Relief for double taxation

4 CFC-legislation

5 Loss compensation

6 Transfer of business assets

Non-EU

EU

Non-EU

EU

EU

EU

Non-EU

EU

benchmark
Benchmark
  • Freedom of investment implies international tax neutrality
    • Inter-nations neutrality:
      • International tax neutrality can be best achieved if taxation does not adversely influence the relation between taxes and public goods to the disadvantage of transnational investment
      • Boils down, in its ultimate implications, to source-state based taxation
    • Neutrality considerations may be constrained by taxpayer equity considerations
    • Striking match with CJEU case law relating to freedom of investment:
      • Economic concept
      • Implies a genuine economic link with the territory of a Member State through the exercise of a genuine economic activity
structure and conclusions of the study
Structure and Conclusions of the Study
  • H1: Research question and acknowledgements
  • H2: Benchmark
  • H3: Dividing line between EU Member States and non-EU Member States
    • Position of associated and dependent territories: (part of a) Member State or third country?
    • Conclusion: third country to the extent not bound to apply the Treaty provision at stake
  • H4: Relevant positive integration between the Member States
  • H5: Relevant negative integration between the Member States
    • Conclusion: significant impact on Member States company tax systems
structure and conclusions of the study1
Structure and Conclusions of the Study
  • H6: Access to freedom of investment vis-à-vis third countries
    • Conclusion: The bigger the investment, the lower the protection (benchmark of “definite influence”)
  • H7: Discrimination and justification grounds under freedom of investment vis-à-vis third countries
    • Conclusion: More room to successfully rely on justification grounds
  • H8: Temporal scope of freedom of investment vis-à-vis third countries
    • Conclusion: Limits the protection under the free movement of capital under Article 63 TFEU
    • Extends the protection under the APC Agreements
structure and conclusions of the study2
Structure and Conclusions of the Study
  • H9: Indirectly held third country investments (intermediate companies & dual resident companies)
    • No protection in case of tax avoidance
    • Benchmark: Intermediate company has no genuine economic link with the economy of Member State
    • Requirement of proportionality: taxpayer must still be allowed to provide proof to the contrary
structure and conclusions of the study3
Structure and Conclusions of the Study
  • H10: Recommendations & conclusions
    • Amendment of existing tax Directives
      • Definition of “third countries”
      • Common relief for double taxation for income from third country investments
      • Common CFC-provision for third country investments with no genuine economic link or subject to special tax regime
      • Common WHT system in case of intermediate EU companies with no genuine economic link
closing
Closing
  • Thank you for your attention…!
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