1. Assessing the EU measures in the BEPS context Prof. Edoardo Traversa, UCLouvain EATLP Annual Congress Munich, 3 June 2016

2. Faculté de droit et de criminologie Institut pour la recherche interdisciplinaire en sciences juridiques Centre de recherche interdisciplinaire "Droit, entreprise et société" - Jean Renauld CRIDES Index Legal basis in EU law to implement BEPS Potential conflicts between EU law and BEPS implementing measures Convergence between BEPS and EU legislation

3. I. Implementation of BEPS in EU law : is there a legal basis?

4. Legal basis for the Anti Tax avoidance Directive Proposal (28 January 2016- COM/2016/026) Art. 115 TFUE enables the Council “to adopt directives on the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the internal market”. Art. 115 TFEU is subject to principles of subsidiarity and proportionality Arguments put forward by the European Commission BEPS “distorts business decisions in the internal market and unless it is effectively tackled, could create an environment of unfair tax competition” Avoiding fragmentation, i.e. « inefficiencies and distortions in the interaction of a patchwork of distinct measures” Legal certainty for the taxpayers (as regard compliance with EU law) Minimum protection for Member States' corporate tax systems (and not full harmonization) Discussion

5. II. Potential conflicts between EU law (Fundamental freedoms and EU directives) and BEPS measures o Interest deduction o CFC rules

6. Interest deduction: EU law framework –Relief from (economic) double taxation in an intra-group context for certain items of income Interest and Royalties and Parent-Subsidiary Directive (dividends) –Domestic anti-abuse on interest deductibility rules have to be compatible with EU law Lankhost-Hohorst) (C-324/00) ; Lasertec (C-492/04); Test Claimants in the Thin Cap Group Litigation (C-524/04); NV Lammers & Van Cleeff (C-105/07) ; Itelcar - Automóveis (C-282/12) (third country context – in absence of shareholding) –No EU regime on interest deductibility in the interest/royalty directive (see ECJ, Scheuten Solar Technology GmbH v Finanzamt Gelsenkirchen-Süd, C ‑ 397/09)

7. Interest deduction in the ATAD Proposal Characteristics - Ratio for deductibility of “exceeding borrowing costs” is limited to - 30 percent of a taxpayers’ earnings before interest, tax, depreciation and amortisation (EBITDA) or - to EUR 1 million, whichever is higher. - Special rules are provided to calculate the ratio for companies belonging to group - Financial and insurance undertakings are excluded from this interest limitation rule. In accordance with BEPS recommendations and similar to regimes existing in some Member States (Germany, Italy, and Spain) => Increase international double taxation of interest, contrary to the objective of the existing EU interest and royalties directive?

8. CFC rules : EU law framework - Restriction to the freedom of establishment and to the free movement of capital (if not limited to controlling shareholding) - See CJUE, Cadbury Schweppes (C-196/04); CFC and Dividend GLO (C- 201/05); Commission v. UK ( C-112/14) - Justification only if it «specifically targets wholly artificial arrangements which do not reflect economic reality and whose sole purpose is to avoid the tax normally payable on the profits generates by activities carried out on national territory » - Appreciated on the basis of « objective factors (…) with regards in particular to the extent to which the CFC physically exists in terms of premises, staff and equipment »

9. CFC rules in the ATAD proposal -Inclusion of CFC income in the profits of an EU company if -More than 50% of voting rights, capital or entitlement to profits -General tax regime lower than 40% of the effective tax rate of the residence country -More than 50% of the total income composed of financial income or intragroup services (financial institutions : only if more than 50% comes from the EU company or associated entreprises) -If the CFC is located in EU or EEA Member States, those rules shall apply if establishment of the entity is wholly artificial or the entity engages, in the course of its activity, in non-genuine arrangements => Compatibility with the fundamental freedoms? What are non-genuine arrangements? Application to holding companies => Disparities in the application of the regime due to differences in effective tax rates between Member States

10. II. Convergence between BEPS and EU law o Hybrids arrangements (“arrangement that exploits the different tax treatment in two jurisdictions to produce a mismatch in tax outcomes” ) o Exit taxation

11. Hybrid mismatches in the PSD Council Directive 2014/86/EU of 8 July 2014 amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States Anti-hybrid rule: a 'linking rule' pursuant to which income is not exempt under the parent subsidiary directive exemption if and to the extent it is deductible for tax purposes in the hands of the payor  Similar (but not identical) approach as recommended by the OECD in the BEPS reports  Compatible with the objective of the Parent-Subsidiary Directive, i.e. to avoid double taxation of distributed profits  Compatible with Art. 115 TFEU, as well as the principle of subsidiarity and proportionality

12. Hybrid mismatches in the ATAD Proposal Original proposal Where two Member States give a different legal characterisation to the same taxpayer (including PE) or payment, leading to double non taxation the legal characterisation given by the Member State in which the payment has its source, the expenses are incurred or the losses are suffered shall be followed by the other Member State. Proposed amendment If double deduction, only the Member State of the source of the payment shall grant the deduction If deduction without inclusion, the Member State of the source of the payment shall deny the deduction => In line with the OECD recommandations => Compliant with the principle of subsidarity and proportionality (to avoid double taxtaion as well as double non taxation)

13. Exit taxation in the ATAD Proposal -Compulsory taxation “at an amount equal to the market value of the transferred assets, at the time of exit, less their value for tax purposes” -Possibility of deferred payment (instalments over at least 5 years with interest) in intra EU and EEA situations -The Member State of destination shall accept the market value established by the Member State of origin of the taxpayer or of the permanent establishment as the starting value of the assets for tax purposes  Aims at avoiding profit shifting through non taxation of capital gains  Implementation of the case-law of the Court of Justice  Attempt to coordinate Member States’ tax system and avoid double taxation