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<title>Why all top-up tax variants in the EU Pillar Two Directive collide with the EU’s fundamental freedoms (and how to solve this)</title>
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<comments>https://kluwertaxblog.com/2025/06/16/why-all-top-up-tax-variants-in-the-eu-pillar-two-directive-collide-with-the-eus-fundamental-freedoms-and-how-to-solve-this/#respond</comments>
<dc:creator><![CDATA[Maarten de Wilde (Erasmus School of Law, Erasmus University Rotterdam, PwC Rotterdam) and Ciska Wisman (affiliated with the University of Amsterdam (UoA), Amsterdam, the Netherlands)]]></dc:creator>
<pubDate>Mon, 16 Jun 2025 13:48:09 +0000</pubDate>
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<description><![CDATA[Maarten de Wilde[1] and Ciska Wisman[2] Summary In this contribution, the authors operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the notions of the internal market and the fundamental freedoms. The various top-up tax mechanisms under the Directive impose differences in tax treatment... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/06/16/why-all-top-up-tax-variants-in-the-eu-pillar-two-directive-collide-with-the-eus-fundamental-freedoms-and-how-to-solve-this/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Maarten de Wilde<a href="#_ftn1" name="_ftnref1">[1]</a> and Ciska Wisman<a href="#_ftn2" name="_ftnref2">[2]</a>
Summary
<table>
<tbody>
<tr>
<td width="690">In this contribution, the authors operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the notions of the internal market and the fundamental freedoms. The various top-up tax mechanisms under the Directive impose differences in tax treatment between domestic and cross-border business operations within the internal market. These differences result in unjustified de facto restrictions of the freedoms of movement. The core of this legal deficit lies in the chosen approach under the Directive in which top-up taxation is determined on a per country basis (jurisdictional blending). This, while the internal market is about creating an area without internal frontiers within which factors of production and goods and services should be able to move freely (regional blending). Possible means to solve the issues created include the introduction of EU regional blending or even global blending, or the repeal of the EU Pillar Two Directive. The latter, if chosen, may be accompanied by a simultaneous introduction of a harmonised competitive corporate tax system for the internal market. If no measures are taken, it seems only a matter of time before the Court of Justice of the European Union will rule the top-up taxation mechanisms under the Pillar Two Directive essentially incompatible with EU law.</td>
</tr>
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</table>
<h4>1 Introduction</h4>
As per 31 December 2023, the Member States of the European Union (EU Member States) are legally required to operate a 15% minimum level of corporate taxation for large businesses under their domestic tax systems. The basis for this lies in the EU Directive of 14 December 2022 to ensure a minimum level of taxation<a href="#_ftn3" name="_ftnref3">[3]</a>, also known as the EU Pillar Two Directive.<a href="#_ftn4" name="_ftnref4">[4]</a> Via this instrument of secondary EU law, the EU Member States have incorporated the so-called<a href="#_ftn5" name="_ftnref5">[5]</a> Global Minimum Tax (Pillar Two)<a href="#_ftn6" name="_ftnref6">[6]</a> in the EU. The Global Minimum Tax is part of the Global Tax Deal, the 2021 political agreement within the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on a global company tax reform for large multinationals to address the tax challenges of a digitizing economy.<a href="#_ftn7" name="_ftnref7">[7]</a>
There are various tax-technical and tax policy related questions and discussions surrounding the Global Minimum Tax (Pillar Two).<a href="#_ftn8" name="_ftnref8">[8]</a> One of the concerns focuses on the question of the compatibility of the 15% minimum tax with the fundamental freedoms of movement as guaranteed by the Treaty on the Functioning of the European Union (TFEU). At the time of the OECD’s first round of public online consultations on the plans at the time, in the spring of 2019, we wrote on the tension of the possible top-up taxes with the EU treaty freedoms: “… that would seem problematic. And that is even without the EU law difficulties that implementing the GLOBE measures within the European Union would unavoidably cause. The GLOBE measures (i.e. the income inclusion rule and the tax on base erosion payments), as they currently stand, are likely to be incompatible with the EU treaty freedoms in view of the European Court of Justice’s judgments in cases such as Cadbury Schweppes (C-196/04) and Eurowings (C-294/97), not to mention the tax treaty-related difficulties that would arise. Furthermore, the tax on base erosion payments could also conflict with the non-discrimination provisions in tax treaties (see article 24(5) of the OECD Model Convention).”<a href="#_ftn9" name="_ftnref9">[9]</a> At the time of the drafting of the proposal for the EU Pillar Two Directive the European Commission looked into primary EU law matters as well. To keep the Directive in line with the EU treaty freedoms, the operational scope of the EU’s version of the Global Minimum Tax was extended to also cover large domestic firms, that is in addition to the political agreement on the taxation of large multinational enterprises within the Inclusive Framework.<a href="#_ftn10" name="_ftnref10">[10]</a> And indeed, today, the EU Pillar Two Directive does not only apply to multinational enterprises but also to large domestic groups.<a href="#_ftn11" name="_ftnref11">[11]</a> According to the European Commission, this neutralizes any possible tension between the directive and the freedoms.<a href="#_ftn12" name="_ftnref12">[12]</a> We don’t think this is the case.
In this contribution, we operationalize a concrete numerical example to explain why all the top-up taxation (TuT) variants from the EU Pillar Two Directive collide with the very notions of the internal market and the fundamental freedoms of movement as guaranteed under the TFEU. The problem of Pillar Two in the EU, when seen from an internal market perspective, lies in the chosen approach of jurisdictional blending, i.e., the per country approach. The internal market, however, is about the creation of an area without internal frontiers where production factors and goods and services must be able to move freely and unimpeded (regional blending or EU blending) and where capital movements to and from the EU are universally liberalized (global blending). If the top-up taxes under the EU Pillar Two Directive, indeed, were to impede the right to free movement, these tax measures are likely to be ineffective due to their incompatibility with primary EU law: null and void that is. Given the limited policy maneuvering room of the individual EU Member States when it comes to the implementation of the EU Pillar Two Directive in their domestic legal systems, the same applies a fortiori and on an equal footing for the Directive’s equivalent provisions in the Pillar Two implementing legislation in the individual EU Member States.<a href="#_ftn13" name="_ftnref13">[13]</a> For the sake of completeness, it is noted at this place that secondary EU law, too, must be compatible with primary EU law.<a href="#_ftn14" name="_ftnref14">[14]</a> The reality of this puts all Pillar Two top-up tax levies of the EU Member States under severe primary EU law pressure.
<h4>2 Why Pillar Two top-up taxation collides with EU treaty freedoms, and how to solve this</h4>
2.1 Global Minimum Tax; I’ll tax if you don’t<a href="#_ftn15" name="_ftnref15">[15]</a>
With the EU Pillar Two Directive, the EU Member States are following up in a coordinated manner on the political agreements made in 2021 within the Inclusive Framework to introduce a global 15% minimum corporate tax level for groups with an annual turnover of more than €750 million. A common approach has been agreed to this end within the Inclusive Framework.<a href="#_ftn16" name="_ftnref16">[16]</a> As is also apparent from the wording of the provisions of the EU Pillar Two Directive, the EU Member States have only very limited policy space when it comes to the implementation of the Directive into their domestic tax systems.<a href="#_ftn17" name="_ftnref17">[17]</a> The Netherlands, for instance, the authors’ home country, has meticulously transposed the Pillar Two rules in the Dutch Minimum Tax Act of 2024,<a href="#_ftn18" name="_ftnref18">[18]</a> to be fully compliant with the obligation to achieve the results anticipated under the Inclusive Framework’s political Global Tax Deal and the EU’s Pillar Two Directive implementing the new minimum tax rules in the EU via legally binding secondary EU law instrumentation as a corollary.<a href="#_ftn19" name="_ftnref19">[19]</a>
Pillar Two aims to further address base erosion and profit shifting (anti-tax avoidance) and to establish a floor on tax competition between countries (anti-tax competition).<a href="#_ftn20" name="_ftnref20">[20]</a> The means to achieve these objectives pursued is a top-up tax of up to 15% on a globally coordinated taxable base. And indeed, an alternative minimum tax that effectively results in a worldwide minimum company tax burden meets both objectives in practical terms.<a href="#_ftn21" name="_ftnref21">[21]</a> The EU Pillar Two Directive requires that if the effective tax rate (ETR) in a tax jurisdiction falls below 15%, top-up taxation will be levied, in short, up to the minimum level.<a href="#_ftn22" name="_ftnref22">[22]</a> The effective tax rate of a group for a reporting year is calculated for this purpose on a per country basis (jurisdictional blending),<a href="#_ftn23" name="_ftnref23">[23]</a> by reference to an effective tax rate calculation by means of a fraction.<a href="#_ftn24" name="_ftnref24">[24]</a> In short, the numerator of this fraction includes the corporate taxes of all group entities established in the jurisdiction for which the calculation is made.<a href="#_ftn25" name="_ftnref25">[25]</a> The denominator, in short, includes the profits of all group entities established in the jurisdiction for which the calculation is made.<a href="#_ftn26" name="_ftnref26">[26]</a> Top-up taxation is due to the extent that the effective tax rate in a jurisdiction is lower than the 15% minimum rate.<a href="#_ftn27" name="_ftnref27">[27]</a> The top-up tax is then calculated by multiplying the percentage point difference<a href="#_ftn28" name="_ftnref28">[28]</a> between the effective tax rate and the 15% minimum rate with the excess profit, i.e. the profit minus a top-up tax-free amount: the so-called Substance-Based Income Exclusion (SBIE) that applies by reference to the group’s tangible presence in the jurisdiction involved, and which is calculated as a fixed return on the costs of labour and fixed assets.<a href="#_ftn29" name="_ftnref29">[29]</a> The top-up tax is then levied successively according to the mechanisms of the Qualified Domestic Minimum Top-up Tax (QDMTT; if introduced by the low-taxing jurisdiction involved),<a href="#_ftn30" name="_ftnref30">[30]</a> the qualified Income Inclusion Rule (IIR),<a href="#_ftn31" name="_ftnref31">[31]</a> or the qualified Undertaxed Profit Rule (UTPR).<a href="#_ftn32" name="_ftnref32">[32]</a> The question of when exactly an additional levy is ‘qualifying’ for Pillar Two purposes will not be further discussed.<a href="#_ftn33" name="_ftnref33">[33]</a>
2.2 Domestic versus cross-border scenarios
2.2.1 Domestic and cross-border scenarios outlined
The effective operation of the EU Pillar Two Directive through the respective EU Member State’s implementing legislation initiates divergences in terms of tax burdens imposed in domestic and cross-border scenarios. We illustrate this with a numerical example, starting with a domestic fact pattern as a base scenario. We then elaborate on some cross-border variants of this base case in three scenarios, in which we link each scenario to one of the Pillar Two top-up tax variants: scenario a) income-inclusion rule (IIR); scenario (b) domestic minimum top-up tax (QDMTT), and; scenario (c) undertaxed profit rule (UTPR).
2.2.2 Domestic scenario (base case)
<ul>
<li>Group. Co1, Co2 and Co3 belong to the same group. All are based in EU Member State Q (‘Query’). Co1 is the ultimate parent entity.</li>
<li>EU MS Q. The sum of the (profit) taxes involved (T) in EU MS Q is €1,500 (Co1: €400, Co2: €600 and Co3: €500) The sum of their income (Y) in EU MS Q is €10,000 (Co1: €2,000, Co2: €3,000, Co3: €5,000). The effective tax rate in EU MS Q is 15% (1,500/10,000)*100%=15%). EU MS Q is not a low-taxing jurisdiction. Co1, Co2 and Co3 are not low-taxed group entities.</li>
<li>TuT EU MS Q. There is no top-up tax up to the 15% minimum level.</li>
</ul>
In this case, EU Member State Q subjects the entities resident in its jurisdiction to €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,500. See also Figure 1.
Figure 1. Domestic scenario (base case)
<a href="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2025/06/Blog-image-1.docx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Blog image 1</a>
2.2.3 Cross-border scenario a): income-inclusion rule (IIR)
<ul>
<li>Co1, Co2 and Co3 belong to the same group. Co1 and Co2 are located in EU Member State Q. Co3 is located in EU Member State X. Co1 is the ultimate parent entity.</li>
<li>EU MS Q. The sum of the covered taxes (T) involved in EU MS Q is €1,000 (Co1: €400 and Co2: €600). The sum of their income (Y) in EU MS Q is €5,000 (Co1: €2,000 and Co2: €3,000). The effective tax rate in EU MS Q is 20% (1,000/5,000)*100%=20%). EU MS Q is not a low-taxing jurisdiction. Co1 and Co2 are not low-taxed group entities.</li>
<li>EU MS X. The sum of the covered taxes (T) of Co3 in EU Member State X is €500. The sum of the income (Y) of Co3 in EU Member State X is €5,000. The effective tax rate in EU Member State X is 10% (500/5,000)*100%=10%). EU Member State X is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).</li>
<li>TuT EU MS Q. Say, EU Member State X does not have a qualified domestic minimum top-up tax. Then, EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co1, under the application of the income inclusion rule. The top-up tax payable by Co1 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).</li>
</ul>
In this case, EU Member State Q subjects the entities resident in its jurisdiction to €250 top-up taxation, where in the base case scenario EU Member State Q levies €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,750, where in the base case scenario the total corporate taxes amount to €1,500. See also Figure 2.
Figure 2. Cross-border scenario a): income-inclusion rule (IIR)
<a href="https://kluwertaxblog.com/2025/06/16/why-all-top-up-tax-variants-in-the-eu-pillar-two-directive-collide-with-the-eus-fundamental-freedoms-and-how-to-solve-this/blog-image-2/" rel="attachment wp-att-20037" data-wpel-link="internal">Blog image 2</a>
2.2.4 Cross-border scenario b): domestic minimum top-up tax (QDMTT)
<ul>
<li>Co1, Co2 and Co3 belong to the same group. Co1 and Co2 are established in EU Member State X. Co3 is based in EU Member State Q. Co1 is the ultimate parent entity.</li>
<li>EU MS X. The sum of the covered taxes (T) involved in EU Member State X is €1,000 (Co1: €400 and CO2: €600). The sum of their income (Y) in EU Member State X is €5,000 (Co1: €2,000 and Co2: €3,000). The effective tax rate in EU Member State X is 20% (1,000/5,000)*100%=20%). EU Member State X is not a low-taxing jurisdiction. Co1 and Co2 are not low-taxed group entities.</li>
<li>EU MS Q. The sum of the covered taxes (T) of Co3 in EU Member State Q is €500. The sum of the income (Y) of Co3 in EU MS Q is €5,000. The effective tax rate in EU MS Q is 10% (500/5,000)*100%=10%). EU MS Q is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).</li>
<li>TuT MS Q. EU MS Q has a qualified domestic minimum top-up tax. EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co3, applying the domestic minimum top-up tax. The top-up tax payable by Co3 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).</li>
</ul>
In this case, EU Member State Q subjects the entity resident in its jurisdiction to €250 top-up taxation, where in the base case scenario EU Member State Q levies €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,750, where in the base case scenario the total corporate taxes amount to €1,500. See also Figure 3.
Figure 3. Cross-border scenario b): domestic minimum top-up tax (QDMTT)
<a href="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2025/06/Blog-image-3.docx" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Blog image 3</a>
2.2.5 Cross-border scenario c): undertaxed profit rule (UTPR)
<ul>
<li>Co1, Co2 and Co3 belong to the same group. Co1 is located in EU Member State A. Co2 is based in EU Member State Q. Co3 is located in EU Member State X. Co1 is the ultimate parent entity.</li>
<li>EU MS A. The sum of the covered taxes (T) of Co1 in EU Member State A is €400. The sum of income (Y) in EU Member State A is €2,000. The effective tax rate in EU Member State A is 20% (400/2,000)*100%=20%). EU Member State A is not a low-taxing jurisdiction. Co1 is not a low-taxed group entity.</li>
<li>EU MS Q. The sum of the covered taxes (T) of Co2 in EU Member State Q is €600. The sum of income (Y) in EU MS Q is €3,000. The effective tax rate in EU MS Q is 20% (600/3,000)*100%=20%). EU MS Q is not a low-taxing jurisdiction state. Co2 is not a low-taxed group entity.</li>
<li>EU MS X. The sum of the covered taxes (T) of Co3 in EU Member State X is €500. The sum of the income (Y) of Co3 in EU Member State X is €5,000. The effective tax rate in EU Member State X is 10% (500/5,000)*100%=10%). EU Member State X is a low-taxing jurisdiction. Co3 is a low-taxed group entity. The top-up tax percentage is 5% (15-/-10=5).</li>
<li>TuT EU MS Q. EU Member State A does not have a qualified income inclusion rule. EU MS Q levies top-up tax up to the 15% minimum level, in the hands of Co2, applying the undertaxed profit rule. The top-up tax payable by Co2 in EU MS Q (apart from the top-up tax-free amount) amounts to €250 (0.05*5,000=250).</li>
</ul>
In this case, EU Member State Q subjects the entity resident in its jurisdiction to €250 top-up taxation, where in the base case scenario EU Member State Q levies €0 top-up taxation. The overall aggregate amount of corporate taxes and top-up taxation for the group amounts to €1,750, where in the base case scenario the total corporate taxes amount to €1,500. See also Figure 4.
Figure 4. Cross-border scenario c): undertaxed profit rule (UTPR)
<a href="https://kluwertaxblog.com/2025/06/16/why-all-top-up-tax-variants-in-the-eu-pillar-two-directive-collide-with-the-eus-fundamental-freedoms-and-how-to-solve-this/blog-image-4/" rel="attachment wp-att-20039" data-wpel-link="internal">Blog image 4</a>
2.3 Pillar Two top-up taxation compatible with EU treaty freedoms?
2.3.1 Top-up taxation mechanisms incompatible and non-binding
A comparison of the domestic scenario with cross-border scenarios a), b) and c) raises the question of whether the top-up taxation under the EU Pillar Two Directive in the various cross-border variants is compatible with the EU treaty freedoms. We believe it is not. Where no additional levy would be levied domestically, the EU Member State involved introduce a Pillar Two additional levy in all equivalent cross-border scenarios. All things considered, this results in a de facto restriction. According to settled case law of the Court of Justice of the EU (CJEU), a restriction of the fundamental freedoms is only permissible if such is justified by overriding reasons in the public interest and under the condition that the restriction’s operation is appropriate to ensuring the attainment of the objective pursued and does not go beyond what is necessary to attain that objective (proportionality).<a href="#_ftn34" name="_ftnref34">[34]</a> The existing justification grounds as formulated by the CJEU do not seem to provide a sufficient basis to justify the restrictions imposed under the EU Pillar Two Directive. This means that, all things considered, the Pillar Two top-up taxation is incompatible with the fundamental freedoms and therefore non-binding, and this holds under the various top-up tax mechanisms. This would hold in court under primary EU law, unless the CJEU would come to the aid of the EU Member States with a newly and yet to be developed justification ground under its rule of reason. Such would require, as the authors see it, for the CJEU to consider, and contrary to the notion of the envisaged internal market and its level playing field rationale, that the EU Pillar Two Directive would operate in the apparent general interest of the EU as a whole, whereby the Directive to that extent and for that reason alone should not be assessed as incompatible with EU law.<a href="#_ftn35" name="_ftnref35">[35]</a> In the authors’ view, such an outcome seems rather unlikely, or at least such would be hard to understand, mostly because the Directive does not actually establish a level playing field within the EU’s internal market.
2.3.2 Assessment of the directive against the freedoms
According to settled case law of the CJEU, the assessment of the compatibility of a national or secondary EU law tax measure with the EU treaty freedoms is based on the decision model as established by the CJEU in its settled case law.<a href="#_ftn36" name="_ftnref36">[36]</a> Insofar as relevant here, it is examined whether it is possible to assess the measure at hand against primary EU law. In the present case, the matter would involve an assessment of the EU Pillar Two Directive (secondary EU law) against the EU treaty freedoms (primary EU law). Under this review, it is examined whether the fact pattern concerned falls within the scope of operation of the fundamental freedoms of movement – (a) access (see section 2.3.3 below). It is then examined whether the measure at hand imposes an obstacle – (b) restriction / discrimination (see section 2.3.4 below). Subsequently, and finally, it is examined whether such a restriction or discrimination is eligible to be justified, including an assessment of whether the justification in question is suitable or appropriate for achieving the objective pursued (effectiveness) and does not go beyond what is necessary (proportionality) – (c) justification (see section 2.3.5 below).
The EU Pillar Two Directive can be assessed against EU treaty freedoms, just as any instrument of secondary EU law can be assessed against primary EU law.<a href="#_ftn37" name="_ftnref37">[37]</a> This is evident from established case law of the CJEU where the court has assessed directives and regulations against the Charter, EU state aid law, EU treaty freedoms and EU principles; all sources of primary EU law.<a href="#_ftn38" name="_ftnref38">[38]</a> It can also be deduced from the preamble to the EU Pillar Two Directive that the EU Member States (rightly) consider that the content of the EU Pillar Two Directive needs to be compatible with the fundamental freedoms.<a href="#_ftn39" name="_ftnref39">[39]</a> It should be noted that it is not entirely clear whether, and if so, to what extent, the EU legislature has some discretion in the exercise of its legislative powers with regard to directives in direct taxation matters, for instance when it comes to safeguarding primary EU law parameters, including the EU treaty freedoms. As it appears from CJEU case law, the EU legislator, under conditions and in specific cases, has allowed the EU legislature some discretion while in other cases it has not. <a href="#_ftn40" name="_ftnref40">[40]</a> The CJEU has held that: “… it is understood that, when the EU legislature adopts a tax measure, it is called upon to make political, economic and social choices, and to rank divergent interests or to undertake complex assessments. Consequently, it should, in that context, be accorded a broad discretion, so that judicial review of compliance with the conditions set out in the previous paragraph of this judgment must be limited to review as to manifest error.”<a href="#_ftn41" name="_ftnref41">[41]</a> The EU legislature’s discretion, however, is not unlimited. For example, the CJEU has explicitly stated that with regard “… to judicial review of compliance with those conditions, where interferences with fundamental rights are at issue, the extent of the EU legislature’s discretion may prove to be limited, depending on a number of factors, including, in particular, the area concerned, the nature of the right at issue guaranteed by the Charter, the nature and seriousness of the interference and the object pursued by the interference.”<a href="#_ftn42" name="_ftnref42">[42]</a> In addition, the EU legislator must always take into account the principle of proportionality, which requires ‘acts of the EU institutions be appropriate for attaining the legitimate objectives pursued by the legislation at issue and do not exceed the limits of what is appropriate and necessary in order to achieve those objective’. <a href="#_ftn43" name="_ftnref43">[43]</a>
The infringement of the EU Pillar Two Directive with the fundamental freedoms however, is so flagrant and binary (just consider the maths), as we will elaborate on below, that in the authors’ view it seems rather unlikely that the CJEU will allow for such under the EU legislator’s margin of appreciation, if any. Note that an argument based on the circumstance that the EU Member States<a href="#_ftn44" name="_ftnref44">[44]</a> are following up on an international political agreement with the EU Pillar Two Directive cannot serve as a justification either. Previously, with regard to some obligations of a public international law nature arising from the ‘principles governing the international legal order established within the framework of the United Nations’, the CJEU observed that these cannot lead to a derogation ‘from the principles of liberty, democracy and respect for human rights and fundamental freedoms … as a foundation of the Union’ [emphasis added, MdW/CW)’.<a href="#_ftn45" name="_ftnref45">[45]</a> If such applies for the framework of the United Nations we think that this should be held equally applicable with regard to some international political agreements on corporate tax policy matters involving the OECD/G20 Two-Pillar Solution.<a href="#_ftn46" name="_ftnref46">[46]</a>
The question of whether it is the national implementing legislation or the EU Pillar Two Directive itself that would be subject to review against primary EU law seems to be determined by whether the EU legislative instrument concerned calls for some ‘exhaustive harmonisation’.<a href="#_ftn47" name="_ftnref47">[47]</a> National implementing measures that relate to a matter that has been exhaustively harmonised at EU level are generally assessed against the harmonisation measure in question, the Directive that is, rather than primary EU law.<a href="#_ftn48" name="_ftnref48">[48]</a> However, such a secondary EU law legislative instrument can be tested against primary EU law itself regardless.<a href="#_ftn49" name="_ftnref49">[49]</a> As a side note, we wonder whether the EU Member States, even in an area which has been the subject of exhaustive harmonisation, would still have their own responsibility to ensure that their legislation operates in line with primary EU law, i.e., when transposing exhaustively harmonizing EU Directives into their domestic legislation. This, for example, for reasons of Union loyalty and loyal cooperation.<a href="#_ftn50" name="_ftnref50">[50]</a> We believe that it could be argued that even if EU Member States only have some limited discretion in transposing EU legislation into their national legal systems, they should still continue to monitor and ensure the compatibility of their legislative activities with primary EU law requirements. Be that as it may, it seems to us that the assessment of the EU Pillar Two Directive against primary EU law is appropriate in any case. Moreover, any national implementing legislation will be held non-binding – null and void – as well, regardless, and on the same basis as the Directive on which that domestic legislation is based, that is, if and to the extent that the CJEU declares the EU Pillar Two Directive to be incompatible with EU primary law.
The EU legislator cannot escape the operation of EU primary law in the exercise of its legislative powers and responsibilities; this, for example, by pointing at some limitations the EU legislator may have had, or may not have had, when it comes to some maneuvering room available in the establishment of some underlying corporate tax policies in this regard, i.e., with a reference to some political decision-making that had taken place outside the EU institutional framework within a forum lacking EU legislative authority.<a href="#_ftn51" name="_ftnref51">[51]</a> In the documents accompanying the proposed Pillar Two Directive, the European Commission indicates that the EU had little policy space, because political decision-making had already taken place within the Inclusive Framework, while non-IF member Cyprus had also committed itself to the Global Tax Deal in a press release.<a href="#_ftn52" name="_ftnref52">[52]</a> However, the Inclusive Framework is not a body with any democratically legitimised legislative powers, and the Inclusive Framework is also not otherwise part of the institutional framework of the EU and its law-making institutions and processes.<a href="#_ftn53" name="_ftnref53">[53]</a> There is no basis in EU law on which the EU legislator, when drafting EU legislation, could escape its responsibilities under the rule of law that guarantee and safeguard the principles and parameters of primary EU law. If some non-institutional democratic non-legitimate actor such as the Inclusive Framework were to be made part of the EU legislative process, such would utterly undermine the rule of law and the democratic foundations and values on which the legal orders of the EU Member States and those of the EU as well have been based. Therefore, we find it hard to imagine that the CJEU would go along with any such ‘it was the IF that decided’ argumentation. Indeed, it is true that the CJEU has considered in the past that the judicial review of any acts of the EU legislator in tax matters must be limited to an assessment of whether the EU legislator has made a ‘manifest error’.<a href="#_ftn54" name="_ftnref54">[54]</a> And indeed, the conflicts with the fundamental freedoms and the fragmentation of the internal market that arises from the top-up tax under the Pillar Two Directive’s jurisdictional blending model, in our opinion, could be seen as such a ‘manifest error’.<a href="#_ftn55" name="_ftnref55">[55]</a>
An example where the CJEU does not consider itself bound by any expressions of actors outside the EU legislative process, is found in the recent judgment in the Nordcurrent-case.<a href="#_ftn56" name="_ftnref56">[56]</a> In Nordcurrent, the CJEU applies the general anti-abuse rule (GAAR) of Article 1(2) EU Parent Subsidiary Directive in relation to the operation of a participation exemption regime in one of the EU Member States company tax systems. The CJEU does not make any reference to the statement of the European Commission, issued en marge of the EU legislative process when the amendments to the Directive introducing the general anti abuse rule were drafted, that these amendments “are not intended to affect national participations exemption systems in so far as these are compatible with the Treaty provisions”.<a href="#_ftn57" name="_ftnref57">[57]</a> If a statement by an EU institution outside the legislative procedural order, in this case the European Commission, cannot be attributed any interpretative value, then this applies all the more – a fortiori – to some declarations or some other documents releases by some actors lacking any EU institutional role, such as the Inclusive Framework. In other words, the Inclusive Framework is not an EU legislator and everything that happens within it consequently is not part of the acquis communautaire. It should be noted that en marge of the EU Pillar Two Directive legislative process, some informal maneuverings were initiated by the European Commission as well, as it appears, through the issuance of some declarations to guide some expressions from the Inclusive Framework into the acquis communautaire.<a href="#_ftn58" name="_ftnref58">[58]</a> Of course, that is not possible, and following the recent Nordcurrent case, these declarations seem to irrevocably suffer the same fate as the European Commission’s statement on the GAAR in Article 1(2) EU Parent Subsidiary Directive: legally irrelevant and non-binding.
2.3.3 Access
In order to achieve access to the protection of the EU treaty freedoms, treaty standing that is, the economic operator concerned and its operations, according to settled case law of the CJEU, must fall within the scope of operation of the freedoms of movement. The present set of facts must fall within: (i) the personal scope; (ii) the geographical scope and (iii) the material scope of operation of the EU treaty freedoms. Notably, at that point, the CJEU does not take into account any tax saving considerations or any tax avoidance considerations on the part of the economic operator concerned.<a href="#_ftn59" name="_ftnref59">[59]</a>
Re (i) Personal scope. Legal entities located in any of the EU Member States that are subject as a constituent entity to the Pillar Two rules under the Pillar Two Directive have access to the protection of the treaty freedoms,<a href="#_ftn60" name="_ftnref60">[60]</a> i.e., insofar as it concerns legal entities established or governed by the company laws of any of the EU Member States involved (personal scope).<a href="#_ftn61" name="_ftnref61">[61]</a> In the fact patterns involved – cross-border scenarios a), b) and c) – it is a legal person (Co), established under the laws of EU Member State Q and a resident of EU Member State Q, that is subject to the top-up tax measure at issue in EU Member State Q. Co1 is subject to top-up taxation under the IIR, Co2 is subject to top-up taxation under the UTPR, and Co3 is subject to top-up taxation under the QDMTT. Co1 and Co2 and Co3 all fall within the personal scope of the freedoms as a national that is a resident of one of the EU Member States, in this case EU Member State Q.
Re (ii) Geographical scope. Legal entities within the personal scope of operation of the freedoms that move across the national borders of the EU Member States within the internal market by engaging into economic activities in other EU Member States through subsidiaries or branches, fall within the geographical scope of the TFEU’s freedoms of movement.<a href="#_ftn62" name="_ftnref62">[62]</a> Each of the fact patterns concerned – scenarios a) to c) that is – constitute a cross-border movement of an economic operator in the internal market. In every instance it is Co1 that conducts economic activities in another EU Member State through a subsidiary company. In scenario a), the EU Member State Q based Co1 operates via Co3 in EU Member State X. In scenario b), the EU Member State X based Co1 operates via Co3 in EU Member State Q. In scenario c), the EU Member State A based Co1 operates via Co2 in EU Member State Q and via Co3 in EU Member State X. All three scenarios involve cross-border economic activities within the internal market and therefore all fall within the geographical scope of operation of the treaty freedoms under the TFEU.
Re (iii) Material scope. The material scope of operation focuses on the question of the applicable treaty freedom. This question is relevant because in third-country situations – movements across the EU’s external borders – the fundamental freedoms do not apply, except for the freedom of movement of capital.<a href="#_ftn63" name="_ftnref63">[63]</a>–<a href="#_ftn64" name="_ftnref64">[64]</a> In third-country scenarios only capital movements are protected. For the sake of completeness, this holds save for the application of the standstill clause in respect of any distortive measures impeding direct investments, amongst others, that have been materially in place as per year-end 1993 (carve-out).<a href="#_ftn65" name="_ftnref65">[65]</a> In the event of a possible simultaneous application of several EU treaty freedoms, the CJEU uses a balancing approach when weighing up the freedom of movement of capital on the one hand and the free movement of goods,<a href="#_ftn66" name="_ftnref66">[66]</a> services<a href="#_ftn67" name="_ftnref67">[67]</a> and workers on the other<a href="#_ftn68" name="_ftnref68">[68]</a>.<a href="#_ftn69" name="_ftnref69">[69]</a> There, the CJEU assesses the question of the applicable freedom by reference to the freedom of movement that is predominantly encroached upon by the measure involved. In weighing up the freedom of movement of capital and the freedom of establishment<a href="#_ftn70" name="_ftnref70">[70]</a>, the CJEU uses a decision tree approach, looking at the rationale of the legislation at issue and the set of facts and circumstances at hand.<a href="#_ftn71" name="_ftnref71">[71]</a> In the case of minority interests (no decisive influence<a href="#_ftn72" name="_ftnref72">[72]</a>), the freedom of movement of capital applies.<a href="#_ftn73" name="_ftnref73">[73]</a> Third-country situations are then protected (save for the application of the standstill clause).<a href="#_ftn74" name="_ftnref74">[74]</a> In the case of majority interests (decisive influence<a href="#_ftn75" name="_ftnref75">[75]</a>), the CJEU assesses the rationale of the relevant measure in the light of the facts and circumstances of the case.<a href="#_ftn76" name="_ftnref76">[76]</a> If the tax measure at hand is aimed at the taxation of corporate groups, the measure is tested against the freedom of establishment resulting in the third-country scenario in question not being protected.<a href="#_ftn77" name="_ftnref77">[77]</a> If the tax measure at hand focuses on taxing portfolio investment returns, the measure is tested against the freedom of capital.<a href="#_ftn78" name="_ftnref78">[78]</a> If the tax measure seeks to combat tax avoidance, the measure is tested against the freedom of movement of capital.<a href="#_ftn79" name="_ftnref79">[79]</a> If the tax measure is of a generic nature, the freedom of movement of capital applies and any third-country scenarios involved are then protected under the TFEU (subject to the application of the standstill clause).<a href="#_ftn80" name="_ftnref80">[80]</a>
In the present fact patterns there is a movement across national borders within the EU, which unquestioningly falls within the material scope of operation of the EU treaty freedoms. In third-country situations, matters seem to come down to a stand-off between establishment (no protection) and capital movement (protection). Whether the protection of the freedom of movement of capital can be invoked in third-country scenarios seems legally uncertain. The reason for this lies in the ambiguity of the pursued objectives underlying the Global Minimum Tax.<a href="#_ftn81" name="_ftnref81">[81]</a> The Pillar Two rules apply to groups, where the constituent entities involved are mutually connected via a controlling interest of an ultimate parent entity (consolidation). This implies establishment. The Pillar Two rules aim to combat abuse. This implies capital movements. The Pillar Two rules aim to curb competition. This implies establishment. Perhaps the ambiguity in terms of the pursued objectives under the Pillar Two top-up tax system should lead to the conclusion that the measures have a generic rationale. That would imply capital movements and protection of any investments via group entities located in third-country situations under the EU treaty freedoms.<a href="#_ftn82" name="_ftnref82">[82]</a> What we also know is that the application of the standstill clause in the TFEU is not an issue in any case, now that the Global Minimum Tax dates from later than year-end 1993. For the remaining part, access to the protection of the EU treaty freedoms in third-country situations is mainly legally uncertain. Of course, this does not alter the fact that it is absolutely clear that intra-EU scnearios involving the operation of the Pillar Two Directive are protected by the fundamental freedoms of movement.
2.3.4 Restriction/discrimination
According to established case law of the CJEU, the EU treaty freedoms protect against restrictive and discriminatory measures.<a href="#_ftn83" name="_ftnref83">[83]</a> It is relevant in this regard to assess whether the measure in question treats cross-border scenarios more disadvantageously from a company tax point of view in comparison to equivalent domestic scenarios.<a href="#_ftn84" name="_ftnref84">[84]</a> For the sake of completeness, it should be noted that the CJEU sometimes examines the equality of cases in the light of the object and purpose of the measure in question.<a href="#_ftn85" name="_ftnref85">[85]</a> However, in our opinion, such an approach is analytically erroneous. This is because the measure at issue, including its rationale or objective upon which the difference in treatment is based, is the subject of the analysis involved and therefore analytically cannot be considered part of the reasoning potentially justifying any such a difference in treatment. If the rationale of a discriminatory measure at hand could serve as a justification of its discriminatory nature, any difference in treatment accordingly would not constitute discrimination or an obstacle under EU law rendering the protection of the EU treaty freedoms obsolete (‘you are not being discriminated against, since you are intended to be treated differently’). This is analytically (and in our opinion also in a more legal-philosophical sense) rather problematic, as it transforms the problem into an argument for denying the problem.
The restrictive and discriminatory effect of the Pillar Two additional levies in the facts patterns concerned are binary and hence evident, at least to us. Domestic and foreign group entities (Co1, Co2, Co3) are comparable since they all fall within the operational scope of the EU Pillar Two Directive. Both domestic and multinational groups are subject to the Pillar Two rules, and in both situations, the Pillar Two rules provide for top-up taxes levies where considered appropriate under the jurisdictional blending model.<a href="#_ftn86" name="_ftnref86">[86]</a> The cross-border situations in scenarios a), b) and c) are nevertheless all treated differently by the EU Member State involved (EU Member State Q) as compared to the domestic situation. Top-up tax is levied in the cross-border scenario, but not in the equivalent domestic scenario. In scenario a), the EU Member State Q based Co1 is restricted from investing in EU Member State X via Co3, due to the operation of the income inclusion rule (IIR).<a href="#_ftn87" name="_ftnref87">[87]</a> In scenario (b), the EU Member State Q based Co3 is discriminated against on the basis that its EU Member State Q investing parent company, Co1, is resident in EU Member State X (second-tier discrimination), due to operation of the domestic minimum top-up tax (QDMTT).<a href="#_ftn88" name="_ftnref88">[88]</a> In scenario (c), the EU Member State Q based Co2 is discriminated against on the basis that its parent company, Co1, which invests in EU Member State X through Co3 is established in EU Member State A, due to the operation of the undertaxed profit rule (UTPR) (second-tier discrimination).<a href="#_ftn89" name="_ftnref89">[89]</a>
An equal level of taxation at home and across borders within the EU is not achieved.<a href="#_ftn90" name="_ftnref90">[90]</a> In the domestic scenario, 1,500 (100%) tax is levied and in the cross-border scenarios 1,750 (116.67%; 1750/1,500*100%). A distinction is made between domestic and cross-border investments within an internal market without internal borders. The imposition of differential treatment has its foundation in the application of the concept of jurisdictional blending instead of regional blending.<a href="#_ftn91" name="_ftnref91">[91]</a> A differential tax treatment arises on the sole ground that Co3 operates in another EU Member State (Co3, cross-border scenario) instead of EU Member State Q (Co3, domestic scenario). Domestically, the 5 percentage points of headroom in the hands of Co1 and Co2 (effective rate 20%) is available to compensate for the stand-alone low-tax burden of Co3 (stand-alone effective rate of 10%). Domestically, no top-up taxation is levied, neither in the hands of Co1 nor elsewhere in the group (total tax 1,500). Across national borders, however, the 5 percentage points headroom in the hands of Co1 and Co2 is not available to compensate for the stand-alone low-tax burden of Co3. Across national borders, top-up taxation is levied, in scenario a) in the hands of Co1, in scenario b) in the hands of Co3, and in the hands of Co2 in scenario c). This is done by imposing the top-up tax under the income inclusion rule, domestic minimum top-up tax, and undertaxed profit rule respectively (250 additional tax each). The Pillar Two top-up tax imposed by the Member State concerned in the domestic scenario is nil and 250 in the cross-border scenario. The total combined corporate income tax and Pillar Two tax in the cross-border scenario is therefore 1,750 instead of the 1,500 in the domestic situation. The math is quite clear.
There is no equal treatment, while there are equal circumstances. The difference in treatment compared to the domestic base case scenario arises solely because of the drawing of EU internal borders between Co1 and Co2 and Co3 in the various cross-border scenarios. In an internal market without internal frontiers under the fundamental freedoms of movement, the introduction of such a variable should not have any effect in terms of top-up taxes imposed by EU Member State Q. In the present facts, due to the Pillar Two top-up taxation for Co1, Co3 and Co2 respectively, the cross-border group involved is confronted with tax-inequality from the perspective of the investment jurisdiction (no import neutrality). The cross-border group involved is also confronted with tax-inequality from the perspective of the investor jurisdiction (no export neutrality). The Pillar Two Directive accordingly distorts both inbound and outbound investment within the internal market, an area where a level playing field supposedly is protected against government induced impediments.
The Pillar Two top-up taxation in the three cross-border scenarios resulting from the IIR, QDMTT and UTPR respectively, makes it less attractive for groups to operate within the internal market. The EU Pillar Two Directive impedes cross-border investment (capital, establishment) through controlled subsidiaries in the territories of the EU. This is a clear breach of the fundamental right to free movement under the TFEU. It should be noted that in some specific circumstances, the effective tax rate for Pillar Two purposes needs to be calculated on a stand-alone basis in the hands of a single constituent entity, Co 3 for instance, in domestic scenarios as well. This applies, for example, to investment entities. However, such a single constituent entity effective tax rate calculation for Pillar Two purposes is the exception, not the rule. This means that the EU Pillar Two Directive imposes at least a de facto restriction/discrimination of the freedoms of movement.<a href="#_ftn92" name="_ftnref92">[92]</a>
2.3.5 Justification
According to settled case law of the CJEU, under the rule of reason, any restrictive or discriminatory tax measures (in addition to the treaty exceptions that are less relevant in the direct tax domain) can be ‘justified by overriding reasons in the public interest’, provided that ‘they are appropriate for ensuring the attainment of the objective pursued’ and ‘do not go beyond what is necessary to achieve that objective’.<a href="#_ftn93" name="_ftnref93">[93]</a> Under EU law as it currently stands, the CJEU essentially recognises three types of justification grounds: (i) integrity of the tax base, (ii) combating tax abuse and (iii) effectiveness of tax audits (fiscal supervision).
Re (ii) Integrity of the tax base. By the justification ground referred to in this paper as ‘integrity of the tax base’, we refer to the collection of justifications as accepted by the CJEU in its case law under various terms such as ‘territoriality principle’,<a href="#_ftn94" name="_ftnref94">[94]</a> ‘coherence of the tax system’ (fiscal coherence),<a href="#_ftn95" name="_ftnref95">[95]</a> ‘need to safeguard symmetry’,<a href="#_ftn96" name="_ftnref96">[96]</a> ‘balanced allocation of taxing powers’,<a href="#_ftn97" name="_ftnref97">[97]</a> whether or not in combination with the ‘risk of tax avoidance’.<a href="#_ftn98" name="_ftnref98">[98]</a> As we see it, the terms included in this collection all amount to more or less the same thing.<a href="#_ftn99" name="_ftnref99">[99]</a> In all these cases, the CJEU finds it justified for the EU Member States to take measures in their tax systems to ensure that domestic income is effectively taxed and foreign income is effectively not taxed. Put differently, the CJEU allows the EU Member States to include domestic ‘losses’ and ‘profits’ in their tax jurisdiction. And, the CJEU allows the EU Member States to keep foreign ‘losses’ and ‘profits’ out of it.<a href="#_ftn100" name="_ftnref100">[100]</a> Territoriality, therefore, or the right of an EU Member State to, to certain extent, fence off its tax base.<a href="#_ftn101" name="_ftnref101">[101]</a> In all cases, however, the chosen measure must be appropriate and proportionate.<a href="#_ftn102" name="_ftnref102">[102]</a>
In the present fact patterns, however, the integrity of the domestic tax base is not at stake, and not at all actually, and hence is ineligible to be invoked. On top, any arguments based on the integrity of the tax base cannot serve to justify arbitrary taxation in view of the proportionality test which applies as well. The Pillar Two top-up taxation in scenarios a) and c) concern extraterritorial additional levies (IIR, UTPR). In these scenarios, EU Member State Q effectively levies taxes on foreign profit components of group entities located abroad, albeit that the top-up taxation technically is collected in the hands of a resident constituent entity. In scenario a) this is done via the application of the IIR, and in scenario c) this is done via the application of the UTPR. The extraterritorial nature of the Pillar Two top-up taxes under the aforementioned top-up tax mechanisms (taxation of foreign source income) entails that these cannot be qualified as an appropriate and proportionate tax levy aimed at protecting the integrity of the domestic tax base of the EU Member State (in this case, the base of EU Member State Q). After all, it is not the domestic basis that is envisaged to be protected here, it is the foreign tax base that is sought to be subject to a minimum level of taxation.<a href="#_ftn103" name="_ftnref103">[103]</a>
Interestingly, the integrity of the domestic tax base is also not at stake in the case of the QDMTT imposed in scenario b). It is true that top-up taxes are levied in this matter on domestic profit components (at least for Pillar Two purposes<a href="#_ftn104" name="_ftnref104">[104]</a>), but this is done in an arbitrary manner, for being based on discriminatory grounds.<a href="#_ftn105" name="_ftnref105">[105]</a> Moreover, no domestic tax base is lost here. Please let us illustrate this. Let’s assume that EU Member State Q would replace the 250 domestic minimum top-up tax imposed on Co3 in the cross-border scenario for a regular corporate tax levy of 250. If this were done only in the cross-border situation, such would undoubtedly constitute a discriminatory corporate tax measure in contradict with the TFEU’s freedoms of movement, this time however in the EU Member State’s corporate income taxation, i.e., as such a tax would not be levied domestically. In order to neutralize such a discriminatory corporate tax treatment in the corporate income tax, EU Member State Q would need to proceed to also levy 250 corporate income tax in the purely domestic benchmark scenario. Of course, EU Member State Q would be completely free to make such a decision in view of its autonomous taxing powers, however, only as long as such would be in compliance with primary EU law, i.e., not being imposed on discriminatory grounds. Be that as it may, it cannot be said here that without the aforementioned 250 tax impost solely in cross-border scenarios, any domestic corporation tax base would all of a sudden be lost. Viz., the aforementioned 250 company tax is merely added. If we were to then apply the Global Minimum Tax in that case, the Pillar Two top-up tax in the hands of Co3 would be zero. After all, the effective rate for Co3 would then be 15% ((500+250)/5,000*100%). This not only illustrates that the integrity of the domestic tax base is not at stake at all in scenario b) too, it also illustrates the arbitrariness of the Global Minimum Tax in this regard. A neutralisation of a difference in domestic/international tax treatment through corporate income taxation (250 additional corporate tax in the hands of Co3) would eliminate the Pillar Two top-up tax under the QDMTT in the cross-border scenario b). This illustrates that the analytical problem of discriminatory Pillar Two top-up taxation – only imposed in cross-border scenarios – is also rather evident in the domestic minimum top-up tax. We also note that the CJEU has held in the past that any “…compensatory tax arrangements prejudice the very foundations of the single market”.<a href="#_ftn106" name="_ftnref106">[106]</a>
Re (ii) Combating tax abuse. According to established case law of the CJEU, the fight against tax avoidance, in abstracto, is considered justified and necessary.<a href="#_ftn107" name="_ftnref107">[107]</a> However, in concreto, the tax measure in question must specifically address and target abusive situations (anti-abuse objective), while it must also function in an appropriate and proportionate manner to achieve that objective.<a href="#_ftn108" name="_ftnref108">[108]</a> This applies equivalently to both direct and indirect taxes,<a href="#_ftn109" name="_ftnref109">[109]</a> and also in the same manner with regard to both the EU directives and the EU treaty freedoms and other sources of primary EU law.<a href="#_ftn110" name="_ftnref110">[110]</a> When it comes to combating tax abuse, all roads lead to Rome, or perhaps the CJEU in Luxembourg. Anti-tax abuse considerations – although admittedly a moving target substantively – are not so easily eligible to be invoked according to settled case law of the CJEU (ultimum remedium). Matters must involve a (merely) tax induced use of (wholly) artificial transactions and/or structures or arrangements (subjective element; intent) contrary to the object and purpose of EU law (objective element; spirit of the law).<a href="#_ftn111" name="_ftnref111">[111]</a> The (EU) legislator may make use of presumptions of evidence and include the presumption of an abusive motive involving artificial arrangements (‘objective test’, part of the subjective element of the CJEU’s ‘tax abuse’- analysis), although the measure at hand must be sufficiently specific and allow for a rebuttal of the presumption.<a href="#_ftn112" name="_ftnref112">[112]</a> In that regard, it is primarily for the tax authorities of the relevant EU Member State involved to establish the existence of tax abuse by means of an artificial arrangement in a given case. Subsequently, taxpayers must be given the opportunity to refute any tax avoidance motives by means of a rebuttal mechanism (‘subjective test’, part of the subjective element of the CJEU’s ‘tax abuse’- analysis).<a href="#_ftn113" name="_ftnref113">[113]</a> The CJEU requires a case by case analysis based on all relevant facts and circumstances, which also needs to be performed on a continuous basis.<a href="#_ftn114" name="_ftnref114">[114]</a>
In the present fact patterns, top-up taxes are levied in a restrictive and discriminatory manner, while abuse by no means is an unabated matter. Above, we set forth that the objective of the Global Minimum Tax is somewhat ambiguous. The top-up tax measures seek to address tax avoidance while also envisaging a curbing of tax competitive responses by countries and companies. Company tax harmonisation is sought to be achieved by means of a lower limit of taxation by reference to a minimum effective tax rate on a per-country basis, while an arbitrary top-up tax has been put in place that differs in treatment between cross-border scenarios vis-á-vis domestic scenarios in the internal market. The ambiguity of objectives raises the question of whether the Global Minimum Tax, actually, is sufficiently aimed at combating abuse, at least to such an extent that it can be questioned whether this justification becomes available in the first place – from a primary EU law perspective that is. According to settled case-law of the CJEU, for a restriction on the fundamental freedoms to be justified on the ground of the prevention of abuse, the measure at issue must be targeted to “… prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.”<a href="#_ftn115" name="_ftnref115">[115]</a> Is the Global Minimum Tax sufficiently tailored for such? We are not sure. And assuming that the Global Minimum Tax is sufficiently tailored to tackle tax abusive practices, then the subsequent question arises whether the chosen set of instrumentation – the Pillar Two top-up tax mechanisms – to achieve this end operates in an appropriate and proportionate manner. We honestly do not think this is the case (let alone the various planning opportunities identified in the Pillar Two domain<a href="#_ftn116" name="_ftnref116">[116]</a>). The Global Minimum Tax operationalises an irrebuttable presumption of proof of ‘abuse’ solely based on the calculation of an effective tax rate for Pillar Two purposes in the various scenarios. No analysis is made based on facts and circumstances. No reference is made to a test based on the intention of the taxpayer (or group) to unduly obtain a tax advantage, nor is there any possibility available for a rebuttal of the presumption of abuse. All this starkly contradicts settled case-law of the CJEU on this matter.<a href="#_ftn117" name="_ftnref117">[117]</a> Notably, also the Substance-Based Income Exclusion<a href="#_ftn118" name="_ftnref118">[118]</a> is based on an irrefutable presumption that abuse is there in the presence of intangible capital and intangible asset utilization by the multinational company involved in any jurisdiction, while the Substance-Based Income Exclusion is designed in such a way that it implies that, even in the presence of labour and fixed assets in a jurisdiction, tax avoidance is deemed present beyond a cost-plus yield on wage costs and fixed asset book values. In our opinion, this can hardly be called sufficiently specific. After all, proceeds from intangible capital, intangible assets and excess profits are not necessarily artificially tax-evaded investment returns. In addition, the EU Pillar Two Directive does not allow taxpayers to refute the assumption of avoidance nor are they given the opportunity to provide evidence demonstrating the existence of economic, financial or any other commercial reasons. In that light, the Global Minimum Tax reveals itself as operating rather disproportionally, as a quite bluntly operating one size fits all top-up tax mechanism rather than the tailor made solution to target abusive tax practices as the proportionality test requires under settled case law of the CJEU.
Re (iii) Effectiveness of tax audits. According to established case law of the CJEU, the necessity for the EU Member States to be able to effectively supervise taxpayer behaviour may provide a justification for an imposed restriction as well.<a href="#_ftn119" name="_ftnref119">[119]</a> The acceptance of this basis for justifying a restriction or discrimination imposed lies in the appreciation under EU law of any administrative difficulties that the tax authorities of the EU Member States concerned may incur in their attempts to effectively collect taxes due to secure needed resources for government spending. This justification ground is particularly relevant in relation to third countries. Within the EU, the room available for invoking this justification ground is rather limited though. The CJEU allows EU Member States to require taxpayers to provide evidence for verification purposes. However, the rules of evidence must be clear and precise.<a href="#_ftn120" name="_ftnref120">[120]</a> In doing so, the EU Member States may not impede the freedoms of movement too much, as the rules of evidence need to operate proportionally.<a href="#_ftn121" name="_ftnref121">[121]</a> Categorical obstructions on administrative grounds is not permitted.<a href="#_ftn122" name="_ftnref122">[122]</a> In third-country scenarios, there is more room for this justification ground to be invoked by the EU Member States, as third-country scenarios and intra-EU situations occur within a different legal context according to the CJEU.<a href="#_ftn123" name="_ftnref123">[123]</a> Under the EU treaty freedoms as they currently stand, any restrictions and discriminations imposed in third-country scenarios can in principle be justified if no administrative cooperation mechanisms have been put in place in relation to the third country concerned on the basis of some public international law instruments. The basis for the justification is that the tax authorities otherwise do not have an appropriate enforcement tool available in such cases to be able to exercise their supervisory tasks.<a href="#_ftn124" name="_ftnref124">[124]</a> Within the EU such an argument is unavailable in view of the mutual assistance in direct tax matters under the Adminsitrative Cooperation Directive.
In the present facts patterns, any concerns about the lack of control possibilities in the Pillar Two domain, however, are not present, at least not within the EU, since all relevant information needed to monitor taxpayer behaviour is already readily available. The EU Pillar Two Directive provides for an top-up tax information return, a standardised administrative form developed within the Inclusive Framework that in-scope multinationals must complete and provide to the tax authorities. The Top-up tax return provides an information collection framework as a basis for tax authorities to be able to verify Pillar Two calculations provided, to determine Pillar Two top-up tax obligations and to perform appropriate risk analyses. The tax authorities then exchange the data with each other on the basis of a multilateral information-sharing framework. Within the EU, the information exchange has been organised through an amendment to the Administrative Cooperation Directive, on which the EU Member States reached a political agreement on 11 March 2025.<a href="#_ftn125" name="_ftnref125">[125]</a> For third-country situations, the Inclusive Framework published a multilateral information exchange framework based on the Convention on Mutual Administrative Assistance in Tax Matters, a so-called Multilateral Competent Authority Agreement (MCAA), on 15 January 2025.<a href="#_ftn126" name="_ftnref126">[126]</a> There, too, access to tax information and data seems to be guaranteed, at least in relation to those Inclusive Framework member jurisdictions that join the MCAA in line with the political agreement under the 2021 Global Tax Deal. As a result, the path to this justification ground seems at best to be a declining matter, at least already within the EU it is, and in third-country situations too under the freedom of movement of capital depending on whether the third countries concerned join the international exchange framework.
2.3.6 Anticipating some new justification grounds?
The justification grounds available under the rule of reason as it currently stands seem insufficient to justify the impediments imposed under the Pillar Two Directive’s top-up taxation mechanisms. It cannot be ruled out however that the CJEU in due course, if requested, will develop some new justification grounds or alter some of the existing justification grounds to justify the distortive effects of the operation of the EU Pillar Two Directive.
Perhaps the CJEU at some point will develop an argument aimed at protecting the ‘integrity of the EU tax base’, or perhaps the achievement of an ‘EU minimum level of taxation for reasons of anti-tax competition and anti-tax abuse’. A complicating element, however, is that the Pillar Two Directive also under such a justification ground still not actually create a level playing field in the internal market. On the contrary, the fragmentation under the jurisdictional blending model would still distort a proper functioning of the internal market without internal frontiers. Cross-border scenarios would still be treated less favorably than domestic scenarios, even in the light of such newly developed justifications, and that simply stands at odds with the principle of proportionality under EU law<a href="#_ftn127" name="_ftnref127">[127]</a> – even under some potential considerations of establishing some EU company tax base that would need to be protected or whatever other to be devised argument to justify the discriminatory and restrictive top-up tax treatment. In that light, it would perhaps be more apparent to envisage that the CJEU, when called upon, will require the EU Member States to actually equalize the minimum level of taxation within the internal market, i.e., via some sort of regional blending for Pillar Two purposes instead of some market fragmenting jurisdictional blending model as the EU Pillar Two Directive has currently put in place. Only then a level playing field in EU company taxation would actually be achieved.
If at some point the CJEU were to refer to anti-competition considerations as a newly devised justification ground at some point, notwithstanding any aforementioned level-playing field considerations, such would raise the question as to the sustainability of such a line of argument. This is in the light, for example, of the recent developments at EU institutional levels since the Draghi report on Europe’s loss of competitiveness and the renewed ambitions of the EU institutions to revive the competitiveness of the internal market, through deregulation, tax simplification and the introduction of tax incentives based on a more flexible EU state aid framework.<a href="#_ftn128" name="_ftnref128">[128]</a> A minimum company tax system fragmenting the internal market alongside domestic tax borders just does not fit nicely in the narrative here. If any newly developed rule-of-reason justifications were to be formed along the lines of competitiveness reasonings, the EU Pillar Two Directive does not seem to us to be the most appropriate and proportionate instrument to achieve such objectives.
2.4 Solutions
We’ll see. For the time being, the top-up tax mechanisms under the EU Pillar Two Directive seems to be incompatible with the fundamental freedoms under primary EU law as it currently stands, as these top-up taxes discriminate cross-border economic activities against domestic economic activities. The restrictive tax treatment is most evident in the top-up taxation under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). And on some closer inspection the same applies for the Qualified Minimum Domestic Top-Up-Tax (QDMTT). Note that the same issues (the de facto unjustifiable obstacle) arise in various other mechanisms in the EU Pillar Two rulebook. The distortive effect of jurisdictional blending can for instance also be seen, amongst others, in the calculation of the Substanced-Based Income Exclusion. This is because only the costs for local use of labour (i.e., not: use of labour in other EU Member States) and tangible assets (i.e., not: use of assets in other Member States) are included in the calculations of the top-up tax free allowance. This puts pressure on the utilization of labour and capital within the internal market in cross-border scenarios. There, too, the lack of regional blending in the EU Pillar Two Directive takes its toll.
So, how could all this be solved? A rather simple solution could be to recognise the EU as a single jurisdiction for Pillar Two purposes (EU jurisdictional blending). If the free movement of capital would prove to be eligible to be invoked as well, which does not seem inconceivable to us, then a global blending model would have to be introduced to alleviate any primary EU law tensions. Whatever the matter, in both cases the EU Pillar Two Directive will have to be amended, at least in such a manner that the EU is considered a single jurisdiction for Pillar Two purposes. Only under a regionally blended model no top-up taxes would be levied in any of the cross-border scenarios a), b) and c) mentioned above, akin to the manner in which no top-up taxes would be due in any of the equivalent domestic scenarios. And in order to persuade third countries to respect all of this and not start top-up taxing themselves, the OECD Pillar Two Model Rules and the Commentary to the Pillar Two Model Rules devised within the Inclusive Framework would need to be adapted accordingly as well. The same would hold for any of the domestic Pillar Two rulebooks in the various Pillar Two implementing countries outside the EU. A further modification of the rules towards a global blended model, we note, would secure a full appreciation of the application of the freedom of capital in third-country scenarios. The advantage of this approach, perhaps, would be that the EU’s Pillar Two rules would accordingly be moving towards mirroring the American minimum tax variant, the US GILTI rules.
An alternative, second, approach would be to do nothing and sit still and wait for developments to come. Maybe the CJEU will come to the aid of the EU Member States in due course, with a newly devised justification ground under the rule of reason. For now, we find that hard to imagine nor do we think this would be a preferable option, for the simple reason that such would allow for a tax-induced fragmentation of the internal market hindering intra-EU investment. Taxpayers who are confronted with a breach of their fundamental freedoms under EU law on this scale should not be forced to engage in years of legal proceedings. And EU Member States should be given the opportunity to correct the flaws identified, for example, for reasons of Union loyalty and loyal cooperation.
A third solution, and this would be our preference, would be to annul the EU Pillar Two Directive and replace it with something that does work. A fault confessed is half redressed. Although we recognize of course that a lot of European political capital has been invested into the Pillar Two Directive, abolishing EU legislation is not impossible. In the past, for example, the Savings Interest Directive was abolished in view of the changes made to the Administrative Cooperation Directive (common reporting standard).<a href="#_ftn129" name="_ftnref129">[129]</a> As far as we are concerned, it would be preferable if the EU Member States would then first return to the drawing board in order to reform their corporate tax systems towards a competitive EU-wide corporate tax system on the basis of well-considered policy considerations and tax law design and drafting. Then the EU Member States would have to agree on the proper foundational building blocks for such an EU company tax framework. Questions worth asking, then, would be the following. Who should become the taxpayer under such a framework? Do we want to tax bodies corporate (separate accounting) or do we want to tax economic entities, corporate groups (unitary combination)? What should the tax base be? Do we want to use profit as a basis, excess profit (economic profit), gross profit (EBIT), turnover (turnover), or cash flows (cash flows)? How should the tax base then be distributed among jurisdictions? Do we want to distribute tax base along the supply side (production factors; origin) or perhaps (also?) along the demand side (market; destination)? Do we want to apply an endogenous distribution key (transfer pricing) or do we want to use an exogenous distribution key (formulary apportionment)? Do we want to harmonise the rates, or do we prefer to leave that to the individual Member States?
<h4>3 Final remarks</h4>
In this contribution, we operationalize a concrete numerical example to explain why all top-up tax variants under the EU Pillar Two Directive collide with the very notions of the internal market and the fundamental freedoms as matters currently stand. Under both the IIR and UTPR as well as the QDMTT, we have highlighted some stark differences in top-up tax treatment between domestic and cross-border scenarios. These differences result in unjustified de facto restrictions of the freedoms of movement. Seen from an internal market perspective, the core of the legal deficit in the Global Minimum Tax and with that the Pillar Two Directive lies in the chosen approach of jurisdictional blending on the basis of which top-up taxation is determined on a per country basis, while the internal market is about creating an area without internal borders within which factors of production and goods and services should be able to move freely (regional blending).
Some possible means to solve the issues created under the Pillar Two Directive as it currently stands include the introduction of regional blending (EU blending) or even global blending for that matter, to secure compliance with the freedom of movement of capital. Or, perhaps better, the abolition of the EU Pillar Two Directive with a subsequent introduction of a well-designed adequately functioning harmonised corporate tax framework for the internal market.<a href="#_ftn130" name="_ftnref130">[130]</a> We believe that the solution to the international company tax issue lies in fundamental system redesign, a putting in place of a fair and neutral business tax system validated on the basis of a democratically legitimised tax legislative process that is guaranteed by the rule of law. Any such transformation requires a well-thought-out company tax reform initiative. Without such fundamental and well-thought-out tax system design, there is a risk, we fear, of cutting and pasting from all those directive proposals that have passed by in recent years such as CCCTB/BEFIT, Unshell, DEBRA, HOTS, TP, and the Digital Tax Package from 2018,<a href="#_ftn131" name="_ftnref131">[131]</a> all of which initiate various kinds of problems of their own. We’ll see.
<a href="#_ftnref1" name="_ftn1">[1]</a> Erasmus University Rotterdam (EUR) and PwC Rotterdam. The author can be reached via dewilde@law.eur.nl.
<a href="#_ftnref2" name="_ftn2">[2]</a> University of Amsterdam (UvA). The author can be reached via c.wisman@uva.nl. The copy was closed on 10 June 2025. A Dutch language version of the article has been published in a Dutch law journal (NL Fiscaal Wetrenschappelijk, NLF-W 2025/18) under the title ‘Waarom alle bijheffingsvarianten in de EU Pijler 2-Richtlijn botsen met de EU-verdragsvrijheden (en hoe dit op te lossen)’.
<a href="#_ftnref3" name="_ftn3">[3]</a> See Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (EU Pillar Two Directive).
<a href="#_ftnref4" name="_ftn4">[4]</a> An overview of the national transposition measures as communicated by the EU Member States is available via https://eur-lex.europa.eu/legal-content/EN/NIM/?uri=oj%3AJOL_2022_328_R_0001.
<a href="#_ftnref5" name="_ftn5">[5]</a> See, for example, points 3 to 6 Preamble of the EU Pillar Two Directive.
<a href="#_ftnref6" name="_ftn6">[6]</a> See OECD/G20 Base erosion and profit shifting project, Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, 8 October 2021 (October 2021 Statement). For a commented overview of the developments from the proposals and the political agreement to the present, see, for example, in Dutch, M.F. de Wilde, ‘Van BEPS tot de Wet minimumbelasting 2024, Een kroniek in commentaren’, Den Haag, SDU.
<a href="#_ftnref7" name="_ftn7">[7]</a> The OECD/G20 Inclusive Framework currently consists of 147 states.
<a href="#_ftnref8" name="_ftn8">[8]</a> See, among others, L. De Broe and M. Massant, ‘Are the OECD/G20 Pillar Two GloBE-Rules Compliant with the Fundamental Freedoms?’, EC Tax Review, Volume 30, Issue 3 (2021) pp. 86 – 98, D. Weber, ‘Some remarks about the difference in the EU legality review between unilateral measures of the EU Member States and multilateral measures of the EU legislator, with special attention to the EU GLoBE Directive’, in P. Pistone (ed.), Building Global International Tax Law; essays in honour of Guglielmo Maisto, IBFD, Amsterdam, 2022, pp. 471-481, J. Englisch, ‘Dynamic References to International Soft Law Agreements: Flexibility With Limits’, EC Tax Review, Volume 33, Issue 1 (2024) pp. 2 – 7, G. Kofler, The ‘Decluttering’ of EU Direct Tax Law, EC Tax Review, Volume 34, Issue 1 (2025) pp. 2 – 7, J. English, ‘Non-harmonized Implementation of a GloBE Minimum Tax: How EU Member States Could Proceed’, EC Tax Review, Volume 30, Issue 5/6 (2021) pp. 207 – 219, W. Haslehner, ‘The Costs of Pillar 2: Legitimacy, Legality, and Lock-in’, Intertax, Volume 51, Issue 10 (2023) pp. 634 – 637, F. Debelva en L. de Broe, ‘Pillar 2: An Analysis of the IIR and UTPR from an International Customary Law, Tax Treaty Law and European Union Law Perspective’, Intertax, Volume 50, issue 12 (2022), pp. 898-906, V. Chand, A. Turina en K. Romanovska, ‘Tax Treaty Obstacles in Implementing the Pillar Two Global Minimum Tax Rules and a Possible Solution for Eliminating the Various Challenges’, World Tax Journal 2022 (Volume 14), No. 1, M.P. Devereux en J. Vella, ‘The Impact of the Global Minimum Tax on Tax Competition’, World Tax Journal 2023 (Volume 15), No. 3, J.F. Pinto Nogueira, ‘GloBE and EU Law: Assessing the Compatibility of the OECD’s Pillar II Initiative on a Minimum Effective Tax Rate with EU Law and Implementing It within the Internal Market’, World Tax Journal 2020 (Volume 12), No. 3, Nogueira, J. F. P. & Turina, A., Feb 2021, Global minimum taxation?: an analysis of the anti-base erosion initiative. Perdelwitz, A. & Turina, A. (eds.). Amsterdam: International Bureau of Fiscal Documentation (IBFD), p. 283-314 32 p. (IBFD Tax Research Series). T.M. Vergouwen, ‘De reikwijdte van de verplichting tot (bij)heffing op grond van de Pijler 2-richtlijn in relatie tot derde staten in het licht van het arrest Generalstaatsanwaltschaft München’, NLF-W 2023/25, S. Pancham, ‘De Pillar 2-heffing en belastingverdragen. Toch geen strijdigheid?’, NLF Opinie 2023/4, L. van Heijningen, ‘Ongeschreven internationaal fiscaal gewoonterecht, de Nederlandse rechtsorde en de UTPR’, NLF-W 2024/11, M.J.A.M. van Gijlswijk en L. van Heijningen, ‘De (ir)relevantie van de wetsgeschiedenis bij de uitleg van implementatiebepalingen’, NLF-W 2022/18, G.K. Fibbe en M.M. Makkinje, ‘De Wet minimumbelasting 2024 en de verhouding tot artikel 1 EP EVRM’, WFR 2023/32, J. R. Goudsmit en L.C. van Hulten, ‘Pijler 2: enkele verdragsaspecten’, WFR 2023/41, L. den Ridder, ‘Europeesrechtelijke knelpunten van de Income Inclusion Rule (Pillar 2)’, WFR 2021/104, H. Vermeulen, ‘Heffingsvarianten van de Wet minimumbelasting 2024’, TFO 2024/192.1, T.M. Vergouwen, ‘De interactie tussen richtlijnen en belastingverdragen: drie casusposities’, MBB 2024/45, S.R. Panham en G.K. Fibbe, ‘Pillar 2: de CFC-regeling in de Wet minimumbelasting 2024’, MBB 2023/33 and M.M. De Reus, D. Salehi, H. Vermeulen en C. Wisman, ‘De Wet minimumbelasting 2024 (Pijler 2)’, FED Fiscale Brochures, Kluwer.
<a href="#_ftnref9" name="_ftn9">[9]</a> See M.F. de Wilde and C. Wisman, ‘OECD Consultations on the Digital Economy: “Tax Base Reallocation” and “I’ll Tax If You Don’t”?’ In P. Pistone & D. Weber (eds.), Taxing the Digital Economy: The EU Proposals and Other Insights (pp. 3-26). (EATLP International Tax Series). IBFD, August 2019. Also see M.F. de Wilde en C. Wisman, ‘OESO-consultatie digitale economie: ‘grondslagherverdeling’ en ‘ik belast wat jij niet doet’?’, NLF-W 2019/1.
<a href="#_ftnref10" name="_ftn10">[10]</a> See Preamble EU Pillar Two Directive point 6: “This Directive should also apply to large-scale purely domestic groups. In that way, the legal framework would be designed to avoid any risk of discrimination between cross-border and domestic situations.”.
<a href="#_ftnref11" name="_ftn11">[11]</a> See Articles 1 and 2 of the EU Pillar Two Directive.
<a href="#_ftnref12" name="_ftn12">[12]</a> See Proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union {SWD(2021) 580 final, Brussels, 22.12.2021 COM(2021) 823 final, 2021/0433 (CNS), p. 3 and 8: “Finally, the measures to implement the OECD Model Rules have to be enacted in accordance with primary law and follow a common line across the Union, to provide taxpayers with legal certainty that the new legal framework is compatible with the EU fundamental freedoms, including the freedom of establishment. … … While the Directive, in general, closely follows the OECD Model Rules, it extends its scope to large-scale purely domestic groups, in order to ensure compliance with the fundamental freedoms.”.
<a href="#_ftnref13" name="_ftn13">[13]</a> See, for example, CJEU 8 March 2017, Case C-14/16 (Euro Park Service). For an analysis of the scope for reviewing the implementing legislation of the EU Member States or secondary EU law against primary EU law, see, for example, H. Vermeulen, ‘Het Unierechtelijke en anderszins verdragsrechtelijk gewaarborgde evenredigheidsbeginsel. Alle wegen leiden naar Rome’, NTFR 2023/1839.
<a href="#_ftnref14" name="_ftn14">[14]</a> See, for example, CJEU 26 October 2010, Case C-97/09 (Ingrid Schmelz), paragraph 50: “It should be noted, in addition, that the prohibition on restrictions on freedom to provide services applies not only to national measures but also to measures adopted by the European Union institutions (see, by analogy in relation to the free movement of goods, Case C‑114/96 Kieffer and Thill [1997] ECR I‑3629, paragraph 27 and case‑law cited). ‘; And more recently, CJEU 8 December 2022, C-694/20 (Orde van Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA).
<a href="#_ftnref15" name="_ftn15">[15]</a> See M.F. de Wilde & C. Wisman, ‘OECD Consultations on the Digital Economy: “Tax Base Reallocation” and “I’ll Tax If You Don’t”?’, In P. Pistone, & D. Weber (Eds.), Taxing the Digital Economy: The EU Proposals and Other Insights (pp. 3-26). (EATLP International Tax Series). IBFD, August 2019
<a href="#_ftnref16" name="_ftn16">[16]</a> See October 2021 Statement: “The GloBE rules will have the status of a common approach. This means that IF members: • are not required to adopt the GloBE rules, but, if they choose to do so, they will implement and administer the rules in a way that is consistent with the outcomes provided for under Pillar Two, including in light of model rules and guidance agreed to by the IF; • accept the application of the GloBE rules applied by other IF members including agreement as to rule order and the application of any agreed safe harbours“. See OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris, http://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-december-2023.pdf, p. 4.
<a href="#_ftnref17" name="_ftn17">[17]</a> The Dutch legislator itself speaks of ‘very limited national policy space’, see, for example, Parliamentary Papers II, 36 369, no. 3, p. 3 and 55. The legislator also indicates that this limited policy space for the individual EU Member States can be explained by the fact that the EU Pillar Two Directive is largely based on the OECD Model Rules and the international political agreement on them. See Parliamentary Papers II, 36 369, no. 3, p. 59.
<a href="#_ftnref18" name="_ftn18">[18]</a> Ibidem.
<a href="#_ftnref19" name="_ftn19">[19]</a> See Article 288 TFEU, “A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.“.
<a href="#_ftnref20" name="_ftn20">[20]</a> See for example “… designed to address the continued risk of profit shifting“, OECD/G20 Base Erosion and Profit Shifting Project Addressing the Tax Challenges of the Digitalisation of the Economy – Policy Note, 23 January 2019 and “…establishes a floor on corporate tax competition“, OECD/G20 Base Erosion and Profit Shifting Project Outcome Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy 11 July 2023. See ” … to put an end to tax practices that allow MNEs to shift profits to jurisdictions where they are not taxed or are taxed very low, … create a floor for competition with corporate tax rates.’, point 2, Preamble EU Pillar Two Directive. The Dutch legislator also refers to these as the objectives of Pillar 2, see Parliamentary Papers II, 2022–2023, 36 369, no. 3, p. 2. The possible budgetary impact seems to have played hardly any role for the Netherlands, Parliamentary Papers I, 2023–2024, 36 369, C, p. 5.
<a href="#_ftnref21" name="_ftn21">[21]</a> See also C. Wisman, ‘Over de Unierechtelijke (on)houdbaarheid van het ‘effectief belastingtarief’ en de ‘bijheffing’ van de WMB 2024’, TFO 2024/192.2.
<a href="#_ftnref22" name="_ftn22">[22]</a> See Articles 26 and 27 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law law via Articles 8.1 and 8.2 of the WMB 2024.
<a href="#_ftnref23" name="_ftn23">[23]</a> Under certain circumstances, the group must make multiple calculations for one state, for example in the case of the presence of Investment Entities. See Article 41 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 10.4 WMB 2024.
<a href="#_ftnref24" name="_ftn24">[24]</a> See Article 26 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 8.1 WMB 2024.
<a href="#_ftnref25" name="_ftn25">[25]</a> See Article 20 et seq. of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Chapter 7 of the WMB 2024.
<a href="#_ftnref26" name="_ftn26">[26]</a> See Article 15 et seq. jo. Article 20(2) EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Chapter 6 WMB 2024.
<a href="#_ftnref27" name="_ftn27">[27]</a> See Article 27 of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law law via Article 8.2 WMB 2024.
<a href="#_ftnref28" name="_ftn28">[28]</a> Note that the EU Pillar Two Directive does not comment on possible rounding, while the OECD Model Rules stipulate rounding to 4 decimal places, Article 5.1 OECD Model Rules. The Netherlands, for example, adheres to the OECD Model Rules in this and prescribes rounding to 4 decimal places, see Article 8.1 WMB 2024. See also C. Wisman, paragraph 6.2.3.1 in M.M. De Reus, D. Salehi, H. Vermeulen and C. Wisman, ‘De Wet minimumbelasting 2024 (Pijler 2)’,, FED Fiscale Brochures, Kluwer, Deventer, 2024.
<a href="#_ftnref29" name="_ftn29">[29]</a> See Article 27 jo. 28 EU Pillar Two Directive. The application is optional, see Article 45 of the EU Pillar Two Directive.
<a href="#_ftnref30" name="_ftn30">[30]</a> See Article 1(2) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 3.1 WMB 2024.
<a href="#_ftnref31" name="_ftn31">[31]</a> See Article 1(1)(a) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 4.1 WMB 2024.
<a href="#_ftnref32" name="_ftn32">[32]</a> See Article 1(1)(b) of the EU Pillar Two Directive. The Netherlands has transposed this into its domestic law via Article 5.1 WMB 2024.
<a href="#_ftnref33" name="_ftn33">[33]</a> However, we do note that an additional levy can only be regarded as a ‘qualified’ additional levy if “… does not provide any benefits that are related to those rules “, see the definitions in Article 3, sections 18, 28, and 43 of the EU Pillar Two Directive. This is also known as the ‘no benefits requirement’.
<a href="#_ftnref34" name="_ftn34">[34]</a> See for example CJEU 20 January 2021, Case C‑484/19 (Lexel AB), para. 46.
<a href="#_ftnref35" name="_ftn35">[35]</a> Cf. CJEU 25 January 1977, Case 46/76, (Bauhuis), para. 27 et seq.
<a href="#_ftnref36" name="_ftn36">[36]</a> See, for example, CJEU 4 October 2024, C-585/22 (X BV) and CJEU 8 December 2022, C-694/20 (Orde van de Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA).
<a href="#_ftnref37" name="_ftn37">[37]</a> See, for example, CJEU 8 December 2022, C-694/20 (Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA). The Dutch Supreme Court also ruled that it is possible to review EU Directives against free movement, see, in Dutch, Supreme Court 20 December 2024, ECLI:NL:HR:2024:1883. As aptly stated by Advocate General (AG) Kokott: “The hierarchy of norms is clear. The Parent-Subsidiary Directive is to be measured against the fundamental freedoms, and not vice versa.”, see AG Opinion Kokott, 14 October 2021, Case C‑556/20 (Schneider Electric SA), para. 36.
<a href="#_ftnref38" name="_ftn38">[38]</a> See, for example, CJEU 26 October 2010, C-97/09, (Ingrid Schmelz), para. 50, in which the CJEU notes in a case about the VAT Directive that the prohibition of obstacles to the free movement of services: “… applies not only to national measures but also to measures adopted by the European Union institutions.‘. Previously, the CJEU ruled in a case concerning the Regulation on statistics relating to the trading of goods that the prohibition on hindering the free movement of goods “applies not only to national measures but also to measures adopted by the Community institutions “, see CJEU 25 June 1997, C-114/96 (Kieffer and Thill), para. 27 with references to Case 15/83 (Denkavit Nederland) and Case C-51/93 (Meyhui v Schott Zwiesel Glaswerke). The CJEU also held with regard to the EU Parent Subsidiary Directive and the freedoms of movement: “It must none the less be ascertained whether restricting the scope of Directive 90/435 to exclude, from the outset, other companies which might be created in accordance with national law, as is the case with Article 2(a) of Directive 90/435 and point (f) of the annex thereto, may be regarded as invalid in the light of the articles of the Treaty which guarantee the freedom of establishment or the free movement of capital..”, CJEU 1 October 2009, C-247/08 (Gaz de France), para. 53. See also CJEU 10 December 2002, C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd) in which the CJEU held: “As a preliminary point, it ought to be borne in mind that the principle of proportionality, which is one of the general principles of Community law, requires that measures implemented through Community provisions should be appropriate for attaining the objective pursued and must not go beyond what is necessary to achieve it (see, inter alia, Case 137/85 Maizena [1987] ECR 4587, paragraph 15; Case C-339/92 ADM Ölmühlen [1993] ECR I-6473, paragraph 15, and Case C-210/00 Käserei Champignon Hofmeister [2002] ECR I-6453, paragraph 59).”, para. 122.
<a href="#_ftnref39" name="_ftn39">[39]</a> If the directive could not be assessed against the EU treaty freedoms, it would not have been legally necessary to extend the scope to domestic groups in order to avoid incompatibility with the freedoms on this point.
<a href="#_ftnref40" name="_ftn40">[40]</a> The CJEU does not seem to allow for any discretion in some cases, for example CJEU 8 December 2022, C-694/20 (Vlaamse Balies ) and in other cases to a certain extent it does, for example CJEU 14 October 2004, C-299/02 (Commission v. the Netherlands) and CJEU 10 December 2002, C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd), in which it stated: “With regard to judicial review of the conditions referred to in the previous paragraph, the Community legislature must be allowed a broad discretion in an area such as that involved in the present case, which entails political, economic and social choices on its part, and in which it is called upon to undertake complex assessments. Consequently, the legality of a measure adopted in that sphere can be affected only if the measure is manifestly inappropriate having regard to the objective which the competent institution is seeking to pursue (see, to that effect, Case C-84/94 United Kingdom v Council [1996] ECR I-5755, paragraph 58; Case C-233/94 Germany v Parliament and Council [1997] ECR I-2405, paragraphs 55 and 56, and Case C-157/96 National Farmers’ Union and Others [1998] ECR I-2211, paragraph 61).”, para. 123.
<a href="#_ftnref41" name="_ftn41">[41]</a> See CJEU 7 March 2017, Case C-390/15 (RPO), CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) and Imperial Tobacco) and CJEU 17 October 2013, Case C-203/12 (Billerud Karlsborg and Billerud Skärblacka).
<a href="#_ftnref42" name="_ftn42">[42]</a> CJEU 8 April 2014, joined Cases C‑293/12 and C‑594/12 (Digital Rights Ireland Ltd), para. 47.
<a href="#_ftnref43" name="_ftn43">[43]</a> In this respect it must be noted that the CJEU also stated that “ In so far as concerns the proportionality of the interference found to exist, the Court recalls that, according to settled case-law, the principle of proportionality requires that measures adopted by European Union institutions do not exceed the limits of what is appropriate and necessary in order to attain the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued (Case C‑343/09 Afton Chemical [2010] ECR I‑7027, paragraph 45, and Joined Cases C‑581/10 and C‑629/10 Nelson and Others [2012] ECR, paragraph 71 and the case-law cited).”, 22 January 2013, Case C‑283/11, (Sky Österreich GmbH), para. 50.
<a href="#_ftnref44" name="_ftn44">[44]</a> Note that Cyprus, an EU Member State, is not a member of the OECD/G20 Inclusive Framework.
<a href="#_ftnref45" name="_ftn45">[45]</a> See CJEU 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi), ECLI:EU:C:2008:461, paragraphs 299-304.
<a href="#_ftnref46" name="_ftn46">[46]</a> See also C. Wisman, ‘Over de Unierechtelijke (on)houdbaarheid van het ‘effectief belastingtarief’ en de ‘bijheffing’ van de WMB 2024’’, TFO 2024/192.2.
<a href="#_ftnref47" name="_ftn47">[47]</a> See, for example, CJEU 24 February 2022, Case C-257/20, (Viva Telecom Bulgaria) and CJEU 20 April 2023, Case C-348/22 (Autorità Garante della Concorrenza e del Mercato), CJEU 8 March 2017, Case C-14/16 (Euro Park Service) and CJEU 12 November 2015, Case C-198/14 (Visnapuu).
<a href="#_ftnref48" name="_ftn48">[48]</a> Ibidem.
<a href="#_ftnref49" name="_ftn49">[49]</a> See CJEU 8 December 2022, Case C-694/20 (Vlaamse Balies), CJEU 22 November 2022, C-37/20 (WM) and C-601/20 (Sovim SA) and CJEU 26 October 2010, Case C-97/09 (Ingrid Schmelz).
<a href="#_ftnref50" name="_ftn50">[50]</a> See Article 4 TEU.
<a href="#_ftnref51" name="_ftn51">[51]</a> For example, it can be deduced from CJEU 3 April 2025, C-228/24 (Nordcurrent). See also the above-mentioned considerations of the CJEU of 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi).
<a href="#_ftnref52" name="_ftn52">[52]</a> In the text accompanying the draft directive, the European Commission noted that “All EU Member States which are members of the Inclusive Framework have already agreed on the main aspects of Pillar 2 and committed to apply the OECD Model Rules. The EU would have no policy options to choose from as key elements of the framework, such as the scope or tax rates and base, have already been prescribed and agreed on.”, Proposal for a Council Directive on ensuring a global minimum level of taxation for multinational groups in the Union, COM/2021/823 final, p. 5.
<a href="#_ftnref53" name="_ftn53">[53]</a> For the ordinary legislative procedure, see Article 289 in conjunction with Article 289. 295 TFEU and see Article 115 TFEU.
<a href="#_ftnref54" name="_ftn54">[54]</a> See CJEU 7 March 2017, Case C-390/15 (RPO), CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) and Imperial Tobacco) and CJEU 17 October 2013, Case C-203/12 (Billerud Karlsborg and Billerud Skärblacka).
<a href="#_ftnref55" name="_ftn55">[55]</a> See CJEU 3 September 2008, Joined Cases C-402/05 P and C-415/05 P (Kadi), paragraphs 299-304.
<a href="#_ftnref56" name="_ftn56">[56]</a> See CJEU 3 April 2025, C-228/24 (Nordcurrent).
<a href="#_ftnref57" name="_ftn57">[57]</a> See https://data.consilium.europa.eu/doc/document/ST-5547-2015-ADD-1/en/pdf). See also C. Wisman, EU GAAR in deelnemingsvrijstelling en irrelevante EC statements, TaxLive, 23 April 2025.
<a href="#_ftnref58" name="_ftn58">[58]</a> See, for example, the Council Statement and the Statement By The European Commission on the Safe Harbours, Annex I and Annex II to Brussels, 30 October 2023 (OR. en), 14732/1/23 REV 1. In this context, see also the letters from Cyprus, Consent letter of 22 March 2023 from Cyprus authorities on the qualifying international agreements referred to under Article 32 and Consent letter of 23 October 2023 from Cyprus authorities on the qualifying international agreements referred to under Article 32, available at https://taxation-customs.ec.europa.eu/taxation/business-taxation/minimum-corporate-taxation_en.
<a href="#_ftnref59" name="_ftn59">[59]</a> See, for example, CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes), para. 35-37: “It is true that nationals of a Member State cannot attempt, under cover of the rights created by the Treaty, improperly to circumvent their national legislation. They must not improperly or fraudulently take advantage of provisions of Community law … However, the fact that a Community national, whether a natural or a legal person, sought to profit from tax advantages in force in a Member State other than his State of residence cannot in itself deprive him of the right to rely on the provisions of the Treaty …As to freedom of establishment, the Court has already held that the fact that the company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of that freedom”.
<a href="#_ftnref60" name="_ftn60">[60]</a> See Article 54 TFEU.
<a href="#_ftnref61" name="_ftn61">[61]</a> Ibid., and see CJEU 14 September 2017, Case C-646/15 (Trustees of the P Panayi Accumulation & Maintenance Settlements).
<a href="#_ftnref62" name="_ftn62">[62]</a> See, for example, CJEU 1 April 2008, Case C-212/06 (Flemish care insurance). See also CJEU 13 June 2017, Case C-591/15 (The Gibraltar Betting and Gaming Association Limited v The Queen), as well as CJEU 15 November 2016, Case C-268/15 (Ullens de Schooten).
<a href="#_ftnref63" name="_ftn63">[63]</a> The free movement of capital and payments is laid down in Articles 63 to 66 TFEU.
<a href="#_ftnref64" name="_ftn64">[64]</a> See, for example, CJEU 6 November 2007, Case C-415/06 (Stahlwerk).
<a href="#_ftnref65" name="_ftn65">[65]</a> See Article 64 TFEU.
<a href="#_ftnref66" name="_ftn66">[66]</a> The free movement of goods is laid down in Articles 28 to 37 TFEU.
<a href="#_ftnref67" name="_ftn67">[67]</a> The free movement of services is enshrined in Articles 56 to 62 TFEU.
<a href="#_ftnref68" name="_ftn68">[68]</a> The free movement of persons (workers) is laid down in Articles 45 to 48 TFEU.
<a href="#_ftnref69" name="_ftn69">[69]</a> See CJEU 3 October 2006, Case C-452/04 (Fidium Finanz).
<a href="#_ftnref70" name="_ftn70">[70]</a> The free movement of persons (establishment) is laid down in Articles 49 to 55 TFEU.
<a href="#_ftnref71" name="_ftn71">[71]</a> See CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref72" name="_ftn72">[72]</a> See CJEU 13 April 2000, Case C-251/98 (Baars).
<a href="#_ftnref73" name="_ftn73">[73]</a> See CJEU 12 December 2006, Case C-446/04 (FII 1) and CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).
<a href="#_ftnref74" name="_ftn74">[74]</a> See Article 64 TFEU.
<a href="#_ftnref75" name="_ftn75">[75]</a> See CJEU 13 April 2000, Case C-251/98 (Baars).
<a href="#_ftnref76" name="_ftn76">[76]</a> See CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref77" name="_ftn77">[77]</a> See CJEU 13 April 2000, Case C-251/98 (Baars), CJEU 12 December 2006, Case C-446/04 (FII 1), CJEU 26 June 2008, Case C-284/06 (Burda) and CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref78" name="_ftn78">[78]</a> See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen), CJEU 17 December 2009, Case C-182/08 (Glaxo) and CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref79" name="_ftn79">[79]</a> See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen), CJEU 17 December 2009, Case C-182/08 (Glaxo) and CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref80" name="_ftn80">[80]</a> See CJEU 13 November 2012, Case C-35/11 (FII 2), CJEU 3 October 2013, Case C-282/12 (Itelcar) and CJEU 11 September 2014, Case C-47/12 (Kronos).
<a href="#_ftnref81" name="_ftn81">[81]</a> It should also be noted that the general objectives are not necessarily reflected in the specific rules. This point, among others, was discussed by C. Wisman during the EFS, Erasmus University Rotterdam Autumn Conference 2024. For the report, see W. Boei & L.K. Voogt, Conference Report: EFS Congress, Do Pillars I and II Have a Future? EC Tax Review, Volume 34, Issue 3 (2025) pp. 111 – 116.
<a href="#_ftnref82" name="_ftn82">[82]</a> See CJEU 13 November 2012, Case C-35/11 (FII 2).
<a href="#_ftnref83" name="_ftn83">[83]</a> See, for example, CJEU 28 January 1986, Case 70/83 (Avoir Fiscal), CJEU 13 December 2005, Case C-446/03 (Marks & Spencer), CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes).
<a href="#_ftnref84" name="_ftn84">[84]</a> See, for example, CJEU 25 February 2010, Case C-337/08 (X Holding).
<a href="#_ftnref85" name="_ftn85">[85]</a> In its case law, the CJEU regularly points out that in order to ensure the comparability of the domestic and cross-border situations, it is necessary to take into account “the aim pursued by the national provisions at issue”, see CJEU 12 June 2018, Case C-650/16 (Bevola), para. 32. At the same time, according to the CJEU, it cannot be the case that if “national tax legislation treats two situations differently, they cannot be regarded as comparable”, see Bevola, para. 35. Otherwise, the right to free movement would be deprived of ‘its substance’, Bevola para. 35. According to the CJEU, “Consequently, the comparability of the situations must be assessed with regard to the purpose of the national provisions at issue, in accordance with the case-law”, Bevola, para. 35. This approach seems problematic to us. If, in an investigation into the comparability of cases, the objective pursued by the national legislation is taken into consideration, you will irrevocably get stuck because you always end up with the consideration that the circumstances differ because the regulation treats these circumstances differently and the different treatment does not discriminate for that reason. An analytical circle. In this way – in the words of the CJEU itself –the principle of equality would be deprived from its meaning which gives the Member States the space to impede/discriminate freely. Perhaps, the CJEU should conclude that ‘therefore’ you should not look at the intention of the scheme for the fairly simple reason that that scheme (and the intention) is the subject of research and thus cannot serve as a valid criterion or argument for assessing the objective comparability of situations. Notably, for an example in literature of the logic tension involving the EU Pillar Two Directive in this regard, see Weber, supra note 8, at 6, claiming that the Directive does not violate primary EU law, arguing it should not be considered “manifestly inappropriate” or a “manifest error” by referring to the objective pursued by the EU Pillar Two rules and considering: “[t]he fact that the EU GloBE Rules only aim to tackle tax competition that exists between Member States and not any competition within a Member State”.
<a href="#_ftnref86" name="_ftn86">[86]</a> Cf. CJEU 22 September 2022, C538/20 (W AG) and CJEU 17 December 2015, Case C-388/14 (Timac Agro) where subjection gives rise to a finding that the circumstances would differ. This is also problematic from an analytical point of view, since it would give the EU Member States an instrument, the tax treaty, to steer the comparability of the cases (e.g. domestic and foreign branches) and thus the scope of the EU freedoms. This would allow the Member States to evade the effective functioning of the freedoms through tax treaties. Moreover, tax treaties, instruments of public international law, would effectively be giving a higher hierarchical status than supranational EU law, which infringes EU law. See for example . Nevertheless, we see it happening in the case law of the CJEU. See M.F. de Wilde, ‘Dislocation refuted?’, in Marres and Weber (Eds.), Liber Amicorum prof. Peter Wattel, Rara Avis, Kluwer, Deventer, 2022.
<a href="#_ftnref87" name="_ftn87">[87]</a> Cf. CJEU 13 December 2005, Case C-446/03 (Marks & Spencer).
<a href="#_ftnref88" name="_ftn88">[88]</a> See CJEU 18 July 2007, Case C-231/05 (Oy AA).
<a href="#_ftnref89" name="_ftn89">[89]</a> See CJEU 18 July 2007, Case C-231/05 (Oy AA).
<a href="#_ftnref90" name="_ftn90">[90]</a> See CJEU 12 December 2006, Case C-446/04 (FII 1), CJEU 13 November 2012, Case C-35/11 (FII 2), CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).
<a href="#_ftnref91" name="_ftn91">[91]</a> Cf. CJEU 13 December 2005, Case C-446/03 (Marks & Spencer), CJEU 25 February 2010, case C-337/08 (X Holding) and CJEU 2 September 2015, Case C386/14, (Groupe Steria).
<a href="#_ftnref92" name="_ftn92">[92]</a> Cf. CJEU 4 October 2024, case C-585/22 (X BV).
<a href="#_ftnref93" name="_ftn93">[93]</a> See, for example, CJEU 30 November 1995, Case C-55/94 (Gebhard).
<a href="#_ftnref94" name="_ftn94">[94]</a> See, for example, CJEU 29 November 2011, Case C-371/10 (National Grid).
<a href="#_ftnref95" name="_ftn95">[95]</a> See CJEU 28 January 1992, Case C-204/90 (Bachmann).
<a href="#_ftnref96" name="_ftn96">[96]</a> See, for example, CJEU 17 July 2014, Case C-48/13 (Nordea Bank).
<a href="#_ftnref97" name="_ftn97">[97]</a> See, for example, CJEU 13 December 2005, Case C-446/03 (Marks & Spencer).
<a href="#_ftnref98" name="_ftn98">[98]</a> See, for example, CJEU 13 December 2005, Case C-446/03 (Marks & Spencer) and CJEU 20 January 2021, C-484/19 (Lexel).
<a href="#_ftnref99" name="_ftn99">[99]</a> See, for example, CJEU 17 December 2015, Case C-388/14 (Timac Agro).
<a href="#_ftnref100" name="_ftn100">[100]</a> We will not discuss the final loss-doctrine of the CJEU, e.g. CJEU 13 December 2005, C 446/03 (Marks & Spencer), CJEU 27 February 2020, Case C-405/18 (AURES Holdings), CJEU 15 May 2008, Case C-414/06 (Lidl Belgium), CJEU 22 September 2022, Case C-538/20 (W AG), CJEU 19 June 2019, Case C-607/17 (Memira Holding AB), CJEU 19 June 2019, Case C-608/17 (Holmen AB), CJEU 5 July 2018, Case C-28/17 (NN A/S), EFTA 13 September 2017, Case E-15/16 (Yara International), CJEU 7 November 2013, Case C 322/11 (K.), CJEU 29 March 2007, Case C 347/04 (Rewe Zentralfinanz).
<a href="#_ftnref101" name="_ftn101">[101]</a> See also P.J. Watttel, ‘General EU Law Concepts and Tax Law’, in Sjoerd Douma, Otto Marres, Hein Vermeulen, Dennis Weber (Eds.), Terra/Wattel, European Tax Law, Volume I – General Topics and Direct Taxation, 8th Ed., Wolters Kluwer, Deventer, 2022, para. 3.2.2.
<a href="#_ftnref102" name="_ftn102">[102]</a> See CJEU 30 November 1995, Case C-55/94 (Gebhard), and see – in the context of the EU law principle of proportionality in a VAT case – CJEU 14 November 2024, Case C-613/23 (Herdijk).
<a href="#_ftnref103" name="_ftn103">[103]</a> That is, not in the meaning of the CJEU case law.
<a href="#_ftnref104" name="_ftn104">[104]</a> The geographical allocation of Pillar 2 profit components differs in some cases from the geographical allocation (sourcing) of profit components in tax treaty law. Where the allocation rules allocate the basis to the treaty partner and the Netherlands is obliged to provide for a reduction to prevent tax according to the exemption method, domestic additional taxation is in conflict with the tax treaties (unless further provisions are made in the treaty to keep Pillar 2 in line with the treaty in question). From a treaty perspective, even the domestic additional tax can in some cases result in an extraterritorial tax. This remains undiscussed.
<a href="#_ftnref105" name="_ftn105">[105]</a> Notably, even in the case of the QDMTT, the collection of top-up taxation does not necessarily take place in the hands of the entity producing the underlying profits that are low-taxed for Pillar Two purposes. This effect, which occurs under all top-up tax mechanisms, either the QDMTT, or IIR and UTPR, raises questions as to the compatibility of these top-yup taxes with Article 1 of the first Protoctol to ECHR, which guarantees the right of possession. This point, among others, was discussed by C. Wisman during the EFS, Erasmus University Rotterdam Autumn Conference 2024. For the report, see W. Boei & L.K. Voogt, Conference Report: EFS Congress, Do Pillars I and II Have a Future? EC Tax Review, Volume 34, Issue 3 (2025) pp. 111 – 116.
<a href="#_ftnref106" name="_ftn106">[106]</a> CJEU 26 October 1999, Case C-294/97 (Eurowings Luftverkehrs), para. 45.
<a href="#_ftnref107" name="_ftn107">[107]</a> See CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes), CJEU 20 January 2021, Case C-484/19 (Lexel), CJEU 26 February 2019, joined Cases C-115/16 (N Luxembourg 1), C-118/16 (X Denmark), C-119/16 (C Danmark I) and C 299/16 (Z Denmark), on the Interest and Royalties Directive, as well as CJEU 26 February 2019, Joined Cases C-116/16 (T Danmark) and C-117/16 (Y Denmark), concerning the Parent-Subsidiary Directive. More specifically, Cases C-115/16 (N Luxembourg 1) and Others concern the interpretation of the term ‘beneficial owner‘ for the purposes of the Interest and Royalties Directive. Cases C-116/16 (T Danmark) and Others concern more specifically the interpretation of the concept of ‘abuse’ for the purposes of the Parent-Subsidiary Directive. These cases, all rendered by the CJEU on 26 February 2019, are usually referred to in terms of ‘Danish Cases’ or also ‘Beneficial ownership cases’ or a combination of these.
<a href="#_ftnref108" name="_ftn108">[108]</a> The CJEU itself indicates when a regulation can be considered to be aimed at combating abuse, regardless of the interpretation by the national legislator itself. CJEU 13 March 2025, C-135/24 (John Cockerill), para. 47: “In that regard, it is apparent from the case-law of the Court that, in order for national legislation to be regarded as seeking to prevent fraud and abuse, its specific objective must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, the aim of which is unduly to obtain a tax advantage”. See also the interpretation of ‘artificiality’ in CJEU 4 October 2024, C-585/22 (X BV), para. 88: ‘ By contrast, where the loan is, in itself, devoid of economic justification and, but for the relationship between the companies and the tax advantage sought, would never have been contracted, it is consistent with the principle of proportionality to refuse the deduction of the whole of the said interest, since such a wholly artificial arrangement [emphasis MdW/CW] must be ignored by the tax authorities when calculating the corporate tax due”.
<a href="#_ftnref109" name="_ftn109">[109]</a> Cf. e.g. CJEU 21 February 2006, Case C-255/02 (Halifax) and CJEU 21 February 2008, Case C-425/06 (Part Service) for the VAT Directive, CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes) for the freedoms.
<a href="#_ftnref110" name="_ftn110">[110]</a> See CJEU 10 November 2011, Case C-126/10 (Foggia) and CJEU 8 March 2017, Case C-14/16 (Euro Park Service) for the Merger Directive, as well as CJEU 7 September 2017, Case C-6/16 (Eqiom) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding) for the Parent-Subsidiary Directive.
<a href="#_ftnref111" name="_ftn111">[111]</a> See CJEU 12 September 2006, Case C-196/04 (Cadbury Schweppes) and CJEU 20 December 2017, joined cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).
<a href="#_ftnref112" name="_ftn112">[112]</a> See CJEU 17 September 2009, Case C-182/08 (Glaxo), as well as CJEU 7 September 2017, Case C-6/16 (Eqiom) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).
<a href="#_ftnref113" name="_ftn113">[113]</a> See CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes) and CJEU 20 December 2017, joined Cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).
<a href="#_ftnref114" name="_ftn114">[114]</a> See for example, CJEU 3 April 2025, Case C‑228/24 (Nordcurrent), para. 36 “… it cannot be ruled out that an arrangement, initially put into place for valid commercial reasons which reflect economic reality, has to be regarded as not genuine from a certain point onwards, on account of the fact that that arrangement has been maintained despite a change in circumstances.”.
<a href="#_ftnref115" name="_ftn115">[115]</a> CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes), para. 55.
<a href="#_ftnref116" name="_ftn116">[116]</a> See e.g., Maarten de Wilde, ‘Is There a Leak in the OECD’s Global Minimum Tax Proposals (GLOBE, Pillar Two)?’, KluwerTax Blog, March 1, 2021, article 3.2.7. OECD Model Rules, as well as the various other specific anti-mismatch and anti-arbitration measures that have found their way into the commentaries on the OECD Model Rules through the various tranches of administrative guidelines published by the OECD during 2023-2025.
<a href="#_ftnref117" name="_ftn117">[117]</a> See for example, See CJEU 12 September 2006, Case C196/04 (Cadbury Schweppes), CJEU 3 April 2025, Case C‑228/24 (Nordcurrent) and CJEU 20 December 2017, joined cases C-504/16 (Deister Holding) and C-613/16 (Juhler Holding).
<a href="#_ftnref118" name="_ftn118">[118]</a> Article 28 EU Pillar Two Directive.
<a href="#_ftnref119" name="_ftn119">[119]</a> See, for example, CJEU 10 February 2011, Joined Cases C-436/08 and C-437/08 (Haribo and Salinen). See CJEU 18 December 2007, case C-101/05 (A.), CJEU 19 November 2009, Case C-540/07 (Commission v Italy) and CJEU 28 October 2010, Case C-72/09 (Rimbaud).
<a href="#_ftnref120" name="_ftn120">[120]</a> See CJEU 15 May 1997, Case C-250/95 (Futura), in which the Court allowed Luxembourg to require foreign taxpayers to keep records for the purposes of vertical loss relief.
<a href="#_ftnref121" name="_ftn121">[121]</a> See CJEU 11 June 2009, Case C-157/08 (Passenheim-Van Schoot) on the extended recovery period for, in short, foreign income. There, the Court of Appeal ruled that the extended recovery period in the case of concealed foreign income is in order under EU law. In cases where the tax authorities have indications that the taxpayer has foreign income, the extended recovery period is compatible with EU law to the extent that it is necessary ‘to make useful use of the mutual assistance arrangements’.
<a href="#_ftnref122" name="_ftn122">[122]</a> See CJEU 27 November 2008, Case C-418/07 (Papillon) and CJEU 11 October 2007, Case C-451/05 (ELISA).
<a href="#_ftnref123" name="_ftn123">[123]</a> See CJEU 18 December 2007, Case C-101/05 (A.), CJEU 19 November 2009, Case C-540/07 (Commission v Italy) and CJEU 28 October 2010, Case C-72/09 (Rimbaud).
<a href="#_ftnref124" name="_ftn124">[124]</a> See CJEU 10 February 2011, joined Cases C-436/08 and C-437/08 (Haribo and Salinen).
<a href="#_ftnref125" name="_ftn125">[125]</a> See Council Directive (EU) 2025/872 of 14 April 2025 amending Directive 2011/16/EU on administrative cooperation in the field of taxation.
<a href="#_ftnref126" name="_ftn126">[126]</a> See more https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html.
<a href="#_ftnref127" name="_ftn127">[127]</a> See Article 5 TEU, see also CJEU 8 December 2022, Case C-694/20 (Vlaamse Balies) and CJEU 10 December 2002, Case C-491/01 (British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd).
<a href="#_ftnref128" name="_ftn128">[128]</a> See, for example, Draghi report The future of European competitiveness, Part A | A competitiveness strategy for Europe and Draghi report The future of European competitiveness Part B | In-depth analysis and recommendations, September 2024, available at <a href="https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en#paragraph_47059" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en#paragraph_47059</a>, Communication from the Commission, A Competitiveness Compass for the EU, COM(2025) 30 final, Brussels 29 January 2025, the proposals of ‘Omnibus I’ and ‘Omnibus II’, available at <a href="https://commission.europa.eu/publications/omnibus-i_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/publications/omnibus-i_en</a> and <a href="https://commission.europa.eu/publications/omnibus-ii_en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://commission.europa.eu/publications/omnibus-ii_en</a>. Council Conclusions on a tax decluttering and simplification agenda which contributes to the EU’s competitiveness – Council conclusions (11 March 2025), 6748/25, FISC 44, ECOFIN 232. Compare also Tax Decluttering in the common European market Informal thoughts by Germany and the Netherlands, 11 December 2024, available at <a href="https://open.overheid.nl/documenten/375fc1b4-3300-417e-972e-154d680afd44/file" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://open.overheid.nl/documenten/375fc1b4-3300-417e-972e-154d680afd44/file</a>.
<a href="#_ftnref129" name="_ftn129">[129]</a> See Council Directive (EU) 2015/2060 of 10 November 2015 repealing Directive 2003/48/EC on taxation of savings income in the form of interest payments.
<a href="#_ftnref130" name="_ftn130">[130]</a> We do not see any direction for a solution in the recent proposals from, for example, the Polish Presidency of the Council to amend the EU Pillar Two Directive in favour of the economic interests of the United States and to the detriment of the interests of the EU Member States. Moreover, any preferential treatment of the United States and American industry for Pillar Two purposes would, of course, encounter all kinds of legal objections, for example under the principle of equality under EU law. Disadvantaged European and other non-US companies could play the horizontal discrimination card before the courts in the various EU Member States, escalating to the CJEU, by invoking the judgment of the CJEU in the Sopora case (C-512/13). They could also file a state aid complaint with the European Commission, which would then have to be taken up by the European Commission. Finally, directives can also violate state aid rules, as we have known since the judgment of the CJEU in the Wolfgang Heiser case (C-172/03). The proposals, so far, also have hardly any political traction within various EU Member States. See, for example, Sophie Petitjean, ‘EP Committee Split Over How to Ease U.S. Pillar 2 Qualms’, TaxNotes International, May 6, 2025.
<a href="#_ftnref131" name="_ftn131">[131]</a> See Proposal for a Council Directive laying down rules for preventing the misuse of shell entities for tax purposes and amending Directive 2011/16/EU (UNSHELL), COM(2021) 565 final, Proposal for a Council Directive on Transfer Pricing (TP), COM(2023) 529 final, Proposal for a Council Directive on a framework for the taxation of business income in Europe (BEFIT), COM/2023/532 final, Proposal for a Council Directive laying down rules for compensation to reduce debt-equity inequalities and limiting the deductibility of interest for corporate income tax purposes (DEBRA), COM/2022/216 final, Proposal for a Council Directive establishing a tax system for micro, small and medium-sized enterprises under the rules of the Member State of their head office and amending Directive 2011/16/EU (HOTS), COM/2023/528 final and see the press release Digital Taxation: Commission proposes new measures to ensure that all companies pay fair tax in the EU Brussels, 21 March 2018.
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<title>The Contents of Highlights & Insights on European Taxation</title>
<link>https://kluwertaxblog.com/2025/05/30/the-contents-of-highlights-insights-on-european-taxation-4/</link>
<comments>https://kluwertaxblog.com/2025/05/30/the-contents-of-highlights-insights-on-european-taxation-4/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Fri, 30 May 2025 13:00:19 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=20022</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (May 2025) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/05/30/the-contents-of-highlights-insights-on-european-taxation-4/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (May 2025) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
Year 2025, no. 5
TABLE OF CONTENTS
GENERAL TOPICS
– EPPO (C-292/23). Witness summons. Judicial review by national court of investigation measures of the EPPO. Court of Justice
(comments by Edwin Thomas) (H&I 2025/149)
– Sangas (C-481/23). No refusal to execute an European arrest warrant to ensure the presence of the accused during proceedings. Court of Justice
(comments by Edwin Thomas) (H&I 2025/129)
INDIRECT TAXATION, CASE LAW
– Cityland (C-164/24). No removal of taxable person from VAT register without analyzing the nature of the infringements. Court of Justice
(comments by Svetlin Krastanov) (H&I 2025/148)
– Greentech (C-640/23). No VAT deduction after reclassification of transactions by tax authorities. Reimbursement. Court of Justice
(comments by Marilena Craciun (Ene)) (H&I 2025/147)
– Dyrektor Krajowej Informacji Skarbowej (C-615/23). Flat-rate compensation to cover losses on supply of public transport services is not included in taxable amount. Court of Justice
(comments by Giorgio Beretta) (H&I 2025/146)
MUTUAL AID
– Publication DAC9 in Official Journal EU – automatic exchange of information – global minimum tax regime (pillar 2)
(comments by the Editorial Board) (H&I 2025/137)
MISCELLANEOUS
– Commission v Malta (C-181/23). Maltese investor citizenship scheme is contrary to EU law. Court of Justice
(comments by Edwin Thomas) (H&I 2025/151)
– The future of EU anti-tax avoidance rules. European Parliament Research Briefing
(comments by the Editorial Board) (H&I 2025/138)
FREE ARTICLE
– Commission v Malta (C-181/23). Maltese investor citizenship scheme is contrary to EU law. Court of Justice
(comments by Edwin Thomas) (H&I 2025/151)
This procedure concerned an action based on <a href="https://www.inview.nl/openCitation/id7b0718f618154c07c094399bf3cf29a6" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 258</a> of the Treaty on the Functioning of the European Union (hereafter: TFEU) brought by the European Commission concerning Malta’s failure to comply with the right of free citizenship under <a href="https://www.inview.nl/openCitation/ida16b37b29c2b8feb4534a6837eaa8d72" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 20</a> TFEU.
In previous procedures where the European Commission initiated proceedings against a Member State under <a href="https://www.inview.nl/openCitation/id7b0718f618154c07c094399bf3cf29a6" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 258</a> TFEU, alleging that free citizenship had been violated, the following issues were involved:
<ul>
<li>To deny Union citizens who do not have Polish nationality but reside in Poland the right to be members of a political party (CJ 19 November 2024, C-814/21 European Commission v Republic of Poland, <a href="https://www.inview.nl/document/id08fee5a2360e461cb305035b7be2a227#--ext-id-e6fba3a8-1606-41ea-afa8-fe3cdb1cea50" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2024:963</a>),</li>
<li>And the same case with regard to the Czech Republic(C-808/21, <a href="https://www.inview.nl/document/id28edbd573a71401e815a9b7852feafdc#--ext-id-ef4f21ec-9065-41a1-bf98-2e9a4adda95b" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2024:962</a>): violation of free citizenship;</li>
<li>The refusal by the Netherlands to grant the benefit of reduced student travel fares prior to the acquisition of a permanent right of residence to persons other than employees or self-employed persons, or persons who have retained this status, and their family members: No violation of the free citizenship and/or Directive 2004/38 (CJ 2 June 2016, C-233/14 European Commission v Kingdom of the Netherlands, <a href="https://www.inview.nl/document/id0e4f326f3183418585d05fc3cbf9b332#--ext-id-c58b7f61-2a41-416e-85e0-0ea548ec7739" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2016:396</a>);</li>
<li>Austria: By reserving the benefit of reduced transport fares in principle exclusively to students whose parents receive Austrian child benefits, Austria has acted contrary to free citizenship (CJ 4 October 2012, C-75/11 European Commission v Republic of Austria, <a href="https://www.inview.nl/document/ide899ea4626fc4c67afd2decaa3db72e6#--ext-id-c93b078f-1a5f-4be1-8736-fae8e2143ec5" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2012:605</a>).</li>
</ul>
Therefore: Procedures in which the European Commission states that a Member State has not complied with free citizenship are (still) quite rare.
When does the free citizenship apply?
According to the latter judgment, free citizenship – referred to by the CJ as citizenship of the Union – is included in <a href="https://www.inview.nl/openCitation/id568d147ab0d986e797d4a4a867943a63" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Articles 18</a>, <a href="https://www.inview.nl/openCitation/ida16b37b29c2b8feb4534a6837eaa8d72" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">20</a> and 21 TFEU and <a href="https://www.inview.nl/openCitation/id8ceccce9bdd7ef5dedde136002b22695" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 24</a> of Directive 2004/38. This free citizenship is restricted to the territory of the EU Member States: the European Economic Area, a treaty between Norway, Iceland and Liechtenstein, lacks a free citizenship.
Citizenship is a type of ‘residual freedom’. This freedom is first addressed if a natural person is not economically active (such as students or pensioners) and (therefore) cannot rely on the free movement of workers (<a href="https://www.inview.nl/openCitation/id788768db06063946f202506f10cf95db" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 45</a> TFEU), the free movement of establishment (<a href="https://www.inview.nl/openCitation/id5f85259bcb72ad3009c7414c4f9bbe22" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 49</a> TFEU), the free movement (<a href="https://www.inview.nl/openCitation/idc4bd609f73927c3858461674378d5551" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 56</a> TFEU) of services or the free movement of capital (<a href="https://www.inview.nl/openCitation/id6739048241869b6f0cb493b39df05dfc" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 63</a> TFEU).
The meaning of Article 4, third paragraph, of the Union Treaty
A novelty in this ‘non-compliance with free citizenship’ procedure concerns the application of the principle of sincere cooperation and mutual trust in the sense of the third paragraph of Article 4, third paragraph of the Treaty on European Union.
The CJ’s line of reasoning is as follows:
<ul>
<li>When establishing criteria for the acquisition of a particular nationality, an EU Member State has broad discretion, provided that these criteria are exercised in compliance with EU law (paragraph 98);</li>
<li>The exercise of the Member States’ power to determine the conditions for the grant of their nationality is therefore – like their power to determine the conditions for the loss of nationality – not unlimited (paragraph 95);</li>
<li>The nationality relationship of a Member State is based on the special bond of solidarity and loyalty between that State and its nationals, as well as on the reciprocity of rights and obligations (paragraph 96)</li>
<li>However, a Member State apparently disregards the requirement of this special bond of solidarity and loyalty if a particular nationality is granted in exchange for pre-determined payments or investments (paragraph 99), referred to by the CJ as ‘marketisation’ (paragraph 100).</li>
</ul>
I characterize this principle of mutual trust and loyal cooperation as follows: If a Member State in principle has an exclusive competence – this exclusive competence applies to nationality, but also, for example, to direct taxes – a Member State may not exercise this exclusive competence in a manner that is not customary or uncommon for countries or that is not customary in international traffic between countries.
Rules for the acquisition and loss of nationality can – also within the EU – differ greatly from Member State to Member State, for example in the area under which conditions a (Member) State permits dual nationality. It is customary internationally that a natural person who did not acquire a particular nationality at birth can still acquire this nationality after having legally resided in the country of his desired nationality for a number of years before he or she must undergo a naturalization procedure.
It is in any case not customary internationally that a natural person can acquire a nationality by simply paying a sum of money.
Conclusion and the consequences of this judgment for tax law
This procedure shows that EU Member States can also be convicted for a form of bad faith or abuse in establishing criteria in a policy area in which they have exclusive competence, such as nationality or direct taxes.
We will now have to wait for the first procedure in which a taxpayer claims that a national tax arrangement in the area of taxation is not internationally accepted or internationally not customary or uncommon, as a result of which it could possibly be stated that this Member State has acted contrary to the principle of mutual trust and sincere cooperation in Article 4, paragraph 3, of the EU Treaty.
Edwin Thomas
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<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
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<title>The effectiveness of the Mutual Agreement Procedure and the global tax controversy landscape: some critical observations on current pressure areas and suggestions to improve the framework</title>
<link>https://kluwertaxblog.com/2025/05/28/the-effectiveness-of-the-mutual-agreement-procedure-and-the-global-tax-controversy-landscape-some-critical-observations-on-current-pressure-areas-and-suggestions-to-improve-the-framework/</link>
<comments>https://kluwertaxblog.com/2025/05/28/the-effectiveness-of-the-mutual-agreement-procedure-and-the-global-tax-controversy-landscape-some-critical-observations-on-current-pressure-areas-and-suggestions-to-improve-the-framework/#respond</comments>
<dc:creator><![CDATA[Robert Danon (Head of Tax Policy Center, University of Lausanne, Partner, DANON, Lausanne and Chairman of the Permanent Scientific Committee (PSC) of the International Fiscal Association (IFA))]]></dc:creator>
<pubDate>Wed, 28 May 2025 10:02:22 +0000</pubDate>
<category><![CDATA[International Tax Law]]></category>
<category><![CDATA[MAP]]></category>
<category><![CDATA[OECD]]></category>
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<description><![CDATA[Introduction On 22 May we delivered an opening address on the current practical challenges of dispute prevention and resolution at the International Tax Dispute Day organized in Singapore by the Tax Policy Center of the University of Lausanne and the Singapore Tax Academy. While acknowledging the progress made since the adoption of BEPS Action 14... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/05/28/the-effectiveness-of-the-mutual-agreement-procedure-and-the-global-tax-controversy-landscape-some-critical-observations-on-current-pressure-areas-and-suggestions-to-improve-the-framework/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Introduction 
On 22 May we delivered an opening address on the current practical challenges of dispute prevention and resolution at the <a href="https://www.taxacademy.sg/the-international-tax-dispute-day/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">International Tax Dispute Day</a> organized in Singapore by the Tax Policy Center of the University of Lausanne and the Singapore Tax Academy.
While acknowledging the progress made since the adoption of <a href="https://www.oecd.org/en/publications/making-dispute-resolution-mechanisms-more-effective-action-14-2015-final-report_9789264241633-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">BEPS Action 14</a> in relation to the mutual agreement procedure (“MAP”) of tax treaties, we observed (at least based on our practice) that problematic positions remain in place in some States. These positions which include for example MAP “dodging” (for instance by labelling differently what is de facto a transfer pricing adjustment) or the ab initio refusal to deviate from a unilateral position in case of audit settlement or adjustment based on an anti-avoidance rule, may lead to an improper denial of access to or operation of the MAP. These approaches, which undermine the effectiveness of the MAP, all have in common that treaty law is not interpreted in good faith pursuant to arts. 26 and 31 of the <a href="https://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Vienna Convention on the Law of Treaties</a> (“VCLT”). Moreover, there is a growing tendency (at least in some states) to invoke domestic law obstacles (or limitations) not to fully implement treaty obligations. This is in clear contradiction with art. 27 VCLT which states that: “a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty”<a href="#_ftn1" name="_ftnref1">[1]</a>. Finally, some of these practices may be at odds with general principles of law (for example due process or proportionality at the MAP access level) which are also applicable to the interpretation of tax treaties pursuant to the principle of systemic integration (art. 31(3)(c) VCLT) <a href="#_ftn2" name="_ftnref2">[2]</a>. We believe that tackling these issues is important (and practically realistic) as part of the tax certainty agenda at a time at which tax controversies continue to be on the rise. Of course, there would in principle be no need to further clarify in the commentaries to art. 25 OECD MC what already flows from a proper interpretation of treaty law and from BEPS Action 14. However, such clarification could further constrain states to observe their treaty obligations.
Finally, there is in our view room for improvement of the MAP framework in two areas. First, it would be appropriate to develop a framework akin to the Bilateral Advance Pricing Arrangement (“BAPA”) for non-transfer pricing cases. Second, there is a need to extend international tax dispute settlement to indirect taxes which are outside the MAP.
Taking advantage of the flight back to Switzerland, we have thus prepared this blog which further elaborates on these questions.
Some pressure areas relating to MAP access 
Cases of improper denial of access to MAP 
It is uncontroversial that art. 25(1) OECD MC provides taxpayers with a right to access the MAP that is rooted in treaty law. BEPS Action 14 and the OECD commentaries make it clear that such access must be granted in good faith. Moreover, access to MAP must also comply with general principles of law, notably the principle of proportionality<a href="#_ftn3" name="_ftnref3">[3]</a>. Therefore, the practice of some competent tax authorities consisting in hindering access to MAP by imposing conditions or requiring information going beyond what is necessary (or suitable) represents in our view an improper denial of access to MAP.
Equally problematic is the position of states refusing to grant access to MAP where, for example, an adjustment is based on a general or specific domestic anti-abuse rule. Such position is undoubtedly in breach of art. 27 VCLT, the interpretation conveyed by BEPS Action 14 and the OECD commentaries<a href="#_ftn4" name="_ftnref4">[4]</a>. Moreover, the question of whether the relevant anti-abuse rule complies with the threshold of the Principal Purpose Test<a href="#_ftn5" name="_ftnref5">[5]</a> or the guiding principle<a href="#_ftn6" name="_ftnref6">[6]</a> is by essence a bilateral issue which needs to be settled through the MAP<a href="#_ftn7" name="_ftnref7">[7]</a>.
MAP “dodging”
A practice that may also be encountered is what we describe as “MAP dodging”: a state makes an adjustment (for example the denial of deductibility of fees for services) which produces de facto an outcome identical to a transfer pricing adjustment but such adjustment is formally not based on transfer pricing legislation. This state then claims that such adjustment is outside art. 25(1) OECD MC. That position is unsustainable. First, for purposes of art. 9 OECD MC as a distributive rule, the basis of an adjustment under domestic law is irrelevant. Further, as BEPS Action 14 makes clear the failure to provide MAP access with respect to a treaty partner’s transfer pricing adjustment may frustrate a primary objective of tax treaties.<a href="#_ftn8" name="_ftnref8">[8]</a> In this regard, it is quite clear that the object and purpose of both art. 9 and 25 OECD MC would be defeated if the latter were to only apply to “formal” transfer pricing adjustments. For this reason, this practice is incompatible with the principle of good faith, amounts to tax treaty dodging in that it renders the MAP inoperative. Finally, following this position, this would mean that de facto transfer pricing adjustments would be classified “as cases not provided for in the Convention” within the meaning of art. 25(3) OECD MC. There is obviously no support for such an interpretation in the genesis and commentaries to art. 25(3) OECD MC. A proper delineation between paragraphs 3 and 1 of art. 25 OECD MC thus also leads to the conclusion that such adjustments are covered by art. 25(1) OECD MC. The OECD commentaries should therefore make it clear that such type of MAP “dodging” is incompatible with a good faith interpretation of art. 25(1) OECD MC.
Some pressure areas relating to MAP operation
Pursuant to BEPS Action 14, the commentaries to art. 25 OECD MC state that the operation of the MAP must be performed in good faith and “in a fair and objective manner, on its merits, in accordance with the terms of the Convention and applicable principles of international law on the interpretation of treaties<a href="#_ftn9" name="_ftnref9">[9]</a>. Yet, in practice cases of improper operation of the MAP still subsist.
The refusal to “deviate” in case of audit settlements or the application of anti-avoidance rules. 
A first well-known example involves audit settlements: a taxpayer may be inclined to settle a case (also to avoid criminal law ramifications as the case may be). While this may not preclude access to MAP, some competent tax authorities may still refuse to deviate from the position taken in the audit settlement with, therefore, possible double taxation if the other contracting state does not provide relief. A similar situation may arise in instances involving the application of domestic anti-avoidance rules.
We submit that the foregoing outcomes are not in accordance with an interpretation of treaty law in good faith. When addressing audit settlements<a href="#_ftn10" name="_ftnref10">[10]</a> and anti-avoidance rules, the commentaries to art. 25 OECD MC essentially focus on MAP access<a href="#_ftn11" name="_ftnref11">[11]</a>. We believe however that the emphasis should also be placed on the requirement to properly operate the MAP in these instances. This is clearly not the case where a competent tax authority refuses ab initio to deviate. Moreover, pursuant to art. 27 VCLT, a domestic law limitation is here not a valid justification.
Suggestions to improve the MAP framework
Dispute prevention: building a BAPA like framework for non-transfer pricing disputes
A key practical aspect of the MAP is of course it’s dispute prevention component. As is well known, the Bilateral Advanced Pricing Agreement (BAPA) framework is based on art. 25(3) first sentence OECD MC<a href="#_ftn12" name="_ftnref12">[12]</a>. While we appreciate that for many MNEs disputes mainly concern transfer pricing, there is at the same time little doubt that (at least in certain regions) non-transfer pricing cases are on the rise. These may involve characterization issues (for example business profits versus (embedded) royalties), jurisdictional questions (for example treaty residence or permanent establishment issues), beneficial ownership, the PPT, etc.
We thus submit that it would be desirable to develop a comparable framework with best practices for such non-transfer pricing disputes. There is indeed no reason why dispute prevention under art. 25(3) first sentence OECD MC should be limited to transfer pricing. Much like the best practice n°1 of the BAPA manual this new framework would in particular state that treaty disputes are to be resolved through a principled based approach with reference to the principles of international law and the commentaries to the MCs.
The case of indirect taxes 
Finally, and leaving aside the global minimum tax for which an ad hoc dispute resolution system is necessary, a dispute settlement mechanism which would apply to indirect taxes is in our view also desirable. Cross-border disputes involving indirect taxes are indeed practically a live question at least in certain regions. However, these latter disputes do not fall within the MAP. Therefore, a framework would need to be developed. It is beyond the scope of this blog to discuss the various possible options, but we believe that solutions do exist.
<a href="#_ftnref1" name="_ftn1">[1]</a> We are of course well aware that the practice of treaty override is permissible in some states. The legality of such practice under municipal law has however no bearing under international law. Further, for purposes of compliance with the minimum standard of BEPS Action 14 and the peer review related thereto, compliance with treaty obligations and art. 27 VCLT is by essence the only benchmark.
<a href="#_ftnref2" name="_ftn2">[2]</a> Art. 31(3)(c) VCLT refers to «any relevant rules of international law applicable in the relations between the parties ». It is settled that these rules are the sources of international law (notably general principles of law) set out in art. 38(1) ICJ Statute
<a href="#_ftnref3" name="_ftn3">[3]</a> Art. 31(3)(c) VCLT
<a href="#_ftnref4" name="_ftn4">[4]</a> 2017 OECD Commentary, para. 26 ad art. 25
<a href="#_ftnref5" name="_ftn5">[5]</a> Art. 29(9) OECD MC
<a href="#_ftnref6" name="_ftn6">[6]</a> 2017 OECD Commentary, para. 61 ad art. 1
<a href="#_ftnref7" name="_ftn7">[7]</a> BEPS Action 14, final Report, N 13 et seq; 2017 OECD Commentaries, para. 26 ad art. 25
<a href="#_ftnref8" name="_ftn8">[8]</a> BEPS Action 14, final Report, N 11
<a href="#_ftnref9" name="_ftn9">[9]</a> 2017 OECD Commentary, para. 5.1 ad art. 25
<a href="#_ftnref10" name="_ftn10">[10]</a> 2017 OECD Commentary, para. 45.1 ad art. 25
<a href="#_ftnref11" name="_ftn11">[11]</a> 2017 OECD Commentaries, para. 26 ad art. 25
<a href="#_ftnref12" name="_ftn12">[12]</a> See OECD (2022), OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, OECD Publishing, Paris ( <a href="https://doi.org/10.1787/0e655865-en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.1787/0e655865-en</a>), para. 4.134 et seq; OECD (2022), Bilateral Advance Pricing Arrangement Manual (<a href="https://www.oecd.org/en/publications/bilateral-advance-pricing-arrangement-manual_4aa570e1-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.oecd.org/en/publications/bilateral-advance-pricing-arrangement-manual_4aa570e1-en.html</a>)
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<title>No abusive treaty-shopping of Caricom multilateral tax treaty</title>
<link>https://kluwertaxblog.com/2025/05/22/no-abusive-treaty-shopping-of-caricom-multilateral-tax-treaty/</link>
<comments>https://kluwertaxblog.com/2025/05/22/no-abusive-treaty-shopping-of-caricom-multilateral-tax-treaty/#respond</comments>
<dc:creator><![CDATA[Jonathan Schwarz (Temple Tax Chambers; King’s College London)]]></dc:creator>
<pubDate>Thu, 22 May 2025 15:41:05 +0000</pubDate>
<category><![CDATA[Abuse of law]]></category>
<category><![CDATA[Anti-tax avoidance]]></category>
<category><![CDATA[ATAD]]></category>
<category><![CDATA[Beneficial ownership]]></category>
<category><![CDATA[BEPS]]></category>
<category><![CDATA[Canada]]></category>
<category><![CDATA[Company]]></category>
<category><![CDATA[Developing Countries]]></category>
<category><![CDATA[Directive]]></category>
<category><![CDATA[Double non-taxation]]></category>
<category><![CDATA[Double Taxation]]></category>
<category><![CDATA[Holding company]]></category>
<category><![CDATA[International Tax Law]]></category>
<category><![CDATA[MLI]]></category>
<category><![CDATA[OECD MC Convention]]></category>
<category><![CDATA[Principal purpose test]]></category>
<category><![CDATA[Tax Avoidance]]></category>
<category><![CDATA[Tax haven]]></category>
<category><![CDATA[Tax Treaties]]></category>
<category><![CDATA[Treaty shopping]]></category>
<category><![CDATA[Withholding Taxes]]></category>
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<description><![CDATA[The Judicial Committee of the Privy Council (the highest appeal court for a number of Commonwealth countries) ruled last month that payment rapid payment of dividends by a Trinidadian company through a chain of intermediate holding companies as required by the ultimate parent company in Canada was not artificial or fictitious for purposes of Trinidad’s... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/05/22/no-abusive-treaty-shopping-of-caricom-multilateral-tax-treaty/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The Judicial Committee of the Privy Council (the highest appeal court for a number of Commonwealth countries) ruled last month that payment rapid payment of dividends by a Trinidadian company through a chain of intermediate holding companies as required by the ultimate parent company in Canada was not artificial or fictitious for purposes of Trinidad’s domestic anti- avoidance rule in <a href="https://www.bailii.org/uk/cases/UKPC/2025/20.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Methanex Trinidad (Titan) Unlimited v The Board of Inland Revenue (Trinidad and Tobago)</a> [2025] UKPC 20.
Methanex Corporation a company resident in Canada was the ultimate indirect parent company of Methanex Trinidad (Titan) Unlimited, a company resident in Trinidad and Tobago. The Trinidadian company was wholly owned by an International Business Company (IBC) incorporated in Barbados, which was in turn a wholly owned subsidiary of a Cayman Island company, itself wholly owned by the Canadian parent.
The Canadian company demanded payment of substantial dividends as a “cash repatriation” by specified dates which where duly paid by the Trinidadian company to the Barbadian IBC which shortly thereafter paid a divided of the same amount to the Cayman company which then paid the same amount as a dividend to the Canadian parent. The Barbadian IBC’s and the Cayman company’s bank account in Canada were at the same bank branch and under the sole control of the Canadian parent.
<h4>CARICOM tax treaty</h4>
Article 11 of the multilateral CARICOM tax treaty, to which Trinidad and Tobago and Barbados are parties, grants exclusive taxing rights over dividends to the residence state of recipient of the dividends. The Canada-Trinidad treaty permits source state taxation at 5% of the gross dividend.
The Court of Appeal (<a href="https://webopac.ttlawcourts.org/LibraryJud/Judgments/coa/2019/rajkumar/CvA_19_P197DD16nov2021.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Methanex Titan (Trinidad) v BIR</a> TT 2020 CA 42) held that the dividend payments were artificial and fictitious because of the “extraordinary rapidity” of the chain of payments and that which meant that the Barbados company did not retain or exercise ownership over the funds, as the funds were received in Canadian bank accounts controlled by Methanex Canada which acted in accordance with email requests from Methanex Canada. The intermediate payments were thus to be disregarded under s. 67 of the Income Tax Act.
<h4>Artificial transaction</h4>
The Privy Council considered that a transaction is ‘artificial’ if, compared with normal transactions of an ostensibly similar type, it has features that are abnormal and appear to be part of a plan which “would not happen in the real world. It held that payment of dividends up a corporate chain at the request of the ultimate holding company is a commercial and common in corporate groups as the only lawful means by which distributable profits can be brought up from subsidiaries.
<h4>Fictitious transaction</h4>
A fictitious transaction, it said, is similar to a sham. In other words, it is intended by the parties “to give to third parties the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations, if any, which the parties intend to create”.
The court noted that “the fact that a payment is made by A to B with the intention that it should be paid by B to C does not of itself render fictitious the payment from A to B.” Similarly, that Methanex Barbados was not the “ultimate intended beneficiary” did not make the dividends fictitious. The fact that the that the authorised signatories on the Methanex Trinidad were employees of Methanex Canada did not mean that Methanex Canada was entitled to treat the funds paid to that account as the Canadian company’s property. In managing the account the employees acted as agents of the Trinidad company, unless there was evidence to the contrary.
<h4>Beneficial ownership</h4>
Although beneficial ownership was not in issue in the case, the court said that the fact that the account of Methanex Trinidad was managed by employees of the Canadian ultimate parent did not mean that money paid into the subsidiaries’ bank accounts was beneficially owned by the Canadian company.
<h4>Treaty interpretation</h4>
The court rejected the tax authorities’ arguments about the interpretation of the CARICOM treaty:
<h5>Resident of a contracting state</h5>
Methanex Barbados was held to be a resident of Barbados within Article 4(1) of the Treaty, even though it was licenced as an IBC which meant that it paid tax on its profits at very reduced rates and was exempt from tax on foreign dividends. The court rejected the argument that full liability to tax as discussed in the OECD Commentary meant at the full rate applicable generally and not at a substantially reduced rate. It decided that full liability meant nothing more than taxing worldwide income of a person.
The court concluded that the purpose of the treaty, as reflected in its preamble, did not alter the analysis. Thus the fact that the treaty was concluded for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, profits or gains and capital gains and for the encouragement of regional trade and investment with a view to encouraging the regulated movement of capital within the Caribbean Common Market, did not prevent companies set up by nationals of third states the sole or major purpose of obtaining preferential tax treatment at negligible rates from benefiting from the treaty. Similarly, there was no implied restriction on treaty benefits for companies benefiting from a special taxing regime on that basis that it could not be intended that one member state would cede its taxing rights jurisdiction where the other member state imposed tax on special entities at a negligible rate.
<h5>“paid … to a resident of another Member State”</h5>
The court also rejected the argument that the words “paid … to a resident of another Member State” in article 11 of the Treaty should be interpreted to mean that any dividends must in substance be received and used by a resident of a member state. It said that having rejected the notion of group control meant that the dividends were paid to the Canadian company, the Barbados company did make a profit which was essential for the dividends to then be paid up the chain of ownership. Consequently the dividends were on the ordinary meaning of the words “paid to” the Barbados company and received by it.
<h4>Observations</h4>
The GAAR found in section 67 of the Trinidad Income Tax Act is representative of such provisions that have been found in the tax laws of a number of Commonwealth countries. It is often regarded and limited and old-fashioned and has been replaced in many cases with more modern version that resemble the Post-BEPS PPT in art 29 of the OECD and UN Models.
Some similarity may be found in the EU’s ATAD GAAR. Article 9 authorised the disregard of a “non-genuine” transaction. A transaction is not genuine if it is not put into place for valid commercial reasons which reflect economic reality. Such language is not far from the artificial and fictitious concepts in section 67 above.
While Barbados is a party to the MLI and has listed the CARICOM multilateral tax treaty as a Covered Tax Agreement, Trinidad and Tobago has not signed the MLI.
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<title>The Contents of EC Tax Review, Volume 34, Issue 03, 2025</title>
<link>https://kluwertaxblog.com/2025/05/20/the-contents-of-ec-tax-review-volume-34-issue-03-2025/</link>
<comments>https://kluwertaxblog.com/2025/05/20/the-contents-of-ec-tax-review-volume-34-issue-03-2025/#respond</comments>
<dc:creator><![CDATA[Ben Kiekebeld (General Editor EC Tax Review and tax adviser at Ernst & Young Belastingadviseurs LLP)]]></dc:creator>
<pubDate>Tue, 20 May 2025 11:48:11 +0000</pubDate>
<category><![CDATA[EC Tax Review]]></category>
<category><![CDATA[EU law]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=20009</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Koen Lenaerts, The Role of the Court of Justice in Enhancing Tax Fairness in the EU This Guest Editorial takes stock of ongoing efforts to enhance tax fairness within the European Union (EU), a... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/05/20/the-contents-of-ec-tax-review-volume-34-issue-03-2025/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/34.3/ECTA2025015" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Koen Lenaerts, The Role of the Court of Justice in Enhancing Tax Fairness in the EU</a>
This Guest Editorial takes stock of ongoing efforts to enhance tax fairness within the European Union (EU), a challenge exacerbated by legal fragmentation across Member States and the limitations of EU primary law in the area of tax harmonization, and delves into the specific role played by the Court of Justice in this context. In particular, four key areas are examined: (1) the fight against abusive tax avoidance practices, particularly in VAT and corporate taxation; (2) the prevention of selective tax advantages granted to undertakings; (3) the promotion of cross-border cooperation between tax authorities; and (4) how to reconcile the promotion of tax fairness with the EU’s constitutional framework. The Editorial highlights how disparities in national tax regimes, while permitting economic operators to seek advantageous tax outcomes, may constitute fertile ground for tax evasion and competitive distortions. The Court of Justice however has an important role to play in addressing that risk, in particular by ensuring the effet utile of EU legislative measures aimed to fight unfair tax practices by economic operators even beyond the conceptual framework of fraud and abuse. While progress has already been made in this respect, the Editorial concludes that achieving tax fairness requires sustained coordination between EU and Member State actors. Such coordination is key to reconcile the operation of the internal market with the EU’s broader social and economic objectives, and thus to preserve the trust placed by citizens in the ability of the Union to bring about social progress.
<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/34.3/ECTA2025016" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Joachim Englisch, EU Excess Profits Tax Ultra Vires?: On the Limits of Article 122 TFEU in EU Tax Policy</a>
Articles 14 et seq. of Regulation (EU) 2022/1854 required all EU Member States to impose a temporary excess profits tax – labelled as a ‘solidarity contribution’ – for certain companies operating in the fossil fuel sector. This development has sparked widespread debate as to whether tax measures can be adopted under the emergency powers of Article 122 (1) TFEU, and if so whether the excess profits tax meets the relevant criteria to qualify as an economic policy emergency measure. The article challenges the predominant view in tax scholarship, pursuant to which Article 122 (1) TFEU is subordinate to other legal bases in the Treaties that specifically address legislative measures of tax harmonization. This notwithstanding, it comes to the conclusion that the excess profits tax has not been conceived as targeted economic policy measure, as required by Article 122 (1) TFEU. It predominantly pursues social policy objectives, and its impact on energy markets and costs is too indirect, too uncertain, and moreover often not effective in the short term. It is moreover argued that EU action was not needed to provide Member States with extra revenues to bolster national budgets in the face of increased spending needs. Finally, an eventual intention of a majority of Member States to ‘Europeanize’ negative economic reverberations of an excess profits taxes, without any apparent attempt to balance this questionable objective with the interests of more investment-friendly Member States, would be contrary to the solidarity requirement of Article 122 (1) TFEU.
<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/34.3/ECTA2025017" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Ilse De Troyer Administrative Tax Cooperation Between EU Member States: Using the Appropriate Legal Basis</a>
 The international cooperation between tax authorities is growing and the legal instruments for such cooperation are expanding. The use of the appropriate legal basis should get sufficient attention, particularly in the administrative tax cooperation between EU Member States. The primacy of EU law and its direct application must be respected. This is also important for the legal protection of the taxpayers.
This article focuses on the impact of EU law on the competence of EU Member States to include provisions in double taxation treaties among themselves that concern some aspects for which EU legislation has already been adopted: provisions on a mutual agreement procedure, on exchange of information and on recovery assistance.
It is concluded that in the current EU context, provisions on these forms of administrative tax cooperation should no longer feature in double taxation treaties between EU Member States. Only where the applicable EU legal instruments leave room for a wider administrative cooperation, Member States can still include such provisions in their double taxation treaties. The latter condition calls for a strict interpretation, given the primacy of EU law.
<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/34.3/ECTA2025018" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Willem Boei & Louisa Voogt Conference Report: EFS Congress, Do Pillars I and II Have a Future?</a>
The EFS, Erasmus University Rotterdam Autumn Congress, held on 3 October 2024, explored the future of Pillars I and II in international taxation. Moderated by Ciska Wisman, the event featured presentations from tax experts, including Maarten de Wilde, Jaap Bellingwout, and Hans van den Hurk, followed by responses from Marlies de Ruiter. Discussions centred on the effectiveness of Pillar II in curbing tax competition and avoidance, with critiques highlighting legal uncertainties, inconsistencies with EU law, and the shift from income-based to subsidy-driven tax competition.
De Wilde examined whether digitalization has truly disrupted corporate taxation or merely exposed existing flaws. Bellingwout discussed the Business in Europe: Framework for Income Taxation (BEFIT) proposal for EU tax harmonization, emphasizing its potential but also its administrative challenges. Van den Hurk questioned Pillar II’s necessity, suggesting that existing anti-avoidance measures might suffice and advocating for simpler solutions, including UN-led initiatives.
A key concern was whether the current reforms ensure fairness and sustainability, particularly given geopolitical tensions and the risk of unilateral tax measures. The congress concluded with skepticism about the viability of Pillars I and II, amid shifting global tax policies and emerging alternatives. The ongoing debate underscores the complexity of achieving international tax cooperation.
<a href="https://kluwerlawonline.com/journalarticle/EC+Tax+Review/34.3/ECTA2025019" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Fabian Barth Facilitation Service and Deemed Supply at the Same Time? Ultra Vires</a>
The proposed changes pursuant to the package for value-added tax (VAT) in the Digital Age (‘ViDA’) inter alia make provision for platforms and other electronic interfaces to become the deemed recipient and supplier of certain accommodation and transportation services. However, after revision by the Council, the redrafted Article 30 of the Implementing Regulation also contains a revolutionary new feature: in addition to being the deemed supplier already, platforms would still be regarded as providing a taxable facilitation service through their activity. The present contribution argues that this new additional service is ultra vires the VAT Directive, hence the underlying Implementing Regulation, once enacted, will be invalid.
 
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<title>The Contents of Highlights & Insights on European Taxation</title>
<link>https://kluwertaxblog.com/2025/05/02/the-contents-of-highlights-insights-on-european-taxation-3/</link>
<comments>https://kluwertaxblog.com/2025/05/02/the-contents-of-highlights-insights-on-european-taxation-3/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University) and Dennis Weber (Editor) (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Loyens & Loeff)]]></dc:creator>
<pubDate>Fri, 02 May 2025 09:38:07 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=20004</guid>
<description><![CDATA[Highlights & Insights on European Taxation Please find below a selection of articles published this month (April 2025) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/05/02/the-contents-of-highlights-insights-on-european-taxation-3/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (April 2025) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
Year 2025, no. 4
TABLE OF CONTENTS
INDIRECT TAXATION, CASE LAW
– Grzera (C-213/24). VAT liability for the sale of agricultural land from personal assets for residential development with use of an agent. Court of Justice
(comments by Giorgio Beretta) (H&I 2025/120)
– Adjak (C-277/24). Polish joint and several liability of management board members. Access to case files in proceedings. Court of Justice
(comments by Pawel Mikula) (H&I 2025/119)
CUSTOMS AND EXCISE
– C/C (C-351/24). Establishment of an error on preferential treatment without initiating a verification procedure. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2025/128)
– Alsen (C-137/23). EU law precludes national legislation under which fiscal marking of gas oils is condition for excise duty exemption. Court of Justice
(comments by Giorgio Emanuele Degani) (H&I 2025/108)
 – BG Technik. Common (C-129/23 and C-567/23). Customs Tariff. Classification of goods. Combined Nomenclature. Wheelchairs and other vehicles for the disabled. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2025/107)
FREE ARTICLE
– Adjak (C-277/24). Polish joint and several liability of management board members. Access to case files in proceedings. Court of Justice
(comments by Pawel Mikula) (H&I 2025/119)
The judgment does not seem fundamentally controversial or surprising. The argument presented by the Court of Justice of the European Union (hereinafter: ‘CJ’) itself does not seem to require extensive commentary (except, perhaps, that it could have been clearer – but in this regard, the vagueness of the Court’s case law is familiar to us, as we feel it frequently). However, it is worth noting that there are a few independent issues related to this ruling.
First, it is worth noting that the CJ still maintains and perpetuates the distinction between two bases of joint and several liability in VAT. Such a distinction seems to have been formed in the judgment C-1/21 (CJ 11 October 2022, C-1/21 MC v Direktor na Direktsia ‘Obzhalvane i danachno-osiguritelna praktika’ Veliko Tarnovo pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite, <a href="https://www.inview.nl/document/id30f60969f31340f086f90595f08dee9f#--ext-id-78b740aa-6181-4d6b-924d-119d3732f1a8" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2022:788</a>), indirectly confirmed in C-613/23 (CJ 14 November 2024, C-613/23 KL v Staatssecretaris van Financiën, <a href="https://www.inview.nl/document/idd130de96432f438a95364c774576106a#--ext-id-69c3ccfa-8e25-4776-a5fa-8461b7435564" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2024:961</a>), and also upheld in the judgment under comment. The first basis is Article 205 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereinafter: the ‘VAT Directive’), under which Member States may designate the person jointly and severally liable for the VAT liability (along with the person liable by ‘default’) – but this liability refers to VAT due on a particular transaction. The second basis is Article 273 of the VAT Directive, which authorizes Member States to introduce all measures for the proper collection of VAT. On this second basis, it is possible to introduce other types of liability for VAT – including liability for part or all of the unpaid tax amount in isolation from a specific transaction. Whether such a distinction is useful remains an open question to be considered on other occasions.
Second, the judgment under comment is an interesting example of the Court formulating a specific rule by weighing various general principles of VAT law (and Union law) according to the requirements of proportionality. The Court clearly points to opposing principles (interests, values): on the one hand, the taxpayer’s right to good administration (stemming from the Charter of Fundamental Rights of the European Union) and the related right of defence (from which, in turn, derives the right of access to files and the right to be heard), and, on the other hand, the public interest realized by effective VAT collection. In addition, the Court also takes into account legal certainty. Weighing these factors, the CJ ultimately formulates a compromise rule: according to the EU standard, the board member does not have to be a party to the proceedings on the VAT liability itself but must be able to effectively challenge the factual and legal findings made in those proceedings.
Third, commenting on this case, it is worthwhile asking whether it was really necessary to invoke the principle of protection of the right of defence to answer the preliminary question. And without this – that is, it follows from the CJ’s case law on joint and several liability itself that a potentially liable person must be able to present evidence that disproves that liability. Since a person has the right to present evidence that he is not liable, he also has the opportunity to present evidence that the tax liability itself does not exist. This follows from Article 273 of the VAT Directive itself and the principle of proportionality. Therefore, it seems that invoking the right of defence is not necessary here.
As a fourth reflection, this more from the Polish backyard, which may be of interest to a wider range of European readers, it is worth pointing out the following. In Poland, it was quite deeply rooted in the case law that in proceedings on the liability of a member of the management board, it is not possible to question the findings of the proceedings on the tax liability itself (especially the judgment of the Polish Supreme Administration Court of 10.11.2021, III FSK 4172/21). Recently, however, there has been a ruling by the Provincial Administrative Court in Warsaw, which broke this established line of case law (judgment of 28 November 2024, III SA/Wa 1840/24). The Warsaw court referred in part to arguments also cited by the CJ in the judgment under comment – i.e., with reference to, among others, the Glencore judgment (CJ 27 February 2025, C-189/19 Glencore Agriculture Hungary, <a href="https://www.inview.nl/document/iddfd018e032364116aa32a46fab6c8172#--ext-id-ec4c2a88-1a98-4641-8626-745eeab9da3b" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2019:861</a>). Thus, we see that similar conclusions had already begun to break through before the commented judgment in Polish case law – bolder and reaching more in-depth into the EU acquis.
Fifth, the stubborn persistence of the Polish administrative courts in their stance may come as a surprise – i.e., with the domestic practice to date being unfavourable to board members. After all, it is worth remembering that the Polish Commercial Code has a completely analogous regulation with regard to the liability of company board members for the company’s civil law liabilities. There, too, two proceedings can be distinguished: the first concerning the debt itself, and the second concerning the liability of a board member. There, too, finally, there were situations in which the member of the board of directors no longer held this function (and could not dispute the existence of the company’s debt itself). With regard to these provisions, the Polish Constitutional Court ruled that such regulations are incompatible with the Polish Constitution (judgment of 12 April 2023, P 5/19). Here, the Polish constitutional court relied, among other things, on the right to a court – and, therefore, similarly to the Court of Justice of the EU.
As part of the sixth thread, it is worth considering what practical effects the CJ’s ruling may have. According to Polish regulations, after delivery of the Court’s judgment, it will be possible to apply for the resumption of relevant tax and court proceedings. In many situations, although board members will be able to challenge decisions already issued against them in the past – it will not lead to the exclusion of their liability (it will be difficult to challenge the previous decisions on the VAT arrears). However, the ruling may have important procedural significance: the issuance of decisions on the liability of board members is limited by the statute of limitations. Many of the management board members’ liabilities will already be time-barred if. Thus, board members will probably succeed because tax authorities may not be able to issue new decisions. As a consequence, they may be compelled to return the liabilities paid by members of the management board with the appropriate (favourable) interest rates.
Seventh and finally, the judgment – although it concerns VAT – probably applies analogously also to other taxes and possibly to other persons jointly and severally liable for taxes (because Polish regulations concern not only VAT and not only members of the management boards of companies). This is because in other areas, too, the position of Polish administrative courts is similar – as, for example, in cases concerning the obligation to return EU subsidies (see the judgment of the Polish Supreme Administration Court of 18 September 2024 (I GSK 608/24). Again, also here the Polish court stated that the authority determining the liability of a member of the management board does not have the right and obligation to examine the legitimacy of the existence of the obligation for which the management board member is liable.
Dr Pawel Mikula 
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<title>The Contents of Intertax, Volume 53, Issue 05, 2025</title>
<link>https://kluwertaxblog.com/2025/04/28/the-contents-of-intertax-volume-53-issue-05-2025/</link>
<comments>https://kluwertaxblog.com/2025/04/28/the-contents-of-intertax-volume-53-issue-05-2025/#respond</comments>
<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Mon, 28 Apr 2025 09:18:20 +0000</pubDate>
<category><![CDATA[Intertax]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=20000</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Antonio Lopo Martinez, Global Taxation’s Price: Quantifying Pillar Two Damages in IIA Disputes This article addresses the emerging conflicts between Pillar Two taxation rules and international investment agreements (IIAs) by focusing on developing methodologies... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/28/the-contents-of-intertax-volume-53-issue-05-2025/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.5/TAXI2025040" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Antonio Lopo Martinez, Global Taxation’s Price: Quantifying Pillar Two Damages in IIA Disputes</a>
This article addresses the emerging conflicts between Pillar Two taxation rules and international investment agreements (IIAs) by focusing on developing methodologies for assessing economic damages in related disputes. The study aims to establish a comprehensive framework for quantifying economic losses arising from potential IIA violations due to Pillar Two implementation. It examines the legal basis for damage claims under IIAs by analysing relevant precedents and provisions. The research evaluates various methodological approaches for calculating damages in international investment disputes and assesses their suitability for Pillar Two-related scenarios. Economic models and quantitative techniques, such as the discounted cash flow (DCF) analysis and the lost profit method, are examined for their effectiveness in estimating Pillar Two’s financial impact on investors. The article incorporates case studies and reviews past damage assessments in tax-related contexts. It discusses policy implications and offers guidelines for key stakeholders including policymakers, investors, and arbitral tribunals as well as focusing on best practices and potential challenges in damage assessment. This research aims to alleviate a critical deficiency in the existing literature by providing a nuanced, multidimensional framework to facilitate a more informed approach to resolving disputes at the intersection of Pillar Two rules and IIAs.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.5/TAXI2025039" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Jarrod Hepburn & Sunita Jogarajan, Denial of Justice: International Investment Agreements and the Implementation of the Global Minimum Tax</a>
To assist in the introduction and operation of the global minimum tax, the OECD’s supplementary material includes a rule which would likely result in a multinational entity paying tax in another jurisdiction on income earned in a particular source jurisdiction where the entity launches a legal challenge against the source jurisdiction’s minimum tax. In effect, this rule (intentionally) discourages taxpayers from using either domestic or international law to challenge the imposition of a minimum tax, by making the challenge economically unviable.
Some commentators have queried whether the jurisdictions that adopt this rule may commit a denial of justice under customary international law, by impeding or discouraging taxpayers’ resort to rights of access to domestic courts and international arbitration tribunals constituted under international investment agreements (IIAs). This paper concludes, however, that such a rule would likely not amount to a denial of justice in so far as it discourages claims to either domestic courts or international tribunals. As such, this paper removes one potential obstacle for countries – particularly developing countries – in implementing the OECD’s minimum tax rules, even if other obstacles may remain.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.5/TAXI2025044" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Paloma Garcia Córdoba, The Impact of Pillar Two Rules on International Investment Treaties: An Assessment of Tax Carve-Out Provisions</a>
Pillar Two, proposed by the Organization for Economic Cooperation and Development (OECD), represents a paradigm shift in international taxation. However, its implementation could result in disputes under existing international investment treaties (IIAs). The investor-state dispute settlement mechanisms (ISDS) may become a relevant procedure for resolving those issues with tax carve-out provisions in IIAs being a key factor. This raises a few relevant questions: What is the purpose of tax carve-out clauses in the context of IIAs? What role do they have in tax-related disputes under investment arbitration? This article explores their crucial relevance in the context of implementing the OECD’s Pillar Two and emphasizes their potential influence on tax-related disputes under IIAs and their significance in preserving states’ sovereignty over their tax policies.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.5/TAXI2025043" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Fabian Kratzlmeier & Aitor Navarro, Escaping Minimum Taxation Through Investor-State Arbitration? A Closer Look at the Robustness of the EU GloBE Directive</a>
The OECD proposal for a global minimum tax (GloBE) is designed in a manner that could be conflictive with investment treaties. This tension is even more severe in the context of its adoption in the European Union through Directive (EU) 2022/2523 as EU Law prima facie supersedes any other international law obligation adopted by Member States. Yet, investors from jurisdictions not subject to GloBE liabilities (and their investment vehicles) may try to seek remedies envisaged in investment treaties and enforce them abroad. Would such claims succeed? How should the Member States or the Union itself react to such undermining of EU Law (and the very idea of the GloBE proposal) abroad? This article explores the robustness of EU Law for adequately enforcing the minimum tax Directive (MTD) and prospective challenges set to arise during arbitration, at the enforcement stage, and after successfully recouping minimum taxation through a fruitful collection of awarded damages.
 
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<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
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<title>The Contents of Intertax, Volume 53, Issue 04, 2025</title>
<link>https://kluwertaxblog.com/2025/04/17/the-contents-of-intertax-volume-53-issue-04-2025/</link>
<comments>https://kluwertaxblog.com/2025/04/17/the-contents-of-intertax-volume-53-issue-04-2025/#respond</comments>
<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Thu, 17 Apr 2025 15:01:27 +0000</pubDate>
<category><![CDATA[Intertax]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19995</guid>
<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions: Xiaorong Li, An Analysis on Expropriation Risks of Top-Up Tax under Pillar Two As Pillar Two moves closer to implementation, its potential clashes with international investment agreements (IIAs) are gaining attention. Among other possible... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/17/the-contents-of-intertax-volume-53-issue-04-2025/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.4/TAXI2025017" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Xiaorong Li, An Analysis on Expropriation Risks of Top-Up Tax under Pillar Two</a>
As Pillar Two moves closer to implementation, its potential clashes with international investment agreements (IIAs) are gaining attention. Among other possible claims, the possibility of top-up taxes under Pillar Two amounting to expropriation under them is often mentioned. This article examines whether a potential investor-state dispute settlement (ISDS) claim on expropriation against top-up taxes is likely to succeed. The analysis begins with jurisdictional issues and concludes that all implementing states, including ultimate parent entity (UPE) jurisdictions, might face challenges for expropriation. Most IIAs provide a definition only on lawful seizure but not expropriation per se. Therefore, the criteria used to ascertain it vary across ISDS tribunals. The key criterion is the substantial deprivation test that is likely going to be the main difficulty in demonstrating the expropriatory nature of top-up taxes in a majority of cases. Even if expropriation risks are not imminent, Pillar Two is leading international tax law down a dangerous and irreversible course with more clashes with other parts of international law. In designing new international tax rules, careful consideration of compliance with the larger international legal framework would be crucial for preventing disputes.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.4/TAXI2025031" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Vanessa Arruda Ferreira & Luzius Cavelti, Good Faith and Investment Treaties With a Particular View on Pillar Two</a>
Good faith has distinct functions in investment law that balance competing interests. It protects investors’ legitimate expectations under investment agreements and stabilization clauses while safeguarding host states’ right to regulate in good faith for a legitimate public interest or purpose. This article first examines whether amendments of the legal and tax regulatory framework by host states, as part of the Pillar Two global policy reform, frustrates investors’ legitimate expectations. It then assesses if such changes could still qualify as good faith conduct by a state that is pursuing legitimate policy objectives thereby excluding liability. Additionally, the article explores how home states’ activation of the Pillar Two mechanisms may conflict with treaties’ performance in good faith and estoppel. Finally, the article investigates how tribunals weigh the good faith aspect in involved parties’ behaviour when calculating liability for damages. It assesses whether the coercive effect on host states caused by Pillar Two mechanisms activated by home states could make them fully or partially liable for damages. The article accentuates the increasing relevance of good faith in current international tax policymaking in which political and economic pressure has become a powerful tool for shaping global rules.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.4/TAXI2025025" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Gergely Czoboly & Gabriella Erdős, QDMTT’s Alignment With International Obligations With Potential Deviations</a>
The introduction of a domestic top-up tax system ensures that the investment country has the primary taxing right to collect the tax necessary to reach the global minimum tax level. However, this makes certain types of income tax incentives redundant and makes some of the promises made to the investors in host countries unfulfillable, creating potential tension between qualified domestic top-up tax systems and international investment agreements (IIAs). The current article focuses on the tax strategies available to countries that minimize the conflict between Qualified Domestic Minimum Top-up Tax (QDMTT) and IIAs while meeting GloBE requirements. We examine in detail the global minimum tax consequences of the different types of incentives, the different scope and terminology of IIAs and GloBE, and the interaction of investment treaties and any GloBE induced changes in tax policy. We conclude that different tax incentives are favoured over others by GloBE, limiting countries’ possibilities to form their tax policies. Since the incentives that are more in line with GloBE require more free cash from jurisdictions, modifying them could be challenging for developing countries without the necessary financial resources. mechanisms activated by home states could make them fully or partially liable for damages. The article accentuates the increasing relevance of good faith in current international tax policymaking in which political and economic pressure has become a powerful tool for shaping global rules.
<a href="https://kluwerlawonline.com/journalarticle/Intertax/53.4/TAXI2025015" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">João Vitor Gomes Martins & Thatiane Cristina Fontão Pires, Assessing Damages in Investment Treaty Arbitration in the Context of Pillar Two: The Interplay Between the Charging Provisions and the Principle of Compensatio Lucri Cum Damno</a>
Assuming that the implementation of Pillar Two Rules into the domestic legislation of several jurisdictions potentially violates international investment agreements (IIAs), the question remains as to how damages should be calculated. While it seems logical to equate them with the tax burden that is imposed, the principle of compensatio lucri cum damno provides that, if the wrongdoer’s actions result in both losses and gains for the victim, these benefits must be offset against his obligation to indemnify.Doing so warrants that reparation will not put the aggrieved party in a more advantageous position because it suffered the damage. This article explores the interplay between the Pillar Two charging provisions and the principle of equalization of benefits, emphasizing the necessity of considering such interactions when assessing damages in investor-state arbitration. It concludes that the OECD guidance on the QDMTTpayable generates two possible undesirable outcomes over the quantum of damages. If the guidance is followed, the damages that are awarded may, at a maximum, reimburse the qualified domestic minimum top-up tax (QDMTT) collected which would likely not nullify the overall Pillar Two impact on an multinational enterprise (MNE) group; if not followed, benefits arising to the investor would need to be considered in the assessment of damages and reduce the compensation to an insignificant amount.
 
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<title>The Override of International Investment Agreements by Double Taxation Conventions in the Latest UN Model Tax Convention: Critical comments</title>
<link>https://kluwertaxblog.com/2025/04/15/the-override-of-international-investment-agreements-by-double-taxation-conventions-in-the-latest-un-model-tax-convention-critical-comments/</link>
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<dc:creator><![CDATA[Robert Danon (Head of Tax Policy Center, University of Lausanne, Partner, DANON, Lausanne and Chairman of the Permanent Scientific Committee (PSC) of the International Fiscal Association (IFA)) and Prof. Dr. Adolfo Martín Jiménez (Prof. Dr. Adolfo Martín Jiménez, University of Cádiz)]]></dc:creator>
<pubDate>Tue, 15 Apr 2025 09:04:00 +0000</pubDate>
<category><![CDATA[Dispute resolution]]></category>
<category><![CDATA[International Investment Agreements]]></category>
<category><![CDATA[UN Tax Convention]]></category>
<category><![CDATA[United Nations]]></category>
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<description><![CDATA[Prof. Dr. Robert J. Danon, University of Lausanne /DANON /Prof. Dr. Adolfo Martín Jiménez, University of Cádiz/AMJ ITC On 24-27 March 2025, the United Nations Committee of Experts on International Cooperation in Tax Matters (“UN Tax Committee”), in its 30th session, approved the latest changes to a new clause to be introduced into art. 25... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/15/the-override-of-international-investment-agreements-by-double-taxation-conventions-in-the-latest-un-model-tax-convention-critical-comments/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Prof. Dr. Robert J. Danon, University of Lausanne /DANON /Prof. Dr. Adolfo Martín Jiménez, University of Cádiz/AMJ ITC
On 24-27 March 2025, the United Nations Committee of Experts on International Cooperation in Tax Matters (“UN Tax Committee”), in its 30th session, approved the latest changes <a href="https://financing.desa.un.org/sites/default/files/2025-03/CRP.2%20Tax%20Trade%20and%20Investment%20Final.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">to a new clause</a> to be introduced into art. 25 of the United Nations Model Tax Convention (“UN MC”) designed to switch off the possibility for investors to have recourse to investor-state dispute settlement (“ISDS”) in tax-related disputes (“the ISDS model clause”)<a href="#_ftn1" name="_ftnref1">[1]</a>. The new clause is meant to be included in double taxation conventions (“DTCs”) and to apply alongside International Investment Agreements (“IIAs”)
This “override” of IIAs by DTCs, which has no counterpart in the OECD Model Tax Convention, is significant. It occurs at a time when international tax law continues to struggle to provide a comprehensive and effective dispute resolution system. First, under international tax law, dispute settlement – the mutual agreement procedure (“MAP”) – is mainly confined to disputes arising from the application of DTCs. Therefore, no international tax remedy is available for disputes concerning, for instance, the misapplication or arbitrary application of domestic tax law, expropriation through taxation, or breaches of investment contracts. Second, <a href="https://www.oecd.org/en/publications/making-dispute-resolution-mechanisms-more-effective-action-14-2015-final-report_9789264241633-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">despite the introduction of a global minimum standard promoting access to a MAP in good faith and in a fair and objective manner</a>, the procedure is not necessarily effective in practice. This is because the MAP – as a state-to-state procedure – remains rooted in diplomatic protection, with competent authorities (CAs) merely required to’ endeavor” to resolve the dispute. Although some DTCs include arbitration clauses to incentivize competent tax authorities to reach an agreement, many DTCs do not contain such clauses. In this context, it is easy to understand that the introduction of a clause into tax treaty practice aimed at suppressing ISDS in tax-related disputes (without any international tax law counterpart) could negatively impact foreign investors (and, consequently, foreign investment), especially as global tax controversies are on the rise.
The UN Model Tax Convention ISDS clause
The text of the new UN MC ISDS clause has two separate but inter-connected sentences. After the latest changes of March 2025, the clause reads as follows:
 
<table>
<tbody>
<tr>
<td width="132">First sentence </td>
<td width="472">“A taxation measure, taken by a Contracting State, that is in accordance with this Convention shall be deemed not to breach any other treaty of which the Contracting States are parties, and any dispute over whether a taxation measure taken by a Contracting State is in accordance with this Convention, or whether the measure falls within the scope of the Convention, shall be settled only by reference to the provisions of the Convention and without recourse to dispute resolution arrangements under any other treaty of which the Contracting States are parties”
 </td>
</tr>
<tr>
<td width="132">Second sentence </td>
<td width="472">“As respects any other dispute over a taxation measure, or as to whether a measure is a taxation measure, the settlement of such dispute shall, unless the competent authorities of the Contracting States agree otherwise, be undertaken without recourse to any dispute resolution arrangements under [such treaties as are agreed to be covered ]”</td>
</tr>
</tbody>
</table>
 
The main features of the clause are the following:
<ul>
<li>The first sentence affirms the primacy of DTCs over IIAs if a taxation measure (i) falls within the scope and (ii) is in accordance with a DTC concluded between states parties to an IIA. The first sentence will override both the standards of protection of IIAs and their dispute settlement procedure. Specifically, by referring to a settlement without recourse to “dispute resolution arrangements under any other treaty”, the first sentence excludes ISDS. This means that disputes concerning taxation measures covered by this first sentence may only be settled through a MAP or by the courts of the contracting states.</li>
</ul>
 
<ul>
<li>The second sentence concerns disputes over a taxation measure that would not be covered by a DTC. This would, for example, concern alleged expropriation through taxation cases, arbitrary state conduct in taxation matters, or a dispute concerning an indirect tax to which a DTC would not apply. In all of these instances, the object and purpose of the second sentence is simply to disapply ISDS without providing any alternative international dispute resolution procedure different from domestic courts (which could, as the case may be, apply the substantive standards of protection of IIAs).</li>
</ul>
 
<ul>
<li>The clause is meant to be self-judging. That is, it would be completely up to the relevant CAs (or domestic courts) to decide whether a taxation measure falls in the first or the second sentence. Only the latter permits the CAs, if they both agree, to again “switch on” the ISDS procedure.</li>
</ul>
 
<ul>
<li>The clause does not provide any time frame for the CAs to settle a dispute under its first or second sentence.</li>
</ul>
A critique of the ISDS model clause from a policy, international and EU law point of view 
From a policy perspective, the drafters of the ISDS model clause maintain it is consistent with a “whole-of-government approach”. However, the clause clashes with modern investment treaty policy. Recent IIAs tend to include comprehensive tax carve-outs, but it is accepted by many States that some matters ought to remain within the ambit of ISDS (often subject to a “tax-filter” mechanism). These “claw-backs” concern expropriation through taxation, but also other matters (for example investment contracts, national treatment or most-favoured nation treatment of indirect taxes). Therefore, by completely overriding ISDS in tax-related disputes, the ISDS model clause achieves the opposite outcome of a “whole-of-government approach”: it treats tax-related investment disputes differently from any other ones.
The first sentence of the ISDS model clause gives priority to a DTC over an IIA where a taxation measure is “in accordance” and “falls within the scope of the Convention”. In practice, however, it is difficult to see why such a priority clause is necessary. As the tribunal made it very clear in <a href="https://www.italaw.com/sites/default/files/case-documents/italaw181339.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Cairn v Indi</a>a, DTCs and IIAs govern different subject matters (art. 30 <a href="https://legal.un.org/ilc/texts/instruments/english/conventions/1_1_1969.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Vienna Convention on the Law of Treaties</a> (“VCLT”)) and operate in different spheres. For example, the allocation of taxing jurisdiction under a DTC has nothing to do with the introduction of retroactive domestic tax legislation breaching the fair and equitable treatment standard. It might be argued that some overlap may exist between the limited non-discrimination of DTCs and the broader standards of protection of IIAs. However, arbitral tribunals have regularly found that the fact that two standards are unequal or apply to the same facts does not make them incompatible under art. 30 VCLT. It is therefore unlikely that an arbitral tribunal would accept the overriding effect of the first sentence of the clause in matters a DTC does not regulate (for example the arbitrary enactment or application of a taxation measure).
Of course, the second sentence of the ISDS model clause could come into play in matters not falling within the scope of a DTC. Although the sentence has a far-reaching scope, it is doubtful that an arbitral tribunal would be prepared to limit its jurisdiction based on an interpretation of this second sentence by CAs that is clearly “ultra vires”. Accordingly, the clause should not, in our view, apply to switch off ISDS in instances involving a measure that is not a taxation measure under the relevant IIA applicable between the parties or is clearly a mala fide taxation measure.
Also, the question of whether a DTC that would incorporate the new ISDS model clause would qualify as a valid inter se agreement to modify a multilateral treaty under art. 41 VCLT (for example in connection with <a href="https://www.energychartertreaty.org/provisions/part-iii-investment-promotion-and-protection/article-16-relation-to-other-agreements/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">art. 16 of the Energy Charter Treaty</a>) appears to have been neglected by the drafters of the clause. The latter seem indeed to wrongly assume that investment treaty protection is confined to bilateral investment treaties. Finally, the ISDS model clause cannot be used by EU members in connection with EU trade agreements to switch off the dispute resolution procedures they regulate.
For the foregoing reasons, as well as other interpretative problems it presents, it is not surprising that the latest commentaries to the ISDS model clause now incorporate a strong minority objection relating to its introduction in tax treaty practice.
Conclusions
The brand new ISDS model clause, rather than being in line with a “whole-of-government approach”, leads to an undesirable fragmentation between international taxation and investment treaty protection. The clause also treats tax issues differently from other fields of law in an unjustified manner. Moreover, the new UN Commentaries on Article 25 have not thoroughly considered several interpretative problems and compatibility issues, notably the relation of the new clause with multilateral trade treaties (both from an international and EU law point of view). It thus remains uncertain whether the new clause will be capable of limiting the jurisdiction of arbitral tribunals as intended by its drafters. For all these reasons, before including the clause in their DTCs, countries should ponder whether it may have detrimental effects on the attraction of foreign investments and lead to new kinds of disputes.
<a href="#_ftnref1" name="_ftn1">[1]</a> The October 2024 version of the UN Model clause commented here has been critically discussed in R. Danon / A. Martín Jiménez, The UN Model Tax Convention’s Attempt to Override Investment Treaties : A Critical and Normative Assessment, Tax Notes International, vol. 177, February 10, 2025, pp. 825 ff. See also our previous coverage
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<title>Transfer Pricing corresponding adjustments as of right</title>
<link>https://kluwertaxblog.com/2025/04/08/transfer-pricing-corresponding-adjustments-as-of-right/</link>
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<dc:creator><![CDATA[Jonathan Schwarz (Temple Tax Chambers; King’s College London)]]></dc:creator>
<pubDate>Tue, 08 Apr 2025 08:15:27 +0000</pubDate>
<category><![CDATA[Arbitration]]></category>
<category><![CDATA[Arm's Length]]></category>
<category><![CDATA[BEPS]]></category>
<category><![CDATA[Double Taxation]]></category>
<category><![CDATA[International Tax Law]]></category>
<category><![CDATA[MAPs and APAs]]></category>
<category><![CDATA[Norway]]></category>
<category><![CDATA[OECD]]></category>
<category><![CDATA[OECD MC Convention]]></category>
<category><![CDATA[Permanent Establishments]]></category>
<category><![CDATA[Tax Treaties]]></category>
<category><![CDATA[Transfer Pricing]]></category>
<category><![CDATA[UN Tax Convention]]></category>
<category><![CDATA[United Nations]]></category>
<category><![CDATA[Article 25]]></category>
<category><![CDATA[Article 9(1)]]></category>
<category><![CDATA[Article 9(2)]]></category>
<category><![CDATA[Corresponding adjustments]]></category>
<category><![CDATA[Sweden]]></category>
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<description><![CDATA[Transfer pricing adjustments under Article 9 of the model treaties are the most common form of dispute that is dealt with under the mutual agreement procedure. It is for this reason that the OECD gathers and publishes statistical data on such cases separate from all other kinds of tax treaty disputes. Recourse to MAP to... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/08/transfer-pricing-corresponding-adjustments-as-of-right/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Transfer pricing adjustments under Article 9 of the model treaties are the most common form of dispute that is dealt with under the mutual agreement procedure. It is for this reason that the OECD gathers and publishes <a href="https://www.oecd.org/en/data/datasets/mutual-agreement-procedure-statistics.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">statistical data</a> on such cases separate from all other kinds of tax treaty disputes.
Recourse to MAP to resolve transfer pricing issues may be a reason why there are few judicial decisions on the interpretation and application of Article 9. A recent decision of the Swedish Supreme Administrative Court on taxpayers’ rights to a corresponding adjustment, shines a light on this largely dark corner.
<h4>Interest deduction denied</h4>
In <a href="https://www.domstol.se/globalassets/filer/domstol/hogstaforvaltningsdomstolen/2024/domar-och-beslut/1348-24-1349-24.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Played Holding AB v Skatteverket,</a> Mål nr 1348-24 and 1349-24( 25 November 2024) a Swedish parent company loaned money to its Norwegian subsidiary at interest. The Norwegian tax authorities denied a part of the interest deduction claimed by the subsidiary as exceeding the arm’s length amount, while the full amount of actual interest paid was taxed in Sweden. The Swedish parent company appealed against a refusal by the Swedish tax authorities to exclude the amount of interest that was found not deductible in Norway from taxation in Sweden. The taxpayer argued that the excess interest should not be taxed in Sweden and that Article 9(2) of the Nordic Double Tax Treaty entitled it to the relief.
Article 9(2) of the Nordic Treaty is patterned on Article 9(2) of the OECD Model. However, it also includes an expression borrowed from the OECD Commentary to Article 9 that any corresponding adjustment must be “justified both in principle and in amount”.
<h4>Appellate rights</h4>
The Supreme Administrative Court noted that Sweden is bound by the treaty under international law, which has force in Swedish law and has priority over internal tax provisions. The court ruled that the Swedish tax authorities are bound to apply the treaty, including Article 9(2) and not just in their capacity as competent authority for purposes of the treaty. Furthermore, a taxpayer who is dissatisfied with the assessment of the tax authority may appeal such an assessment to the courts. It follows that, on appeal, a court may determine whether a corresponding adjustment pursuant to Article 9(2) is justified both in principle and amount and should accordingly be made.
The Court further said that the obligations on the competent authorities of the Contracting States to consult each other, if necessary, does not mean that only the competent authorities (the Swedish Tax Agency) can make a corresponding adjustment and that the courts are prevented from doing so.
<h4>Treaty interpretation</h4>
In my view the decision is correct as a matter of interpretation of Article 9(2). First, it is clear that, if a contracting State makes a primary adjustment under Article 9(1), then the other state is required to make a corresponding adjustment by reference to arm’s length conditions. This obligation is on the “other contracting State” and not only on the competent authorities. Second, the obligation on the competent authorities (as defined, for example, in Article 3(1)(f) of the OECD or UN Models) is to consult with the other competent authority if necessary. Third, there is no necessity for the taxpayer to present a case for the mutual agreement procedure in Article 25(1) of the Models. The obligation to make a corresponding adjustment arises by reason of the primary adjustment made by the other state under Article 9(1).
Paragraph 4.35 of the OECD Transfer Pricing Guidelines is misleading in saying that corresponding adjustments are non-mandatory in nature. It is only correct in saying that the courts who are requested to make an adjustment are not automatically bound by any decision in the state where the primary adjustment is made, but can consider the application of the arm’s length principle independently.
<h4>Prevention of economic double taxation</h4>
The purpose of the obligation on the competent authorities to consult if necessary, is to prevent economic double taxation from arising due to potentially differing views of whether an amount is arm’s length or not without the need for taxpayer intervention, thus minimising the need for cases to be presented under article 25(1). This obligation operates in parallel with, and should be viewed as an extension of, Article 25(3). As such, it is a part of<a href="https://www.oecd.org/en/publications/making-dispute-resolution-mechanisms-more-effective-action-14-2015-final-report_9789264241633-en.html" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right"> BEPS Action 14</a> Minimum Standard 1.1.
These conclusions are consistent with the fact that the mutual agreement procedure in Article 25(1) and (2) is in addition to, and not in place of, domestic remedies.
In most cases, as indicated by OECD statistics, presentation of a case for the mutual agreement procedure will be the preferred option for resolution of transfer pricing disputes. Just as the ability of taxpayers to contest primary transfer pricing adjustments in domestic courts provides and important protection, so too does the ability to seek a corresponding adjustment in the domestic courts of the other state. The right to judicial determination of the corresponding adjustment is of particular significance where the treaty does not provide for mandatory binding arbitration if the competent authorities are unable to reach agreement.
<h4>Attribution of profits to permanent establishments</h4>
The right to judicial determination of corresponding adjustments is of equal force for the attribution of profits to permanent establishments of treaties that follow Article 7 of the OECD Model, 2010 and later versions. Article 7(3) provides for corresponding adjustments in effectively identical terms to Article 9(2). This issue does not arise in relation to treaties patterned on Article 7 of the UN Model or the pre-2010 OECD Model.
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<title>Digital Service Tax, dual strategy against the US pressure</title>
<link>https://kluwertaxblog.com/2025/04/03/digital-service-tax-dual-strategy-against-the-us-pressure/</link>
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<dc:creator><![CDATA[Raffaele Russo (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Chiomenti)]]></dc:creator>
<pubDate>Thu, 03 Apr 2025 14:00:24 +0000</pubDate>
<category><![CDATA[Digital economy]]></category>
<category><![CDATA[Digital services tax]]></category>
<category><![CDATA[DST]]></category>
<category><![CDATA[United States]]></category>
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<description><![CDATA[Trump wasted no time. Just over a month after the 20 January Memoranda, the President issued a new Memorandum on 21 February, this time setting his sights squarely on the digital sector. Presented as a measure to defend American companies and innovators against what is called “overseas extortion”, the Memorandum paves the way for the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/03/digital-service-tax-dual-strategy-against-the-us-pressure/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Trump wasted no time. Just over a month after the 20 January Memoranda, the President issued a new Memorandum on 21 February, this time setting his sights squarely on the digital sector. Presented as a measure to defend American companies and innovators against what is called “overseas extortion”, the Memorandum paves the way for the imposition of tariffs and protective measures in response to “one-sided, anti-competitive policies and practices of foreign governments”.
Once again, behind the rhetoric of defending national interests lies a strategy that risks exacerbating trade tensions and further undermining the already strained international tax landscape. The memorandum reaffirms Trump’s protectionist agenda, giving his administration broad power to oppose Digital Service Taxes (DSTs), in addition to other policies deemed discriminatory and disproportionate against American Big Tech (read: the Digital Markets Act and the Digital Services Act).
During the first Trump presidency, the United States had already launched investigations under Section 301 of the Trade Act of 1974 against countries that had introduced a DST. It considered the DST of Austria, India, Italy, Spain, Turkey and the United Kingdom to be discriminatory against American digital companies and inconsistent with international tax principles, imposing additional tariffs of up to 25% on approximately $1.2 billion worth of United States imports from these six countries. However, on October 2021, tensions were tempered with a political agreement reached under the Biden Administration, which led to the closure of the investigation without the United States applying countermeasures (at least, “until OECD Pillar 1 takes effect”).
With the 21 February Memorandum, the Office of the United States Trade Representative (USTR) is directed to consider not only whether to renew Section 301 investigations on the DSTs of the six countries mentioned above, but also whether to conduct new investigations under Section 302(b) against other countries, particularly Canada, which recently introduced its own DST.
Finally, the Memorandum invests the Secretary of the Treasury and the Secretary of Commerce with new responsibilities, requiring them, along with the USTR, to:
<ul>
<li>identify trade and regulatory practices that – in the digital economy and beyond – “discriminate against, disproportionately affect, or otherwise undermine the global competitiveness or intended operation” of American companies;</li>
<li>investigate policies in the European Union or the United Kingdom that has “the effect of requiring or incentivizing the use or development of United States companies’ products or services in ways that undermine freedom of speech and political engagement or otherwise moderate content”;</li>
<li>assess whether foreign countries impose, “including, without limitation, in the digital economy”, discriminatory or extraterritorial taxes against American taxpayers, or any other tax measures that “otherwise undermines the global competitiveness of United States companies, is inconsistent with any tax treaty of the United States, or is otherwise actionable under section 891 of title 26, United States Code, or other tax-related legal authority”.</li>
</ul>
Trump’s strategy against DSTs is clear, and countries that that have implemented them face a choice: give in to Washington’s pressure or respond to the American administration’s rhetoric.
In this scenario, coordination at the European level and/or among the countries that apply similar DSTs would be useful to put on the table shared arguments that can demonstrate that these taxes are neither discriminatory nor extraterritorial. In this regard, the 2021 data on the Italian DST witness that. Indeed, the number of taxpayers subject to the DST included 59 residents in Italy, 40 in the United States, 16 in Ireland, 15 in Germany, 13 in the United Kingdom, 9 in France, 9 in the Netherlands, 9 in Singapore, and 6 in Australia. Numbers that contradict the narrative that DST applies only to American businesses.
If, despite the discussions, Washington remains deaf to the arguments made, it would be appropriate to consider countermeasures, but that are neither irrational nor unjustified, as some of the positions expressed by the American administration in recent weeks for example in relation to VAT. They would instead be grounded on a solid policy rationale. In this context, it is worth recalling that the DST ratio is to tax the extraction of value that occurs through the storage, processing, and exploitation of data that users make available online in exchange for otherwise free digital services.
Therefore, one could consider (1) introducing a progressive tax rate mechanism: the higher the group’s revenue (an indicator of greater monetization of user contributions), the higher the tax rate; (2) extending the scope of the DST to other form of monetization of users’ contributions, beyond targeted advertising, intermediation, or data sales. Changes that would then have a solid rationale and be able to hit where it is most appropriate to do so.
 
 
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<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
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<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
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<title>The Contents of Highlights & Insights on European Taxation</title>
<link>https://kluwertaxblog.com/2025/04/02/the-contents-of-highlights-insights-on-european-taxation-2/</link>
<comments>https://kluwertaxblog.com/2025/04/02/the-contents-of-highlights-insights-on-european-taxation-2/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Wed, 02 Apr 2025 09:12:07 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19977</guid>
<description><![CDATA[ Highlights & Insights on European Taxation Please find below a selection of articles published this month (March 2025) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/02/the-contents-of-highlights-insights-on-european-taxation-2/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[ <a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (March 2025) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
Year 2025, no. 3
TABLE OF CONTENTS
GENERAL TOPICS
– Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties. White House
(comments by the Editorial Board) (H&I 2025/91)
DIRECT TAXATION, LEGISLATION
– Clean Industrial Deal. Action Plan on taxes on electricity
(comments by the Editorial Board) (H&I 2025/92)
– Clean Industrial Deal. Communication. Roadmap. European Commission
(comments by the Editorial Board) (H&I 2025/90)
DIRECT TAXATION, CASE LAW
– Ministarstvo financija (Bourse Erasmus+) (C-277/23). Support for learning mobility received by child under Erasmus+ programme excluded from determination basic personal allowance parent. Court of Justice
(comments by Edwin Thomas) (H&I 2025/63)
INDIRECT TAXATION, CASE LAW
– Foreningen C and Others (C-573/22). Denmark may charge VAT on statutory media licence fee. Court of Justice
(comments by Marja Hokkanen) (H&I 2025/67)
– Weatherford Atlas (C-527/23). EU law precludes refusal of VAT deduction. Purchase of administrative services provided within the same group of companies. Court of Justice
(comments by Raluca Rusu) (H&I 2025/64)
CUSTOMS AND EXCISE
– EU countermeasures to US steel and aluminium tariffs. European Commission
(comments by the Editorial Board) (H&I 2025/97)
– BALTIC CONTAINER TERMINAL (C-376/23). Free zone customs procedure. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2025/73)
– Malmö Motorrenovering (C-781/23). Goods placed under temporary admission procedure. Extension period. Court of Justice
(comments by Piet Jan de Jonge) (H&I 2025/72)
MISCELLANEOUS
– Communication. Savings and Investment Union. Examining harmonised approach to ownership of investments and fund structures. European Commission
(comments by the Editorial Board) (H&I 2025/101)
FREE ARTICLE
– Ministarstvo financija (Bourse Erasmus+) (C-277/23). Support for learning mobility received by child under Erasmus+ programme excluded from determination basic personal allowance parent. Court of Justice
(comments by Edwin Thomas) (H&I 2025/63)
The non application of Regulation 883/2004 (paragraph 31)
The CJ first ruled that a tax advantage which reduces, under certain conditions, the amount of income tax, that allowance does not constitute a family benefit within the meaning of Article 1(z) of Regulation (EC) No 883/2004 of the European Parliament and of the Council of 29 April 2004 on the coordination of social security systems (‘Regulation No 883/2004’). Therefore, Article 67 of Regulation 883/2004 is not applicable (paragraph 31).
Practically, this means that the conditions on which certain expenses are deductible from the income tax in an EU Member State (or a Member State of the European Economic Agreement, because Regulation 883/2004 is also applicable in Norway, Iceland and Liechtenstein) belongs fully to the competence of EU Member States. That aforementioned deduction, therefore, is not governed by EU law.
Article 18 TFEU is also not applicable (paragraph 32)
The CJ ruled that – in general – parents/tax subjects with children who have not exercised their right to free movement are not comparable to parents/tax subjects with children who have actually exercised their right to free movement (paragraph 32).
The right of Union citizenship (Articles 20 and 21 TFEU)
The CJ ruled that this right comprises the following rules:
<ul>
<li>a national of a Member State who has exercised, in his or her capacity as a Union citizen, his or her freedom to move and reside within a Member State other than his or her Member State of origin, may rely on the rights pertaining to Union citizenship, in particular the rights provided for in <a href="https://www.inview.nl/openCitation/id80191c7014f529390c5a75b850e8e583" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 21</a>(1) TFEU, including, where appropriate, against his or her Member State of origin (paragraph 37);</li>
</ul>
 
<ul>
<li>national legislation which places certain nationals at a disadvantage simply because they have exercised their freedom to move and to reside in another Member State constitutes a restriction on the freedoms conferred by <a href="https://www.inview.nl/openCitation/id80191c7014f529390c5a75b850e8e583" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 21</a>(1) TFEU on every citizen of the Union (paragraph 38);</li>
</ul>
 
<ul>
<li>The opportunities offered by the TFEU in relation to freedom of movement for citizens of the Union cannot be fully effective if a national of a Member State could be dissuaded from availing of them by obstacles resulting from his or her stay in another Member State because of legislation of his or her State of origin which penalises the mere fact that he or she has availed of those opportunities , which is particularly important in the field of education (paragraphs 39 and 40);</li>
</ul>
 
<ul>
<li>As a main rule, EU law offers no guarantee to a citizen of the Union that the exercise of his freedom of movement will be neutral as regards taxation. This given the disparities in the tax legislation of the Member States. This rule also applies to a situation where the person concerned has not himself or herself made use of the right of movement, but claims to be the victim of less favourable treatment following the exercise of a family member’s freedom of movement (paragraph 43);</li>
</ul>
 
<ul>
<li>Unfavourable tax consequences for a taxable parent with a dependent child who has exercised his or her freedom of movement constitute a restriction on freedom of movement within the meaning of <a href="https://www.inview.nl/openCitation/id80191c7014f529390c5a75b850e8e583" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 21</a>TFEU, where they result from the exercise of that freedom by that child. The fact that those unfavourable consequences have thus materialised, not for the child who has exercised his or her right to free movement but for that parent, whether or not that parent has exercised that right, is thus irrelevant for the purpose of establishing the existence of a restriction on freedom of movement under <a href="https://www.inview.nl/openCitation/id80191c7014f529390c5a75b850e8e583" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 21</a> the effects of that restriction may be relied on, not only by the Union citizen who has exercised his or her freedom of movement but also by the Union citizen on whom that first citizen is dependent and who, therefore, is directly disadvantaged by the effects of that restriction (paragraph 49 and 50).</li>
</ul>
The extension of the scope of the free citizenship
In this procedure, the scope of the free citizenship is extended from the situation where the tax subject and/or his or her spouse is confronted with the negative effects of free movement within the EU to a situation where a tax subject is confronted with negative effects of free movement of Union citizens who are dependent on that tax subject. In this case, the negative effects of free movement of children on the tax position of their parents constitute an infringement of the right to free movement based on the free citizenship. Future proceedings will tell whether also the free movement of other persons than children can lead to an infringement of the right to free movement based on the free citizenship.
The remaining questions after this ruling
The right to free citizenship, as meant in <a href="https://www.inview.nl/openCitation/ida16b37b29c2b8feb4534a6837eaa8d72" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Articles 20</a> and 21 of the TFEU, is restricted to nationals of the EU Member States. Citizens of, for example, the European Economic Area (EEA, comprising of Norway, Iceland and Liechtenstein), Switzerland, United Kingdom and other third country citizens are not entitled to the form of free citizenship as meant in <a href="https://www.inview.nl/openCitation/ida16b37b29c2b8feb4534a6837eaa8d72" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Articles 20</a> and 21 TFEU. The nuance here is that the EEA countries are part of the Schengen zone.
The essence of this ruling is that free cross border movement into another EU country by an EU citizen (the right to free citizenship), who is dependent on his or her parents (hereinafter: the ‘dependent person’) can be attributed to his or her parents, when this cross-border movement of this child leads to negative fiscal consequences for his or her parents.
In my opinion, the following questions are still not answered:
<ul>
<li>Can the right to free citizenship be invoked when the dependent person has migrated into an EU Member State, but the parents (EU citizens) live an a non-EU Member State?</li>
</ul>
 
<ul>
<li>Can the right to free citizenship be invoked when the dependent person has migrated into an EU Member State, but the parents (non-EU citizens) live in an EU Member State?</li>
</ul>
 
<ul>
<li>Can the right to free citizenship be invoked when the dependent person has migrated into an EU Member State, but the parents/EU citizens reside in one of the areas named in <a href="https://www.inview.nl/openCitation/idd222be42ac407243b7edac544ab03e0d" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">annex II</a>of the TFEU like, for example, Aruba?</li>
</ul>
 
<ul>
<li>Can the right to free citizenship be invoked when the dependent person has migrated into an EU Member State, but the parents/EU citizens reside in one of the EEA Member States (Norway, Iceland and Liechtenstein) and/or Switzerland and/or United Kingdom and or another third country?</li>
</ul>
In short: A very interesting ruling, the scope of which will hopefully become known in the near future.
Edwin Thomas 
<hr /><h2>More from our authors:</h2><table>
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<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
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by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
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<title>Who’s Paying What, and Where? Insights About the Global Shift Toward Tax Transparency</title>
<link>https://kluwertaxblog.com/2025/04/01/whos-paying-what-and-where-insights-about-the-global-shift-toward-tax-transparency/</link>
<comments>https://kluwertaxblog.com/2025/04/01/whos-paying-what-and-where-insights-about-the-global-shift-toward-tax-transparency/#respond</comments>
<dc:creator><![CDATA[Luis Wolf Trzcina. (Brazilian economist, accountant and lawyer. Master in Tax Law in Brazil and in the United States. )]]></dc:creator>
<pubDate>Tue, 01 Apr 2025 16:03:03 +0000</pubDate>
<category><![CDATA[Corporate income tax]]></category>
<category><![CDATA[ESG]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19971</guid>
<description><![CDATA[Taxes are an unavoidable aspect of our lives and play a crucial role by shaping how a country grows and serves its people. Beyond being a financial obligation, taxes represent the primary source of government revenue, directly supporting social and economic objectives. The connection between tax and ESG is primarily rooted in its Social (S)... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/04/01/whos-paying-what-and-where-insights-about-the-global-shift-toward-tax-transparency/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[Taxes are an unavoidable aspect of our lives and play a crucial role by shaping how a country grows and serves its people. Beyond being a financial obligation, taxes represent the primary source of government revenue, directly supporting social and economic objectives.
The connection between tax and ESG is primarily rooted in its Social (S) implications, particularly in how companies contribute to public finances, by funding education, healthcare, infrastructure, national defense and social security.
For this reason, aggressive tax avoidance can damage corporate reputation, often through public “tax shaming”, as consumers increasingly favor companies that fairly contribute to society. As a result, companies must consider the visibility of their “fair” contribution to society—supporting public services, infrastructure, economic growth, and social welfare.
The Environmental (E) pillar can also part of the tax strategy, as it involves the use of environmental tax incentives – for example, how a company uses tax credits for green energy, research and development or carbon reduction -, as well as its exposure to carbon taxes or emissions trading schemes as financial risks.
Tax can equally be tied to Governance (G) aspects. For example, ethical companies commit to paying taxes where economic activity takes place, rather than shifting profits to low-tax jurisdictions. Furthermore, understanding how tax risks and policies are governed at the board level is an important indicator of good governance and it is closely linked to anti-bribery and anti-corruption policies.
The global tax landscape is undergoing major change, with increasing pressure from the public and policymakers to address unfair tax practices, especially by large corporations. In this context, tax transparency has emerged as a keyway for businesses to demonstrate responsible tax behavior. Stakeholders increasingly want to know where companies pay taxes, how much they pay, and how they manage tax risks.
For companies, being transparent is a way to build and protect their reputation, earning trust and credibility not only with investors, employees, regulators, and policymakers, but also with customers.
When effectively disclosing their contributions, tax transparency ensures that governments, stakeholders, and the public have clear insight into taxes paid, tax planning strategies, litigation procedures, and compliance with tax laws. It plays a critical role in the fight against tax evasion, aggressive tax avoidance, and base erosion and profit shifting.
Therefore, voluntary tax transparency refers to companies proactively disclosing tax-related information beyond legal requirements. This may include country-by-country tax payments, explanations for tax planning decisions, and commitments to responsible tax practices. Being voluntary, it is frequently pursued for several reasons:
<ol>
<li>Building Trust with Stakeholders – Investors, customers, and employees increasingly expect corporations to act responsibly.
<ul>
<li>Reputation Management – Avoiding accusations of aggressive tax avoidance or unethical tax planning, which can lead to “tax shaming.” Starbucks and Amazon, for instance, faced a public backlash over tax avoidance, damaging their reputations and prompting regulatory scrutiny.</li>
</ul>
</li>
<li>Regulatory Readiness – Preparing for future mandatory disclosure requirements.</li>
<li>Sustainability & ESG Integration – Tax transparency is becoming a core part of ESG strategies as the payment of “fair share” of taxes is fully linked with “E” and “S” pillars, besides being a strong sign of a well-managed “G”.</li>
</ol>
It reflects a growing trend among corporations to uphold transparency, integrity, and accountability in tax practices. One widely used framework is the GRI Tax Standard 207-2020, introduced by the Global Reporting Initiative (GRI) in 2019. It represents the first global standard dedicated to tax transparency within the ESG framework. This comprehensive approach enables organizations to inform stakeholders with a clear and detailed view of their tax practices, as it encourages companies to voluntarily disclose:
<ul>
<li>Tax strategy and governance</li>
<li>Public country-by-country reporting (pCbCR)</li>
<li>Tax risk management approach</li>
</ul>
Companies like Vodafone, Shell, Vale and Anglo American have adopted GRI 207 reporting.
Additionally, the Fair Tax Mark, a UK-based certification, recognizes companies that voluntarily disclose fair and responsible tax practices. It serves as a “gold standard” of responsible tax conduct and certifies that a business:
<ul>
<li>Follows both the spirit and the letter of the law</li>
<li>Avoids tax avoidance practices such as the artificial use of tax havens</li>
<li>It is transparent about profits made and taxes paid</li>
</ul>
Companies like Timpson, Lush, and SSE have received this accreditation, signaling their commitment to paying fair taxes.
Also, the B Team, a global nonprofit focused on responsible business practices, has also developed Responsible Tax Principles. These have been endorsed by companies such as Unilever, Allianz, Maersk, Natura Cosméticos, and Novozymes. These principles emphasize transparency, fair tax contributions, and collaboration with tax authorities.
<h4>Final Thoughts</h4>
Tax practices were traditionally viewed as financial or legal matters, separate from ESG concerns. However, stakeholders, including investors, regulators, and consumers, now see tax as a central component of corporate responsibility and ethical governance.
It is important to recognize that companies are at different stages in their journey toward tax transparency. There is no one-size-fits-all approach, as motivations and capacities vary.
Nonetheless, a clear trend is emerging: more large multinational groups are choosing to publicly share tax-related information as part of their broader commitment to transparency.
Luis Wolf Trzcina. Brazilian economist, accountant and lawyer. Master in Tax Law in Brazil and in the United States. Writer of the book “The Marvellous Connections Between ESG and Taxation”, recently published by Wolters Kluwer.
 
Conflict of interest: I declare no conflict of interest.
Use of AI: No AI was used for the writing of the blog.
<hr /><h2>More from our authors:</h2><table>
<tr>
<td><a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">
<img align="left" border="3" src="http://wolterskluwerblogs.com/tax/wp-content/uploads/sites/59/2021/11/10058516-0002_OR2_290.jpg" width="60" title="Schwarz on Tax Treaties, Sixth Edition" alt="Schwarz on Tax Treaties, Sixth Edition" />
</a></td>
<td>
<a title="Schwarz on Tax Treaties, Sixth Edition" href="https://lrus.wolterskluwer.com/store/product/schwarz-on-tax-treaties-sixth-edition/" target="_blank">Schwarz on Tax Treaties, Sixth Edition</a> 
by Jonathan Schwarz 
€ 211 

</td>
</tr></table> <hr />]]></content:encoded>
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<title>Lowy: the first PPT-case</title>
<link>https://kluwertaxblog.com/2025/03/24/lowy-the-first-ppt-case/</link>
<comments>https://kluwertaxblog.com/2025/03/24/lowy-the-first-ppt-case/#respond</comments>
<dc:creator><![CDATA[Melanie Massant (KU Leuven)]]></dc:creator>
<pubDate>Mon, 24 Mar 2025 08:00:11 +0000</pubDate>
<category><![CDATA[India]]></category>
<category><![CDATA[Luxembourg]]></category>
<category><![CDATA[Principal purpose test]]></category>
<category><![CDATA[Uncategorized]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19963</guid>
<description><![CDATA[On December 30th of last year, the Indian Income Tax Appellate Tribunal was the first “quasi judicial institution” to apply the PPT to a treaty-shopping arrangement.[1] The case concerned a dispute between a Luxembourg-based holding company, SC Lowy, and the Indian tax authorities. Facts of the case The Luxembourg holding company, SC Lowy, is owned... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/03/24/lowy-the-first-ppt-case/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[On December 30th of last year, the Indian Income Tax Appellate Tribunal was the first “<a href="https://itat.gov.in/page/about_tribunal" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">quasi judicial institution</a>” to apply the PPT to a treaty-shopping arrangement.<a href="#_ftn1" name="_ftnref1">[1]</a> The case concerned a dispute between a Luxembourg-based holding company, SC Lowy, and the Indian tax authorities.
Facts of the case
The Luxembourg holding company, SC Lowy, is owned by a company located on the Cayman Islands and has made investments all over the world, including in India.
Due to those investments in India, SC Lowy receives business income, capital gains and interest, for which it claims a reduction or exemption on the basis of articles 7, 13(6) and 11, resp., as provided by the Luxembourg-India double tax treaty. However, the Indian tax authorities denied these tax treaty benefits, arguing that a) the arrangement constitutes unacceptable treaty shopping, b) SC Lowy is just a conduit, c) the tax residency certificate received by SC Lowy is not sufficient to establish tax residency, d) SC Lowy is not the Beneficial Owner of the income received, and e) there is no commercial rationale for the establishment of SC Lowy. (§14)
For the interposition of SC Lowy to constitute unacceptable treaty shopping, as asserted by the Indian tax authorities, the arrangement must however fulfill the following two tests foreseen in the Principal Purpose Test, which was included in art. 29 of the Luxembourg-India double tax treaty:
<ul>
<li>It must be reasonable to conclude that obtaining the treaty benefits foreseen by the Luxembourg-India double tax treaty was one of the principal purposes of the arrangement;</li>
<li>It must be established that granting the treaty benefits in these circumstances would contradict the object and purpose of the relevant treaty provisions.</li>
</ul>
According to SC Lowy the first test of the PPT was not fulfilled. The tribunal agreed with SC Lowy and based its conclusion on the following findings (§17-19) regarding SC Lowy:
<ul>
<li>it was incorporated as a holding company in Luxembourg in 2015 and is registered in India as a “Foreign Portfolio Investor”</li>
<li>Only 13.9% of all of its investments are located in India</li>
<li>It has incurred substantial operational expenditure relating to investments in Luxembourg in the nature of consulting fees, legal and litigation fees, other professional fees apart from other administrative expenses such as rent paid for office premises, bank account charges, accounting fees, etc.</li>
<li>It exists till date in Luxembourg and continues to hold substantial investments.</li>
</ul>
Given that the first test of the PPT is not fulfilled, the tribunal concludes that the PPT cannot be applied to deny the relevant treaty benefits. In addition, the tribunal also concluded that SC Lowy was the Beneficial Owner of the income and thus not a mere conduit and that the tax residency certificate was sufficient to establish its tax residency.
On the basis of the tribunals analysis, the Indian tax authorities could thus not deny the treaty benefits provided by the India-Luxembourg double tax treaty.
An analysis in line with the OECD/UN Commentaries on the PPT 
The OECD/UN Commentaries try to clarify the application of the PPT, thereby providing some examples. The analysis of the tribunal in the Lowy case seems to be in line with these Commentaries.
<ul>
<li>In examples G, H and K of the OECD/UN Commentaries on the PPT (§ 182), a corporation is interposed between a principal shareholder and its investments. The OECD refers to the objectively observable factors of this interposed company that may indicate the presence of an economic activity, such as personnel, assets, functions, risks and activities, to then conclude that the first test of the PPT was not met. These factors often fall under the term “economic substance”. While there is no consensus on the importance of the economic substance of an interposed company for the analysis of the first test of the PPT, according to the OECD Commentaries, it does seem to matter whether the interposed company has sufficient economic substance to carry out the investments for which it was formed.</li>
</ul>
The Indian tribunal also seems to hold this view, referring to the “substantial investments” and associated significant expenses of the interposed Luxembourg holding company, SC Lowy, including professional fees, as well as administrative expenses such as rent for office premises, bank charges, accounting fees, etc., which indicate the effective exercise of an economic activity, i.e. the investment in various assets around the world.
<ul>
<li>Example D of the OECD/UN Commentaries deals with a “collective investment vehicle” established in State R with a “diversified portfolio of investments” of which 15% consists of shares of companies that are resident in State S. Under the treaty between R and S, the withholding tax on dividends is reduced. In the specific example, according to the OECD/UN, it would not be reasonable to deny the company the treaty benefit unless the investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining a benefit.</li>
</ul>
In this example, the OECD/UN considers the limited number of investments by the interposed company in State R that could result in a treaty benefit (in this case, only 15%) to be a relevant factor in concluding that obtaining the tax benefit was not a primary purpose for interposing the company (under the aforementioned proviso). Also in the Lowy case, the Indian tribunal refers to the fact that the investments in India represent only 14 % of the total investment portfolio held by the Luxembourg holding company.
<ul>
<li>In line with OECD/UN examples D and K, the tribunal also referred to the fact that SC Lowy had filed its tax returns and paid taxes on its income in its state of residence, i.e. Luxembourg.</li>
</ul>
These three aspects – the economic substance of the interposed company, the limited percentage of investments that would result in the tax benefit, and the fact that the interposed company pays its taxes in its state of residence – were seen by the tribunal, in line with the OECD/UN examples, as important factors in concluding that obtaining the tax benefit was not one of the principal purposes for the interposition of SC Lowy.
In addition to these three aspects, it also appears to be important for the tribunal that SC Lowy was registered as a Foreign Portfolio Investor. Such investors are subject to certain Indian regulation. This is reminiscent of the OECD/UN’s assumption that listed companies are not formed with the purpose to engage in treaty shopping (OECD/UN Comments on Art. 29, § 15), presumably because listed companies are subject to strict regulation.
Moreover, in line with the OECD/UN Commentaries, the tribunal relies on an objective analysis, based on facts and circumstances, to determine whether obtaining the treaty benefit was one of the principal purposes for the interposition of the SC Lowy, as opposed to a purely subjective analysis based on the intentions of the taxpayers. Moreover, the Indian government recently confirmed in a circular of January 2025, regarding the application of the PPT in Indian tax treaties, that the PPT analysis requires a “context-specific, fact-based exercise” to be conducted on a case-by-case basis, “taking into account the objective facts and circumstances.” In the same circular, the Indian government confirms that tax authorities may refer to Action Plan 6, as well as the UN Commentaries on the PPT, as additional or supplementary guidance in applying the PPT.
Conclusion
The conclusion of the first PPT-case is in line with what could have been expected on the basis of the OECD/UN Commentaries and the examples included therein. As prescribed by the Commentaries and implied by the examples, the tribunal applies an objective analysis, taking into account the economic substance of the interposed company, as well as its limited number of investments that could rely on the relevant treaty benefit and the fact that it pays its taxes in Luxembourg, to come to the conclusion that obtaining the treaty benefits provided by the Luxembourg-India double tax treaty was not one of the principal purposes of the interposition of SC Lowy.
However, it will not always be as clear whether obtaining a treaty benefit was one of the principal purposes of interposing a company. What if, for example, a taxpayer receives treaty benefits by interposing an existing company with economic substance between itself and its investments? Or what if a tax benefit applies to 80% of the investments and the interposed company does not have any economic substance? The OECD/UN Commentaries do not provide an answer to these and many other situations that could potentially fulfill the first test of the PPT.
Moreover, there is even more controversy surrounding the second test of the PPT. Since the first test was not met in the case at hand, the tribunal does not discuss the second test.
We will thus have to wait for future cases that will hopefully provide more clarity on the application of both the first and the second test of the PPT.
Since caselaw is highly context specific and dependent on the jurisdictions where the arrangement takes place, it would however be preferable for the OECD/UN itself to resolve any ambiguities or uncertainties by clarifying the PPT application in the OECD/UN Commentaries.
<a href="https://www.law.kuleuven.be/fisc/leden/00141013" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Mélanie Massant,</a> KU Leuven
Conflict of interest: the author declares no conflict
 
 
<a href="#_ftnref1" name="_ftn1">[1]</a> <a href="https://indiankanoon.org/doc/39588531/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">SC Lowy P.I. (LUX) S.A.R.L., vs. ACIT, 30 December 2024</a>.
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<title>The UTPR and the (disguised) discrimination under tax treaties</title>
<link>https://kluwertaxblog.com/2025/03/21/the-utpr-and-the-disguised-discrimination-under-tax-treaties/</link>
<comments>https://kluwertaxblog.com/2025/03/21/the-utpr-and-the-disguised-discrimination-under-tax-treaties/#respond</comments>
<dc:creator><![CDATA[Błażej Kuźniacki ( PwC Netherlands, Lazarski University and Singapore Management University) and Mees Vergouwen (Assistant professor at Leiden University and tax advisor at De Brauw Blackstone Westbroek, Amsterdam. )]]></dc:creator>
<pubDate>Fri, 21 Mar 2025 14:07:01 +0000</pubDate>
<category><![CDATA[MNEs]]></category>
<category><![CDATA[Pillar II]]></category>
<category><![CDATA[UTPR]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19956</guid>
<description><![CDATA[The authors are winners of the Mitchell B. Carroll Prize for the last two consecutive years, as awarded at the International Fiscal Association global congresses in 2023 and 2024 in Cancún (Mexico) and Cape Town (South Africa), respectively.* The compatibility of the Undertaxed Profits Rule (UTPR) with tax treaties based on the OECD or the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/03/21/the-utpr-and-the-disguised-discrimination-under-tax-treaties/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The authors are winners of the Mitchell B. Carroll Prize for the last two consecutive years, as awarded at the International Fiscal Association global congresses in 2023 and 2024 in Cancún (Mexico) and Cape Town (South Africa), respectively.*
The compatibility of the Undertaxed Profits Rule (UTPR) with tax treaties based on the OECD or the UN Model Tax Convention (MTC) is an overarching question for all multinational (MNE) groups in scope of GloBE rules and other stakeholders, including shareholders of the MNEs and States of their presence. So far, the main focus has been on the two questions: (i) does the UTPR qualify as a “tax covered” by a tax treaty within the meaning of article 2;<a href="#_ftn1" name="_ftnref1">[1]</a> (ii) if so, is its application compatible with the distributive provisions, in particular article 7(1). A question that has received less attention is the relation of the UTPR to the non-discrimination provision. This question is important because the UTPR results in the imposition of a tax burden for a group entity depending on, essentially, whether the owners of a domestic enterprise are tax resident in jurisdictions that implemented the GloBE rules. Based on the non-discrimination provision under tax treaties, in particular article 24 (5), more burdensome taxation on the basis of the tax residence of the owners is prohibited. Considering that the tax residence of the owners may result in more burdensome taxation for group entities under the UTPR, we aim to highlight in this contribution how such taxation may give rise to an incompatibility with the non-discrimination provision under tax treaties.
The discriminative nature of the UTPR
The discriminative nature of the UTPR may be illustrated as follows. Assume that an MNE Group has an ultimate parent entity A. A holds shares in low-taxed group entity B, tax resident in a non-implementing jurisdiction, and group entity C, tax resident in an implementing jurisdiction. If A were resident in a non-implementing jurisdiction and, as such, would not levy the Income Inclusion Rule (IIR), C becomes subject to the UTPR in respect of the profits of the low-taxed B. If, however, A were tax resident in the same jurisdiction as C, no UTPR would be imposed on C because A would have applied the IIR. This example hence illustrates that the tax burden for C, tax resident in an implementing jurisdiction, is more burdensome if its owner, i.e., the ultimate parent entity, is resident in the other contracting state as compared to being a resident in the same jurisdiction as C. The key question with respect to this discrimination based on the tax residency of the ultimate parent entity is whether it is prohibited by the non-discrimination provision in a tax treaty.
The broad objective scope of non-discrimination in article 24 
In answering this question, the starting point is that the non-discrimination provision typically applies irrespective of the scope of article 2,<a href="#_ftn2" name="_ftnref2">[2]</a> i.e. on all taxes rather than only taxes on income or capital or substantially similar taxes. Considering that the UTPR is clearly a tax, it falls within the scope of the non-discrimination provision irrespective of whether it were to qualify as an in-scope tax within the meaning of article 2. One of the reasons for the broad objective scope of the non-discrimination provision in tax treaties following the OECD or the UN MTCs could be the general importance of non-discrimination under international law.<a href="#_ftn3" name="_ftnref3">[3]</a> More specifically to cross-border taxation, non-discrimination appears to function as a legal device to promote cross-border investment under tax treaties by removing obstacles stemming from discriminatory taxation.<a href="#_ftn4" name="_ftnref4">[4]</a>
The narrow material scope of article 24
Although the objective scope of the non-discrimination provision in tax treaties patterned on the OECD or the UN MTC might be broad, its material scope seems narrow insofar as it covers, in principle, only overt, direct discriminations. Based on this narrow material scope, hidden or indirect forms of discrimination do not seem prohibited by tax treaties even if in most instances the less advantageous treatment burdens the person who is protected by that article.<a href="#_ftn5" name="_ftnref5">[5]</a> In other words, the material scope of article 24 is limited to, and only prohibits, a less favourable treatment that is caused by one of the prohibited criteria mentioned in its paragraphs; discriminations resulting from other criteria do not violate such non-discrimination provision under tax treaties.<a href="#_ftn6" name="_ftnref6">[6]</a> This might seem like a clear-cut distinction. However, it is generally acknowledged that article 24 cannot be circumvented by making the less favorable tax treatment dependent on criteria that are only superficially neutral, which would indicate that there is no direct, overt discrimination, but in substance negate the protection granted by the principle of non-discrimination under tax treaties (disguised discrimination).<a href="#_ftn7" name="_ftnref7">[7]</a> The OECD explicitly acknowledges this in para. 1 of the Commentary to article 24 by indicating that the non-discrimination provision also covers disguised discrimination by providing the so-called “passport” example, i.e., a different treatment based on whether or not a person holds a passport issued by a contracting state would, although not directly based on nationality, constitute a prohibited (disguised) discrimination on the basis of nationality for the purposes of the non-discrimination provision. This example is obvious and pertains to a discriminatory situation of an individual. Clearly, there must be other examples of disguised discriminations, especially within the context of legal persons or entities other than individuals. Support for this view may be derived from international tax treaty jurisprudence wherein it is recognized that some forms of indirect discrimination, i.e., discrimination based on criteria that do not directly match the criteria mentioned in the non-discrimination provision, may also be precluded under non-the discrimination provision.<a href="#_ftn8" name="_ftnref8">[8]</a>
The forms of discrimination prohibited by article 24(5)
The passport example above relates to a (disguised) discrimination based on nationality. In addition to prohibiting discrimination based on nationality, article 24 (5) also prohibits discrimination based on the residence of the owners of a domestic enterprise.<a href="#_ftn9" name="_ftnref9">[9]</a> In this respect, this provision reads as follows:
<ol start="5">
<li>Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.</li>
</ol>
As indicated above, the UTPR can result in more burdensome taxation for a subsidiary as a result of, inter alia, the tax residence of the ultimate parent entity, as well as other parent entities in an MNE Group. Hence, it seems justified to assess the compatibility of the UTPR with this paragraph of the non-discrimination provision. In assessing whether this is the case, a narrow and formalistic interpretation of the non-discrimination provision would lead to the conclusion that the UTPR’s more burdensome taxation for a subsidiary cannot be regarded as a result of a direct, overt discrimination on the basis of the tax residence of a parent entity. This is because the more burdensome taxation of a subsidiary would not be linked only to the tax residency of its direct or indirect parent entities; the more burdensome taxation is only triggered if top-up-taxes are not levied and collected from such parent entities. Consequently, the imposition of the UTPR would not be solely linked to the tax residency of a parent entity but also to the extent to which top-up taxes are levied and collected from it.<a href="#_ftn10" name="_ftnref10">[10]</a> Due to this dual cause of the UTPR’s imposition, the UTPR cannot qualify as a direct, overt discrimination prohibited by article 24(5) because the foreign shareholding as such is not decisive in this respect; it could, at best, result in an indirect discrimination.<a href="#_ftn11" name="_ftnref11">[11]</a> As a consequence, the more burdensome taxation would only be the result of an indirect discrimination, which is not prohibited by article 24(5).
Whereas there may not be a prohibited discrimination under a narrow and formalistic interpretation because the UTPR is not solely linked to the tax residence of a parent entity, it should be borne in mind that article 24 prohibits disguised discrimination in addition to direct, overt discrimination. Hence, the fact that foreign ownership of a domestic enterprise is one of the decisive criteria within the context of the UTPR, may still be relevant within the context of assessing the compatibility of the UTPR with the non-discrimination provision. Consequently, the key question to be answered is whether the UTPR can be regarded as resulting in a disguised, prohibited, discrimination that does not seem to escape the gravity pull of article 24(5).
Can the UTPR give rise to a disguised discrimination?
In assessing the key question as to whether the UTPR gives rise to a disguised, prohibited, discrimination, it seems necessary to make a comparison of a subsidiary with a foreign resident parent entity with the counterfactual scenario of a hypothetical resident parent entity all else being equal.<a href="#_ftn12" name="_ftnref12">[12]</a> If the subsidiary of a foreign tax resident in a non-implementing jurisdiction is subject to the UTPR whereas in a purely domestic situation of an implementing jurisdiction they will never be subject to such taxation, then it seems that a disguised discrimination may be construed insofar as it is subject to a more burdensome taxation in a cross border situation in comparison to a purely domestic situation as this more burdensome taxation seems to be inextricably linked to the residence criterion.<a href="#_ftn13" name="_ftnref13">[13]</a> This would, for example, be the case insofar as a state which imposes a top-up tax via the UTPR on a subsidiary of a foreign tax resident would not do so in respect of a subsidiary of a domestic tax resident due to the collection of the top-up-tax earlier on either through the QDMTT or the IIR. In this situation, all else being equal, the shift of tax residency of a parent entity is decisive for the level of taxation for its subsidiary. If resident in a non-implementing jurisdiction, the subsidiary becomes subject to more burdensome taxation in respect of undertaxed profits of low-taxed subsidiaries (or the parent entity itself) as compared to a resident parent entity in an implementing jurisdiction; in this latter situation, no UTPR would be imposed on the subsidiary because undertaxed profits would already be levied and collected from the resident parent entity. This indicates that there is room for the position that the UTPR gives rise to a disguised discrimination on the basis of tax residency of the direct or indirect parent entity of a subsidiary and its direct or indirect ownership or control, which is prohibited under tax treaties.<a href="#_ftn14" name="_ftnref14">[14]</a> Such discrimination is disguised because the UTPR does not rely directly only on the criterion of a foreign tax residency but, rather, on the ostensibly neutral criterion of whether the foreign parent entity is resident in an implementing jurisdiction and would subject the profits of its low taxed subsidiaries, as well as its own profits, to a tax rate (ETR) below 15%. If such foreign parent entity would not be resident in an implementing jurisdiction which does not levy and collect top-up taxes from such parent entity, then its subsidiaries (constituent entities of the MNE’s group) in implementing jurisdictions face more burdensome taxation as a result of the UTPR all else being equal. <a href="#_ftn15" name="_ftnref15">[15]</a>
It follows from the above that a key factor for the application of the UTPR on a subsidiary is whether a parent entity of a subsidiary has a tax residence in an implementing jurisdiction. The negative answer means that the UTPR will most likely apply, while the affirmative one that it will not apply. In domestic situations it will then never apply because a jurisdiction, which has the UTPR in force, is always an implementing jurisdiction. From the perspective of the subsidiary, the ostensibly neutral criterion of whether the foreign parent entity is resident in an implementing jurisdiction and would subject the profits of its low taxed subsidiaries, as well as its own profits, to a tax rate (ETR) below 15% effectively entails a disguised discrimination. As a result of this disguised discrimination, it is less attractive – in terms of its own tax burden – for a subsidiary to have a parent entity in a non-implementing jurisdiction as compared to a parent entity in an implementing jurisdiction or a domestic parent entity. This indicates that the UTPR creates an obstacle to cross border investments and commerce by means of a discriminatory unsolvable double taxation based on foreign ownership as the UTPR would not apply domestically.
The mentioned obstacle triggers tensions with the relevant purposes of tax treaties. Indeed, the principal purpose of tax treaties to eliminate such obstacles within the scope of their provisions.<a href="#_ftn16" name="_ftnref16">[16]</a> The specific purpose of article 24 is to remove obstacles stemming from discriminatory taxation caused by, in particular, ownership by non-residents.<a href="#_ftn17" name="_ftnref17">[17]</a> This reveals that the obstacle resulting from the UTPR may be regarded as being contrary to such purposes. As a result, the disguised discrimination caused by the UTPR creates obstacles to cross border investment and commerce. Such an obstacle may then be regarded as contrary to the specific purpose of article 24(5) and as jeopardizing the effectiveness of this non-discrimination provision if it were compatible with it.
Consequently, the effectiveness of article 24(5) may indicate that, based on the obstacle created by the disguised discrimination of the UTPR based on foreign ownership, the UTPR must be regarded as prohibited by article 24(5) notwithstanding that the UTPR would not result in a direct, overt discrimination.
Other arguments for the position that the UTPR is incompatible with article 24(5) because it results in a disguised discrimination may be derived from the following arguments, which go beyond the scope that blog post and require a separate analysis:<a href="#_ftn18" name="_ftnref18">[18]</a>
<ul>
<li>An interpretation of article 24(5) in a good faith, which requires to give to those provisions meaning that most fully reflects the common intention of the parties to the tax treaty, and to understand the concept of non-discrimination in a way that gives effect to the provisions of the tax treaty in the fullest possible way, with each of its terms and provisions being considered relevant and giving effect to the purposes of the tax treaty to the fullest possible extent;<a href="#_ftn19" name="_ftnref19">[19]</a></li>
<li>A consideration of the attempts of the OECD to design the UTPR so that states applying the UTPR will circumvent their obligations under tax treaties, and thus levy tax despites tensions with articles 7 and 9 due to the extraterritorial reach of the UTPR, apparently against the allocation of taxing rights among States under tax treaties;<a href="#_ftn20" name="_ftnref20">[20]</a></li>
<li>An interpretation of article 24(5) in accordance with the principle of systemic integration under 31(3) (c) VCLT, which requires an interpreter to take into account “any relevant rules of international law applicable in the relations between the parties”.<a href="#_ftn21" name="_ftnref21">[21]</a> Such rules may, for example, include rules stemming from the non-discrimination provisions under the EU treaties,<a href="#_ftn22" name="_ftnref22">[22]</a> human rights treaties and similar provisions under the investment treaties, i.e. international investment agreements (IIAs) and other IIAs of relevance to the MNEs in scope of pillar 2;<a href="#_ftn23" name="_ftnref23">[23]</a>I</li>
<li>A relevant tax treaty case law around the globe according to which the non-discrimination under tax treaties does not only prevent a direct but also indirect or disguised discrimination.<a href="#_ftn24" name="_ftnref24">[24]</a></li>
</ul>
<a href="#_ftnref1" name="_ftn1"></a>*Mees Vergouwen received the award for the book “The Effect of Directives Within the Area of Direct Taxation on the Interpretation and Application of Tax Treaties” in 2024 while Błażej Kuźniacki for the book “Beneficial Owner in International Taxation” in 2023. See more information here: https://www.ifa.nl/research-awards/mitchell-b-carroll-prize.
[1] Whenever we refer to any “article”, it means an equivalent of the relevant article of the OECD or the UN MTC, as included in a tax treaty, unless indicated otherwise.
<a href="#_ftnref2" name="_ftn2">[2]</a> Although 24(6) of the OECD MTC says “The provisions of this Article shall, notwithstanding the provisions of Article 2, apply to taxes of every kind and description.”, some treaties deviate from it, e.g. art. 24(4) of the Brazil-Netherlands tax treaty (1990) says “In this Article, the term “taxation” means taxes to which this Convention applies.” Accordingly, the actual scope of non-discrimination provision shall always be carefully examined in each and every tax treaty.
<a href="#_ftnref3" name="_ftn3">[3]</a> In particular, non-discrimination is one of core elements of the rule of law, which aligns “with core values that any system of law deserving of the name, whether domestic or international, aims for.” See A. Reinisch & S. W. Schill (eds), “Introduction” in “Investment Protection Standards and the Rule of Law” (Oxford University Press 2023), p. 17.
<a href="#_ftnref4" name="_ftn4">[4]</a> N. Bammens & F. Vanistendael “Article 24: Non-Discrimination – Global Tax Treaty Commentaries – Global Topics”, IBFD (2023), sec. 1.1.2.1.
<a href="#_ftnref5" name="_ftn5">[5]</a> A. Rust, “Non-discrimination. Art. 24” in A. Rust & E. Reimer (eds.), “Klaus Vogel on Double Taxation Conventions”, Wolters Kluwer Law & Business (2022), p. 1908.
<a href="#_ftnref6" name="_ftn6">[6]</a> Ibidem.
<a href="#_ftnref7" name="_ftn7">[7] </a>Bammens & Vanistendael, supra n. 4, sec. 1.1.2.2. Cf. Commentary on article 24 of the OECD MTC, para. 1: “whilst paragraph 1, which deals with discrimination on the basis of nationality, would prevent a different treatment that is really a disguised form of discrimination based on nationality such as a different treatment of individuals based on whether or not they hold, or are entitled to, a passport issued by the State.”
<a href="#_ftnref8" name="_ftn8">[8]</a> E.g. the German Federal Tax Court (Bundesfinanzhof), 8 Sept. 2010, Case I R 6/09, Bundessteuerblatt II 2013, para. 189; The Indian Authority for Advance Rulings (AAR), 17 Aug. 2016, Banca Sella SpA v. Assistant Director of Income Tax, 2016-TII-372-KOL-TP-SB.
<a href="#_ftnref9" name="_ftn9">[9]</a> Rust, supra n. 5, p. 1909.
<a href="#_ftnref10" name="_ftn10">[10]</a> A. Christians & S. E. Shay, “The Consistency of Pillar 2 UTPR With U.S. Bilateral Tax Treaties,” Tax Notes Int’l, Jan. 23, 2023, pp. 45-452; T. Masuda, “The Compatibility of the UTPR and Japan’s Tax Treaties”, 114 Tax Notes International (May 20, 2024), pp. 1136-1141; R. Matteotti, “Tax issues related to the introduction of the international top-up tax UTPR as part of the GloBE minimum tax in Switzerland”, Expert opinion provided to the Swiss Confederation represented by the General Secretariat of the Federal Department of Finance, Archiv für Schweizerisches Abgaberecht (ASA) (2024-2025), p. 214.
<a href="#_ftnref11" name="_ftn11">[11]</a> V. Bendlinger, “The OECD’s Global Minimum Tax and its Implementation in the EU: A Legal Analysis of Pillar Two in the Light of Tax Treaty and EU Law”, Kluwer Law International (2023), pp. 328-329.
<a href="#_ftnref12" name="_ftn12">[12]</a> N. Bammens, “The Principle of Non-Discrimination in International and European Tax Law”, IBFD (2012), 191 et seq.
<a href="#_ftnref13" name="_ftn13">[13]</a> Cf. in respect to article 24(4) and the UTPR in the form of a denial of deduction, J. Englisch & J. Becker, “International Effective Minimum Taxation – The GLOBE Proposal”, 11 Word Tax Journal 4 (2019), 523. Compatibility with article 24(4) has lost its relevance since the UTPR is no longer a payments rule (a denial of deduction), but a profits rule (an additional tax).
<a href="#_ftnref14" name="_ftn14">[14]</a> See A. Nikolakakis & J. Li, “UTPR — No Taxation Without Value Creation!”, Tax Notes Int’l, April 3, 2023, pp. 51-52; J. Li, “The Pillar 2 Undertaxed Payments Rule Departs From International Consensus and Tax Treaties”, Tax Notes Int’l, March 21, 2022, p. 1407. Cf. S. Douma et al., “The UTPR and International Law: Analysis From Three Angles”, Tax Notes Int’l, May 15, 2023, pp. 873-874.
<a href="#_ftnref15" name="_ftn15">[15]</a> Consider that sometimes, e.g. for some of the Chinese MNEs, which do not have tax residency in China and which UPEs have tax residency in Cayman Islands or British Virgin Islands (BVIs), the UTPR may lead to top-up-tax in States from where the MNEs actually come from and where they have the most of their economic substance. See N. Noked & J. Wang, “Chinese companies in tax havens”, Journal of International Economic (Sept. 27, 2024), pp. 533-534. However, it is a very rare example and, as of today, purely theoretical, because China did not implement pillar 2.
<a href="#_ftnref16" name="_ftn16">[16]</a> The Commentary to Art. 1 of the OECD Model, para. 54: the principal purpose of tax treaties “is to promote [(…)] exchanges of goods and services, and the movement of capital and persons”, i.e. to promote international trade and investment. The main operational purpose of tax treaties is the elimination of international double taxation.
<a href="#_ftnref17" name="_ftn17">[17]</a> Bammens & Vanistendael, supra n. 4, sec. 1.1.2.1.
<a href="#_ftnref18" name="_ftn18">[18]</a> The authors of this contribution continuously develop and refine the reasoning in respect of that topic in their common and individual academic and tax advisory environments.
<a href="#_ftnref19" name="_ftn19">[19]</a> F. Engelen, “Interpretation of Tax Treaties under International Law”, IBFD (2005), pp. 131-132; R. Vann, “Interpretation of Tax Treaties in New Holland” in H. van Arendonk et al. (eds), “A Tax Globalist: Essays in Honour of Maarten J. Ellis”, IBFD (2005), p. 147. Cf. The Arbitral Tribunal administered by the Permanent Court of Arbitration (PCA), 25 May 2005, Award in the Arbitration regarding the Iron Rhine (‘Ijzeren Rijn’) (Railway between the Kingdom of Belgium and the Kingdom of the Netherlands), Vol. 27, RIAA, paras 49, 64; M. Fitzmaurice, “The Practical working of the Law of the Treaties” in M. Evans (ed.), “International Law”, Oxford University Press (2003), pp. 189-190.
<a href="#_ftnref20" name="_ftn20">[20]</a> Douma et al., supra n. 14, 869-873. See also sections “Prevention of extraterritorial taxation as a relevant justification for the U.S. defense measures” and “ Prevention of tax treaty dodging as a relevant justification for the U.S. defense measures” below.
<a href="#_ftnref21" name="_ftn21">[21]</a> See more C. McLachlan, The Principle of Systemic Integration and Article 31(3)(C) of the Vienna Convention’, International & Comparative Law Quarterly 2 (2005), p. 280.
<a href="#_ftnref22" name="_ftn22">[22]</a> In this respect reference could, for example and by analogy, by made to the line of reasoning in CJEU, 12 Sept. 2006, C-196/04 (Cadbury Schweppes) in paragraphs 43-45. The circumstance that the top-up taxes would have been levied and collected from the parent entity if it were resident in the same state as the subsidiary, would not be decisive as the fact remains the same that the subsidiary is subject to the UTPR in respect of profits of another legal person if its parent entity is a non-resident. Reference may furthermore be made to the line of reasoning in CJEU, 4 Oct. 2022, C-585/22 (X BV), para. 38 wherein it was ruled that an apparently objective criterion relating to the level of taxation at the level of a lender can give rise to an indirect discrimination based on the location of, in that case, such lender.
<a href="#_ftnref23" name="_ftn23">[23]</a> See more the two sub-sections below. For the application of the principle of systemic integration in order to factor in rules stemming from EU treaties and IIAs for purposes of interpretation of tax treaties see, respectively: L. De Broe, “Should Courts in EU Member States Take Account of the ECJ’s Judgment in the Danish Beneficial Ownership Cases When Interpreting the Beneficial Ownership Requirement in Tax Treaties?” in G. Maisto, “Current Tax Treaty Issues: 50th Anniversary of the International Tax Group”, IBFD (2020), sec. 16.2.1; B. Kuźniacki & S. van Weeghel, “VCLT and the peaceful coexistence of tax and investment treaties: a case study of limited MFN clauses and the FET standard”, World Tax Journal 1/2025, sections 1-2.
<a href="#_ftnref24" name="_ftn24">[24]</a> E.g. the German Federal Tax Court (Bundesfinanzhof), 8 Sept. 2010, Case I R 6/09, Bundessteuerblatt II 2013, para. 189; The Indian Authority for Advance Rulings (AAR), 17 Aug. 2016, Banca Sella SpA v. Assistant Director of Income Tax, 2016-TII-372-KOL-TP-SB. See also other case law of relevance to the current analysis: The UK First-Tier Tribunal (FTT), Felixstowe Dock and Railway Company v. HMRC, 9 Dec. 2011, paras 61-62; The Dutch Supreme Court (Hoge Raad), HR nr. 28 674, Dutch Supreme Court (27 April 1994), paras 4.1-4.4.
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<title>Global Minimum Taxation and EU Competitiveness: What Now?</title>
<link>https://kluwertaxblog.com/2025/03/17/global-minimum-taxation-and-eu-competitiveness-what-now/</link>
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<dc:creator><![CDATA[Leopoldo Parada (Reader in Tax Law, King’s College London )]]></dc:creator>
<pubDate>Mon, 17 Mar 2025 17:06:40 +0000</pubDate>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Global minimum tax]]></category>
<category><![CDATA[United States]]></category>
<guid isPermaLink="false">https://kluwertaxblog.com/?p=19947</guid>
<description><![CDATA[Introduction A few weeks ago, the US Trump administration announced its departure from the so-called ‘global tax deal’, which includes all negotiations at the Inclusive Framework both regarding the OECD Pillar One and Pillar Two. In practical terms, and in the exclusive context of Pillar Two (Global Minimum Tax), this means that the United States... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/03/17/global-minimum-taxation-and-eu-competitiveness-what-now/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[<h4>Introduction</h4>
A few weeks ago, the US Trump administration announced its departure from the so-called ‘global tax deal’, which includes all negotiations at the Inclusive Framework both regarding the OECD Pillar One and Pillar Two. In practical terms, and in the exclusive context of Pillar Two (Global Minimum Tax), this means that the United States will not implement any of the OECD acronyms, aka IIR, UTPR, and QDMTT. At the same time, Europe navigates in exactly the opposite direction, dealing with the domestic implementation of a Directive approved by unanimity back in 2022 [Council Directive 2022/2523], and which has the specific purpose of transposing the OECD Pillar two –– the acronyms–– into the laws of 27 Member States. To add some drama to an already confusing global scenario, the Trump administration announced that any attempt to tax US MNEs in Europe (e.g., with a UTPR) would imply an automatic retaliation, most likely, with his new favourite tool: tariffs.
This article analyses the current scenario for Europe, especially from the perspective of its competitiveness vis-à-vis other regional blocks and other global commercial actors, including the United States. It argues that despite the lack of economic rationale from the US government regarding tariffs, Europe has self-inflicted new legal barriers (i.e. the EU Directive on Pillar Two), restricting its general capacity to compete for capital as an economic block. This does not only challenge Europe in the short-term, responding to the new global scenario, but also in the long-term, redefining its role in the global economy.
<h4>Pillar two: tax competition and tax competitiveness at stake</h4>
For anybody who follows the debate on Pillar Two, it is easy to understand that Pillar Two reduces the incentives for countries to attract capital using their corporate income tax system for this purpose. Indeed, Pillar Two requires that every single entity of a MNE group (over a certain thresholds of annual revenues) pays a minimum effective corporate income tax rate of 15%, whatever the multinational group operates. If a country goes below the effective tax rate (ETR) in a certain year, a “top-up tax” is triggered, and it is captured somewhere, including in the low-tax country via a Qualified Domestic Minimum Top-up tax (QDMTT). In other words, countries cannot use corporate income tax incentives freely anymore because many of those incentives will ultimately reduce the domestic ETR triggering a top-up tax. That is, Pillar Two establishes a floor for tax competition while at the same time reduces the incentives to shift profits to low-tax jurisdiction. So far so good.
When the EU implemented these rules in the EU Directive on Pillar Two also attended to the aims of reducing tax competition and profit shifting. After all, the EU mentality was that since Member States are sovereign in direct tax matters, it is better to avoid “excessive competition” or a so-called “race to the bottom”, both within and outside the EU. However, here is precisely the problem.
The EU Directive does not only affect MNE groups that operate worldwide, but also those operating exclusively within the European internal market. In other words, while European thought (perhaps) that Pillar Two would reduce incentives for European countries to compete reducing their corporate income tax rates, remaining competitive in terms of substance (i.e., payroll and tangible assets), they did not contemplate that similar restrictions in a pure intra-EU context could end up affecting its own competitive position in the global economy. And this is precisely what was put on evidence in mid-January 2024 when the Trump administration disclosed its intention to withdraw from the global tax deal. If an EU Directive will force Member States to impose top-up taxes in exclusive intra-EU scenarios, but other global economic actor as relevant as the United States (or China) will not have to deal with this, ‘EU competitiveness is without doubt at stake.
<h4>The shift towards competition outside corporate income taxes</h4>
Pillar Two does not eliminate tax competition. In fact, it simply shifts it to other places, including consumption taxes like Value Added Tax (VAT) or personal income taxes (PIT), and non-tax areas like subsidies. Will Europe compete now like this?
While VAT is harmonised among Member States, offering exemptions on VAT has a major issue since it makes the tax regressive. Moreover, and at least from a pure revenue perspective, it seems to be risky that Europe shifts competition to VAT considering the importance of VAT as a tax revenue generator. The story is rather different with PIT. In this field, Member States are still free to decide what to do, offering an escape door for Member States to compete in a world post-Pillar Two. We have witnessed some of this competition already with Member States offering special tax regimes for wealthy individuals, or “flat” income taxes to alleviate their tax burden while they bring capital into their countries. However, this highlights an important question: does Europe want Member States to jump individually on this, or maybe it is better to think about a harmonised system of special regimes for individuals instead? After all, if Pillar Two is shifting competition to personal income taxes, but at the same time is reducing the EU competitiveness, harmonised special tax regimes for individuals may not be that insane after all.
Competition via subsidies deserves a separate mention. Although it is still unclear to me why ‘subsidy competition’ needs to be preferable to ‘tax incentives competition’, especially taking into consideration bribery and corruption as distortive factors, it is evident that the EU Directive on Pillar Two is forcing Member States to offer grants and subsidies rather than tax incentives. The interesting issue is that while Member States are pushed in this direction, a different European legal constraint –– State Aid law–– restricts Member States’ capacity to subsidize specific undertakings. Two contradicting policies, indeed. If the European Union want to define its future role in the global economy, it should start from reshaping these contradicting policies, making perhaps the application of State aid rules a bit more lenient, at least if the aim is that Member States compete properly using subsidies or grants for this purpose.
Reactions to the new global scenario 
The announcement of the US Trump administration, although surprising in terms of timing, it was predictable. In fact, it had already been announced since the Make America Great Again campaign that anything smelling like ‘international commitment’ would be removed from the Trump agenda. This was raised regarding the U.S. participation in NATO (North Atlantic Treaty Organization) and other international agreements like the Paris Agreement or the World Health Organization (WHO), and now it is simply materializing with respect to the global minimum tax of the OECD. Therefore, one does not need to be very smart to understand what happened, and the challenge for Europe is evident. What can the Europeans do now? There are a few options on the table.
First, Europe could decide to make the US regimes of GILTI and CAMT as Pillar Two equivalent. Indeed, although not the same, they resemble the idea of minimum tax very much. In fact, this resemblance is perhaps the reason –– and not the altruism of the US–– why previous US administrations did not see issues of participating in a ‘global tax deal’ that, after all, would imply no major legislative reform in that country. In other words, the cost of cooperating was always low, so why not? Second, Europe could decide to extend the so-called “UTPR safe harbour” to cover fully the four-year administration of Trump. That is, preventing to bother the big brother up north, and reducing the escalation of tariffs worldwide. Although sensitive, this option has one major drawback: it needs to be revised in four years, and nobody can tell now what will happen then. Third, Europe could consider the contingent application of the IIR, UTPR, and QDTT in the EU Directive. In other words, the top-up tax will be triggered only in those cases in which a similar rule applies somewhere else. Although this has logic from the perspective of a country (or a block of countries) willing to maintain its competitiveness in a global economy, it is unlikely to happen, especially considering the pressure from the OECD, and the fact that the EU is an important part of it. Fourth, and finally, the UTPR should simply be repealed from the EU Directive. If all Member States agree that EU competitiveness is as important as the individual Member States’ capacity to compete, this is indeed the ‘second best world’. In fact, it prevents a commercial war while it keeps happy those in love with the wave of minimum taxes.
Final remarks
Europe is currently facing a significant dilemma. On the one hand, it seeks to maintain its strong stance in supporting the OECD BEPS and BEPS 2.0, a position no one else has embraced as fully. On the other hand, it is experiencing internal struggles, limiting its own ‘internal market’ while more competitive economies continue to grow –– a quick trip to Shanghai or Shenzhen makes this painfully clear. However, trying to balance both is no longer feasible. If Europe wants to remain a contender for capital as an economic block, it is time to make bold changes and decide just how far ahead or behind it wants to be in the next 30 years. The moment to act is now.
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<title>The contents of Highlights & Insights on European Taxation</title>
<link>https://kluwertaxblog.com/2025/03/05/the-contents-of-highlights-insights-on-european-taxation/</link>
<comments>https://kluwertaxblog.com/2025/03/05/the-contents-of-highlights-insights-on-european-taxation/#respond</comments>
<dc:creator><![CDATA[Giorgio Beretta (Amsterdam Centre for Tax Law (ACTL) of the University of Amsterdam; Lund University)]]></dc:creator>
<pubDate>Wed, 05 Mar 2025 14:32:45 +0000</pubDate>
<category><![CDATA[Customs and Excise]]></category>
<category><![CDATA[Direct taxation]]></category>
<category><![CDATA[EU law]]></category>
<category><![CDATA[Indirect taxation]]></category>
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<description><![CDATA[ Highlights & Insights on European Taxation Please find below a selection of articles published this month (February 2025) in Highlights & Insights on European Taxation, plus one freely accessible article. Highlights & Insights on European Taxation (H&I) is a publication by Wolters Kluwer Nederland BV. The journal offers extensive information on all recent developments in European Taxation in the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/03/05/the-contents-of-highlights-insights-on-european-taxation/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[ <a href="https://shop.wolterskluwer.nl/Highlights-Insights-on-European-Taxation-sNPHIEURTX/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>
Please find below a selection of articles published this month (February 2025) in <a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation</a>, plus one freely accessible article.
<a href="https://www.linkedin.com/newsletters/h-i-journal-newsletter-6902189056642682880/" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Highlights & Insights on European Taxation (H&I)</a> is a publication by Wolters Kluwer Nederland BV.
The journal offers extensive information on all recent developments in European Taxation in the area of direct taxation and state aid, VAT, customs and excises, and environmental taxes.
To subscribe to the Journal’s page, please click <a href="https://www.linkedin.com/company/highlights-insights-on-european-taxation/?viewAsMember=true" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">HERE</a>
Year 2025, no. 2
TABLE OF CONTENTS
DIRECT TAXATION, LEGISLATION
– US withdrawal from Global Tax Deal. Chair of the tax subcommittee of the European Parliament
(comments by the Editorial Board) (H&I 2025/23)
– Memorandum America First Trade Policy
(comments by the Editorial Board) (H&I 2025/22)
– Global Tax Deal has no force or effect in the United States
(comments by the Editorial Board) (H&I 2025/21)
DIRECT TAXATION, CASE LAW
– XX (unit-linked) (C-782/22). Gross-Net taxable base. EU law precludes difference in treatment between residents and non-residents as regards dividends received in the Netherlands. Court of Justice
(comments by the Editorial Board) (H&I 2025/60)
– Volvo Group Belgium (C-436/23). EU law does not preclude Belgian fairness tax on the resident subsidiaries of non-resident companies. Court of Justice
(comments by the Editorial Board) (H&I 2025/25)
– Credit Suisse Securities (C-601/23). Free movement of capital precludes Spanish dividend withholding tax. Court of Justice
(comments by the Editorial Board) (H&I 2025/59)
INDIRECT TAXATION, CASE LAW
– Lomoco Development (C-594/23). Building land. Supply of land that has the foundations of residential housing structures in place
(comments by Marta Papis-Almansa) (H&I2025/26)
CUSTOMS AND EXCISE
– Sistem Lux (C-717/22 and C-372/23). CJ’s findings on customs sanctions and confiscation rules. Court of Justice
(comments by Tom Walsh) (H&I 2025/48)
– EU-Chile Interim Trade Agreement (ITA) will enter into force on 1 February 2025
(comments by Piet Jan de Jonge) (H&I 2025/29)
– Georgia joins the Common Transit Convention and the Convention on the Simplification of Formalities in Trade in Goods
(comments by Piet Jan de Jonge) (H&I 2025/28)
– New Computerised Transit System (NCTS): The deployment of the phase 5 is succesful
(comments by Piet Jan de Jonge) (H&I 2025/27)
MISCELLANEOUS
– A bolder, simpler, faster Union: the 2025 Commission work programme
(comments by the Editorial Board) (H&I 2025/53)
– Communication from the Commission on the Competitiveness Compass for the EU
(comments by the Editorial Board) (H&I 2025/45)
FREE ARTICLE
– Credit Suisse Securities (C-601/23). Free movement of capital precludes Spanish dividend withholding tax. Court of Justice
(comments by the Editorial Board) (H&I 2025/59)
In this case, the Court of Justice of the European Union (CJ) clarifies the treatment of withholding tax on dividends in the context of EU law. The case centred on Spanish tax rules applied in Biscay, where resident companies experiencing financial losses were entitled to reclaim withholding tax on dividends, whereas non-resident companies in similar circumstances were denied this benefit. The CJ found that this distinction contravened the principle of free movement of capital under <a href="https://www.inview.nl/openCitation/id6739048241869b6f0cb493b39df05dfc" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 63</a> of the Treaty on the Functioning of the European Union (TFEU).
This judgment aligns with previous CJ rulings, particularly Sofina (CJ 22 November 2018, C-575/17, <a href="https://www.inview.nl/document/id5fc2888983fd4b03aba1fb36bffc6f75#--ext-id-3590a9dd-8f11-4333-bd0f-8e2939c07dc9" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2018:943</a>), reinforcing the principle that tax measures must be applied in a non-discriminatory manner, regardless of the taxpayer’s residency. It highlights the Court’s commitment to ensuring that national tax provisions do not impose unjustified restrictions on cross-border investment. The decision may push Member States to review their withholding tax systems to ensure compliance with EU law, particularly in cases where tax relief mechanisms favour domestic over foreign entities.
However, while the ruling strengthens the free movement of capital, it also raises practical challenges. Tax authorities will need to develop procedures to accurately assess the financial standing of non-resident companies to ensure fair application of tax refunds. This could require enhanced cooperation between Member States’ tax administrations and lead to administrative complexities. Additionally, the decision may open the door for a wave of refund claims from non-resident entities previously disadvantaged under similar tax regimes, potentially creating financial and administrative pressures for national tax authorities.
Territoriality and Non-Resident Taxpayers
The CJ’s judgment in Credit Suisse Securities (19 December 2024, C-601/23, <a href="https://www.inview.nl/document/iddd5f9038116d4b29833a1f2fb028625e#--ext-id-25035db2-1936-4393-8f3b-654df8cd6220" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">ECLI:EU:C:2024:1048</a>) can be seen as diverging from the Court’s earlier ruling in Futura Participations and Singer (CJ 8 June 2006, C-250/95, ECLI:EU:C:2006:384) in several key respects. While both cases deal with the tax treatment of non-resident companies, they apply different reasoning regarding territoriality and non-discrimination in tax law.
In Futura Participations, the Court upheld a Luxembourg rule that allowed non-residents to carry forward losses ‘only if those losses were economically connected to a Luxembourg permanent establishment’. The Court reasoned that Luxembourg was entitled to apply the principle of territoriality, meaning that a Member State can restrict tax advantages to income and losses arising within its jurisdiction. Since Luxembourg did not tax worldwide income for non-residents, it was not required to grant them the same tax benefits as residents.
In contrast, Credit Suisse Securities focused on the discriminatory impact of Spain’s withholding tax system on dividend taxation. The Court found that Spain’s rules, which allowed loss-making domestic companies to reclaim withholding tax while denying the same benefit to non-resident companies, violated the free movement of capital (<a href="https://www.inview.nl/openCitation/id6739048241869b6f0cb493b39df05dfc" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">Article 63</a> TFEU). This ruling did not give much weight to the territoriality argument, despite the fact that non-resident companies might not have been subject to full taxation in Spain.
Justification for Different Treatment
In Futura Participations, the CJ accepted that the different treatment of non-residents was objectively justified because Luxembourg did not tax them on a worldwide basis. The Court acknowledged that Member States have discretion in setting conditions for tax deductions when they relate to non-residents.
In Credit Suisse Securities, however, the Court took a stricter approach and ruled that Spain’s refusal to grant a withholding tax refund to non-residents was discriminatory, even though non-resident companies were not taxed on their global income in Spain. The judgment did not consider whether Spain’s rules could be justified by the need to ensure tax coherence or territoriality, which had been an acceptable justification in Futura Participations.
Broader Implications for Withholding Taxes and Tax Sovereignty
By departing from Futura Participations, the Credit Suisse Securities ruling creates uncertainty about the extent to which Member States can apply territoriality principles in cross-border taxation. The decision suggests that even if a non-resident entity does not have a taxable presence in a Member State, it may still be entitled to the same tax refunds as domestic entities. This could limit the ability of Member States to design tax systems that differentiate between domestic and foreign taxpayers based on their taxable nexus.
Conclusion
While both cases address the tax treatment of non-resident companies, Credit Suisse Securities departs from Futura Participations by downplaying the importance of territoriality in justifying different tax treatment. The ruling places a stronger emphasis on the free movement of capital, potentially restricting the ability of Member States to apply tax rules that distinguish between residents and non-residents. This shift raises important questions about the balance between tax sovereignty and EU fundamental freedoms, with implications for future cases involving cross-border taxation
Editorial Board
 
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<title>Broadening the VAT Base: Financial Services and Supplies of Real Property in the Brazilian Tax Reform</title>
<link>https://kluwertaxblog.com/2025/03/04/broadening-the-vat-base-financial-services-and-supplies-of-real-property-in-the-brazilian-tax-reform/</link>
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<dc:creator><![CDATA[Melina Rocha (Fundação Getúlio Vargas) and Daniel Loria (Loria Advogados)]]></dc:creator>
<pubDate>Tue, 04 Mar 2025 09:38:49 +0000</pubDate>
<category><![CDATA[Brazil]]></category>
<category><![CDATA[Financial services]]></category>
<category><![CDATA[Tax reform]]></category>
<category><![CDATA[VAT]]></category>
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<description><![CDATA[The authors would like to thank Bernard Appy, Secretary for Tax Reform at the Ministry of Finance (Brazil) for his comments and inputs. It is well established in the academic literature and suggested by international organizations that a broad-based VAT reduces distortions, increases economic efficiency, promotes growth and simplifies the system (Bird et al, 2007,... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/03/04/broadening-the-vat-base-financial-services-and-supplies-of-real-property-in-the-brazilian-tax-reform/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[The authors would like to thank Bernard Appy, Secretary for Tax Reform at the Ministry of Finance (Brazil) for his comments and inputs.
It is well established in the academic literature and suggested by international organizations that a broad-based VAT reduces distortions, increases economic efficiency, promotes growth and simplifies the system (Bird et al, 2007, Brys et al, 2016, Acosta-Ormaechea, 2019). Additionally, empirical evidence suggests that reduced rates and exemptions tend to benefit high-income households more in absolute terms than low-income households and, therefore, are not the most effective way to achieve equity (OECD/KIPF, 2014; Thomas, 2020; OECD, 2024).
In recent years, the most common recommendation for broadening the VAT base has been to reduce rates differentiation and exemptions and to implement targeted VAT refunds to low-income households to address regressivity and equity concerns (Thomas, 2020; Barreix, 2022; de la Feria et al, 2024). However, most jurisdictions still apply reduced VAT rates to a range of goods and services considered essential, and many countries also make extensive use of VAT exemptions (OECD, 2024).
Like other countries, the political economy obstacles to implementing a broad-based VAT were present in the tax reform recently introduced in Brazil. The country is currently implementing a Dual VAT system (IBS/CBS, the acronyms in Portuguese for GST) that will maintain the same tax burden of the replaced taxes relatively to GDP, which means the standard rate will be determined based on the revenues collected from the taxes that will be replaced. For political reasons, the reform included a list of goods and services subject to reduced rates and beneficial regimes, which will, in turn, increase the standard rate. Following empirical studies and best practices recommended by international organizations, the reform will also implement a personalized refund of the VAT paid by lower-income households (named as “cashback”) to address distributional goals.
Although Brazil could not fully implement a broad-based VAT due to the numerous reduced rates and beneficial regimes, the Brazilian reform has broadened the VAT base by including supplies that are normally not subject to VAT in other jurisdictions, such as financial services (specifically margin-based services) and supplies of real property (such as sale and rental of used residential property). Both models are described in further detail below.
Brazilian VAT model on financial services
As Pierre-Pascal Gendron once said, “the incorporation of financial services into the base of a value-added tax (VAT) operated on a transaction-by-transaction basis using the invoice-credit method remains the last unconquered frontier for this type of tax” (Gendron, 2016).
Financial services, especially margin-based ones, are exempt from VAT in most countries. Some countries do apply VAT on certain fee- and commission-based services provided by financial institutions. The non-taxation of margin-based financial services is primarily due to the complexity of determining the tax basis (i.e. taxable financial margin) and calculating it on a transaction-by-transaction basis. However, the VAT exemption on financial services has created complexity, distortions and impacts on neutrality, mainly because the financial services providers cannot claim input tax credits on their purchases (Gendron, 2016, López-Laborda et al, 2018).
During the discussions of the group responsible for drafting the model, academic models for applying VAT on financial services that are compatible with the credit-invoice method were considered, such as the “mobile-ratio method” proposed by Julio López-Laborda and Guillermo Peña (2018) and the model proposed by Næss-Schmidt et al (2016).
Ultimately, as Brazil currently applies a turnover-tax (PIS/COFINS) on financial services, the reform adopted a “subtraction approach” similar to the one in place with the current taxes. As such, while the financial services based on fees and commissions will follow the regular transaction-by-transaction VAT model, the margin-based financial services will follow an accounts-based method under a specified regime. According to this regime, the VAT will be calculated at a specific rate on the difference between revenues and deductible expenses related to the financial services. More specifically, VAT will apply to certain financial revenues (e.g. revenues from loans, foreign exchange transactions, and transactions with securities and financial instruments) after the deduction of certain amounts (e.g. financial expenses incurred as cost of funding, foreign exchange expenses, losses on securities and financial instruments).
To avoid distortions and cascading, the Brazilian model will implement a non-cumulative system under the financial services regime. Financial services providers subject to the regime will be able to claim input tax credits on their expenses and the purchasers of financial services registered for VAT will also be able to claim input tax credits, with specific rules and exceptions.
In the case of loans, the input tax credit for registered businesses will be equal to (a) the financial expenses (i.e. interest) in excess of the risk-free interest rate (in Brazil, Selic), multiplied by (b) the tax rate paid by the creditor of that loan on its margin. More specifically, the basis for the input tax credit will be calculated by deducting from each loan installment, at the time of payment in cash: i) the portion of the loan payment that corresponds to the principal amount (following the amortization schedule set in the loan contract); and ii) the amount equivalent to the Selic rate on the principal.
There will be a difference between the basis for the VAT applied on the services and for its corresponding input tax credits, since banks will be able to deduct actual cost of funding, while the debtors will deduct Selic. However, in practical terms, this was deemed to be more equitable than allowing banks to deduct Selic, since the larger ones have funding costs that are lower than this rate (due to interest-free deposits from their clients), while smaller banks have higher funding costs.
Another important point is that banks will be able to deduct from the basis provisions for losses on the loans, including on the principal amount, following generally accepted accounting principles. This can lead to a potential mismatch between the VAT applied on the services and its corresponding input tax credits. For bonds and other debt instruments issued in the capital markets, a zero percent rate applies on the creditor side when it is a financial service provider, while creditors who are not taxpayers (e.g. the general investor base) will not be subject to tax. In these cases, there is no input tax credit for the debtor, but it is expected that lower interest rates will be available under these circumstances, due to the difference in VAT.
Last, the law was not able to design a credit system for foreign exchange transactions, due to practical constraints on how to measure the foreign exchange margin on each particular transaction.
Brazilian VAT model on supplies of real property
VAT on real property is another complex area where jurisdictions adopt very different approaches. Some countries apply VAT on the sale of new residential properties and exempt the sale and long-term rental of used residential properties. In respect of commercial properties, some jurisdictions apply VAT on the sale and the rental of both new and used properties as the purchasers/lessees are generally entitled to input tax credits. This is the case in Canada, New Zealand, India and Australia. As with financial services, the VAT treatment of real property has led to distortions and cascading effects due to input tax credit restrictions, as well as complexities arising from qualification issues (Poddar, 2010).
Academics have proposed that all transactions with real property should be included in the VAT base (Cnossen, 2010, Poddar, 2010, van Brederode, 2011). The taxation of newly built residential property is considered a second-best approach and a reasonable proxy for the discounted value of the VAT that should have been applied to exempt rentals or the owner’s use of the property. However, because residential properties usually appreciate, this approach does not account for increases in property value that should be subject to VAT (Cnossen, 2010, Peacock, 2023). To address this issue, it has been proposed to apply VAT to the difference between the selling price and the purchase price, either directly or through a margin scheme that allows an immediate tax credit against sales at the time of purchase (Cnossen, 2010). Another proposed model involves applying VAT to an imputed rent, treating owner-occupiers as if they were supplying residential services to themselves as tenants for a specific period, such as a year, while excluding the first sale of residential properties from the VAT base (Peacock, 2023).
In Brazil, the model that will be implemented in the reform tried to address the issues above. All supplies of real property such as sale and rental will be subject to IBS/CBS under a specific regime. Persons selling or renting real property in the course of commercial activities will be subject to the specific regime. Additionally, individuals who make supply of real property will be required to register for and apply IBS/CBS on their supplies if the following conditions are met: i) if they rent or lease more than three different properties and their revenues with these supplies exceeds R$ 240,000 (Brazilian real) in the previous calendar year; or ii) if they sell more than three different properties, including transferring property rights, in the previous calendar year. Further, individuals who sell real property or transfer real property rights on properties they have built themselves will be required to register if, in the previous calendar year, they sold more than one property they built within the last five years prior to the sale.
The VAT on the sale of real property by registered persons will apply on the added value at each stage of the construction and commercialization process of real estate, as follows:
<ul>
<li>VAT will apply only to the difference between the sale price and the land and building cost. The cost amount will be generally the original purchase price of the property adjusted for inflation. For example, if a taxable person buys a property for R$ 1 million and sells it for R$ 1.1 million, the taxable amount is only $ 100,000.</li>
<li>In addition, a $ 100,000 BRL (approximately $17,000 USD) deduction will be applied to the taxable amount on the sale of newly built residential properties. This ensures a progressive tax structure, reducing the tax burden on affordable housing.</li>
<li>The tax rate applied to the reduced taxable amount will be 50% lower than the standard rate. This results in an effective rate of approximately 13.25% if the standard rate is 26.5%. The reduced rates for both sale and rental were included for political reasons. Ideally, supplies of real property should be subject to the standard rate.</li>
<li>The registered seller will be entitled to claim input tax credits in respect of all IBS/CBS paid on construction materials and services.</li>
</ul>
Rentals of real property by registered persons, including both commercial and residential properties, are also taxable under the specific regime and the tax rate for these supplies will be 70% lower than the standard rate. Additionally, a deduction of $600 BRL (approximately $102 USD) will apply to the rental amount for residential property.
Conclusion 
Although it was not able to fully implement a broad-base VAT due to the introduction of various reduced rates and differential regimes for political economy reasons, Brazil is adopting new models for financial services and real property transactions. These models will expand the VAT base to include margin-based financial services as well as the sale and rental of used residential properties. By broadening the VAT base, these models aim to reduce distortions, tax cascading, and complexities that are currently in place in jurisdictions where such supplies are excluded from the VAT base.
 
References
Acosta-Ormaechea, S and Morozumi, A (2019), “The Value Added Tax and Growth: Design Matters”, IMF Working Paper 19/96, Washington, D.C, <a href="https://www.imf.org/en/Publications/WP/Issues/2019/05/07/The-Value-Added-Tax-and-Growth-Design-Matters-46836" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">The Value Added Tax and Growth: Design Matters</a>
Bird, R. and Gendron, P.-P. (2007), The VAT in Developing and Transitional Countries, Cambridge University Press.
Brys, B. et al. (2016), “Tax Design for Inclusive Economic Growth”, OECD Taxation Working Papers, No. 26, OECD Publishing, Paris, <a href="https://doi.org/10.1787/5jlv74ggk0g7-en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.1787/5jlv74ggk0g7-en</a>.
Cnossen, S. (2010), Improving the VAT treatment of exempt Immovable Property in the European Union. Working Paper WP 10/19, Oxford University Centre of Business Taxation, <a href="https://oxfordtax.sbs.ox.ac.uk/sitefiles/wp1019.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://oxfordtax.sbs.ox.ac.uk/sitefiles/wp1019.pdf</a>
de la Feria, Rita and Swistak, Artur (2024). Designing a Progressive VAT. Working Paper WP/24/78, International Monetary Fund, Washington, D.C, <a href="https://www.imf.org/en/Publications/WP/Issues/2024/04/05/Designing-a-Progressive-VAT-546923" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://www.imf.org/en/Publications/WP/Issues/2024/04/05/Designing-a-Progressive-VAT-546923</a>
Gendron, P. (2016), “Policy Forum: Canada’s GST and Financial Services–Where Are We Now and Where Could We Be?,” Canadian Tax Journal, Canadian Tax Foundation, vol. 64(2), pages 401-416, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2909922" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2909922</a>
López-Laborda, J., and Peña, G. (2018). A New Method for Applying VAT to Financial Services. National Tax Journal, 71(1), 155-182. <a href="https://doi.org/10.17310/ntj.20" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.17310/ntj.20</a>
Næss-Schmidtm, H. et al (2016), “Why and how to apply a Value Added Tax on financial services”, Copenhagen Economics, <a href="https://copenhageneconomics.com/wp-content/uploads/2021/12/copenhagen-economics-2016-why-and-how-to-to-apply-vat-to-financial-services.pdf" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://copenhageneconomics.com/wp-content/uploads/2021/12/copenhagen-economics-2016-why-and-how-to-to-apply-vat-to-financial-services.pdf</a>
OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Tax Policy Studies, No. 22, OECD Publishing, Paris, <a href="https://doi.org/10.1787/9789264224520-en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.1787/9789264224520-en</a>.
OECD (2024), Consumption Tax Trends 2024: VAT/GST and Excise, Core Design Features and Trends, OECD Publishing, Paris, <a href="https://doi.org/10.1787/dcd4dd36-en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.1787/dcd4dd36-en</a>.
Peacock, Christine (2023), “Shifting from pre-paid to periodic GST on the consumption of residential premises”, Australian Tax Forum, 38(2), pp. 199-223, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4605685" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4605685</a>
Poddar, Satya (2010), “Taxation of housing under a VAT”, Tax Law Review (63), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1669559" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1669559</a>
Thomas, A. (2020), “Reassessing the regressivity of the VAT”, OECD Taxation Working Papers, No. 49, OECD Publishing, Paris, <a href="https://doi.org/10.1787/b76ced82-en" data-wpel-link="external" target="_blank" rel="external noopener noreferrer" class="wpel-icon-right">https://doi.org/10.1787/b76ced82-en</a>.
van Brederode, Robert (2011), “Theory and Practice of VAT Treatment of Real Estate”, in Immovable Property under VAT: A Comparative Global Analysis, Kluwer Law International, pp. 1-27.
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<title>The Contents of Intertax, Volume 53, Issue 02, 2025</title>
<link>https://kluwertaxblog.com/2025/02/19/the-contents-of-intertax-volume-53-issue-02-2025/</link>
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<dc:creator><![CDATA[Ana Paula Dourado (General Editor of Intertax)]]></dc:creator>
<pubDate>Wed, 19 Feb 2025 10:00:45 +0000</pubDate>
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<description><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:   Tina Ehrke-Rabel & Barbara Gunacker-Slawitsch, Tax Administration AI: The Holy Grail to Overcome Information Asymmetry in Tax Enforcement?   Liberal democracies are based on the concept of the free person who is a... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/02/19/the-contents-of-intertax-volume-53-issue-02-2025/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:
 
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Liberal democracies are based on the concept of the free person who is a rational being capable of understanding their behaviour and taking responsibility for it. The state may only interfere with individual freedom when it has a legal basis, if it is necessary to safeguard the functioning of a democratic society. Therefore, in liberal democracies, citizens have duties to fulfil and responsibilities to bear. In return, they are not and must not be surveilled by the state. Tax enforcement is built upon this concept.
Tax administration Artificial Intelligence (AI) has the potential to change this concept. What is technically feasible is not necessarily appropriate for sustaining the fundamental values of a liberal society.
If society wants to uphold these values, any deployment of tax administration AI must be legally framed with clear rules on the origin of the data, the method of data processing, the aim of the data processing, and the possibility of human intervention. Additional legal prerequisites may be necessary depending on the purpose of the use of tax administration AI. If it is deployed in a mindful way, it is likely to increase both the efficiency and the equality of tax enforcement.
 
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The court is showing a tendency towards exposing secondary EU law to a less intensive review under primary EU law than it does for national law. With a potentially large wave of direct tax law harmonization ahead, this has been met with alertness in literature as it may not be adequate for the field of taxation. Against this background, this article elaborates on the development of a direct tax relevant doctrine on the enforcement of economic rights enshrined in primary EU law. The core argument worked out by the author can be summarized as follows. Given the weak democratic legitimation of EU direct tax directives, and having regard to the fact that they are extraordinary difficult to adapt or abolish, the court has an increased responsibility to protect taxpayers’ economic rights – particularly when the underlying legislative decision or value is not worth being upheld at the cost of an infringement of such rights.
 
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<title>The U.S. pushback on minimum corporate tax rates may test the limits of bilateral tax treaties with EU Member States</title>
<link>https://kluwertaxblog.com/2025/02/18/the-u-s-pushback-on-minimum-corporate-tax-rates-may-test-the-limits-of-bilateral-tax-treaties-with-eu-member-states/</link>
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<dc:creator><![CDATA[Raymond Luja (Maastricht University)]]></dc:creator>
<pubDate>Tue, 18 Feb 2025 15:20:56 +0000</pubDate>
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<description><![CDATA[*This post was first published on the website of Maastricht University*   In recent weeks the tax world gave a lot of attention to how President Trump blew up some serious advancements in international tax law, long in the making. One of those advancements was the introduction of a minimum tax on profits of the... <div class="more-container"><a class="more-link" href="https://kluwertaxblog.com/2025/02/18/the-u-s-pushback-on-minimum-corporate-tax-rates-may-test-the-limits-of-bilateral-tax-treaties-with-eu-member-states/" itemprop="url" data-wpel-link="internal">Continue reading</a></div>]]></description>
<content:encoded><![CDATA[*This post was first published on the website of Maastricht University*
 
In recent weeks the tax world gave a lot of attention to how President Trump blew up some serious advancements in international tax law, long in the making. One of those advancements was the introduction of a minimum tax on profits of the largest multinational corporations, ensuring that they pay at least 15% in taxes on profits from their worldwide activities.
 
After initial consensus on a global minimum effective tax rate had been reached back in 2021 with over 130 jurisdictions, the agreement signed was never ratified by the U.S. Congress.
 
We should be willing to admit that President Trump was correct in stating that a minimum tax may lead to extraterritorial taxation when other countries levy additional taxes to cover for low or no taxation in some other parts of the world. (The U.S. itself already had some experience with this.) The EU was one of the frontrunners when introducing the Minimum Tax Directive (2022/2523) at the end of 2023. Extraterritorial taxation will effectively start later, covering profits from 2025 onwards.
 
One elephant in the room is the tension between international law and European law. Many EU Member States have bilateral tax treaties with the U.S. that regulate the division of taxing rights on corporate profits. Ratification of the multilateral agreement would have been necessary to infringe upon those pre-existing divisions, despite attempts from the Organization for Economic Co-operation and Development (OECD), the G20 and the EU to play down the necessity of such changes to comply with international law.
 
If the European Commission would start enforcing the Minimum Tax Directive and expect EU Member States to indeed tax the profits of U.S. multinationals if needed, these Member States might find their own courts turning against them given the pre-existing bilateral agreements.
 
A textbook solution would be to amend such pre-existing agreements in a way that they are brought in line with EU Law, but this would require both countries to agree in order to avoid a contentious treaty override. As this is not likely to happen anytime soon (if ever), the EU might in theory force EU Member States to terminate their agreements.
 
The problem is that bilateral tax agreements cover much more than just corporate taxation. It is often business that is the driving force behind concluding bilateral agreements, but individuals benefit from them as well. Personal income taxes and taxes on personal property are also regulated by the same agreement to avoid double taxation. Having a large network of bilateral tax treaties is a necessity open economies can hardly do without, as they are of vital importance to businesses operating cross-border and to citizens who work or live abroad.
 
So the question is: what the EU will do next? Keeping a minimum tax in place with respect to jurisdictions that did not ratify the multilateral agreement will inevitably lead to legal challenges by the taxpayers involved, simply based on domestic and international law. It is just a matter of time and this will not be limited to the U.S.. (On a side note, the sheer complexity of implementing the minimum tax as it stands today would warrant a reconsideration anyway.)
 
The European Commission should stay clear of interfering with bilateral tax treaties, even though Article 4(3) TEU and Article 351 TFEU could provide it with a basis to try and do so when the effectiveness of the Minimum Tax Directive would be threatened. But as bilateral tax treaties cover so much more and are mostly in the realm of the exclusive competence of Member States, this is not the time to start testing the limits of said Articles.
 
In the grand scale of things, minimum taxation is just a minor part of the realm of both personal and corporate taxation. Not that it is unimportant, to the contrary, but when the Minimum Tax Directive was adopted Member States did not intend to give up the remainder of their sovereign rights either.
 
The necessity of having bilateral tax treaties adapted to single nation needs and business taxation being an inextricable part thereof, may lead to quite a different end result than the bilateral Open Skies-agreements that were scrutinized by the EU’s Court of Justice back in 2002. The fundamental freedoms are not directly at stake and the EU has no competence of its own to regulate direct taxation internationally. On balance the EU’s interests here are far more limited compared to the infringement on reserved rights that are of crucial importance to any sovereign Member State. But can we afford to wait how this plays out in the various courts or will someone play another trump card in between?
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