6.2.5.2 Concurrence with EU law

As has been indicated numerous times in this research, tax treaties restrict the application of domestic law by countries. For EU Member States further limits apply: tax treaties concluded by Member States must comply with EU law. In the absence of unification or harmonization measures, Member States remain competent to establish criteria for the distribution of taxing powers, in order to provide for the avoidance of double taxation by means of a tax treaty. Member States are free to determine the connecting factors for the distribution of taxing rights. The exercise of such powers should be in accordance with EU law. A Member State which has the right to tax a cross-border situation, in line with the provisions of a tax treaty, needs to equally treat that situation in comparison to a comparable purely domestic situation.1 Discriminating cross-border investments is prohibited by the fundamental freedoms.2

The question arises whether a unitary business approach would lead to conflicts with EU law. If the unitary business approach would be implemented by an EU harmonization measure,3 this could be seen as exhaustive harmonization. Harmonization would ‘switch off’ primary EU law. The compatibility of the law of a Member State would then have to be assessed in view of the harmonizing measure, and not in light of primary EU law.4 If no measures would be taken at EU level, there also does not seem to be a conflict with EU law. As a worldwide group approach does not discriminate against cross-border businesses in comparison with domestic businesses, there should be no problems in this respect.

If all transactions between group members would be neutralised due to a comprehensive group approach, this would mean that various EU directives would no longer be relevant in an intra-unitary business context.5 However, as the PSD and IRD both apply a relatively low withholding threshold, the directives would remain relevant in situations in which passive income flows from a group member to an associated non-group member. Additionally, the MD remains relevant for reorganizations that take place in non-unitary business situations. Most of the ATAD rules would apply in fewer situations, as these are aimed at making sure that group situations cannot be exploited to avoid taxation.6 Still, it should be kept in mind that for entities that fall outside the scope of the unitary business there might still be tax avoidance opportunities.7

Member States must also comply with state aid rules. Any aid granted by a Member State through state resources that distorts or threatens to distort competition by providing a selective advantage, if it affects the trade between Member States, is considered incompatible with the internal market.8 If unitary business companies would be treated more beneficially than non-unitary business companies, this might entail an advantage in comparison to the ‘normal’ tax system.9 Additionally, it must be determined whether the advantage would be selective. This also requires examining the ‘normal’ tax regime applicable. As a next step, it should be assessed whether the advantage granted may be selective if the measure derogates from that normal regime to the extent that it differentiates between economic operators who, in light of the objective assigned to the tax system of the Member State concerned, are in a situation that is comparable factually and legally.10 This would require an assessment per national tax system of the various Member States. However, to avoid any doubt, the potential issue can be solved by requiring implementation of the unitary business approach within the EU via a directive. If a different treatment stems from the obligation to comply with an EU directive, no state aid is granted by a Member State.11 In other words, if the treatment is required by EU law, it is not allocable to the respective state.