4.3.1 Introduction

This section revolves around the various EU directives in the field of direct taxation. A directive is a measure that leads to positive integration: harmonized measures and coordination at EU level.1 An EU directive should be transposed into national law. In certain cases, however, directives can have direct effect with an aim to protect the rights of individuals. Direct effect of EU law for a directive is solely possible if the provisions fulfil the condition of being clear, precise and unconditional, whereas the national legislation does not fully comply with the directive requirements or the Member State has not transposed the directive by the deadline.2 It must be kept in mind that EU directives can generally only have direct vertical effect,3 which means that directives cannot be relied upon per se by Member States as against individuals.4 A Member State that failed to implement a directive can thus not rely on the not implemented directive in proceedings against individuals (i.e., no reverse vertical direct effect). This also applies if a directive has not been implemented correctly. In this manner legal certainty for taxpayers can be ensured. After all, taxpayers should be able to rely on their national law.

However, the aforementioned does not mean that directives cannot have adverse consequences for individuals. National authorities are required to interpret national law to the extent possible in accordance with relevant EU law.5 This consistent interpretation is limited by general principles of law, particularly those of legal certainty and non-retroactivity. The obligation for national courts to interpret national law in accordance with EU law cannot serve as a basis for the interpretation of national law contra legem.6 Via consistent interpretation, a reverse direct effect can in essence be the outcome for taxpayers.7

If the results of the directive cannot be achieved via interpretation, Member States are liable for any damage or loss caused to individuals and undertakings by failure to transpose the directive.8 In this respect four conditions must be fulfilled. First, the directive should grant rights to individuals. Second, it must be possible to identify the content of those rights on the basis of provisions of the directive. Third, there must be a causal link between the breach by the Member State and the damage suffered.9 Finally, the breach must be sufficiently serious.10

In the field of direct taxation, so far four directives have been adopted based on art. 115 TFEU. This provision authorises the EU to issue directives that contribute to the establishment or functioning of the internal market. First, a Directive on intra-group cross-border profit distributions was adopted, the PSD. Subsequently, with the adoption of the MD the EC aimed to eliminate the tax consequences of mergers of companies in a cross-border context. Thirdly, intra-group cross-border payments of interest and royalties are the subject of the IRD. These three directives create benefits for taxpayers. The most recently adopted directive in the field of direct taxation is the ATAD, which in essence creates obligations for taxpayers. This Directive prescribes anti-avoidance measures that Member States must – as a minimum standard – implement in their national legislation.

The question arises to what extent a group approach is applied in the EU directives and if so,11 whether such an approach would fit within the objectives of the OECD MTC. In this regard it should be noted that secondary EU law has a different objective than tax treaties: i.e., harmonization vs. allocation. However, as the overall goals of the EU and the OECD MTC are to a certain extent similar (both aim to reduce tax obstacles to cross-border services, trade and investment, without providing opportunities for tax avoidance), the approach taken within EU directives can provide insights to develop a model tax treaty that better takes into account the group situation of an entity.

For the various directives the separate legal entity is the starting point. However, specific benefits are granted if there is a relation between the legal entities. Additionally, the anti-avoidance rules are targeted to situations in which there is a certain connection between the involved entities. In this section, it is successively analysed whether there is a group approach in the PSD (par. 4.3.2), the IRD (par. 4.3.3), the MD (par. 4.3.4) and the ATAD (par. 4.3.5). In this context, particular attention is paid to the specific elements of the directives that may be relevant to the treaty application for companies that are part of a group. After describing these components, the extent to which the group approach contained in the respective EU directive can already be found in the OECD MTC is explained. Furthermore, it is discussed per directive whether the approach taken would fit within the objectives of the OECD MTC, being eliminating double taxation without providing possibilities for tax avoidance. The section will be concluded with an interim conclusion.