ATAD 1
(assessment of the Luxembourg case)
Adv LLM thesis
submitted by
Ilaria Panzeri
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law'
degree at the University of Amsterdam
supervised by
Hein Vermeulen
co-supervised by (if applicable)
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
1. I hereby certify (a) that this is an original work that has been entirely prepared and written by myself without any assistance, (b) that this thesis does not contain any materials from other sources unless these sources have been clearly identified in footnotes, and (c) that all quotations and paraphrases have been properly marked as such while full attribution has been made to the authors thereof. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree. I also accept that in case of such a violation professional organizations in my home country and in countries where I may work as a tax professional, are informed of this violation.
2. I hereby authorize the University of Amsterdam and IBFD to place my thesis, of which I retain the copyright, in its library or other repository for the use of visitors to and/or staff of said library or other repository. Access shall include, but not be limited to, the hard copy of the thesis and its digital format.
3. In articles that I may publish on the basis of my Adv LLM Thesis, I will include the following statement in a footnote to the article’s title or to the author’s name:
“This article is based on the Adv LLM thesis the author submitted in fulfilment of the requirements of the 'Advanced Master of Laws in International Tax Law' degree at the University of Amsterdam.”
4. I hereby certify that any material in this thesis which has been accepted for a degree or diploma by any other university or institution is identified in the text. I accept that any violation of this certification will result in my expulsion from the Adv LLM Program or in a revocation of my Adv LLM degree.
signature:
name: Ilaria Panzeri
Table of Contents
Table of Contents ... III
List of Abbreviations used ... V
Executive Summary (max. 1 page) ... VI
Main Findings (max. 1 page) ... VII
1.
Introduction ... 1
1.1. CFC regimes ... 1
1.1.1. United Kingdom’s Bricom Holdings Ltd: no conflict ... 2
1.1.2. Finland’s Re A Oyj Abp: no conflict ... 2
1.1.3. Japan’s Glaxo Kabushiki: no conflict ... 2
1.1.4. Re Société Schneider Electric: CONFLICT ... 3
1.2. Domestic anti-avoidance rule denying double tax relief ... 3
1.3. Overview of the ATAD 1 ... 3
1.4. Research proposal ... 4
1.5. Structure of the study and methodology ... 5
1.6. Scope and Limitations ... 6
2.
Legal framework ... 6
2.1. International law: pacta sunt servanda and good faith ... 6
2.2. Legitimacy of EU law and main principles ... 7
3.
Prevalence of EU law over domestic law ... 7
3.1. Primacy of EU law ... 7
3.2. Direct effect ... 8
3.3. Reverse direct effect ... 8
4.
Prevalence of EU law over DTTs ... 9
4.1. The legitimacy of tax treaty override ... 10
4.1.1. Monist and dualist system ... 10
5.
Possibility of a EU Member State to respect a DTT if it clashes with EU law10
5.1. DTTs with other EU Member States ... 125.2. DTTs with third countries ... 14
5.2.1. DTTs concluded before the access to EU (1) ... 14
5.2.2. DTTs concluded after ATAD 1 (3) ... 15
5.2.3. DTTs concluded after the access to EU but before ATAD 1 (2) ... 15
5.2.3.1. Cons ... 15
5.2.3.2. Pros ... 17
5.2.3.3. Other arguments ... 19
5.2.3.4. Examples of the express prevalence of DTT over EU law ... 21
5.2.3.5. Author’s conclusions... 22
6.
Luxembourg implementation of CFC regime ... 24
6.1. Luxembourg implementation of CFC regime ... 24
6.2. Official positions ... 24
6.2.1. The Opinion of the Conseil d’État ... 24
6.2.2. Circular Tax Authorities ... 25
6.3. Assessment ... 25
6.3.2. Interpretative inverse vertical direct effect ... 26
6.3.3. Reservation on OECD model tax convention ... 26
6.3.4. Options in the MLI ... 26
6.3.5. MLI treaty abuse ... 27
7.
Conclusions ... 27
ANNEX ... 29
List of Abbreviations used
(alphabetical list of abbreviations used in the Thesis)
AG Advocate General ALP Arm's Length Principle Art.,
Arts. Article, Articles
ATAD Anti Tax Avoidance Directive BEPS Base Erosion Profit Shifting C-, T- Court Case Number
CCTB Common Corporate Tax Base CFC Controlled Foreign Company CIN Capital Import Neutrality CTA Covered Tax Agreement DTT Double Tax Treaty
EC European Community
ECJ European Court of Justice EEC European Economic Community ETR Effective Tax Rate
EU European Union
GAAR General Anti Avoidance Rule ICJ International Court of Justice
MLI Multilateral Convention to Implement Tax Treaty Related Measures
MNE Multinational Enterprise
NL The Netherlands
OECD Organization for Economic Cooperation and Development para. paragraph
p.p. page
PE Permanent Establishment SAAR Specific Anti Avoidance Rule TEU Treaty on European Union
TFEU Treaty on the Functioning of European Union
UK United Kingdom
Executive Summary (max. 1 page)
There is not an express consensus about the relationship between International law and EU law as the two legal orders have different sources of legitimacy so that establishing a clear prevalence of one on the other might be difficult in some circumstances. The adoption of ATAD 1 created an additional level of complexity in the analysis of the conflict arising from the interaction between DTTs and EU law.
Focusing on the new CFC provision included in ATAD 1, the present paper studies such interaction, and the possible impacts this might have on the DTTs concluded by EU Member States. In an attempt to define the compatibility and an eventual hierarchy between the two legal orders, the paper categorizes the possible outcomes arising from their interaction. The scenarios identified are separately analyzed, in the first instance from a theoretical perspective, and in the second instance from a practical perspective by assessing the implementation and interpretation of the CFC regime in Luxembourg.
The main research question addressed is if an EU Member State can give prevalence to the provisions included in DTTs after the implementation of the CFC regime under ATAD 1.
In this respect four sub-questions have been investigated (i) What are the legal frameworks of EU law and International law (ii) the prevalence of EU law over domestic law (iii) the prevalence of EU law over DTTs and the possibility of treaty override (iv) possibility of a EU Member State to respect a DTT when it clashes with EU law.
Firstly, under the sub-question (i), the paper briefly discusses the principle of pacta sunt servanda, as the foundation of international law and the legitimacy of EU law deriving from the conferral principle. Under sub-question (ii), the prevalence of EU law over domestic law is explained through the principles of primacy of EU law, direct effect, and reverse direct effect mainly developed by the case laws of the ECJ. Sub-question (iii) briefly analyses the two different tax system monist and dualist and the possibility to give rise to treaty override. Sub-question (iv) introduces the heart of the study. DTTs concluded by EU Member States are divided into two groups, one concluded with other EU Member States and one with third countries. Six categories per group are identified depending on the moment of conclusion of the DTTs, namely (1) before the access to the EU (2) after the access to the EU before the adoption of secondary EU law (3) after the adoption secondary EU law, and the source of EU law, namely (a) primary Eu law (b) secondary EU law. Following the analysis based in principle on Art. 351 of TFEU and Art. 30 of VCLT, the conclusion reached by the paper is a general prevalence of EU law over DTTs when concluded with EU Member States.
Concerning DTTs concluded with third countries, different conclusions have been drawn. DTTs should prevail when concluded before the access to the EU, and EU law should prevail when DTTs are concluded after the adoption of secondary EU law or in the period between the access to the EU and the adoption of secondary EU law in respect of primary EU law.
A “grey area” is identified when DTTs are concluded after the access to the EU and before the adoption of secondary law with reference to the same secondary law. Even though pros and cons have been addressed, the conclusion is still unclear. In the author’s view, there could be more room for accepting an interim prevalence of DTTs over EU law, namely the non-application of the CFC regime.
The last chapter addresses the correct implementation and interpretation of the CFC regime under the Luxembourgish tax system. The assessment is based on the paper’s results, together with the MLI provisions opted in or out by Luxembourg and the official opinions issued by the Conseil d’État and the tax authority about the application of CFC regime. The conclusion of the author mirrors the study performed, according to which a prevalence is confirmed for DTTs concluded with EU Member States, and an interim protection can be granted to DTTs concluded with third countries, even though the MLI might still deny the treaty benefits.
Main Findings (max. 1 page)
The two tables summarize the output of the study, namely a general prevalence of EU law over DTTs when the same are concluded with EU Member States and different outcomes when concluded with third countries.
Even though the conclusions in relation to all the “white areas” were quite straightforward, the most interesting outcomes are related to the “grey area” arising from the DTTs concluded after the access to EU but before the adoption of secondary law (ATAD 1) in respect of the same.
After the analysis of pros and cons to establish a hierarchy between the two legal orders, the below findings could be highlighted.
The conferral principle, on which the EU law finds its legitimacy, should be interpreted in a broad sense when it comes to shared competence with pre-emption. A broad interpretation would avoid unjustified limitation to the tax sovereignty of the EU Member States, not being sufficient a potential power in the hands of EU to prevent EU Member States to conclude DTTs.
Accepting a broad interpretation of Art. 351(1) of TFEU paves the way to accept an extension of protection also to DTTs concluded before the adoption of ATAD 1.
A Broad or narrow interpretation of Art. 351(1) would lead to the same long-term consequence when considering Art. 351(2) under which EU Member States “must take all appropriate steps to eliminate incompatibilities”, limiting the scope of Art. 351(1) to an interim protection. However, it remains unanswered how long this interim period should be and the consequence for the EU Member States in case the incompatibilities are not eliminated.
The meaning of the term “rights and obligations” included in Art. 351(1) should not be interpreted according to the ECJ case laws as rights of third countries and obligations of EU Member States, as a DTT should be considered as a whole, the provisions of the same cannot be denied on a stand-alone basis, but considered as rights for taxpayers and obligations for the contracting states.
According to an interpretative inverse vertical direct effect, the EU Member States should implement and interpret the CFC regime under ATAD 1 in accordance with the object and purpose of the Directive. Following the principle of pacta sunt servanda, a domestic provision, even if it is derived from EU law, should not affect the obligations taken under a previous DTT.
The elimination of the specific clause in the text of ATAD 1 should not have great relevance as the Art. of CFC has been implemented accordingly.
Member State/ Member State
Before access to EU (1)
After access to EU before adoption of secondary law (2)
After the adoption of secondary law (3)
Primary law (a) EU EU EU
Secondary law (b) EU EU EU
Member State/3rd
Countries
Before access to EU (1)
After access to EU before adoption of a secondary law (2)
After adoption of secondary law (3)
Primary law (a) DTT EU EU
1. Introduction
The international tax issues have been at the center of political attention in recent years, as companies, facing the increasing integration of economies and markets, create more and more integrated groups. Such integration has created several opportunities for base erosion and profit shifting (BEPS), which required a supranational intervention in order to ensure that the taxation takes place where the value is created1.
The scene of the international tax law, and consequently of the international tax planning, has therefore drastically changed in the recent years since the 15 actions of the BEPS project2 have been released. Existing structures of Multinational Enterprises (MNEs) needed to be reassessed under the new “recommendations” provided under such actions in order to identify schemes that can potentially create a conflict with them.
In particular, Action 3 of the BEPS project has been released to give guidance to the countries to design effective Controlled Foreign Company (CFC) rules.
As will be followed explained, CFC rules have been implemented following the BEPS recommendation in the Anti-Tax Avoidance Directive (ATAD 13), giving rise to a significant impact on each European Union (EU) Member State, especially when such regime was not present before or could have been considered non-effective. One of the impacts to be considered is the effect that the latter Directive might have when it comes to the interaction with the Double Tax Treaties (DTTs) already concluded or to be concluded by the EU Member States.
1.1. CFC regimes
CFC rules are generally introduced in a tax system to prevent the tax deferral. The deferral is achieved by allocating profits to foreign jurisdiction (low-taxed jurisdiction) without distributing the same to the parent company4. The main characteristic of the regime is to fictitiously reattribute such profits to the ultimate parent company without the occurrence of an actual distribution5, either taxing a deemed dividend or ignoring the corporate veil. In both ways, the taxation at the level of the shareholder or parent company is achieved, preventing the deferral.
Action 3 of the BEPS project acknowledges the possibility for a group of companies to shift profits by creating non-resident affiliates for non-business reasons, but partly or entirely for tax reasons6.
The report includes recommendations to implement effective CFC rules, which are provided as building blocks7. Even if such recommendations are not designed as a minimum standard, they ensure an effective implementation of the rules against profit shifting.
The report is flexible and to be adapted to the policy of each country and to its international legal obligation, especially for EU Member States8.
1 European Council, COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016 Laying down Rules against Tax Avoidance Practices That Directly Affect the Functioning of the Internal Market [2016] Official Journal of the European Union L 193/1, preamble n. 1; OECD, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report, pp. 3.
2 Https://Www.Oecd.Org/Tax/Beps/About/ - BEPS project addressed the problem of tax planning scheme put in
place by MNEs based on the gaps and mismatches in tax rules in order to avoid or lower the taxation. The result of the project is a 15-action package tackling tax avoidance in different areas of taxation where the risk can be considered the highest.
3 European Council (n 1)
4 Peter J Wattel, Otto Marres and Hein Vermeulen, European Tax Law (Kluwer International ed, 2019), p.p.
258-259.
5 Wattel, Marres and Vermeulen (n 4), p.p. 258-259.
6 OECD, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report (n 1), introduction
p.p. 11.
7 OECD, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report (n 1), pp. 9: Six
building blocks are present (1) definition of a CFC (2) CFC exemptions and threshold requirements (3) Definition of income (4) Computation of income (5) Attribution of income (6) Prevention and elimination of double taxation.
As extensively discussed in the past9, the application of CFC regimes may trigger incompatibilities with the provisions agreed in DTTs, especially with Art. 7 (business profit), 10 (dividends), and 21(other income). Moreover, such incompatibility is reflected in the application of Art. 23A (exemption method), in particular when a foreign Permanent Establishment (PE) of an EU resident company falls under the scope of the CFC regime.
In the past, we have witnessed interpretations by national courts, both in favor and against, in relation to the compatibility of DTTs and CFC regimes. Despite the mainstream decisions ruled for full compatibility10, some cases have been ruled for incompatibility. In paragraph 1.1.1 - 1.1.4, we report the main cases solved by national Courts in relation to this conflict.
Furthermore, it is worth noting that, since the 2003 revision of the OECD commentary11, the same included specific paragraphs acknowledging the absence of conflict between CFC regimes and DTTs, in particular with Arts. 7(1) (business profit) and 10(5) (dividends)12 of the model.
1.1.1. United Kingdom’s Bricom Holdings Ltd: no conflict13
In Bricom case, the CFC regime has been challenged by the UK tax authority in relation to a Dutch subsidiary to which the parent company paid interests.
The appeal was based on the applicability of the exemption under Art. 11(1) of the DTT, according to which no taxing rights are present in the hands of the parent company.
According to the Court, “The chargeable profits referred to in (the CFC legislation) must be ascertained
without reference to the (treaty) and must be measured by reference to the total income of [the subsidiary] inclusive of United Kingdom source interest”.
The interest, therefore, was just a part of the notional sum that had to be attributed to the taxpayer based on an interest in the entity and on which tax had to be charged.
1.1.2. Finland’s Re A Oyj Abp: no conflict14
In Re A Oyj case, the absence of conflict of the CFC regime and DTT was declared based on the absence in the relevant DTT of any provision to deny to the parent company state the application of the regime, especially because no provisions were in place in the DTT against the elimination of economic double taxation.
1.1.3. Japan’s Glaxo Kabushiki: no conflict15
The Japanese case has been debated based on Art. 7 (business profit) of the relevant DTT, which provides for exclusive taxing rights in the country of the subsidiary in the absence of a permanent establishment in the parent company State to which the profit is attributable, preventing the application of the CFC law in the latter state.
The Supreme Court did not identify a conflict of the CFC regime with the article 7 of the DTT as the purpose of the same is to prevent juridical double taxation, and that according to the CFC regime, the tax imposed in the parent company state was imposed on the parent company, and not to the subsidiary, thus concluding that the regime was not in breach of the treaty obligation.
9 Ulrich Lang, Michael; Aigner, Hans-Jörgen ; Scheuerle, CFC Legislation, Tax Treaties and EC Law (Klower Law
International 2004), pp. 28-29
10 Vikram Chand and Craig Elliffe, The Interaction of Domestic Anti-Avoidance Rules with Tax Treaties in the Post-BEPS and Digitalized World (2020) 74 Bulletin for International Taxation, p.p. 317.
11 OECD, Model Tax Convention on Income and on Capital (2003)
12 OECD, ‘Model Tax Convention on Income and on Capital (2003)’ (n 11) Art. 1 para. 22.1; Art. 7 para. 10.1; Art.
10 paras. 37-39.
13 For further information: Case 25 June 1997 Bricom Holdings Ltd v Commissioners of Inland Revenue (summary)
14 For further information: Case 20 March 2002/596 A Oyj Abp (summary)
1.1.4. Re Société Schneider Electric: CONFLICT16
The French tax authorities claimed a Swiss subsidiary of a French company as a CFC under the French domestic law, considering the regime not in conflict with DTTs as no juridical or economic double taxation17 arose and because the DTTs are also meant to avoid tax fraud and evasion.
The case, decided in favor of the taxpayer, was debated based on the Art. 7 (business profit) of the relevant DTT. According to the Supreme Court, the word “profit” had no treaty definition and was, therefore, necessary to be interpreted according to domestic law. Furthermore, the “profits” to be taxed in France under the CFC rules were the same derived by the Swiss subsidiary, whereas no PE was present in France to which the profit would be attributable. The Court concluded that taxing the profit in France would be contrary to Art. 7(1) of the DTT.
The Court ruled that even assuming the prevention of tax avoidance as one of the purposes of the DTT, it was not sufficient to justify an overrule of allocation of taxing right granted by one of its articles.
1.2. Domestic anti-avoidance rule denying double tax relief
Art. 23A of the OECD model18 convention provides for the exemption as a method for the elimination of double taxation.
The incompatibility between CFC and the exemption method under DTT has already been addressed in the past for being in contrast with the concept of capital import neutrality (CIN)19.
In relation to that, Action 3 confirms that the States implementing a CFC regime should take into consideration its treaty obligation for determining the method of double tax relief to be granted20. We assume, for example, a company X resident in State R, operating through a PE in state S, and a DTT in place between R-S including an article to eliminate the double taxation in line with Art. 23A. In this case, State R should not be allowed to tax the income attributable to the PE when such income “may be” taxed in State S.
Upon the application of an anti-avoidance rule, such as the CFC regime, due to a low level of taxation in State S, State R considers the PE as abusive, therefore, claims the possibility to tax the income attributable to the PE, disregarding the exemption granted under the DTT R-S.
Denying the access to the treaty benefit in State R under the anti-avoidance rule clearly creates a conflict with the benefit of the tax exemption granted under Art. 23A of the DTT, also in the light of the absence of an express requirement in the article of an adequate level of taxation in country S21.
This kind of conflict could also be identified in the CFC regime introduced by ATAD 1.
1.3. Overview of the ATAD 1
On 12th July 2016, the EU made a step forward in the positive integration22 of direct taxation, adopting the ATAD 1as a vehicle for the implementation of the BEPS project at the EU level23. One of the main reasons to adopt such a Directive can be traced back to a non-harmonized international tax system that facilitates the BEPS.
ATAD 1, in its preamble, highlights the need to ensure that the taxes are paid “where profits and value
16 For further information about the facts: Case 28 June 2002 - 232 276 Schneider Electric Company (summary) 17 Absence of juridical double taxation because the same income was taxed in the hands of two different entities;
absence of economic double taxation because the foreign corporate tax paid would be creditable in France.
18 OECD, Model Tax Convention on Income and on Capital (2017), art. 23A, (ANNEX)
19 John A Swain and Walter Hellerstein, State Jurisdiction to Tax ‘Nowhere’ Activity, pag 6: a CIN tax system is
based on a “territorial” approach. Foreign-source income is exempted in the resident state and taxed only at the source state rate.
20 OECD, Designing Effective Controlled Foreign Company Rules, Action 3 - 2015 Final Report (n 1), para. 7.2.5. 21 Vikram Chand, The Interaction of Domestic Anti-Avoidance Rules with Tax Treaties (with Special References
to the BEPS Project) (Robert Danon ed, Schulthess 2018), para. 766.
22 Wattel, Marres and Vermeulen (n 4), pp.4: negative integration is intended as case laws of the ECJ, positive
integration is intended as tax measures undertaken by the EU.
are generated”24.
The Directive has been drafted as a minimum standard to be considered effective for a good functioning of the internal market25. Such minimum standard allows the EU Member States to implement the Directive, providing a higher level of protection, giving a coherent and coordinated effect towards the EU26. Furthermore, “only a common framework could prevent a fragmentation of the market and put an end to currently existing mismatches and market distortions”27.
ATAD 1 targets expressly taxpayers subject to corporate tax, excluding transparent entities and including Permanent establishments of entities resident for tax purposes in a third country if they are situated in one or more Member States28.
ATAD 1 has identified 5 anti-avoidance rules, namely the interest limitation rule, exit taxation, CFC rule, anti-hybrid mismatch rule and general anti-avoidance rule.
The CFC article of the Directive has been extensively debated during the approval process without finding common ground so that a two-option provision has been included in the final version of the Directive29.
Option A) is aimed at attributing the tainted income to the head office or the parent company, with the possibility for the EU Member State to exclude the application of the CFC rule in case less than or equal to a third of the income derives from “bad” income, according to the six categories identified in the Directive30.
Option B) requires the attribution of the non-distributed income to the head office or parent company to the extent that such income arises from non-genuine arrangements put in place with the “essential purpose of obtaining a tax advantage”31.
1.4. Research proposal
Even though the incompatibility between CFC regimes and DTTs has been intensely discussed in the past, the possible conflict arising between the application of the CFC regime after the implementation of ATAD 1, therefore as a result of EU law, and the DTTs concluded by the EU Member States, has not been yet fully addressed and solved.
If we consider in particular the example above reported in para. 1.2, concerning the denial of double tax relief in the light of the application of a domestic anti-avoidance rule, an automatic question would arise whether the same denial conflict could exist when the anti-avoidance rule applied derives from a European Directive (ATAD 1).
The author is going to assess, whether a benefit granted under the DTTs in place takes prevalence over the implementation of the ATAD 1 CFC regime, and in particular, whether the exemption method could still be applied when a company resident in a EU Member State operates in other jurisdictions through a PE which falls under the new CFC regime.
In fact, even though the denial of the double tax relief in the situation described above should take into consideration the hierarchy between domestic law and DTTs, together with the purpose of a DTT32, in case the same situation arises after the implementation of EU law, the same conflict should be considered from a different perspective, namely between EU law and DTTs.
In order to ease the reader in understanding the arguments provided, together with a practical impact that the same might have in the daily application of the DTTS, the author suggests keep in mind the example discussed in para. 1.2.
24 European Council (n 1), preamble n. 1. 25 European Council (n 1), preamble n. 3. 26 European Council (n 1), preamble n. 2. 27 European Council (n 1), preamble n. 2. 28 European Council (n 1), preamble n. 4, art. 1. 29 Wattel, Marres and Vermeulen (n 4), p.p. 259. 30 European Council (n 1), Art. 7 option A) (ANNEX). 31 European Council (n 1), Art. 7 option B) (ANNEX).
In fact, one of the structures used for tax planning in the past by MNEs (in particular in Luxembourg33) was based on the attribution of profit to a PE in a low-taxed jurisdiction or a “disregarded PE”34, which could benefit from the exemption granted under the DTT concluded by the head office country.
This particular kind of structure could be in threat after the implementation of the CFC regime in EU Member States’ tax system.
As this situation could be quite common in countries adopting the exemption method in their DTTs, a further analysis of the interpretation given by EU Member States (i.e. Luxembourg) in relation to the implementation of the CFC regime could help to bolster the identification of a possible hierarchy between DTTs and EU law.
1.5. Structure of the study and methodology
The author will guide the reader to assess the possibility the compatibility between the DTTs concluded by EU Member States and the CFC regime implemented by the same after ATAD 1, and in case of conflict, which set of rules should prevail.
The study is structured in the following steps.
Firstly, the author provides for the legal framework of EU law and International law. A general understanding will be provided in relation to the legitimacy of EU law, and the principle of pacta sunt
servanda and good faith of international law. Secondly, the principles of primacy, direct effect, and
reverse direct will be analyzed. This will allow the reader to reach a better comprehension of the interaction between EU law and domestic law.
Afterward, the paper gives an overview of the concept of treaty override.
The fourth step of the analysis, which constitutes the heart of the paper, is aimed at investigating the possible outcomes arising from the interaction between a DTTs concluded by an EU Member State and EU law. DTTs concluded by EU Member States are divided into two groups, one concluded with other EU Member States and one with third countries.
Two particular elements will influence the study, (i) the moment of conclusion of the DTT and (ii) the source of EU law to which the DTT is confronted.
In case a “grey area” is identified, pros and cons will be evaluated, attempting to provide a possible prevalence of one legal order (DTTs) on the other one (EU law).
As a final step, the results obtained will be applied to the specific Luxembourgish case. The author, by analyzing the peculiarity of the country, will try to assess the correctness of the implementation and interpretation of the CFC regime in Luxembourg.
The study has been performed based on existing literature, legal sources, and case laws.
Even though no particular explanations are required for the literature, legal sources, and case laws employed, it might be useful for the reader, to clarify the reason why Luxembourg has been chosen as a representative EU Member State for the assessment.
The country has implemented for the first time in its history a CFC regime implementing ATAD 1 provisions. Therefore, in the author’s view, its hierarchy interpretation could be considered of particular interest for the study. Furthermore, even if other countries, such as The Netherlands, might have the same interpreting issues, it seems that for the moment, no practical impact could be detected35.
33 An example can be drawn from the structure of the McDonald’s State aid case European Commission, Commission Decision of 19.9.2018 on Tax Rulings SA.38945 (2015/C) (Ex 2015/NN) (Ex 2014/CP) Granted by Luxembourg in Favour of McDonald’s Europe (2018)
34 For the definition of disregarded PE: Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU)
2016/1164 as regards hybrid mismatches with third countries (ATAD 2), preamble n. 19, (ANNEX)”
35 According to IM De Groot, Implementation of the Controlled Foreign Company Rules in the Netherlands (2019)
47 Intertax, para. 5: As of 2019, the Netherlands should not have any DTT with exemption method as a double tax relief without a switch-over clause with countries considered in the CFC “blacklist”. However, since the list may change, the analysis could be considered valuable also from a Dutch perspective.
1.6. Scope and Limitations
Notwithstanding the broad subject under analysis and the interaction of the research question with many other topics of International Law, the paper will be mainly limited to the study of a possible compatibility between the application of the CFC regime implemented under ATAD 1 and the DTTs, and to define an eventual hierarchy in case of conflict, together with the consequent practical application under the Luxembourg example.
Therefore, to avoid creating confusion in the reader with arguments that differ from the main study, it is necessary to limit the scope of the paper.
The limitations will regard the following topics:
- State aid rules under Arts. 107-108 of the Treaty on the Functioning of the European Union (TFEU);
- importance given to the Vienna Convention on the Law of Treaties (VCLT) - together with the relevance of any of its articles used for the analysis - for the interpretation of treaties between States: the same will be taken for granted as a codification of customary international law; - possible interactions between the different specific anti-avoidance rules (SAARs) and the
general anti-avoidance rule (GAAR) included in the ATAD 1;
- possible hierarchical interpretation between the different actions of the BEPS project; - interaction of the CFC rule with the EU freedoms36;
- Other possible conflict rules issued by international Law, the interaction with each other and with the conflict rule provided by EU law: the paper will only assess the EU law conflict rule under Art. 351 of TFEU;
- the legal status of the OECD commentary, and the explanatory memorandum to the Multilateral Convention to Implement Tax Treaty Related Measures (MLI);
- dynamic or static interpretation of DTTs;
- a detailed analysis of the effect of the new preamble included in the DTTs (art. 6 MLI), and the anti-avoidance provision (art. 7 MLI).
2. Legal framework
As mentioned in para. 1.5, this chapter is aimed at providing a general overview of the guiding principles of international law and EU law.
2.1. International law: pacta sunt servanda and good faith
From a general perspective, in case a domestic provision conflicts with a DTT provision, the provision of the DTT should prevail37, in fact, “every treaty in force is binding upon the parties to it and must be performed by them in good faith”38. This provision represents the principle of pacta sunt servanda, and it is the foundation of international law. The principle guarantees the absence of the adoption of unilateral measures non-compliant with treaty obligations39. In the absence of centralized law enforcement, the stability of the treaty network mainly depends on the respect of such principle40.
The article entails two concepts (i) international treaties are binding upon all the parties (ii) treaties have to be performed in good faith.
For a treaty to be performed in good faith, the intentions of the parties and the object and purpose of the treaty should prevail41, in fact, “the principle of good faith obliges the parties to apply it in a reasonable
36 Free movement of goods, free movement of capital, freedom of establishment and provide services, free
movement of persons.
37 OECD, ‘Model Tax Convention on Income and on Capital (2017)’ (n 18), Art. 1 para. 70. 38 United Nations, Multilateral Vienna Convention on the law of treaties (VCLT) 1980, Art. 26.
39 Bob Michel, Anti-Avoidance and Tax Treaty Override: Pacta Sunt Servanda? (2013) 53 European taxation, para.
4.1.
40 Michel (n 39), para. 4.1.
way and in such a manner that its purpose can be realized”42.
2.2. Legitimacy of EU law and main principles
Art. 5 of the Treaty of European Union (TEU)43 defines the Union competences based on a conferral principle. According to this principle, the EU has only competence in the field conferred to it by the EU Member States in the founding treaties TEU and Treaty on the Functioning of European Union (TFEU)44. The competences conferred by the EU Member States to the EU can be classified in (i) exclusive competences (ii) shared competences with pre-emption (iii) shared competences without pre-emption45. Following this classification, the competences not included in the three categories belong to the EU Member States46. However, notwithstanding such distinction, the competences attributed to the EU are quite broad, in fact, “in accordance with article 352 of the TFEU, the Council can take any action that is necessary for the attainment of the Union objectives in the functioning of the common market”47. Direct taxation is not expressly included in none of the above categories; however, the achievement of a Customs Union is explicitly listed under category (i).
According to article 28 of TFEU “The Union shall comprise a customs union which shall cover all trade
in goods and which shall involve the prohibition between Member States of customs duties on imports and exports and of all charges having equivalent effect, and the adoption of a common customs tariff in their relations with third countries.” Indeed, border duties and discriminatory taxation constitute a hinder
to the achievement of the Customs Union.
It can follow that direct and indirect taxation are areas included in the competence to achieve an internal market, area which falls, according to Art. 4 of TFEU, in the competences under category (ii).
In other words, the EU and the EU Member States share competence in the area. However, when the EU exercise its competence, the EU Member States lose theirs.
3. Prevalence of EU law over domestic law
The prevalence of EU law over domestic law can be derived from the analysis of the general principles of primacy and direct effect established by the case laws of the ECJ. Such principles are necessary to obtain a consistent effect on the tax systems of each EU Member State,48 as below explained.
Of additional importance for the study at hand is the concept of reverse direct effect and its development in the recent case laws.
3.1. Primacy of EU law
Even in the absence of an express provision interpreting and giving hierarchy between EU law and the national provisions of the Member States, it is since long time that the case laws of ECJ49 provided for the primacy of both primary50 and secondary51 EU law.
According to this principle, EU Member States must be compliant with EU rules when exercising their sovereignty power52.
42 Case Gabíkovo-Nagymaros Project (n 41), para. 142. 43 TEU Art. 5 (ANNEX)
44 Wattel, Marres and Vermeulen (n 4), p.p.9
45 Marjaana Helminen, EU Tax Law as Part of the Legal System, EU Tax Law – Direct Taxation (IBFD 2019) 46 Helminen (n 45).
47 Helminen (n 45).
48 Wattel, Marres and Vermeulen (n 4), para. 351.
49 C-6/64 Costa v ENEL para. “On the submission that the court was obliged to apply the national law”, (ANNEX)
50 Wattel, Marres and Vermeulen (n 4), para. 2.2.1: it is considered primary source of EU law the founding treaties
TEU, TFEU and their amendment, the Charter of Fundamental Rights of the EU, together with the fundamental principles developed by the ECJ and international agreement concluded by the EU.
51 Wattel, Marres and Vermeulen (n 4), para. 2.2.1: acts adopted by the EU, derived and based on primary law.
Art. 288 of TFEU includes regulations, directives, recommendations, and opinions.
As a direct consequence, EU law has the power to override domestic laws of every rank, also of a constitutional level, and Member States have to comply with it when elaborating legislation or concluding a DTT, or when such provisions or DTT are already in place and have to be interpreted53.
The domestic provisions are not made void by the primacy principle; however, they cannot be applicable in case of inconsistency with the higher rank EU law, lex superior derogate legi inferiori54.
3.2. Direct effect
The direct effect of primary and secondary EU Law stems from the same conferral principle mentioned in the previous paragraph. EU Law forms part of the national legislation of each EU Member State, even in the absence of a specific implementation, directly creating rights and obligation to the Organs of the communities, citizens, and EU Member States55. The direct effect is ensured in case the EU tax law provisions are sufficiently precise, clear, and unconditional56.
The result of this principle is the possibility for individuals and legal persons to rely directly, in front of Tax Authorities and Courts in the EU Member States, on the provisions of primary and secondary sources of EU law, also in the absence, insufficiency or incorrectness implementation of such provisions in the domestic law (vertical direct effect)57.
3.3. Reverse direct effect
Despite case laws settled the principle of direct effect, the same cannot be clearly stated for the reverse direct effect, according to which a principle of EU law can be directly applied against private parties, even in the absence of its domestic implementation.
In principle, the absence of a reverse direct effect stems from previous decisions of the ECJ, concluding that “a Directive may not of itself impose obligations on an individual and that a provision of a Directive may not be relied upon as such against sucha person”58.
This principle has been further developed in the Kofoed case59, in which it has been analyzed the possibility to rely upon the anti-abuse provision of the Merger Directive60 in the absence of a domestic implementation of the same.
Para. 45 of the case law states that “all authorities of a Member State, in applying national Law, are required to interpret it as far as possible in the light of the wording and purpose of the Community Directives in order to achieve the result pursued by those Directives. Moreover, although it is true that the requirement of a directive-compliant interpretation cannot reach the point where a Directive, by itself and without national implementing legislation, may create obligations for individuals or determine or aggravate the liability in criminal Law of persons who act in contravention of its provisions, a Member State may nevertheless, in principle, impose a directive-compliant interpretation of national Law on individuals”.
v Staatssecretaris van Financiën, para. 36, C-250/95 Futura, para. 19, C-118/96 Safir, para. 21, C-264/96 ICI, para. 19, C-311/97 Royal Bank of Scotland, para.19, C-391/97 Gschwind, para. 20, C-294/97 Eurowings, para. 32, C-55/98 Vestergaardvver, para. 15, C-251/98 Baars, para.17, C-35/98 Verkooijen, para.32, C-141/99 AMID, para.19, joined cases 397/98 and 410/98 Metallgesellschaft para. 37, 136/00 Dannerd, para. 28, C-436/00 X and Y, para. 32, C-324/00 Lankhorst-Hohorst, para. 26, C-385/00 De Groot, para. 75, C-422/01 Skandia and Ramstedt, para. 25, C-42/02 Lindman, para. 18, C-334/02 Commission v France, para. 21, C-9/02 de Lasteyrie du Saillant, para. 44, C-520/04 Turpeinen, para. 11, C-403/03 Schempp, C-319/02 Manninen, para. 19, C-231/05 Oy AA, para. 16, C-446/03 Marks & Spences, para. 29, C-196/04 Cadbury Schweppes, para. 40 and C-374/04 Test Claimants in Class IV of the ACT Group Litigation, para. 36 (ANNEX).
53 Helminen (n 45), Par. 1.2.3.
54 Yariv Brauner and Georg W Kofler, The Interaction of Tax Treaties with International Economic Laws, Global Tax Treaty Commentaries Global topics (2018), P.p. 4.
55 Helminen (n 45) para. 1.2.5
56 C-26/62 Van Gend & Loos P.p. 13 (ANNEX) 57 Helminen (n 45), para. 1.2.5.
58 C-152/84 Marshall, Para 48.; C-80/86 Kolpinghuis, para.8 (ANNEX). 59 C-321/05 Kofoed
60 Council Directive 90/434/EEC on the common system of taxation appplicable to mergers, divisions, transfers of
Someone could argue that, if a Member State does not give a “directive-compliant” interpretation of the national Law implementing an EU Directive, contrary to what a MS might do, the Directive creates obligations towards individuals and legal persons, putting them in a worse position compared to the one they might have following the interpretation given by the same MS61.
The so-called “Danish cases” 62 gave a recent contribution to the development of the reverse direct effect principle”.
On the contrary of what suggested by the Advocate General (AG) Kokott in its opinion, these case laws concluded that “the general principle of EU law that EU law cannot be relied on for abusive or fraudulent ends must be interpreted as meaning that, where there is a fraudulent or abusive practice, the national authorities and courts are to refuse a taxpayer the exemption […], even if there are no domestic or agreement-based provisions providing for such a refusal.”63
It could be argued from the decision that the Court considers distinctly (i)the anti-abuse provision in a Directive, not implemented under the domestic law, which according to the absence of a direct reverse effect cannot be invoked against an individual, and (ii) a general principle under which the abuse of rights is prohibited under EU law64.
Therefore, it should not be still possible to declare the existence of a reverse direct effect.
4. Prevalence of EU law over DTTs
As mentioned in the para. 3.1, EU Member States must comply with EU law when concluding or interpreting DTTs. However, to determine the primacy of EU law over Double Tax treaties, it is in first instance fundamental to identify the areas of friction between the two systems and their respective goals. DTTs are aimed at eliminating the double taxation (and lately to prevent tax evasion and avoidance65). In contrast, the goal of EU law is to build a single market, protecting the fundamental rights of the European Union.66 The starting point for the analysis should probably consider the primacy of EU law over DTTs as a direct consequence of the primacy of EU law over domestic legislation, being DTTs part of domestic legislation67. The primacy of EU law clearly confirms the impossibility to override an EU law by domestic law provisions68. Therefore, is it possible to conclude that the DTTs are subordinated to the provisions of EU law?
61 CFE ECJ Task Force, Opinion Statement ECJ-TF 2/2018 on the ECJ Decision of 7 September 2017 in Case C-6/16, Eqiom, Concerning the Compatibility of the French Anti-Abuse Rule Regarding Outbound Dividends with the Parent-Subsidiary Directive and Fundamental Freedoms (2018) 58 European Taxation, p.p.10: “In any event, the obligation to interpret national law in accordance with EU law (e.g., an existing domestic GAAR) also exists where the result prescribed is not favorable to the individual or company, so that an interpretative inverse vertical direct effect may be created”.
62 C-115/16 N Luxembourg 1; C-118/16 X Denmark A/S; C-119/16 C Denmark I; C-299/16 Z Denmark ApS v Skatteministeriet
63 C-115/16 N Luxembourg 1; C-118/16 X Denmark A/S; C-119/16 C Denmark I; C-299/16 Z Denmark ApS v Skatteministeriet (n 62), para. 122.
64 Bruno da Silva, N Luxembourg 1 & Others . Beneficial Ownership of Interest and Royalties . Abuse of Rights
(2019) 252 H&l, p.p. 37
65 Modification introduced following to BEPS project and present in the 2017 OECD Model Tax Convention
Commentary
66 José Manuel Almudì Cid, Jorge A Ferreras Gutiérrez and Pablo A Hernandez Gonzalez-Barreda, Combating Tax Avoidance in the EU Harmonization and Cooperation in Direct Taxation (EUCOTAX Se, Kluwer Law International BV 2019), P.p. 396.
67 Koichi Inoue and Toshio Miyatake, Preservation Principle, Current Tax Treaty Issues (IBFD 2020), Par. 5.3.2
“In a dualist state, no income tax treaties have the formal status of law in the domestic legal system unless the legislature enacts a statute to incorporate the treaty into domestic law. On the other hand, in a monist state, income tax treaties are incorporated into the domestic legal order without the need for any legislative act, other than the act authorizing the executive to conclude the treaty or legislative approval of the treaty. In sum, a monist state should be distinguished from a dualist state focusing on the necessity of a statute incorporating the treaty into domestic law.”
4.1. The legitimacy of tax treaty override
The examination of the legitimacy of the tax treaty override originates from the relationship in place between domestic Law and International Law, as previously discussed in para. 2.1.
The come into play of EU law included an additional parameter to the scenario about tax treaty override. Both treaties within EU Member States and between EU Member States and third countries can be affected by change under EU law.
International legal order on one side and EU and domestic legal order on the other side, have one main difference, the last two have both institutions with representative powers, with consequent attribution of competences.
On the other hand, the international legal order has no representative institutions, therefore, any relationship between States at the international level can be ruled only by agreements concluded between themselves. The rules are therefore established as a matter of general acceptance69.
“The creation of international Law as Law is, therefore, based on the consent of states which consider international Law generally applicable and binding as Law. Thus […] International Law is created by states, and it is binding exactly because it is the expression of the will of states”70.
Below are explained the different issues arising from the monist and dualist system.
4.1.1. Monist and dualist system71
The monist system, in the absence of an implementation of the DTT into domestic law, could give rise to misinterpretation. In fact, following the interpretation given by the domestic Court, if a treaty is considered in violation of domestic law, the latter should be applicable as if the treaty law never existed. This would give rise to a treaty override.
On the other hand, in the dualist system, a treaty override can arise when the principle of lex posterior
derogate legi priori is applied. In order to avoid such override, a solution can be found by applying the
principle of lex specialis derogate generalibus. According to such principle, the Court applying the law will give prevalence to the earlier treaty provision based on the presumption that the later law was not meant to be in breach of earlier obligations, giving, therefore, a “consistent interpretation” of the later domestic law with the one included in the DTT according to its object and purpose.
Notwithstanding the two different
systems, it is worth noting that, in the light of International Law, no differences are considered between monist and dualist system, as the only commitment in the hands of the States is to be compliant with the obligations undertaken by International law72, and it is up to each State to decide how to reach such result.
5. Possibility of a EU Member State to respect a DTT if it clashes with EU law
The Treaties of the EU have been subject to many deletions, adding, and renumbering during the years73.One of the deletions concerns the former article 293 of the European Community (EC) treaty, which stated that “Member States shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals: […] the abolition of double taxation within the
69 C de Pietro, Tax Treaty Override and the Need for Coordination between Legal Systems: Safeguarding the Effectiveness of International Law (2015) 7 World Tax Journal
70 Pietro (n 69)
71 Jan Wouters and Marteen Vidal, The International Law Perspective, Tax Treaties and Domestic Law (IBFD
2006), para. 2.1.
72 Wouters and Vidal (n 71), para. 2.1.
73 Treaty of Rome EEC (1957); Single European Act (1986); Treaty on European Union (1992); Treaty of
Amsterdam (1997): amendment, renumbering and consolidation of EU and EEC treaties; Treaty of Nice (2001); Treaty of Lisbon (2007)
Community […]”7475.
The article in question was the only provision addressing the problem of juridical double taxation within EU Member States as an issue that could hinder the achievement of the internal market. Since its deletion, as a result of the amendment introduced by the Treaty of Lisbon, no obligations are present anymore on behalf of EU Member States to eliminate double taxation76.
However, it is worth noting that this article did not either (i) establish that the elimination of double taxation had to be considered as an autonomous sphere of the Member states, nor (ii) imply with its deletion, the elimination of its competence to the Member States.7778
In the past, the ECJ ruled that “the abolition of double taxation is one of the objectives of the Community to be attained by the Member States”79.
Therefore, the elimination of double taxation can still be considered as an objective of the TFEU as the overlap of taxing jurisdictions results in a distortion of the internal market80.
This conclusion can also be gathered from the general principle of EU loyalty embodied in Art. 4(3) of the TEU. According to this principle, actions (unilateral or bilateral) are required in any case by EU Member States in the specific field, in order to achieve the objective of the European Union of an internal market81.
Tax treaties “are designed to eliminate or mitigate the negative effects on the functioning of the internal market resulting from the coexistence of national tax systems” 82, indeed, “the fact that a taxable event might be taxed twice is the most serious obstacle there can be to people and their capital crossing internal borders83”
The ECJ has ruled many times that is not a competence of the EU to avoid the juridical double taxation84, as it is not either “to call in question the limits inherent in any power of taxation or to disturb the order of priority of the allocation of tax competences as between Member States”, as, in the absence of harmonization, it is not for the ECJ to “interfere in the conception or organization of the tax systems of the Member States”85.
According to their sovereignty, the Member States retain the power to determine the criteria to allocate
74 EC art. 293
75 Almudì Cid, Ferreras Gutiérrez and Hernandez Gonzalez-Barreda (n 66), p.p. 398.
76 European Commission, Communication from the Commission to the European Parliament, the Council and the
European Economic and Social Committee - Double Taxation in the Single Market 2011, P.p.5 (ANNEX)
77 Brauner and Kofler (n 54), p.p. 8
78 Michael Lang and others, Introduction to European Tax Law: Direct Taxation (Linde Verlag 2013) The relevance
of the article 293 of EC has been discussed also in relation to the Arbitration Convention in Par. 731 of the book in which it is confirmed the different views present in literature for the importance of the same: “In the literature, art. 293 EC has been seen as an obligation to abolish double taxation within the EU by some authors and as a mere declaration of intent by others. Art. 293 EC simply encouraged Member States to conclude, inter alia, the Arbitration Convention as an international agreement. In case an agreement is put in place, art. 293 EC did not have any further consequences. Therefore, the deletion of Art. 293 EC in the course of the TFEU is of no relevance for the ongoing application of the Arbitration Convention. Even after the abolition of Art. 293 EC the Arbitration Convention forms ordinary treaty law and is still part of the acquis communitaire.”
Par. 45: “It should be noted that the EC Treaty contained Art. 293 providing that the Member States must as far as necessary enter into negotiations to secure the abolition of double taxation. Such a provision does not exist in the TFEU. However, as this provision was devoid of direct effect and merely constituted a political declaration, the effect of its deletion should not be overestimated or perceived as a sign of removing the abolition of double taxation from the political agenda of the EU.”
79 C-265/04 Bouanich, para 49 (ANNEX).
80 Economic and Social Committee, Opinion of the Economic and Social Committee on ’ Taxation in the European Union — Report on the Development of Tax Systems’, p.p. 7.
81 Martti Nieminen, Abolition of Double Taxation in the Treaty of Lisbon (2010) 64 Bulletin for International
Taxation, para. 3
82 C-513/04 Kerckhaert-Morres, para. 21; C-67/08 Margarete Block, para. 29; C-298/05 Columbus Container Services, para. 44.
83 AG, Opinion of Advocate General Ruiz-Jarabo Colomer C-376/03 D ., Para 85
84 C-513/04 Kerckhaert-Morres (n 82), Para 22; C-67/08 Margarete Block (n 82), Para 30-31; C-128/08 Damseaux,
para 33.
the taxing powers to eliminate, unilaterally or bilaterally, double taxation86.
Following to what above said, someone could argue that, pursuant to the objectives of EU law, Member States should take the necessary measures to eliminate international double taxation. As a consequence, as it is not the aim of the ECJ to define how the elimination should be done, the EU Member States can decide to implement unilateral or bilateral solutions to the problem, as a consequence of the loyalty principle, being therefore irrelevant the deletion of Art. 293 EC87.
EU Member States have concluded DTTs to eliminate double taxation with both European Countries and third countries. Being the counterpart of the DTT a EU Member State or a third country, together with the moment in which the DTT has been concluded, can produce different results when it comes to the interaction with the EU Law.
As the conflict arises between EU law and International Law, it is supposed to be solved by applying one of the existing conflict rules88.
In principle, Art. 351 TFEU89 can be used as a conflict rule under EU law. The article regulates the relationship between DTTs and EU law.
Art. 351(1) of the TFEU embeds a grandfathering clause, protecting the DTTs already concluded by EU Member States with third countries, either before 1958 or before the access of the country to the EU. However the second paragraph also provides for a sort of equilibrium in requiring the EU Member States to “take all appropriate steps to eliminate the incompatibilities established”, and to “assist each other to this end and […], where appropriate, adopt a common attitude”.
In the following paragraphs, it is examined the possible concrete outcomes deriving from the interaction between DTTs concluded by EU Member States and EU law.
5.1. DTTs with other EU Member States
According to the wording of Art 351(1) of the TFEU, the “protection” granted under this article is not extended to DTTs concluded within EU Member States.
In order to confirm such interpretation, different situations should be analyzed, according to the combination of (i) the moment in which the DTTs have been concluded, ((1) before the access to the EU(2), after the access to EU before the adoption of secondary law90 and (3) after the adoption of secondary law) (ii) the interaction with the different sources of EU tax law ((a) primary law or (b) secondary law). Here below a sum up table of the different possible scenarios which might arise.
Member State/ Member State
Before access to EU (1)
After access to EU before adoption of secondary law91 (2)
After the adoption of secondary law (3)
Primary law (a) EU EU EU
Secondary law (b) EU EU EU
86 Brauner and Kofler (n 54), p.p. 10 87 Nieminen (n 81), para. 3.1.
88 Konstanze von Papp, Solving Conflicts with International Investment Treaty Law from an EU Law Perspective : Article 351 TFEU Revisited (2015) 42 Legal I.E.I, p.p.3. See para. 1.6 for the scope limitation.
89 Treaty of the Functioning of the European Union (TFEU), Art. 351: “(1)The rights and obligations arising from
agreements concluded before 1 January 1958 or, for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties.
(2) To the extent that such agreements are not compatible with the Treaties, the Member State or States concerned shall take all appropriate steps to eliminate the incompatibilities established. Member States shall, where necessary, assist each other to this end and shall, where appropriate, adopt a common attitude. (3) […]”
90 In the analysis performed under para. 5, the author uses the terms secondary law, Directive or ATAD 1 as
interchangeable.
It does not require further explanation the prevalence of EU law in case of DTTs concluded after a Directive is adopted in relation to such Directive and to primary EU law (situation (3)(a) and (3)(b)), or after the access of a Member State to the EU, but before the adoption of a Directive in respect to primary law (situation (2)(a)), as the EU Member States are bound by the primacy of EU law (see. para. 3.1). In fact, if this outcome were considered debatable, the EU Member States would just need to renegotiate DTTs to circumvent the provisions of EU law, undermining in this way the supremacy of this latter92. On the other hands, in case the DTTs are concluded before the access to the Union, in respect of primary and secondary EU law (situation (1)(a) and (1)(b)) or after the access to the EU but before a Directive is adopted in relation to such Directive (situation (2)(b)), Art 30 of VCLT, entailing the principle of lex posterior 93, could help to interpret which source of Law should have prevalence.
Starting the analysis from the conflict arising in relation to a Directive (situation (1)(b) and (2)(b)), assuming as an example ATAD 1, the provision of Art. 30 (3) could be applicable, under the assumption that the conflict arising between a Directive and DTTs is comparable to the conflict arising between two treaties. Such assumption is based on the fact that a Directive is considered “inextricably linked” 94 to the TFEU following to Art 28895.
According to Art. 30(3) if all the parties of the earlier treaty are also parties of the new treaty, then the earlier treaty provisions apply only when not in contrast with the provisions of the new one.
Therefore, following this assumption, considering that the parties of the previous DTT signed, as EU Member States, are also two of the parties who agreed upon the Directive96, the later treaty (ATAD 1) would have prevalence over the DTTs in place97.
If we now analyze the conflict with primary EU law (situation (1)(a)), the same paragraph 3 would have even more reasons to be applied, reaching the same outcome, as no further assumption is needed. It also stems from ECJ cases the prevalence of EU law over DTTs within EU Member States98.
As a result, Member States have to comply with EU law, even if this gives an output which conflicts with the treaty obligations99.
A contrary point of view can be drawn according to the original draft of article 351 “The rights and obligations of the Member States stemming from their participation in international economic organizations are not affected by the provisions of this Treaty”100101.
According to the wording of the draft version of Art. 351(1), it seems that the parties had in mind rights and obligations of the Member States present under the international treaties already in place,
92 von Papp (n 88), p.p. 12.
93 United Nations Multilateral Vienna Convention on the law of treaties (VCLT) (n 38). Art. 30 (ANNEX).
94 KPMG, The KPMG Guide to CCCTB This Publication Is Published by KPMG International Cooperative in Collaboration with KPMG ’ s EU Tax Centre . (2012), chapter 16, para. 3.2.
95 Art. 288 TFEU, refer to footnotes 51.
96 A tax directive in order to be approved requires a unanimous decision of the EU Member States. 97 See also C-278/82 Rewe en Hauptzollämter, para 29 (ANNEX).
98 C-235/87 - Matteucci, para 22 (ANNEX); C-10/61 Commission of the EEC v Italy, para. 2 (ANNEX); C-82/72 - CJ Walder, para. 7-8 (ANNEX) (It is however worth noting that for the specific case at hands the EU regulation expressly overrules precedent convention in place. The conclusion of the prevalence of EU law therefore could also be interpreted consistently with a contrario reading of art. 30(2) of the VCLT “When a treaty specifies that it is subject to, or that it is not to be considered as incompatible with, an earlier or later treaty, the provisions of that other treaty prevail.”),C-3/91 Exportur, para. 8 (ANNEX), C-469/00 Ravil, para. 37(ANNEX), C-216/01 Budějovický Budvar, para. 98 (ANNEX).
99Groot (n 35), p.p. 782, Bruno De Witte, Old-Fashioned Flexibility: International Agreements between Member States of the European Union, G. de Burca & J. Scott (red.), Constitutional Change in the EU – From Uniformity to Flexibility? (Hart Publishing Ltd 2000 2000), p.p. 47-51, A. Rosas, The Status in EU Law of International Agreements Concluded by EU Member States, Fordham International Law Journal 2011/5, p. 1304 and C. Eckes, ‘Protecting Supremacy from External Influences: A Precondition for a European Constitutional Legal Order?’, European Law Journal 2012/2, p. 239..
100 von Papp (n 88) translation of the author of the Travaux Préparatoires du Traité instituant la Communauté
Economique Européenne, p.p. 12.
101 No specific analysis is performed on the reliability of the drafting materials according to the interpretation of
