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14.3.1.  Company taxation in the EU

    A common system of taxation applicable to cross-border reorganisations of companies in the EU was put in place in 1992 and improved in 2006. A directive on the common system of taxation aims at removing fiscal obstacles to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of a European company (Societas Europaea or SE) or a European Cooperative Society (SCE) between Member States [Directive 2009/133]. In all these transactions, the Merger Directive provides for the deferral of the taxes that could be charged on the income or capital gains derived by the shareholders of the transferring or the acquired company from the exchange of such shares for shares in the receiving or the acquiring company. The deferral is granted provided that the receiving company continues with their tax values and effectively connects them to its own permanent establishment in the Member State of the transferring company. Thus, the receiving company assumes the rights and obligations of the transferring company. This solution encourages the formation of "European companies", which usually result from the merger of companies originally established in different Member States.

    Another directive relates to the common fiscal system applicable to parent companies and subsidiaries situated in different Member States [Directive 2011/96, last amended by Directive 2015/121]. There can be little doubt that the decision by a company to set up a subsidiary in another Member State of the EU would be adversely affected by the fact that the dividends of the latter would be subject, on the one hand, to corporation tax in the country where it had its domicile and, on the other, to a non-recoverable withholding tax, in the Member State where the subsidiary would be domiciled. The Directive abolishes withholding taxes on dividends distributed by a subsidiary to its parent company established in another Member State.

    A code of conduct on business taxation engages the Member States not to bring in any tax rules which constitute harmful tax competition and to phase out existing rules including withholding taxes on interest and royalty payments between companies forming part of a group [Council resolution]. A group within the framework of the Council has the task to assess the tax measures that may fall within the scope of the code and to oversee the provision by the Member States of information on those measures [Council conclusions]. A Commission notice clarifies the application of the State aid rules to measures relating to direct business taxation.

    A common system of taxation is applicable to interest and royalty payments made between associated companies in different Member States [Directive 2003/49]. Therefore, interest or royalty payments arising in a Member State are exempted from any taxes imposed on those payments in that State, whether by deduction at source or by assessment. For budgetary reasons, Greece, Spain and Portugal may apply transitional measures in introducing the new system.

    According to the Court of Justice, Articles 43 EC and 48 EC must be interpreted as precluding the inclusion in the tax base of a resident company established in a Member State of profits made by a controlled foreign company in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in the first State, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable [Case C-196/04]. The Commission has proposed a strategy for providing companies with a consolidated corporate tax base (CCCTB) for their EU-wide activities as a fundamental part of the strategy for achieving the Lisbon goals [COM/2001/582], but it acknowledges the existence of many problems in its implementation [COM/2006/157].

    In July 1990, representatives of the Member States also signed a Convention providing for the introduction of an arbitration procedure in the event of disagreement between the tax authorities of the Member States relating to a cross-border operation [Convention 90/436]. This ensures the avoidance of double taxation arising when an adjustment to the profits of a company carried out by the tax authority of one Member State is not matched by a similar adjustment in the Member State of the partner company. Such double taxation would penalise European transnational cooperation. A time limit has been placed on the procedure, so that lengthy delays lasting for several years and generating additional costs cannot develop. The company concerned by the measures in question becomes rapidly a party to the procedure and consequently has an opportunity to put its viewpoint forward.

    In the "Schumacker" case, the Court of Justice found that, although direct taxation does not as such fall within the competence of the Community, the powers retained by the Member States must nevertheless be exercised consistently with European law, and in particular with the rules governing the free movement of workers, which require the abolition of any discrimination based on nationality [Case C-279/93]. Thus, tax benefits granted only to residents of a Member State can constitute indirect taxation by reason of nationality, but only where different rules were applied to comparable situations or the same rule was applied to different situations. Where direct taxes are concerned, however, the Court found that the situations of residents and non-residents are not, as a rule comparable and, therefore, a non-resident can be taxed by a Member State more heavily on his income than a resident in the same employment.

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