G. Rolle - Economic Double Taxation of Cross-Border Income in The Internal Market (2019)

KU Leuven
Faculty of Law
ECONOMIC DOUBLE TAXATION OF

CROSS-BORDER INCOME IN THE
INTERNAL MARKET
A STUDY ON CONFLICTS OF QUALIFICATION AND
EVALUATION OF TRANSACTIONS BETWEEN
CORPORATE ENTITIES
Giovanni ROLLE
Supervisor:
Prof. L. De Broe Dissertation presented in
Co-supervisor partial fulfillment of the
Prof. A. Cordewener requirements for the
degree of Doctor in Law
2019
GIOVANNI ROLLE
ECONOMIC DOUBLE TAXATION OF CROSS-BORDER INCOME IN THE INTERNAL MARKET
(A STUDY ON CONFLICTS OF QUALIFICATION AND EVALUATION

OF TRANSACTIONS BETWEEN CORPORATE ENTITIES)
LEUVEN, 22 OCTOBER 2019

Acknowledgements
I would like to thank my supervisor Prof. Dr. Luc de Broe and my co-supervisor Prof. Dr.
Axel Cordewener for the time they have dedicated to review the drafts of the thesis and
the many treasured comments and suggestions that I have received all along the way
from the initial project.
Also, I wish to thank Prof. Dr. Niels Bammens, Prof. Dr. Carlo Garbarino and Prof. Dr.
Jérôme Monsenego for being members of the jury and for taking time to read and
comment on the manuscript.
I am most grateful to Prof. Dr. Frans Vanistendael, for his support in the early stage of
the present research, to Prof. Dr. Pasquale Pistone, for the invitation to a Jean Monnet
Roundtable at the WU Wien where I had the opportunity to discuss some aspects of the
relationship between EU law and the arm’s length principle, to Jonathan Schwarz,
Visiting Professor at the King’s College London, for his helpful insights on the UK tax
principles and information resources and to Prof. Oreste Calliano who, after having
supervised my graduation thesis years ago at the University of Torino, has always
encouraged me to carry on research work above and beyond my work as tax advisor.
Thanks to my former colleagues Alessandro Turina, for sharing ideas on the early
international tax literature and Marco Belloni, for the helpful discussions on the business
income implications of the first CCCTB proposal. Thanks to Els Costers and Ingrid
Matthys, at the Faculty of Law of KU Leuven, for their kind help and guidance in many
practical matters, which was essential and greatly appreciated in my position as a non-
resident doctoral student.
I owe the final word of thank to my wife Daniela and my children, without their warm
support and understanding this work could have never been completed.
Torino - Leuven, 22 October 2019
2
Table of contents
I Introduction ........................................................................................................... 14
II The notion of economic double taxation ............................................................... 30
III Paradigms of economic double taxation ............................................................... 55
IV Domestic law remedies against economic double taxation ................................ 117
V Economic double taxation and international treaty law ....................................... 157
VI The Arbitration Convention ................................................................................. 214
VII Economic double taxation in the TFEU and the corporate tax directives ........... 235
VIII The possible solution of a Pan European Tax Base (CCCBT) ........................... 310
IX Summary conclusions ......................................................................................... 323
X Bibliography ........................................................................................................ 332
3
Detailed table of contents
I Introduction ......................................................................................................................... 14
I.1 Aim ................................................................................................................................. 14
I.2 Research questions........................................................................................................ 15
I.3 Methodology of the research .......................................................................................... 16
I.3.a In general ............................................................................................................... 16
I.3.b The selection of paradigm cases of economic double taxation ............................. 16
I.3.b.1 General criteria and the focus on what can be defined as “transactional”
double taxation as opposed to what can be defined as “structural” double taxation ..... 16
I.3.b.2 Cases included ............................................................................................. 18
I.3.b.3 Cases excluded ............................................................................................ 18
I.3.c The choice of Countries and the date of reference ............................................... 20
I.3.d The instrumental distinction between causes and remedies ................................. 22
I.3.e Methodology for the analysis of national rules: comparative approach, level of
comparison and analysis of formants ................................................................................ 23
I.3.f The functional method, its relationship with the identification of comparable rules,
and the purpose of the analysis of national rules ............................................................... 25
I.4 Outline of the contents ................................................................................................... 28
II The notion of economic double taxation ............................................................................. 30
II.1 Introduction ................................................................................................................ 30
II.2 The notion of economic double taxation in Model Tax Conventions ......................... 30
II.2.a The definition of the Commentary on the OECD Model Tax Convention.............. 30
II.2.a.1 Two different definitional patterns ................................................................. 30
II.2.a.2 Subjective profiles: one person vs two persons............................................ 33
II.2.a.3 Objective profiles: comparable taxes ............................................................ 33
II.2.b The search of a definition in Articles 9 and 23 of the OECD Model Tax Convention
34
II.2.c The predecessors to the OECD Model Tax Convention and the preparatory work
36
II.2.c.1 The early drafts of the League of Nations (1923 – 1935) ............................. 36
II.2.c.2 The Mexico and London Drafts (1943 – 1946) ............................................. 38
II.2.c.3 The first categorisation and definition of economic double taxation in the
OEEC/OECD preparatory works (1958 – 1977) ............................................................ 40
II.3 The legal doctrine definitions of economic double taxation ....................................... 43
II.3.a After the OECD Model Tax Convention................................................................. 43
II.3.b Before the OECD Model Tax Convention ............................................................. 47
II.4 The definition of economic double taxation and the economic perspective .............. 52
II.5 Conclusions on the origin and the purpose of the distinction between juridical double
taxation and economic double taxation................................................................................... 53
III Paradigms of economic double taxation............................................................................. 55
III.1 Introduction ................................................................................................................ 55
4
III.2 Transfer pricing .......................................................................................................... 56
III.2.a Categorisation and definition of transfer pricing rules ....................................... 56
III.2.b Italy .................................................................................................................... 58
III.2.b.1 Background and sources .............................................................................. 58
III.2.b.2 Scope of application and the statutory limitation to cross-border transactions
59
III.2.b.3 The rule and the trend towards the alignment with the OECD guidelines .... 61
III.2.b.4 The effects and the recent introduction of unilateral corresponding
adjustments .................................................................................................................... 61
III.2.c France ............................................................................................................... 61
III.2.c.1 Background and sources .............................................................................. 61
III.2.c.1.1 The statutory provisions of Article 57 of the CGI ................................... 61
III.2.c.1.2 Special statutory rules on interest rates ................................................ 62
III.2.c.1.3 The judicial doctrine of the acte anormal de gestion ............................. 63
III.2.c.2 Scope of application...................................................................................... 65
III.2.c.2.1 The statutory provisions of Article 57 of the CGI ................................... 65
III.2.c.2.3 The judicial doctrine of the acte anormal de gestion ............................. 66
III.2.c.3 The rule ......................................................................................................... 66
III.2.c.3.1 The statutory provisions of Article 57 of the CGI and the missing reference
to the arm’s length principle ....................................................................................... 67
III.2.c.3.3 The judicial doctrine of the acte anormal de gestion: is it equivalent to the
arm’s length standard? .............................................................................................. 69
III.2.c.4 The effects .................................................................................................... 71
III.2.c.4.1 The statutory provisions of Article 57 of the CGI and the reconstruction of
the upwards adjustment as a constructive dividend .................................................. 71
III.2.c.4.2 Special statutory rules on interest rates and the reconstruction of excess
interest as constructive dividends .............................................................................. 72
III.2.c.4.3 The judicial doctrine of the acte anormal de gestion: profit adjustment and
case-by-case assessment of a constructive dividend................................................ 72
III.2.d United Kingdom ................................................................................................. 73
III.2.d.1 Background and sources .............................................................................. 73
III.2.d.1.1 Transfer pricing legislation .................................................................... 74
III.2.d.1.2 Securities and the reasonable commercial return ................................. 74
III.2.d.2 Scope of application...................................................................................... 75
III.2.d.3 The rule ......................................................................................................... 75
III.2.d.4 The effects .................................................................................................... 77
5
III.2.d.4.2 Securities and reasonable commercial return ....................................... 78
III.2.e Comparative considerations on transfer pricing rules ....................................... 78
III.3 Thin capitalization and interest limitation ................................................................... 80
III.3.a Categorisation and definition of thin capitalisation and interest limitation rules 80
III.3.b Italy .................................................................................................................... 81
III.3.b.2 Scope of application...................................................................................... 82
III.3.b.3 The rule ......................................................................................................... 82
III.3.b.4 The effects .................................................................................................... 83
III.3.c France ............................................................................................................... 83
III.3.c.3 The rule ......................................................................................................... 86
III.3.c.4 The effects .................................................................................................... 86
III.3.d.3 The rule ......................................................................................................... 88
III.3.d.4 The effects .................................................................................................... 89
III.3.e Comparative considerations on thin capitalisation and interest limitation rules 90
III.4 Hybrid financial Instruments....................................................................................... 91
III.4.a Categorisation and definition of hybrid financial instrument qualification rules. 91
III.4.b Italy .................................................................................................................... 93
III.4.b.2 Scope of application...................................................................................... 93
III.4.b.3 The rule ......................................................................................................... 94
III.4.b.4 The effects .................................................................................................... 94
III.4.c France ............................................................................................................... 94
III.4.c.3 The rule ......................................................................................................... 96
III.4.c.4 The effects .................................................................................................... 97
III.4.d.3 The rule ....................................................................................................... 100
III.4.d.4 The effects .................................................................................................. 101
III.4.e Comparative considerations on hybrid financial instruments .......................... 101
6
III.5 Mergers and the taxation of transferred assets ....................................................... 102
III.5.a Categorisation and definition of mergers and rules concerning the transfer of
assets 102
III.5.b Italy .................................................................................................................. 104
III.5.b.1 Corporate law background .......................................................................... 105
III.5.b.2 Taxation of hidden capital gains of the absorbed company in domestic
mergers 105
III.5.b.3 Taxation of hidden capital gains of the absorbed company in cross-border
mergers 106
III.5.c France ............................................................................................................. 107
III.5.c.1 Corporate law background .......................................................................... 107
III.5.c.2 Taxation of hidden capital gains of the absorbed company in domestic
mergers 108
III.5.c.3 Taxation of hidden capital gains of the absorbed company in cross-border
mergers 109
III.5.d United Kingdom ............................................................................................... 110
III.5.d.1 Corporate law background .......................................................................... 110
III.5.d.2 Taxation of hidden capital gains of the absorbed company in domestic
mergers 111
III.5.d.3 Taxation of hidden capital gains of the absorbed company in cross-border
mergers 112
III.5.e Comparative considerations on cross-border mergers and the taxation of
transferred assets ............................................................................................................. 113
III.6 Answers to the research (sub) questions and conclusive remarks ......................... 114
III.6.a Functional categorization ................................................................................ 114
III.6.b Comparison of the rules .................................................................................. 115
III.6.c Difference in treatment between domestic and cross-border transactions ..... 116
IV Domestic law remedies against economic double taxation .............................................. 117
IV.1 Introduction .............................................................................................................. 117
IV.2 Is a general prohibition of double taxation provided under national law? ................ 117
IV.2.a Italy .................................................................................................................. 117
IV.2.a.1 The general prohibition of double taxation provided by Article 163 of the
Italian Tax Code ........................................................................................................... 117
IV.2.a.2 Is the prohibition applicable to cross border situations? ........................ 119
IV.2.a.3 Which tax is double? Criteria from case law. ......................................... 120
IV.2.b France ............................................................................................................. 122
IV.2.c United Kingdom ............................................................................................... 124
IV.2.d Interim conclusions concerning general prohibitions of double taxation......... 128
IV.3 Transfer pricing and corresponding adjustments..................................................... 129
IV.3.a Italy .................................................................................................................. 129
IV.3.a.1 Domestic situations ................................................................................ 129
IV.3.a.2 Cross-border situations .......................................................................... 130
7
IV.3.b France ............................................................................................................. 130
IV.3.b.1 Domestic situations ................................................................................ 130
IV.3.b.1.1 The statutory provisions of Article 57 of the CGI ................................ 130
IV.3.b.1.2 Special statutory rules on interest rates.............................................. 130
IV.3.b.1.3 The judicial doctrine of the acte anormal de gestion .......................... 131
IV.3.b.2 Cross-border situations .......................................................................... 132
IV.3.c.1 Domestic situations ................................................................................ 133
IV.3.c.2 Cross–border situations .......................................................................... 135
IV.3.d Comparative considerations on transfer pricing and corresponding adjustments
135
IV.4 Thin capitalisation and interest limitation: the treatment of excess interest in the hands
of the lender .......................................................................................................................... 136
IV.4.a Italy .................................................................................................................. 136
IV.4.b France ............................................................................................................. 137
IV.4.c.2 Cross border situations ........................................................................... 139
IV.4.d Comparative considerations on thin capitalisation, interest limitation and the
treatment of excess interest in the hands of the lender.................................................... 140
IV.5 Hybrid financial instruments and the treatment of non-deducted interest in the hands
of the lender .......................................................................................................................... 141
IV.5.a Italy .................................................................................................................. 141
IV.5.b France ............................................................................................................. 142
IV.5.c.2 Cross-border situations .......................................................................... 144
IV.5.d Comparative considerations on hybrid financial instruments and the treatment of
non-deducted interest in the hands of the lender ............................................................. 145
IV.6 Mergers and the recognition of the tax value of transferred assets in the hands of the
receiving company ................................................................................................................ 147
IV.6.a Italy .................................................................................................................. 147
8
IV.6.b France ............................................................................................................. 151
IV.6.c.2 Cross-border situations .......................................................................... 153
IV.6.d Comparative considerations on mergers and the recognition of the tax value of
transferred assets in the hands of the receiving company ............................................... 153
IV.7 Answers to the research (sub) questions and conclusive remarks ......................... 154
V Economic double taxation and international treaty law .................................................... 157
V.1 Introduction .............................................................................................................. 157
V.2 Article 9, Para. 1 and the arm’s length principle as a special type of distributive rule ...
................................................................................................................................. 158
V.2.a Overview ......................................................................................................... 158
V.2.b The effects of treaty-based transfer pricing provisions in respect of national
legislations ........................................................................................................................ 160
V.3 Article 9, Para 2 and the corresponding adjustments .............................................. 163
V.3.a Overview ......................................................................................................... 163
V.3.b The double taxation condition ......................................................................... 164
V.3.c The arm’s length condition .............................................................................. 165
V.3.d The corresponding adjustment obligation ....................................................... 166
V.4 Article 25 and the mutual agreement procedure...................................................... 168
V.4.a Overview ......................................................................................................... 168
V.4.a.1 The specific case procedure: scope of application ..................................... 168
V.4.a.2 The specific case procedure and the “not in accordance” condition .......... 172
V.4.a.3 The interpretative procedure ....................................................................... 174
V.4.a.4 The legislative procedure ............................................................................ 175
V.4.b Effects.............................................................................................................. 176
V.4.b.1 Specific case procedure.............................................................................. 176
V.4.b.2 Interpretative procedure .............................................................................. 176
V.4.b.3 Legislative procedure .................................................................................. 177
V.5 Elements on the treaty policy and legislation of Italy, France and the UK............... 177
V.5.a.1 Italy.............................................................................................................. 177
V.5.a.2 France ......................................................................................................... 179
V.5.a.3 UK ............................................................................................................... 180
V.6 Treaty remedies and transfer pricing ....................................................................... 182
V.6.a The OECD Model and the limitations of domestic transfer pricing rules ........ 182
V.6.b The OECD Model and the corresponding adjustments .................................. 184
V.7 Treaty remedies, thin capitalization and interest limitation ...................................... 185
9
V.7.a The OECD Model ............................................................................................ 185
V.7.a.1 The issue of transactional adjustments and the application of Article 9 to thin
capitalisation rules ........................................................................................................ 186
V.7.a.2 The application of Article 9 to the different sorts of interest limitation rules 189
V.7.a.3 Thin capitalisation rules, re-characterisation of the transaction and secondary
adjustments .................................................................................................................. 192
V.7.b The impact of BEPS ........................................................................................ 194
V.8 Treaty remedies and hybrid financial instruments ................................................... 195
V.8.a Introduction ...................................................................................................... 195
V.8.b Does the OECD Model provide criteria for the distinction between dividends and
interest? ......................................................................................................................... 195
V.8.b.1 Exclusion of a possible distinction based on the arm’s length principle ..... 196
V.8.b.2 The definitions of dividends (Article 10) and interest (Article 11) ............... 197
V.8.b.2.1 What is the meaning of “taxation treatment of income from shares” ... 198
V.8.b.2.2 What is a “corporate right”? ................................................................. 199
V.8.b.2.3 Are the definitions mutually exclusive? ................................................ 200
V.8.c Article 23 of the OECD Model and the double taxation relief.......................... 201
V.8.d Article 25 and its possible application to hybrid financial instruments ............ 202
V.8.e BEPS Action 2 and the lack of rules concerning the application of treaties to
hybrid financial instruments. ............................................................................................. 203
V.8.f Some remarks about the treaty practice of Italy, France and the UK ................. 207
V.9 Treaty remedies and cross-border mergers ............................................................ 209
V.9.a The OECD Model: General remarks on the taxation of capital gains ............. 209
V.9.b The possible application of Article 9 and the recognition of the taxed basis as a
corresponding adjustment ................................................................................................ 210
V.10 Answers to the research (sub) questions and conclusive remarks ......................... 211
VI The Arbitration Convention ............................................................................................... 214
VI.1 Introduction .............................................................................................................. 214
VI.2 Overview .................................................................................................................. 214
VI.3 History ...................................................................................................................... 215
VI.4 The legal status of the arbitration convention and of the code of conduct .............. 217
VI.5 Brief remarks on the material scope of application .................................................. 219
VI.5.a The double taxation condition ......................................................................... 219
VI.5.b The arm’s length condition .............................................................................. 221
VI.6 The application to transfer pricing ............................................................................ 222
VI.7 The application to thin capitalization and interest limitation ..................................... 223
VI.8 The application to hybrid financial instruments ........................................................ 225
VI.9 The application to cross – border mergers .............................................................. 226
VI.10 The directive on tax dispute resolution: a possible solution for conflicts leading to
economic double taxation? ................................................................................................... 226
VI.10.a Introductory remarks ....................................................................................... 226
10
VI.10.b Substantial provisions: the material scope of application ............................... 228
VI.10.b.1 The initial proposal.................................................................................. 228
VI.10.b.2 The Presidency compromise and the final text ...................................... 230
VI.11 Answers to the research (sub) questions and conclusive remarks ..................... 233
VII Economic double taxation in the TFEU and the corporate tax directives ......................... 235
VII.1 Introduction .............................................................................................................. 235
VII.2 The principles of judicial interpretation of the European Union Treaties in tax matters
................................................................................................................................. 235
VII.2.a Double taxation in the European Treaties ....................................................... 235
VII.2.b (Economic) Double taxation as an obstacle .................................................... 237
VII.2.c Overt discrimination, covert discrimination, restrictions .................................. 239
VII.2.d Disparities and the “parallel exercise of taxing powers” .................................. 241
VII.2.d.1 The case law of the Court on tax disparities .......................................... 241
VII.2.d.2 The difference with the “market access” approach in other matters ...... 243
VII.2.d.3 Remarks on the “market access” doctrine and tax disparities ............... 245
VII.2.e Justifications .................................................................................................... 248
VII.3 EU Law and the selected paradigms of double taxation ......................................... 249
VII.3.a Transfer pricing, thin capitalisation and interest limitation .............................. 249
VII.3.a.1 Transfer pricing, thin capitalisation, interest limitation rules and the TFEU.
................................................................................................................ 249
VII.3.a.1.1 Freedom of establishment and ownership discrimination.................. 249
VII.3.a.1.2 Consequence on the territorial scope of application of the freedom of
establishment in transfer pricing and thin capitalisation cases ................................ 251
VII.3.a.1.3 Is double taxation deriving from transfer pricing and thin capitalisation
adjustments a restriction? ........................................................................................ 252
VII.3.a.1.4 Is double taxation deriving from interest limitation rules a restriction? ....
........................................................................................................... 254
VII.3.a.1.5 Justification - Legitimate objective ..................................................... 259
VII.3.a.1.6 Proportionality and the arm’s length principle .................................... 261
VII.3.a.1.7 Proportionality and commercial justification ...................................... 262
VII.3.a.1.8 Proportionality, double taxation and corresponding adjustments ...... 264
VII.3.a.1.9 The discriminatory remedies and the Masco Denmark case: internal
consistency vs. arm’s length standard ..................................................................... 265
VII.3.a.1.10 Remarks on Masco Denmark .......................................................... 267
VII.3.a.2 Transfer pricing, thin capitalisation and excess interest in the interest and
royalty directive ............................................................................................................ 269
VII.3.a.2.1 The measure of interest in the interest and royalty directive ............. 269
VII.3.a.2.2 Can the interest and royalty directive prevent economic double taxation
through the inhibition of source state interest deduction limitation rules? ............... 270
VII.3.b Hybrid financial instruments ............................................................................ 272
VII.3.b.1 Introduction ............................................................................................. 272
VII.3.b.2 The possible comparison with case law on dividends ............................ 273
11
VII.3.b.2.1 Inbound dividend relief ....................................................................... 275
VII.3.b.2.2 Outbound dividend relief .................................................................... 276
VII.3.b.2.3 Critical Remarks on the possible application of the dividend case law to
the remuneration of hybrid financial instruments ..................................................... 278
VII.3.b.3 Economic double taxation and the notion of “distributed profit” in the Parent
– Subsidiary Directive................................................................................................... 278
VII.3.b.3.1 The present text of Directive 2011/96/EU .......................................... 279
VII.3.b.3.2 The preparatory works ....................................................................... 281
VII.3.b.3.3 Conclusive remarks regarding the framing of hybrid financial instruments
within the Parent-Subsidiary Directive ..................................................................... 284
VII.3.b.4 Hybrid financial instruments in the ATAD ............................................... 286
VII.3.b.4.1 The too narrow definition of hybrid mismatch .................................... 287
VII.3.b.4.2 The provisions on “deduction without inclusion” ................................ 287
VII.3.b.4.3 Conclusions on the possible relevance of the linking rules in respect of
double taxation of the remuneration of hybrid financial instruments ....................... 289
VII.3.c Cross border mergers ..................................................................................... 290
VII.3.c.1 The Merger Directive, the roll-over relief and the lack of rules for “taxable”
cross-border mergers ................................................................................................... 291
VII.3.c.2 The Merger Directive and cross-border mergers involving a Permanent
Establishment ............................................................................................................... 293
VII.3.c.3 The taxation of cross-border mergers and the taxation of cross-border
transfers of residence: early case law and policy initiatives......................................... 294
VII.3.c.4 The National Grid Indus decision and the territoriality principle ............. 297
VII.3.c.5 Some critical remarks on the exit taxes case law................................... 298
VII.3.c.6 Exit taxes and double taxation in the ATAD ........................................... 300
VII.3.c.7 Remarks on exit taxation in the ATAD ................................................... 301
VII.3.c.8 Can the exit tax case law be extended to cross-border mergers? ......... 302
VII.3.c.9 Can the ATAD exit tax provisions be extended to cross-border mergers? ..
................................................................................................................ 304
VII.3.c.10 Some final remarks about the treatment of cross-border mergers in Italy,
France and the UK ....................................................................................................... 305
VII.4 Conclusions and answers to the first research question ......................................... 307
VIII The possible solution of a Pan European Tax Base (CCCBT)......................................... 310
VIII.1 Introduction .......................................................................................................... 310
VIII.2 Common Base provisions .................................................................................... 311
VIII.2.a Transfer pricing ............................................................................................... 311
VIII.2.b Thin capitalisation and interest limitation ........................................................ 312
VIII.2.c Hybrid financial instruments ............................................................................ 313
VIII.2.d Cross-border mergers ..................................................................................... 315
VIII.3 Consolidated base taxation ................................................................................. 315
VIII.3.a Consolidation ................................................................................................... 315
VIII.3.b Apportionment ................................................................................................. 316
12
VIII.3.c Transfer pricing ............................................................................................... 317
VIII.3.d Thin capitalization and interest limitation ........................................................ 318
VIII.3.e Hybrid financial instruments ............................................................................ 318
VIII.3.f Cross-border mergers ..................................................................................... 319
VIII.4 Conclusions and answers to the second research question ............................... 319
IX Summary conclusions....................................................................................................... 323
IX.1 The tax treaty paradox ............................................................................................. 323
IX.2 The case against general prohibitions or isolated settlement procedures .............. 324
IX.3 The limits of EU fundamental freedoms ................................................................... 324
IX.4 Consolidation vs. new rules for tax jurisdictions ...................................................... 325
IX.4.a Transfer pricing ............................................................................................... 326
IX.4.b Thin capitalisation and interest limitation ........................................................ 326
IX.4.c Hybrid financial instruments ............................................................................ 327
IX.4.c.1 Debt return, interest and borrowing cost ................................................ 327
IX.4.c.2 Equity return ........................................................................................... 328
IX.4.c.3 The income tax treatment of debt return ................................................ 329
IX.4.c.4 The income tax treatment of equity return .............................................. 330
IX.4.d Cross-border mergers ..................................................................................... 330
X Bibliography ...................................................................................................................... 332
13
I INTRODUCTION
I.1 Aim
The aim of this dissertation is to analyse the situations in which a cross-border
transaction between two corporate entities is treated differently by the respective States
of residence for the purposes of determining the corporate income tax base of the two
entities.
For reasons that pertain to the qualification or to the evaluation of such cross-border
transaction, it may happen that the resulting item of income, in whole or in part, be non-
deductible for one of the corporate entities and taxable for the other (or viceversa), thus
generating double taxation.
Since two jurisdictions are involved, this kind of double taxation constitutes “international”
or “cross-border” double taxation; since two different taxpayers are involved (and for
reasons that will constitute specific object of analysis) this is commonly referred to as
“economic” double taxation.
Albeit the ultimate aim of the research is to ascertain if and to what extent a solution to
the described issue can be found in EU law (in negative integration and positive
integration) the analysis will be also carried out across different legal systems, i.e.: the
national tax systems and tax treaty law.
National tax systems (of selected Countries) are examined because it is in those systems
that the issue of economic double taxation finds its roots, so that a deeper understanding
of the causes is necessary. Also, it may be expected that, in some Countries, rules exist
aimed at preventing or avoiding economic double taxation at least at a domestic level.
Tax treaties are examined because, as a matter of fact, they provide the present
standard of reference for the solution of conflicts (i.e., allocation criteria and a procedure
in case of disputes on their application). The importance of tax treaties in a EU law
perspective is represented by the circumstance that, until the Treaty of Lisbon, the
abolition of double taxation was entrusted to negotiation between Member States1. Also,
bilateral tax treaties, along with the EU Arbitration Convention2 have been adopted as
the substantial basis underlying the procedural rules of the Dispute Resolution Directive3.
As far as EU law is concerned, the starting point is that in the last 30 years, the Court of
Justice of the European Union (CJEU) has delivered a relevant number of decisions
concerning the relationship between EU rules and national tax rules of one given
Member State. However, this circumstance has left unsolved cases (including those
which generate economic double taxation) in which possible obstacles to the
fundamental freedoms do not find their origin in one single national system, but from the
interaction (or lack of coordination) between two (or more) systems.
1
Article 293 of the EC Treaty, (formerly Article 220 of the Treaty of Rome) provided 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 Community (…)”.
2
Convention on the elimination of double taxation in connection with the adjustment of profits of
associated enterprises, 90/436/EEC, in Official Journal, L 225, 20 August 1990, p. 10.
3
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in
the European Union, in OJEU, L 265 of 14 October 2017, p. 1.
14
The aim is thus to examine the CJEU decisions which have addressed cases of double
taxation of the kind outlined above in order to explore the limits of negative integration in
this matter and retrieve possible hints for a solution, especially criteria which may indicate
which of the States involved has the burden of providing a remedy. The same will be
done with respect to EU tax directives.
Finally, the proposals concerning the adoption of a Common Corporate Tax Base and a
Common Consolidated Corporate Tax Base will be examined, in order to evaluate
whether these may provide remedies to economic double taxation, in comparison with
the present state of EU law.
I.2 Research questions

The starting point of the research is that lack of coordination of national tax systems can
generate economic double taxation even if those systems are not discriminatory.
The above point can be illustrated on the basis of an overview of national rules
concerning income apportionment and income qualification, in the light of the notion (to
be analysed) of double economic taxation.
It may be foreseen that rules concerning transfer pricing, income qualification (especially
interest vs. dividends) and cross-border reorganizations may generate such kind of
effect.
In this context, the research questions are the following.
Q.1 “Is economic double taxation deriving from the conflict between national rules of
Member States concerning the qualification and evaluation of transactions between
corporate entities prevented by treaty law, EU secondary legislation or the Internal
market freedoms?”
The answer would be based on the analysis of identified and illustrated cases of
economic double taxation in the light of provisions and principles of EU law and, in
particular of the case law of the Court of Justice of the European Union.
Q.2 “Can more effective remedies against double economic taxation deriving from the
conflict between national rules of Member States concerning the qualification and
evaluation of transactions between corporate entities be obtained through improvements
of the present rules, through the adoption of a common tax base or through the adoption
of consolidated taxation with formula apportionment?”
The answer would be based, among else, on a comparative analysis of principles and
remedies (if any) provided by the national tax systems of the Countries which are
encompassed within the territorial scope of the research (Italy, France and the United
Kingdom) and how these principles and remedies may apply to cross-border situations
(e.g. where the treatment of a given income is made dependent on the treatment of the
same income into another jurisdiction). The same analysis will be conducted in the light
of international tax treaty law. In particular, it has to be questioned whether existing
bilateral treaties (or, at least, some of them) provide any remedies in cases of economic
double taxation.
Some further research (sub)questions have been conceived in respect of some parts of
the analysis and are illustrated in the introduction to the individual chapters.
15
I.3 Methodology of the research
I.3.a In general
The research is aimed at finding an answer to the research questions, starting from a
fact (the double economic taxation) and progressively testing hypothetical answers with
the principles obtained from the analysis of the applicable law (as deriving from different
sources).
This will imply the retrieval or the formulation of a notion of economic double taxation
and the examination of the national rules which are suitable to give rise to economic
double taxation.
The analysis will be carried out taking into account, for each of the systems involved, all
the relevant materials (legislation, case law, legal doctrine) in their respective context,
with the aim of investigating the actual operational rules, understand the underlying legal
principles and measuring and understanding analogies and differences among legal
patterns. Finally, the aim is also to highlight possible factors of convergence, along the
time. It will be part of this analysis a more precise identification and description of cases
which are likely to generate double economic taxation.
In the analysis of tax treaty law, recourse will also be made to the historical method,
implemented through the detailed examination of the preparatory works, since the early
twentieth century, of the relevant treaty provisions.
I.3.b The selection of paradigm cases of economic double taxation

International economic double taxation may arise in a rather wide variety of situations.
In the framework of the pragmatic approach which underlies the present research, it is
not realistically possible to examine in due detail all possible combinations which may
arise from the interaction of income tax rules of the jurisdictions involved.
At the same time, a high-level approach, based on the general definition of economic
double taxation, as outlined above at Chapter II, does not seem capable of generating
useful results4.
It then appears necessary to focus the analysis on a smaller number of rules, which be
suitable to support the elaboration of a meaningful comparison and critical evaluations
of causes and remedies.
The selection has been made in the light of some general criteria and also on the basis
of a more detailed evaluation of the most common situations where economic double
taxation is likely to arise.
I.3.b.1 General criteria and the focus on what can be defined as “transactional” double
taxation as opposed to what can be defined as “structural” double taxation
A preference is given to situations which imply a transaction (sale of good or services,
financial transaction, corporate reorganisation) between two companies, whose income
is respectively subject to corporate income tax in different States.
4
This approach is inspired, in particular, by the remarks and research propositions made by C.
GARBARINO, La tassazione del reddito transnazionale, Padova, 1990, p. 398.
16
Economic double taxation would in such case expectedly derive from the difference in
treatment of the transaction in each of the involved States5.
Such difference in treatment may entail that the remuneration of a given transaction be
taxable (in whole or in part) for one of the parties but not deductible (in whole or in part)
for the other party. This effect may be attributed to either a different qualification of the
transaction or to a different evaluation of the related remuneration.
This kind of double taxation can be defined, for the purposes of the present dissertation
as “transactional” economic double taxation.
It is, in some respect, different from the double taxation which may derive from the
overlapping of tax jurisdiction in static subjective situation (such as in the case of dividend
payments, hybrid entities or controlled foreign companies) which may give rise to what
can be defined as “structural” economic double taxation.
Transactional economic double taxation appears to be more critical in terms of remedies,
because the two taxable persons involved, as their respective States, are in the same
position in respect of the transaction itself. Priority can’t be easily attributed to one or the
other States as far as the burden of elimination of double taxation is concerned.
Structural economic double taxation, on the contrary, might be more easily framed in a
scheme where one of the two States takes priority. This may be, e.g., because an item
of income originates and is taxed in one State in the hands of a person and again taxed
in the second State of the head of a separate person (typically on the basis of ownership
of a participating interest in the first taxable person).
The elimination of economic double taxation, as it happens in the case of controlled
foreign company legislation or in the case of cross-border dividends, would ultimately
become a matter of choice between source taxation and residence taxation. In this
respect, economic double taxation is more similar to juridical double taxation.
Another important difference between what has been defined “transactional” and
“structural” double taxation is that criteria possibly adopted in respect of this latter are
subject to being applied to all individual cases. Once, e.g. States agree that economic
double taxation of dividends be eliminated through the exemption of the dividend in the
State of residence of the recipient, that solution may well apply (once the conditions
provided by the applicable rules are met) to all dividends. By contrast, in the case of
transactional economic double taxation, the adoption of a criterion does not always avoid
possible conflicts on its application on a case by case basis. This is expectedly the case
of conflicts of evaluation, where the adoption of a common evaluation criterion is only
the beginning of a solution, since conflicts may well arise in respect of the application of
that given criterion to each individual transaction.
The hypothesis that remedial measures for the two outlined categories of economic
double taxation may need to be different (or in other words, that measures conceived for
structural double taxation may not be suitable to being applied in respect of transactional
double taxation) finds a preliminary evidence in the circumstance that separate
provisions presently exist in EU law. Reference in here made to the Parent-Subsidiary
Directive, on the one side, and to the EU Arbitration Convention, on the other side. It is
of some interest, in this perspective, that the EU Commission, in a policy document
5
This situation is best described by K. VOGEL, A. RUST, Introduction, in (E. Reimer and A. Rust
eds), Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, at m.no.
4, in the following terms: “economic double taxation can result from conflicting rules regarding the
inclusion or deduction of positive and negative elements of income and capital as, for example,
in cases of transfer pricing”.
17
published shortly before the date of adoption of the two measures (23 July 1990) makes
reference to different “category of obstacles” when referring to, respectively double
taxation of dividends and double taxation of transfer pricing adjustments6.
I.3.b.2 Cases included

In what follows the selected subject matters are listed, along with the rationale underlying
their selection.
Transfer pricing
Transfer pricing rules are an established paradigm of potential economic double taxation.
It may be expected that all Countries examined have transfer pricing legislation, case
law, doctrine and treasury guidelines and that also the issue of economic double taxation
is addressed by a variety of sources.
Thin capitalisation and interest limitation rules
Thin capitalisation and interest limitation rules (as defined in Para. III.3 below) represent
an interesting object of study due to the variety of national approaches to the
identification of excess interest or excess debt. This difference in approach among
national legislations increases the chance of creating economic double taxation and the
difficulty of adopting adequate remedies.
Hybrid financial instruments
The investigation of national rules on the qualification of hybrid financial instruments
(based on criteria other than the interest rate or the amount of interest or debt) is of
significant interest due to the possible connection with the corporate law categories of
debt and equity and because of the absence of internationally accepted criteria on this
matter. So, it is quite likely that national rules provide for different criteria which may
result in economic double taxation.
Mergers
Corporate reorganisations may give rise to (present or potential) double taxation in many
circumstances, regardless of whether the reorganisation itself be regarded as a taxable
transaction or a tax neutral transaction. The present dissertation intents to examine the
peculiar economic double taxation that may arise where a cross border merger gives
rise to, on the one side, the taxation of unrealised capital gains by the transferring
company Country on the assets transferred while, on the other side, the tax basis is not
recognised, by the receiving company Country.
I.3.b.3 Cases excluded
Conversely, other cases – although of potential interest for further research – have been
excluded. Those excluded are cases which have been above defined, for the purposes
of the present dissertation as cases of “structural” double taxation. Here below is a list of
subject matters excluded, along with the rationale behind their exclusion.
In general terms, the exclusion derives from the consideration that in all cases below
double taxation (even considering that it concerns two different persons) can be framed
into a scheme of conflict between a source state and a residence state. Due to the
undetermined variety of cases of economic double taxation, the list of excluded matters
is, by nature, incomplete.
6
COMMISSION, Guidelines on company taxation, 20th April 10990, SEC(90)601 final, Para. 13
18
Dividends
The taxation of dividends is a paradigm of economic double taxation, which arises where
profits are taxed in the hands of the distributing company at the time of accrual and in
the hands of the receiving shareholders at the time of the distribution.
Economic double taxation of dividends is not within the scope of the present research,
for the reasons mentioned above. Nonetheless, remedies to economic double taxation
of dividends (especially those deriving from EU law) will be taken into consideration for
comparative purposes, in order to understand whether criteria may be derived that can
contribute to solving the examined cases of economic double taxation. This is particularly
true with respect to hybrid financial instruments, which shall be examined in close
connection with and in comparison with the tax treatment of dividends.
Capital gains on the sale of shares
The taxation of capital gains arising from the sale of shares can also give rise (in whole
or in part) to economic double taxation, to the extent that the gain reflects past or future
income generating capacity of the transferred company.
This has led some countries to introducing participation exemption regimes or to
otherwise exempt from capital gain taxation the portion of the capital gains which
correspond to profits already taxed in the hands of the transferred company.
Capital gains may also give rise – in a cross border situation - to juridical double taxation,
to the extent that capital gain tax is applied in both the State of residence of the alienator
and of the transferred company.
The analysis of economic double taxation of capital gains would be influenced by timing
issues and by anti-abuse regulations (e.g. where the assets of the transferred company
include a prevailing portion of real estate investments) which would require a dedicated
and comprehensive examination.
CFC legislation
National CFC legislations, although different among them in many respects, have the
common feature of providing taxation upon accrual of foreign resident entity income on
the head of resident (qualifying) shareholders. This feature may generate international
economic double taxation to the extent that the income of the non-resident entity is
generally taxed in the hands of that same entity in the foreign State of residence as well
as in the hands of the (qualifying) shareholders in the State of residence, A further (but
separate) issue of double taxation arises at the time when profits are distributed to the
shareholders, and this may be a case of domestic and juridical double taxation with
reference to taxes borne by that same shareholder at the time of the income allocation
upon accrual and a case of economic double taxation (not different from the case of
ordinary dividends) with reference to taxes borne by the foreign entity at the time of the
income taxation upon accrual. Of course, there may also be – just as in the case of
dividends – an issue of juridical double taxation, in respect of possible withholding taxes
applied by the State of residence of the controlled entity at the time of the distribution.
Hybrid entities
Economic double taxation may arise also in front of conflicting entity qualifications and,
particularly, if an entity is qualified as a taxable entity (i.e.: whose income is taxable in
the hands of the entity itself) in one State and as a transparent entity (i.e.: whose income
is taxable in the hands of the shareholders) in another State.
Although of a relevant interest (especially since there is no generally accepted criterion
on the qualification of an entity as taxable or transparent), the subject had already been
19
the subject of extensive study7 at the time when this dissertation was initially proposed
and, furthermore, the diverging qualification (and tax treatment) of entities does not only
create economic double taxation, but a wider array of effects depending upon the
combination of the applicable qualifications, as summarised – with reference to the
conflicts of qualification between the state of residence of the entity and the State of
residence of shareholders8 - in the table below. Also, the actual existence of an economic
double taxation would depend on the tax regime of dividends in the jurisdiction
concerned.
Qualification of the entity (ACo.) in its own State of residence (A)
Taxable Transparent
Income of ACo. is subject to tax in State A Income of ACo. is subject to tax in State A
Qualification of ACo. in the State of
residence (B) of shareholder (BCo)
in the hands of ACo. at the time of accrual in the hands of BCo. at the time of accrual
and in State B in the hands of BCo. at the and in State B in the hands of BCo. at the
Taxable
time of distribution. So, income is not time of distribution. This would be a case of
subject to economic double taxation if not juridical double taxation.
at the time of distribution and this would
then be a case of economic double
taxation of dividends.
Income of the ACo. is subject to tax at the Income of ACo. is subject to tax upon
Transparent
time of accrual both in State A in the hands accrual in the hands of BCo. Both by State
of ACo. and in State B in the hands of BCo. A and State B. This would be a case of
This would be a proper case of economic juridical double taxation. It is expected that
double taxation, similar to the one no further taxation occurs at the time of the
generated by CFC legislation. dividend distribution.
All the above suggests that an appropriate study of hybrid entities would require an
exclusive focus and conversely would not be realistically feasible in the context of a
detailed pragmatic study which included other cases of economic double taxation.
I.3.c The choice of Countries and the date of reference

Comparative study of cases of double taxation and of the possible remedies provided by
domestic law requires a rather detailed research and description of national jurisdictions,
which included underlying theories and concepts, with direct access to national primary
law sources (legislations, bilateral tax treaties, case law and doctrine) and can be
realistically performed only with respect to a limited number of Countries9.
Three Countries, in particular, have been selected, Italy, France and the UK.
The choice is necessarily related to the linguistic skills of the author of the present
dissertation and to other factors illustrated in the table below.
7
In particular, G. FIBBE, EC Law Aspects of Hybrid Entities, Amsterdam, 2009.
8
The array of cases would be further enlarged if the analysis included also the qualification of the
entity in the State of source.
9
The choice has been, more in general, made in the light of the comparative research criteria
indicated by M.VAN HOECKE, Deep Level Comparative Law, in (M.Van Hoecke ed.),
Epistemology and Methodology of Comparative Law, Oxford, 2004, p. 165s.
20
Country Reasons of the choice
Italy  Home jurisdiction of the candidate.
 Civil law system
 Worldwide basis of taxation
 The Italian tax legislation includes provisions referred to all the areas within the scope
of the research and also a general prohibition of double taxation.
France  Civil law system
 Territorial basis of taxation (on certain categories of corporate income)
 The French tax legislation includes provisions referred to all the areas within the
scope of the research.
UK  Common law system - certain peculiar provisions (particularly on company share
capital) suggest further research of the influence of corporate law on tax law
qualifications
 Worldwide basis of taxation
 The UK tax legislation includes provisions referred to all the areas within the scope of
the research.
The selected Countries are also among the largest economies in the European Union
and their legal systems is expected to offer an adequate variety of rules and cases.
It may be nonetheless necessary - for specific topics – to look at other EU Member States
in function of such Countries being relevant to the subject matter. This happens, in
particular, with reference to Countries involved in CJEU cases.
With a referendum held on June 23rd 2016, the voters of the United Kingdom have, with
a slight majority, opted to leave the European Union. This development, which could
have not been foreseen at the time when the scope of the present research was defined,
does not jeopardise the results of the comparative analysis carried out. This does not
only depend on the fact that the UK will still be a member of the European Union until
the completion of the procedure envisaged by Article 50, TFEU. The UK rules have been
examined as an example of how national tax rules can be a cause of or a remedy to
cross-border economic double taxation and the conclusion drawn are of a much more
general nature.
Two important specifications are necessary in respect of the analysis of the individual
legal systems.
First, the purpose of the present dissertation is not to provide a detailed and complete
analysis of all the profiles and implications of the rules applicable to the selected
paradigms in each Country. This would be an impossible task to be achieved for a
researcher who – like in the case of the author of the present dissertation - does not
operate inside the selected jurisdictions.
Rather, the aim is to capture the essential elements of each given system in the specific
perspective of the research and (sub) research questions addressed and which are
illustrated in more detail in the introductory paragraphs to Chapters 3 and 4 below.
As an example, the aim of the comparative analysis can be considered to have been
achieved, for the purpose of the subsequent examination of the possible remedies, once
defined whether a given rule exists in a Country and whether it applies equally or
differently to domestic and cross-border transactions. The possible debate over some
aspects of that given rule is relevant only to the extent that it has influence on the answer
to the specific research questions or (sub) questions. It is unavoidable that the
representation given of each jurisdiction may thus appear incomplete when regarded
from the perspective of lawyers or scholars of that jurisdiction.
Second, the analysis makes reference to the legislation in force in the three selected
Countries as of 31st December 2018. This circumstance, where appropriate, is
mentioned in connection with the individual rules mentioned in the text.
21
The author of the present dissertation is aware that some statutory changes or case law
developments may have occurred after the mentioned date.
This is in part due to the implementation of the ATAD10, which concerns some of the
selected paradigms.
Where appropriate, the changes have been briefly pointed out, but not examined in
detail. The analysis has been rather focused (Chapter 7), on the relevant rules of the
ATAD itself and their impact in terms of economic double taxation.
A more recent date of reference of the comparative analysis at Chapters 3 and 4 would
have implied a critical examination of the modalities of implementation of the ATAD in
the selected Member States, a task which would require the prior completion of the
implementation process and would anyway go beyond the scope of this dissertation11.
I.3.d The instrumental distinction between causes and remedies

A common feature of the rules examined at Chapter 3 below is that they have the effect
of increasing the taxable income allocated to the jurisdiction concerned, by either
increasing revenue or by limiting deductible cost.
Such increase of taxable income is considered, in the context of the present study, as
the (potential) cause of economic double taxation. The rule under which, in that same
jurisdiction (at a domestic level) or in the other jurisdiction (at a cross-border level), an
adjustment be possibly made is considered as the remedy to the economic double
taxation caused by the first jurisdiction rule.
The structure of the present study is based on the above exemplified distinction between
causes and remedies. Such distinction is functional to both the association of causes
with remedies (i.e.: evaluate whether the available remedies match properly with causes)
and the comparison among different remedies (in terms of their relative effectiveness).
This distinction must not be taken in absolute terms.
Indeed, it may be argued that some rules are at the same time a cause of and a remedy
to economic double taxation. For example, Article 9, Para. 1 of the OECD Model (as
illustrated in more detail at Chapter 5 below) enables the effects of national rules
concerning transfer pricing adjustment if actual conditions diverge from arm’s length
conditions and, in this sense, it may be regarded as a cause of double taxation. At the
same time, the fact that Article 9, Para. 1, sets a common criterion (the arm’s length) for
transfer pricing adjustments prevents the contracting States from making unilateral
adjustments which would be hardly accepted on a bilateral basis and, in this sense
(where associated with a dispute resolution mechanism), it is a remedy against economic
double taxation12.
10
Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices
that directly affect the functioning of the internal market, in OJ L 193/1 of 19 July 2016 (“ATAD”).
11
Analyses of this nature have been performed in the past on a larger scale and with the
involvement of by local researchers An example is the Survey on the Implementation of the EC
Interest and Royalty Directive carried out by the IBFD in 2005.
12
On Article 9 of the OECD Model as a rule with the propose of preventing double taxation see
J. WITTENDORFF, Transfer Pricing and the Arm's Length Principle in International Tax Law,
Alphen Aan der Rijn, 2010, p. 145 et seq. Also E. BAISTROCCHI, I. ROXAN, Resolving Transfer
Pricing Disputes, Cambridge, 2012, p. 14 submit that the arm’s length principle seeks to avoid
double taxation as a way to minimise transaction cost in international trade.
22
The above distinction between causes and remedies should not suggest that economic
double taxation can be attributed to one or the other category of rules. In fact, double
taxation derives from lack of coordination between the rule applicable to one party to the
transaction (e.g.: the price of a sale can be upwards adjusted to the arm’s lengths
conditions) and the rule applicable to the other party (the deductible cost is the agreed
price, not the arm’s length price). Lack of coordination may come off within one same
jurisdiction, or may occur between two different jurisdictions.
The identification of one of the two rules as a cause of double taxation and of the other
as a remedy would improperly attribute to only one of the rules the responsibility of
generating double taxation. It is not the aim of the present work to suggest any such
relationship between the two rules. In logical terms, if something is seen as a cause, a
solution may be the removal of the cause, while in the context of the examined tax rules,
the solution to economic double taxation should equally be searched in the identification
of an appropriate remedy.
I.3.e Methodology for the analysis of national rules: comparative approach, level
of comparison and analysis of formants
The analysis at Chapters III and IV concentrates on the national rules which, in the three
selected jurisdictions, concern the selected matters.
The identification and the analysis of said national rules make use of the main elements
of the methodology of comparative law.
Indeed, the study is not limited to the description of specific tax institutions of the three
jurisdiction involved13, but includes the identification of similarities and differences which
are relevant in the perspective of economic double taxation and the critical evaluation of
such similarities and differences14.
The one below should be considered a specific sectorial analysis rather than a general
study of the three tax jurisdictions involved15. The underlying assumption is that a
pragmatic analysis (i.e.: referred to specific rules) may lead to a more meaningful
understanding of economic double taxation, of the way it originates and of the possible
remedies, than a general analysis.
The envisaged approach is inspired by the fundamental comparative law distinction
between macro – comparison and micro – comparison. The first one is defined as the
comparison of “the spirit and style of different legal systems, the methods of thoughts
13
As remarked by K. ZWEIGERT, H. KÖTZ, An introduction to comparative law, Oxford, 1998,
p. 6 f., “to juxtapose without comment (…) is not comparative law”, and the mere study of foreign
law can rather be defined as “descriptive comparative law”, whereas proper comparative law
requires specific comparative and critical reflections suitable to bring out the differences and the
underlying reasons. Similarly, M.VAN HOECKE, Deep Level Comparative Law, in (M.Van Hoecke
ed.), Epistemology and Methodology of Comparative Law, Oxford, 2004, p. 166, points out that
“comparative law must be more than just describing, and mostly translating, foreign law”.
14
R. SACCO, Legal Formants: A Dynamic Approach to Comparative Law, in The American
Journal of Comparative Law, 1991, p. 4s.: “Comparative law presupposes the existence of a
plurality of legal rules and institutions. It studies them in order to establish to what extent they are
identical or different”; W. J. KAMBA, Comparative Law: A Theoretical Framework, in The
International and Comparative Law Quarterly, 1974, p. 486 defines comparative law as the
“systematic application of the comparative technique to the field of law”.
15
M. BARASSI, Comparazione giuridica e studio del diritto tributario straniero, in (V. Uckmar ed.)
Manuale di diritto tributario internazionale, Padova, 2005, p. 1503 s.
23
and procedures they use”, while the latter has rather to do with “specific legal institutions
or problems”16.
In the above framework, the analysis of Chapters III and IV essentially consists in a
micro-comparison. The research field is nonetheless extended, where necessary, in the
awareness that tax institutions are often governed on the basis of facts and definitions
taken from other areas of law17. For example, the examination of the tax regime of
corporate mergers requires the prior identification of the corporate law framework of both
domestic and cross-border mergers in the specific jurisdictions, also considering the
influence of EU corporate directives.
Furthermore, due regard has been given to the existence of general principles capable
of influencing or explaining the specific rules. For example, before examining specific
remedies against economic double taxation in each individual subject matter (transfer
pricing, thin capitalisation, etc.), it appears necessary to investigate whether the
prevention of economic double taxation in general is contemplated in the given tax
system under general statutory rules, constitutional principles or judicial doctrine.
Indeed, comparative law theory recommends that micro – comparison adequately takes
into account the legal context18. A relevant role is also attributed, in the following analysis,
to the historical background of relevant rules, in order to facilitate the possible detection
of the “underlying conceptions and theories”19.
The aim of the present research is to bring the description as close as possible to the
“law in action”, in the perspective of a comparison among the national legislations, to be
matched, at a later stage (Chapters VI to VIII) with international and EU rules.
16
K. ZWEIGERT, H. KÖTZ, An introduction to comparative law, Oxford, 1998, p. 4 f.
17
Manuale di diritto tributario internazionale, Padova, 2005, p. 1527. As remarked in the wider
perspective of the drafting of tax legislation, “taxation must be approached in an interdisciplinary
manner”, see R. GORDON, V. THURONYI, Tax Legislative Process, in (V. Thuronyi ed.) Tax Law
Design and Drafting, The Hague, 2000, p. 4 f.
18
W. J. KAMBA, Comparative Law: A Theoretical Framework, in The International and
Comparative Law Quarterly, 1974, p. 514. The point is central in the analysis of M.VAN HOECKE,
Deep Level Comparative Law, in (M.Van Hoecke ed.), Epistemology and Methodology of
Comparative Law, Oxford, 2004, who underlines, at p. 167 that “rules cannot be (fully) understood
isolated from their legal and non-legal context” or, in other words, (p. 191) that “comparative law
research may only be carried out meaningfully if it also includes the deeper level of underlying
theories and conceptions”. A landmark contribution in this matter can be found in G.
GROSSFELD, Core Questions of Comparative Law, Durham, 2005, who remarks (p. 9 f.) that ”it
is of little use to compare individual institutions in isolation” and “perceiving only the positivistic-
legal connection also does not suffice”. M. LIVINGSTON, Law, Culture, and Anthropology: On the
Hopes and Limits of Comparative Tax. Canadian Journal of Law and Jurisprudence, Vol. 18, No.
1, January 2005, p. 119 et seq. has considered the use of a wider cultural analysis in comparative
tax research, drawing a distinction between the broad national characteristic and the attitude of
tax administrators and practitioners. This latter topic has been further developed in M.
LIVINGSTON, From Milan to Mumbai, Changing in Tel Aviv: Reflections on Progressive Taxation
and "Progressive" Politics in a Globalized but Still Local World, in The American Journal of
Comparative Law, Vol. 54, No. 3 (Summer, 2006), pp. 555 et seq.
19
The expression is by M.VAN HOECKE, Deep Level Comparative Law, in (M.Van Hoecke ed.),
Epistemology and Methodology of Comparative Law, Oxford, 2004, p. 178, who interestingly
argues that “these more fundamental theories are not typically linked to a country as such, but to
a period in history” (p. 189)
24
The work is conducted considering all formants20 of each system, in their respective
context. So, the study takes into consideration the legislative formant, the case law
formant, the doctrinal formant and – recognising a peculiarity of tax law – the guidelines
and statements of practice of the national tax authorities, that constitute what can be
defined the “treasury formant”21.
The analysis of different formants is made in the awareness that they are not necessarily
consistent22. A comparative analysis (differently from a local analysis) should not aim at
the composition of the conflict, if any, among formants and the at identification of a single
solution, but should simply take such conflicts into account23. For example, it may be that
the scope of application of transfer pricing rules be different under the different formants:
the purpose of the present analysis is not to determine which should eventually be
considered the scope of application of said rules, but to explore the effects (especially in
in terms of economic double taxation and disparity of treatment between domestic and
cross-border transactions) of the possible divergence of formants.
The analysis of formants implies the consultation of local tax codes and other tax
statutes, along with preparative works, explanatory notes and similar. Also, official notes
and guidelines, if any, issued by the local tax authorities are to be consulted; this part of
the work is facilitated by the publication (in some of the States involved) of online
manuals and collections by the tax authorities. The opinions of practitioners and scholars
is extensively searched in books, reviews and online papers. Access to local case law is
made through local or international databases.
I.3.f The functional method, its relationship with the identification of

comparable rules, and the purpose of the analysis of national rules
The study of each institution is carried out in several stages, which, in summary, consist
in the delineation of the institution, the investigation of its historical background, the
identification of sources, the description of the rules and, finally, the comparison of the
solutions adopted in the three jurisdictions involved. Throughout the different stages of
the analysis, the main focus is on the functions performed by the examined rules, in
20
R. SACCO, Legal Formants: A Dynamic Approach to Comparative Law, in The American
Journal of Comparative Law, 1991, p. 21 s.: “it is wrong to believe that the first step toward
comparison is to identify "the legal rule" of the countries to be compared”; conversely, “living law
contains many different elements such as statutory rules, the formulations of scholars, and the
decisions of judges-elements”, defined “formants” with a term borrowed from phonetics. As the
Author further illustrates in his landmark contribution, “The statutes are not the entire law. The
definitions of legal doctrines by scholars are not the entire law. Neither is an exhaustive list of all
the reasons given for the decisions made by courts. In order to see the entire law, it is necessary
to find a suitable place for statute, definition, reason, holding, and so forth. More precisely, it is
necessary to recognize all the "legal formants" of the system and to identify the scope proper to
each”.
21
R. SUCCIO, Comparazione delle procedure di soluzione dei conflitti in materia tributaria nei
sistemi italiano e statunitense, Milano, 2012, p. 209. On the administrative guidelines as formants,
see also M. BARASSI, Comparazione giuridica e studio del diritto tributario straniero, in (V.
Uckmar ed.) Manuale di diritto tributario internazionale, Padova, 2005, p. 1513.
22
And “within a given legal system with multiple legal formants there is no guarantee that they will
be in harmony rather than in conflict”. See R. SACCO, Legal Formants: A Dynamic Approach to
Comparative Law, in The American Journal of Comparative Law, 1991, p. 23.
23
Manuale di diritto tributario internazionale, Padova, 2005, p. 1506.
25
accordance with the so-called “functional method” of comparative law, which appears to
be the most appropriate for the present analysis.
The functional method has Its emphasis on the function on the objects to compare, and
– in essence - consists in asking what “legal norms, concepts or institutions” in one
system perform a function equivalent to the one performed by other “legal norms,
concepts or institutions” in another system24.
The method is referred to by one of the leading textbooks on comparative law as “the
basic methodological principle of all comparative law”25, but is not without its critics26 and
its (claimed) monopoly is today fissured by a number of alternatives which have their
roots in the wider context of social sciences27.
However, the method retains its attractiveness for micro-comparison since it focuses “not
on rules but on their effects, not on doctrinal structures and arguments but on events”
and thus allows for the bringing together of quite different objects in the light of their use
and purpose28.
Such focus on functions seems also particularly appropriate when the objects to be
compared belong to different legal systems, on a national level, but also to a
supranational level, as it happens in the comparison of the solutions to a specific problem
proposed by e.g. treaty law and EU law29.
The functional method is widely adopted in comparative tax studies30. The adoption of
functionalism in tax comparison implies the analysis of the functions of tax rules of
different countries “with the goal of identifying analogies and differences of domestic tax
systems and potential alternative solutions to common problems”31.
The functional method is especially helpful with reference to the correct identification of
the objects to be compared. As comparative law scholars have it, “in law the only things
24
W. J. KAMBA, Comparative Law: A Theoretical Framework, in The International and
Comparative Law Quarterly, 1974, p. 517 et seq.
25
The statement dates back to the early 1970’s. See, in a recent edition, K. ZWEIGERT, H. KÖTZ,
An introduction to comparative law, Oxford, 1998, p. 34.
26
A critical survey of the debate about the functional method can be found in R. MICHAELS, The
Functional Method of Comparative Law, in (M. Reinmann and R. Zimmermann eds.) The Oxford
Handbook of Comparative Law, Oxford, 2006, p. 340 et seq.
27
An effective evaluation of current alternatives to functionalism is made by G. SAMUEL, An
Introduction to Comparative Law Theory and Method, Oxford - Portland, 2014, p. 79 et seq.
28
G. SAMUEL, An Introduction to Comparative Law Theory and Method, Oxford - Portland, 2014,
p. 65. In the words of K. ZWEIGERT, H. KÖTZ, An introduction to comparative law, Oxford, 1998,
p. 45, the method allows problems to “be stated without any reference to the concepts of one’s
own legal system”.
29
On the possibility to compare national and international rules, see M. BARASSI, Comparazione
giuridica e studio del diritto tributario straniero, in (V. Uckmar ed.), Manuale di diritto tributario
internazionale, Padova, 2005, p. 1516.
30
See R. AVI-YONAH, N. SARTORI, O. MARIAN, Global Perspectives on Income Taxation Law,
New York, 2011, p. 4.
31
C. GARBARINO, An Evolutionary Approach to Comparative Taxation: Methods and Agenda for
Research, in The American Journal of Comparative Law, Vol. 57, No. 3, Summer 2009, pp. 677-
709. The Author highlights that comparative taxation should address tax models “in whatever form
they operate (as a set of statutory rules, a judicial doctrine, administrative guideline, an
established pattern of behaviour, or as a combination of the above), as long as they serve the
same or similar function”.
26
which are comparable are those which fulfil the same function” 32 or, in other words, “are
functionally equivalent (…) in different legal systems”33.
The identification of national rules to be compared in Paragraphs 3 and 4 is thus primarily
made on the basis of their function34. E.g., once that “thin capitalisation” rules have been
selected as an object of the study, the first issue to be addressed is the identification of
“thin capitalisation” rules in the jurisdiction involved, on the basis a prior delineation of
the function of what can be termed a “thin capitalisation" rule.
This is done in the awareness that “the same name in two legal orders can have its
origins in different values and have different results”35 and with the purpose to “find out
to what extent the word used in the compared legal system bear the same meaning”36.
As part of the effort to ensure the necessary neutrality in respect of the three national
jurisdictions involved (a neutral perspective which is suitable in enquiries aimed at
harmonisation37), the identification of comparable rules also takes into account the
definitions developed at an international or supranational level. This introductory part of
the analysis is further described in the introductory paragraph to each subject matter
(Para. III.2.a for transfer pricing, Para. III.3.a for thin capitalisation, etc.).
Finally, the functional method also constitutes the basis for subsequent critical
comparison of different rules, Indeed, functional comparative law can help not only in
describing rules but also at the stage of their evaluation: the identification of the purposes
of a rule provides a standard for the evaluation of how well a rule serves said purposes38.
This has been also been named “better law comparison”, where the better of several
laws is the one which better fulfils its function39.
32
K. ZWEIGERT, H. KÖTZ, An introduction to comparative law, Oxford, 1998, p. 34 s.; W. J.
KAMBA, Comparative Law: A Theoretical Framework, in The International and Comparative Law
Quarterly, 1974, p. 485 f. so summarises: “the comparatist seeks the rules which perform the
same function”.
33
R. MICHAELS, The Functional Method of Comparative Law, in (M. Reinmann and R.
Zimmermann eds.) The Oxford Handbook of Comparative Law, Oxford, 2006, p. 342. R. SUCCIO,
Comparazione delle procedure di soluzione dei conflitti in materia tributaria nei sistemi italiano e
statunitense, Milano, 2012, p. 2010, warns that it would be risky to rely on the assumption that
tax professionals speak a common language.
34
As K. ZWEIGERT, H. KÖTZ, An introduction to comparative law, Oxford, 1998, p. 45 s., have
it, comparative law asks “what is the function of legal institutions in different countries”. Similarly,
G. SAMUEL, An Introduction to Comparative Law Theory and Method, Oxford - Portland, 2014,
p. 67, explains that the comparatist looks at a specific problem in one system and then asks “how
such a problem would be solved in another legal system”.
35
G. GROSSFELD, Core Questions of Comparative Law, Durham, 2005, p. 9.
36
M.VAN HOECKE, Deep Level Comparative Law, in (M.Van Hoecke ed.), Epistemology and
Methodology of Comparative Law, Oxford, 2004, p. 175. For a recent overview of problems
associated with the translation of legal language, see B. POZZO, Comparative law and language,
in (M. Bussani and U. Mattei, eds.) The Cambridge Companion to Comparative Law, Cambridge,
2012, p. 95 f.
37
G. DANNEMANN, Comparative law: study of similarities or differences?, in (M. Reinmann and
R. Zimmermann eds.) The Oxford Handbook of Comparative Law, Oxford, 2006, p. 342
38
J. GORDLEY, The functional method, in (P. G. Monateri ed.) Methods of Comparative Law,
Cheltenham – Northampton, 2013, p. 107 s.
39
R. MICHAELS, The Functional Method of Comparative Law, in (M. Reinmann and R.
Zimmermann eds.) The Oxford Handbook of Comparative Law, Oxford, 2006, p. 342.
27
I.4 Outline of the contents
The present Chapter 1 is dedicated to illustrating the aim and methodology of the
research, including the central research questions.
A first part of the dissertation (Chapters 2 and 3) concerns the definition and the causes
of economic double taxation.
Chapter 2 is dedicated to the notion of economic double taxation, i.e., the central concept
of the present dissertation. Since it soon aroused during the research work that virtually
all present tax literature and even the CJEU40 make reference to the definition provided
in the Commentary on the OECD Model Tax Convention, the Chapter is mostly an
historical research as to the when, and why, that definition was conceived.
Chapter 3 better defines the scope of the present study by delimitating the paradigm
cases of double taxation and then explores the national tax systems of the three selected
Countries in respect of those cases, so as to compare the relevant rules and examine
whether they discriminate between domestic and cross-border situations.
The second part of the dissertation (Chapters 4 to 8) is devoted to the examination of

the structure and effects of remedies against economic double taxation provided by
different sources of law. This examination is done progressively, starting from national
law, to treaty law and then to EU law, so as to finally examine the pending proposals of
a Common Consolidated Corporate Tax Base (and address the second research
question) vis-à-vis the residual necessity of further harmonisation in the matter.
Chapter 4 first investigates on the presence of general prohibitions of double taxation in
the selected Countries, to then focus on specific remedies possibly provided in respect
of the paradigm cases; the possible discriminatory nature of such general prohibitions or
specific remedies is then analysed.
Chapter 5 aims at grasping to which extent tax conventions may apply to the paradigm
cases of economic double taxation or otherwise provide criteria suitable to be applied
outside treaty law. The evolution of the model solution devised by the OECD in respect
of economic double taxation deriving from transfer pricing adjustments is also examined.
The same analysis is done with respect to the EU Arbitration Convention, which is
separately examined at Chapter 6 (rather than in Chapter 7), due to its being part of the
acquis communautaire but formally not of EU law. Chapter 6 also briefly addresses the
tax dispute resolution directive of 10 October 2017, especially in comparison with the
initial proposal by the Commission.
Chapter 7 examines the interaction of national rules on the paradigm cases with the
fundamental freedoms and the EU corporate tax directives. Case law on economic
double taxation of dividends as well as the rationale and history of corporate tax
directives are analysed in order to ascertain whether they can provide criteria suitable to
be applied to unsolved cases of economic double taxation.
Chapter 8 separately examines the proposals of the European Commission for a
Common Corporate Tax Base (CCTB) and for a Common Consolidated Corporate Tax
40
See, e.g., the Opinion of Advocate general Kokott delivered on 18 March 2004 in Manninen,
Case C-319/02, Para. 3.
28
Base (CCCTB), with the purpose of determining the respective contributions to the
possible elimination of economic double taxation within the EU.
29
II THE NOTION OF ECONOMIC DOUBLE TAXATION
II.1 Introduction
The present Chapter intents to examine the notion of economic double taxation, in the
light of the following two research (sub) questions:
 What is the origin and the purpose of the current distinction between juridical
and economic double taxation?
 Does the generally accepted definition of economic double taxation provide
hints for the search of a solution?
This will be done through the analysis of the OECD Model Tax Convention and the
Commentary, in the light of the related preparatory works and the comparison of the
scholars definitions before and after the OECD Model Tax Convention.
II.2 The notion of economic double taxation in Model Tax

Conventions
II.2.a The definition of the Commentary on the OECD Model Tax Convention
II.2.a.1 Two different definitional patterns

The articles of the OECD Model Tax Convention do not contain any definition of double
taxation. At least, not a definition in the usual legislative pattern which associates a
definiendum with a definiens, i.e., “the term x means y”41.
This gap is quite remarkable considering that the elimination of double taxation is one of
the main aims of the fitting out of a Model Tax Convention by the OECD.
In earlier versions the term double taxation (although still not defined) was included in
the very title of the document, which was Model Double Taxation Convention on Income
and on Capital. In 1992 the title was changed into Model Tax Convention on Income
and on Capital42 to reflect a changed balance of purposes, and especially the increased
importance of the prevention of international tax evasion. A similar change, consisting in
the deletion of the reference to double taxation, was made to the proposed title of the
convention; since the 2017 revision, however, the same aim was differently pursued
through adding an explicit reference to the prevention of tax evasion and avoidance43.
41
See P. TARIGO, Il Concorso di fatti imponibili nei trattati contro le doppie imposizioni, Torino,
2008, p. 37 f., with further bibliographic references to the role and form of definitions in the general
theory of law.
42
Paragraph 16 of the Introduction to the Commentary reminds, in this respect, that “in both the
1963 Draft Convention and the 1977 Model Convention, the title of the Model Convention included
a reference to the elimination of double taxation. In recognition of the fact that the Model
Convention does not deal exclusively with the elimination of double taxation but also addresses
other issues, such as the prevention of tax evasion and non-discrimination, it was subsequently
decided to use a shorter title which did not include this reference. This change has been made
both on the cover page of this publication and in the Model Convention itself”.
43
In the 1963 and 1977 Model, the envisaged title was “Convention between (State A) and (State
B) for the avoidance of double taxation with respect to taxes on income and on capital”, while in
30
The Commentary does not encompass a general definition of “double taxation” but rather
recognises two categories, namely those of “juridical” double taxation and “economic”
double taxation, to then provide separate definitions for each category.
Juridical double taxation is defined in the first paragraph of the Introduction to the
Commentary as “the imposition of comparable taxes in two (or more) States on the same
taxpayer in respect of the same subject matter and for identical periods” 44. The
Commentary does not further linger on the four individual elements of such definition
(“comparable taxes”, “same taxpayer”, “same subject matter” and “identical periods”)45.
The definition of “economic” double taxation is provided separately and recurs several
times, in connection with the specific situations where it is expected to arise.
A first definition can be encountered at Para. 5 of the Commentary on Article 9, Para. 2
(dealing with corresponding adjustments) which highlights that the re-writing of
transactions between associated enterprises on the basis of the arm’s length rule may
give rise to economic double taxation, defined as the “taxation of the same income in the
hands of different persons” 46.
A second definition is provided at Paragraph 40 of the Commentary on Article 10, where
it is reminded that certain national laws seek to avoid or mitigate economic double
taxation of dividends, defined as “the simultaneous taxation of the company’s profits at
the level of the company and of the dividends at the level of the shareholder”. At the
same time, the OECD Commentary explains that, “in contrast to the notion of juridical
double taxation, which has, generally, a quite precise meaning, the concept of economic
double taxation is less certain” and divergences exist among States as to the validity of
the concept and the need to provide relief 47.
later versions the title was changed into “Convention between (State A) and (State B) with respect
to taxes on income and on capital”. Since the 2017 revision, the envisaged title was again
changed into “Convention between (State A) and (State B) for the elimination of double taxation
with respect to taxes on income and on capital and the prevention of tax evasion and avoidance”.
See Para 16.1 of the Introduction to the Commentary
44
Para. 1 of the Commentary on Article 23 proposes a simplified definition of “juridical double
taxation”, as the case where “the same income or capital is taxable in the hands of the same
person by more than one State”. This definition refers to “income or capital” rather than to “subject
matter” and does not contain the condition concerning the identical taxable period.
45
For a detailed analysis of the definition of double taxation based on qualitative elements, see
M. PIRES, International Juridical Double Taxation of Income, Deventer – Boston, 1989, esp. p.
13 et seq.
46
This definition is connected with the one to be found in the OECD Transfer Pricing Guidelines,
at Para. 4.2: “Double taxation means the inclusion of the same income in the tax base by more
than one tax administration, when either the income is in the hands of different taxpayers
(economic double taxation, for associated enterprises) or the income is in the hands of the same
juridical entity (juridical double taxation, for permanent establishments)”. The OECD Transfer
Pricing Guidelines were adopted in 1979 and, in the 1992 revision of the OECD Commentary on
Article 9, it was stated that such Guidelines represent “internationally agreed principles”. On the
transfer pricing guidelines as a source of tax law J. CALDERÓN, The OECD Transfer Pricing
Guidelines as a source of tax law: is globalization reaching the tax law?, in Intertax, Vol. 35 (2007),
No. 1, p. 5.; C. GARBARINO, La tassazione del reddito transnazionale, Padova, 1990, p. 43.
47
The Commentary explains that “41. (…) as the concept of economic double taxation was not
sufficiently well defined to serve as a basis for the analysis, it seemed appropriate to study the
problem from a more general economic standpoint, i.e. from the point of view of the effects which
the various systems for alleviating such double taxation can have on the international flow of
31
The first Paragraph of the Commentary on Article 11 states that “Unlike dividends,
interest does not suffer economic double taxation, that is, it is not taxed both in the hands
of the debtor and in the hands of the creditor”. The sentence confirms in a reverse form
the definitional approach presented in other points of the OECD Commentary; at the
same time it seems to underestimate the possibility that interest – where not deductible
- may indeed suffer economic double taxation48.
A further definition can be found in the Commentary on Article 23, which reads that the
“so-called economic double taxation” is the situation where “two different persons are
taxable in respect of the same income (…)”.
Such latter definition is not substantially different from those, elsewhere provided by the
OECD Commentary and already mentioned, but is particularly significant in the light of
its context. Indeed, the Commentary on Article 23 presents juridical and economic double
taxation as two opposed categories and addresses “economic” double taxation for the
purpose of clarifying that such “economic” double taxation does not fall within the scope
of application of that same Article, which concerns only “juridical” double taxation”49. The
exclusion of economic double taxation from the scope of application of the Model
provision is further underlined by the specification that “if two States wish to solve
problems of economic double taxation, they must do so in bilateral negotiations”.
These declarations do not imply that economic double taxation be always excluded from
the scope of application of the OECD Model; on the contrary there are statements of the
Commentary which are careful to point out that the respective provisions apply to such
category of double taxation50. The Commentary on Article 23 rather draws a divide
between the two categories of double taxation and clarifies that most of the provisions of
the Model (i.e. those which are based on the interaction between distributive rules and
the remedies against double taxation of that same Article 23) are exclusively aimed at
cases of juridical double taxation.
In this perspective, it becomes clear that the generality of the Model provisions concern
juridical double taxation, while economic double taxation is relevant for the purposes of
the convention only where specific provisions apply. After all, where the Commentary
uses the expression “double taxation” without further specification, it is to juridical double
taxation (and not to both categories) that it aims.
capital. For this purpose, it was necessary to see, among other things, what distortions and
discriminations the various national systems could create; but it was necessary to have regard
also to the implications for States' budgets and for effective fiscal verification, without losing sight
of the principle of reciprocity that underlies every convention”.
48
The sentence also appears to be in contradiction with the content of Points 67 and 68 of the
Commentary on Article 23, which concern “thin capitalisation” cases and which shall be addressed
below in this same Paragraph.
49
The Commentary reads as follows: “1. These Articles deal with the so-called juridical double
taxation where the same income or capital is taxable in the hands of the same person by more
than one State. 2. This case has to be distinguished especially from the so-called economic
double taxation, i.e. where two different persons are taxable in respect of the same income or
capital”.
50
See, Para. 5 of the OECD Commentary on Article 9 and Para. 10 of the OECD Commentary
on Article 25
32
II.2.a.2 Subjective profiles: one person vs two persons
The difference between the two notions relates – consistently in all of the above referred
definitions - to the identity of the taxpayer, i.e., whether taxation concerns the same
person or two different persons).
In my view, the notion of “person” to be adopted for this purposes is the one defined in
the same OECD Model, and specifically at Article 3, according to which the term “person”
includes “an individual, a company and any other body of persons”. Under the same
Article 3, the term “company” means “any body corporate or any entity that is treated as
a body corporate for tax purposes”, so that the quality of “person” for the purposes of a
treaty may ultimately depend upon the domestic rules of the States concerned.
On this basis, the reiterated taxation of income on an entity which is disregarded for tax
purposes (e.g. source taxation of an entity which is transparent for tax purposes in the
State of residence) and on its shareholder should be considered as juridical double
taxation even if, from a purely legal perspective, two different persons (the entity and the
shareholder) are involved.
Similarly, the taxation at source in the hands of a partnership and the taxation of the
partner in the respective State of residence should be considered as “economic” double
taxation since a partnership, regardless of its tax regime, is a “body of persons” under
Article 3 of the OECD Model.
The positions taken by the Commentary on the application of the Convention to
partnerships is however different51. There may be situations where, due to different entity
qualifications in the States concerned, economic double taxation may arise, which the
Commentary recommends to treat as juridical double taxation for the purposes of the
Convention. This approach – which can be seen as a contradiction52 - is based on the
prominence, claimed at Point 6.3 of the Commentary on Article 1, of the tax qualification
made by the “the jurisdiction of the person claiming the benefits of the Convention as a
resident”.
II.2.a.3 Objective profiles: comparable taxes

What the two categories of juridical and economic double taxation have in common is
the objective element, described in quite similar terms.
The definition of juridical double taxation sub Article 1 requires the “imposition of
comparable taxes (…) in respect of the same subject matter”.
The definition sub Article 23 simply refers to the “same income” and this simplified
approach is taken in the various definitions of economic double taxation: the
Commentary on Article 9 and to Article 23 refers to the “same income”, while the one to
Article 10 mentions the “company profits” and the “dividends”, taking for granted, without
further explanations, that the two items meet the “same income” requirement.
The reiterated use of the expression “same income” associated with the terms “taxation”
or “taxable” in place the more detailed expression “imposition of comparable taxes (…)
in respect of the same subject matter” imply that income taxes fit within the definition.
This means that, in the perspective of the OECD Model, double taxation (either juridical
51
See Point 2 ff. of the Commentary on Article 1, which reproduce the conclusions of the report
by the Committee on Fiscal Affairs entitled “The Application of the OECD Model Tax Convention
to Partnerships”, adopted on January, 20 1999.
52
P. TARIGO, Il concorso di fatti imponibili nei trattati contro le doppie imposizioni, Torino, 2008,
p. 88 s.
33
or economic) arises only when the taxes and the subject matter are the same, as in
particular it happens in the case of income taxes that fall within the material scope of
application of the OECD Model).
By contrast, it is at all clear that the overlap of different taxes (e.g.: income taxes and
consumption taxes) is not considered to constitute double taxation for treaty purposes.
II.2.b The search of a definition in Articles 9 and 23 of the OECD Model Tax
Convention
As mentioned already, the articles of the OECD Model do not contain an explicit
definition. However, the term “double taxation” appears in the text of the OECD Model
and some of its provisions may contribute (although not in the form of a proper definition)
to the identification of the key elements of a notion of double taxation.
As far as juridical double taxation is concerned, is seems appropriate to focus on Chapter
V of the OECD Model, whose heading is “Methods for elimination of double taxation” and
which contains the two versions of Article 23, namely Article 23 A (exemption method)
and 23 B (credit method).
Neither versions use the term “double taxation” other than in the title. However, both
versions introduce the respective methods (exemption and foreign tax credit) with
reference to a situation described with the same language, i.e, the situation “where a
resident of a Contracting State derives income (…) which, in accordance with the
provisions of this Convention, may be taxed in the other Contracting State (…)”.
The wording identifies two of the elements which constitute what the OECD Commentary
defines juridical double taxation: the identity of the taxpayer (“a resident”) and the identity
of subject matter (“income”).
Article 23 does not conversely contain reference to the comparability of taxes and to the
identity of tax period, which are mentioned by the OECD Commentary as elements of
the definition.
As to the comparability of taxes, it may be submitted that such requirement is already
provided elsewhere in the OECD Model and precisely at Article 2, which delineates the
material scope of application of the treaty, defining taxes on income (and, separately,
taxes on capital)53. On such basis it may be argued that the overlap of taxes other than
those to which the treaty applies, as well as the overlap of income taxes and capital taxes
does not constitute double taxation under the OECD Model.
The requirement of identity of the tax period is not addressed at all in the OECD Model54,
while the Commentary seems to be in contradiction with its own definition where (at Para.
32.8) provides that relief from double taxation must be given regardless of when the tax
is levied by the source State.
As to economic double taxation, the search of a definition leads to the provisions of
Article 9, Para. 2, concerning corresponding adjustments. The provision refers to the
situation where “a Contracting State includes in the profits of an enterprise of that State
53
Credit is allowable only in respect of taxes to which the treaty applies. Also, it is at all clear that
income tax and capital tax are to be kept separate for tax credit purposes. See A. RUST, Article
23 B, in (E. Reimer and A. Rust eds) Klaus Vogel on Double Taxation Conventions, Alphen aan
den Rijn, 4th ed., 2105, at m.no. 43.
54
It may thus be argued that the crediting period is a question left to domestic law. See. A. RUST,
Article 23 B. Credit Method, in (E. Reimer and A. Rust eds) Klaus Vogel on Double Taxation
Conventions, Alphen aan den Rijn, 4th ed., 2105, at m.no. 49.
34
— and taxes accordingly — profits on which an enterprise of the other Contracting State
has been charged to tax in that other State (…)”.
It may be discussed whether the term “charged to tax” along with the expression
“includes (…) and taxes accordingly” may indicate that actual double taxation is a
condition for the application of Article 9, Para. 255. In any case, it may be argued that the
language of the provision depicts the underlying notion of economic double taxation.
It may also be argued that the requirement as to the identity of taxes in the two
contracting States applies to Article 9, Para. 2 in the same way that it applies in respect
of Article 23.
The provision has a structure which resembles the earlier quoted incipit of (both version
of) Article 23, since it contains reference to the dualism of States, to the identity of subject
matter and to the subjective profiles. In this latter respect, the most visible difference is
that two distinct subjects (precisely, two different enterprises) are concerned.
The subjective requirement of Article 9, Para. 2 (which presupposes the dualism of the
enterprises), in the comparison with the requirement of Article 23 (which is based on the
identity of the person) matches with the distinction drawn in the OECD Commentary
between juridical and economic double taxation.
Such distinction appears even more clearly, due to the similarity of the provisions, if
Article 9, Para. 2 is compared with Article 7, Para. Para. 3, which (since the 2010
revision) has introduced corresponding adjustments also in respect of the attribution of
profits to permanent establishments56.
Article 9, Para. 2 Article 7, Para. 3
“a Contracting State includes in the profits of an “a Contracting State adjusts the profits that are
enterprise of that State — and taxes accordingly — attributable to a permanent establishment of an
profits on which an enterprise of the other enterprise of one of the Contracting States and
Contracting State has been charged to tax in that taxes accordingly profits of the enterprise that have
other State (…)”. been charged to tax in the other State”.
The structure and language of Article 7, Para. 3 are very similar to those of Article 9,
Para. 2, the key difference being that in Article 7, Para. 3 the taxation of profits which
have been charged to tax in the other State does not concern two separate enterprises
as it happens in Article 9, Para. 2, (respectively, “an enterprise of that State” and “an
55
G. KOFLER, Article 9, in (E. Reimer and A. Rust eds) Klaus Vogel on Double Taxation
Conventions, Alphen aan den Rijn, 4th ed., 2105, at m.no. 111; J. WITTENDORFF, Transfer
Pricing and the Arm's Length Principle in International Tax Law, Alphen aan den Rijn, 2010, p.
241. This latter takes the view that the provision would not apply if one of the companies or the
profit is exempt, while it is not a condition that taxation has actually been triggered, as it may
happen in the case of losses.
56
The provision was adopted in by the report entitled “The 2010 Update to the Model Tax
Convention”, adopted by the OECD Council on 22 July 2010. E. REIMER, Article 7, in (E. Reimer
and A. Rust eds) Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn, 4th ed.,
2105, at m.no. 153 remarks that the corresponding adjustment mechanism of Article 7, Para. 3
is similar to that of Article 9, Para. 2 and has been strongly influenced by that provision.
35
enterprise of the other Contracting State”) but one single enterprise (“the enterprise”) of
a Contracting State and its own permanent establishment in the other State.
Finally, the term “double taxation” is to be found in Article 25, Para. 3, which specifies
that the Competent Authorities “may also consult together for the elimination of double
taxation in cases not provided for in the Convention”. Neither the provision nor the
commentary contain further specifications and are thus of little use in the search of
definitional elements of double taxation in the OECD Model. Moreover, lack of definitions
complementing Article 25, Par 3. leaves open the issue as to whether economic double
taxation falls within the scope of application of the provision. The issue is further
addressed in Chapter V below, dedicated to treaty remedies against economic double
taxation.
II.2.c The predecessors to the OECD Model Tax Convention and the preparatory
work
II.2.c.1 The early drafts of the League of Nations (1923 – 1935)

The distinction between juridical and economic double taxation, which can now be found
in the OECD Commentary in the terms outlined above, does not appear in the earlier
proceedings under the League of Nations.
The earliest available document, the Report on Double Taxation, presented in 192357,
although fully devoted to the examination of the effects of double taxation and the
possible remedies, does not provide a definition.
Nonetheless, it may be argued, from the overall contents, that the focus of the panel of
prominent economists was on what would be termed today juridical double taxation.
Indeed, the analysis of effects and the investigation of alternative remedies and
allocation rules is made with reference to the situation of a person resident in one State
and receiving income (or owning assets) in another State. At a point (Section 2, Para.
5.b) the 1923 Report provides a clarification which may highlight the scope of the
analysis and indirectly the underlying notion of double taxation in the sense submitted
above: “we are here dealing not with a tax on the corporation or business but with a tax
on the shareholder. We are not discussing the question as to whether, in an income tax,
for instance, the tax on the corporation as such is to be regarded as virtually a tax upon
the shareholder, and whether therefore the additional tax on the shareholder is to be
considered a double tax”58.
No further suggestion as to the notion of double taxation came from the Report and
Resolutions submitted by the Technical Experts to the Financial Committee in 192559 or
from the Introductory notes to the 1927 Draft of a Bilateral Convention for the Prevention
of Double Taxation (“1927 Draft”), which are limited to illustrating the adverse economic
57
Report on Double Taxation submitted to the Financial Committee Economic and Financial
Commission Report by the Experts on Double Taxation, Document E.F.S.73. F.19, April 5th 1923.
The document, as well as all the League of Nation documents referred to in this Paragraph, are
available at www.taxtreatieshistory.org.
58
The clarification is made in the context of the selection of the most appropriate connection factor
for income from shareholdings. The 1923 Report suggests that the place of origin of shareholding
income is the State of the shareholder, a solution which would also have had the advantage of
preventing discussions as to the actual origin of the company income.
59
Report and Resolutions submitted by the Technical Experts to the Financial Committee,
Document F.212, Geneva, February 1925.
36
effects of the phenomenon: “Double taxation, which affects mainly undertakings and
persons who exercise their trade or profession in several countries, or derive their
income from countries other than the one in which they reside, imposes on such
taxpayers burdens which, in many cases, seem truly excessive, if not intolerable. It tends
to paralyse their activity and to discourage initiative and thus constitutes a serious
obstacle to the development of international relations and world production”60.
The 1927 Draft itself does not provide any definition of double taxation neither in the next
nor in the commentary. However, Article 10 of the 1927 Draft, which introduces a limited
tax credit system, seems to be based on the assumption that the source tax (or, more
precisely, the “impersonal tax”) and the residence tax (the “personal tax”)61 be levied on
the same taxpayer. At the same time, the 1927 Draft includes “foreign affiliates” in the
definition of permanent establishment62 and, on such basis, it may be argued that the
income apportionment rule of Article 5 is applicable to situations of double taxation of
income in the hands of different taxpayers (the parent company and the foreign affiliate),
a situation which may be defined today of “economic” double taxation.
The 1928 updated drafts do not contain any longer the mentioned reference to “foreign
affiliates”63, but shortly later, when the newly appointed Fiscal Committee addressed the
issue of income apportionment, affiliated companies were again taken into account
alongside permanent establishments64.
This approach is further confirmed with the publication, in 1933, of the Draft convention
on the allocation of profits (“1933 Draft”), included in the Report to the Council on the
Fourth Session of the Committee65. The 1933 Draft contains a specific provision (Article
5) on the criteria of determination of income of affiliate companies and (Article 6) a
dispute resolution mechanism.
Although there is no definition or open distinction between different categories of double
taxation, it may thus be argued that the 1933 Draft enlarges the scope of the League of
60
League of Nations: Committee of Technical Experts on Double Taxation and Tax Evasion,
Double Taxation and Tax Evasion, Report Document C. 216. M. 85, London, April 12th, 1927. The
Report contains 4 draft conventions, one is the Convention for the Prevention of Double Taxation,
the others concern the Prevention of Double Taxation in the special matter of Succession,
Administrative Assistance in Matters of Taxation and Judicial Assistance in the Collection of Taxes.
61
On the distinction between impersonal and personal tax, which influences the structure of the
1927 Draft, the Commentary reads that: “impersonal taxes are in most cases levied on all kinds
of income at the source, irrespective of the personal circumstances of the taxpayer (nationality,
domicile, civil status, family responsibilities, etc.) thus differing from personal taxes which rather
concern individuals and their aggregate income”.
62
According to Article 5 of the 1927 Draft, “The real centres of management, affiliated companies,
branches, factories, agencies, warehouses, offices, depots, shall be regarded as permanent
establishments”.
63
See League of Nations, Double Taxation and Tax Evasion, Report Presented by the General
Meeting of Government Experts on Double Taxation and Tax Evasion, Document
C.562.M.178.1928.II, Geneva, 1928
64
See League of Nations Fiscal Committee, Report to the Council on the Work of the Second
Session of the Committee, Document C.340.M.140.1930.II, Geneva, 1930 and especially
Appendix 2, which contains the summary by Professor Adams of the replies received to a
questionnaire on income apportionment.
65
League of Nations Fiscal Committee, Report to the Council on the Fourth Session of the
Committee, Document C.399.M.204. 1933.II.A., Geneva, 1933.
37
Nations initiatives to the kind of double taxation, namely economic double taxation, which
is now addressed by Article 9 and 25 of the OECD Model66.
The updated 1935 draft convention on the allocation of profits was unchanged on the
point67 and its provisions, rather than maintaining the form of a separate model
convention, would have soon become part of a the Mexico and London Drafts68.
II.2.c.2 The Mexico and London Drafts (1943 – 1946)

During the 1939 session of the Fiscal Committee of the League of Nations69 it had been
suggested to undertake a revision of the model bilateral conventions dating back to
1927/1928. The proceedings led to the adoption of a first draft model at a regional
conference in Mexico City in 1943 (the “Mexico Draft”), and of a second draft model
during the tenth session of the Fiscal Committee, held in London in 1946 (the “London
Draft”)70. As remarked in the Foreword to the Commentary (there is a single commentary
for both drafts) the membership of the Mexico City and London meetings differed
considerably and some provisions are accordingly disparate, although the general
structure of the two drafts is similar71.
Both drafts have the same title (“Model Bilateral Convention on the Prevention of the
Double Taxation of Income and Property”) and the Commentary for the first time outlines
the concept of double taxation: “International double or multiple taxation arises when the
taxes of two or more countries overlap in such a manner that persons liable to tax in
more than one country bear a higher tax burden than if they were subject to one tax
jurisdiction only”. The Commentary further specifies that such additional burden must be
due to the fact that “two or more jurisdictions concurrently impose taxes having the same
bases and incidence without regard to the claims of the other tax jurisdictions”.
The definition does not mention different categories of double taxation nor seems to
leave much room for including “economic” double taxation in it. Indeed, while the second
part of the definition is quite neutral, the reference made to “persons liable to tax in more
than one country” as opposed to those “subject to one jurisdiction only” evokes closely
the paradigm of “juridical” double taxation.
The definition is consistent with the approach taken in both Drafts with respect to the tax
credit provision. Indeed, both Article XIII of the Mexico Draft and Article XIII of the London
Draft (which have almost the same formulation) refer to the situation of “the taxpayer” in
respect of whom the State of fiscal domicile has the right to tax the entire income and
oblige this latter State to recognise, within certain limits, a deduction for the tax collected
66
See also Para. V.2.b below.
67
League of Nations Fiscal Committee, Report to the Council on the Fifth Session of the
Committee, Document C.252.M.124.1935.II.A., Geneva, 1935
68
The principles and criteria of the 1933 and 1935 draft conventions on the allocation of profits
have found room in Article VI and VII of the Protocols to both the Mexico Draft and the London
Draft
69
Report to the Council on the Work of the Ninth Session of the Committee, Document
C.181.M.110.1939.II.A., Geneva, 1939.
70
See League of Nations Fiscal Committee, Report on the Work of the Tenth Session of the
Committee. Document C.37.M.37.1946.II.A., Geneva, 1946.
71
London and Mexico Model Tax Conventions Commentary and Text, Document
C.88.M.88.1946.II.A., Geneva, 1946.
38
by the source State “on the income which is taxable in its territory”72. The provisions
seem based on the assumption that tax be collected by both States in the hands of the
same taxpayer, and there seem to be no room to claim relief from economic double
taxation. This construction is indirectly confirmed by the Commentary, which refers to
additional stipulations in respect of income tax borne by the distributing company on its
profits73.
By contrast, the text of the Drafts elsewhere takes into account situations which may well
be considered of “economic” double taxation: Article VIII, Para. 2 of the London Draft
provides, at certain conditions, the exemption of intra-group dividends in the hands of
the recipient parent company74. The Commentary specifies that such provision “is
intended to avoid the special cases of double or multiple taxation which may occur when
the income distributed by a company is derived from dividends received from
subsidiaries or related companies (…)”75.
The rewriting of conditions applied in commercial or financial transactions between
related parties is dealt with in Articles VII of both Protocols, which however not do not
include a corresponding adjustment provision.
Article XVI of the Mexico Draft and Article XVII of the London Drafts provide for a dispute
resolution mechanism for those taxpayers who have “suffered double taxation”. Nor the
text nor the related Commentary clarify whether the provision may find application also
in respect of cases involving “economic” double taxation.
Both drafts include a consultation clause (Article XVII for the Mexico Draft, Article XVIII
in the London Draft) and the earlier draft specified that the consultation could take place
“more particularly in cases not expressly provided for”.
72
According to the mentioned provisions, the credit is limited to the amount of the domicile State
tax which corresponds to the proportion between the income taxable in the other State and the
total income of the taxpayer.
73
The Commentary reads that “Depending on the system followed by that country in respect of
the taxation of corporate income, the tax borne by such dividends may take different forms—e.g.,
the form of a tax paid by the distributing company in its own name or that of a tax on corporate
earnings. Therefore, to enable the taxpayer in receipt of dividends so taxed in the country of their
origin to obtain, in connection with such dividends, the deduction provided by Article XIII, it may
be desirable to stipulate that taxes which a company is required to withhold from dividends it
distributes or to pay on such dividends shall be considered as having been paid by the
shareholder for the purpose of this article”.
74
Article VIII, Para. 2 of the London Draft reads as follows: “2. Notwithstanding the provisions of
paragraph 1, dividends paid by a company which has its fiscal domicile in one contracting State
to a company which has its fiscal domicile in the other contracting State and has a dominant
participation in the management or capital of the company paying the dividends shall be exempt
from tax in the former State”. The wording can’t be found in the Mexico Draft, which however
stated, with analogous effects, at Article IX, that “Income from movable capital shall be taxable
only in the contracting State where such capital is invested”.
75
The corresponding provision of the Mexico Draft is Article IX, according to which “Income from
movable capital shall be taxable only in the contracting State where such capital is invested”. The
provision has the effect of preventing not only juridical double taxation of dividends, but also
economic (international) double taxation of dividends; however due to the wider scope and lack
of explanations in the Commentary, it is of more limited use for defining and categorising double
taxation.
39
II.2.c.3 The first categorisation and definition of economic double taxation in the
OEEC/OECD preparatory works (1958 – 1977)
The first Report of the Fiscal Committee of the OEEC, under the heading “Position of the
Problem” reads as follows ”it was not until comparatively recent times that countries
sought to settle the problems of double taxation: that is, the concurrent imposition of tax
on the same subject matter by two States, (…)”76.
The quoted sentence depicts a unitary and objective conception of double taxation.
Indeed, at the outset of the OEEC proceedings, no categorization appears yet and the
mentioned Report makes reference to taxation of the “same subject matter”, with no
mention of the subjective profiles.
The first reference to “economic” double taxation can be found in a later document,
focused on the taxation of dividends. A report on the matter, presented in November
1958 by Working Party No. 12 of the Fiscal Committee, reads as follows: “the fact that
the company and the shareholder are not identical for taxation purposes generally results
in economic double taxation”.
The document does not contain any general-purpose definition or any reference to the
origin of the term, but explains that such kind of double taxation occurs when the
company which pays the dividend is liable to tax on its profits and the shareholder, who
receives the dividend, is also liable to income tax77.
That such double taxation is labelled as “economic” due to the involvement of two taxable
persons (the company and the shareholder) remains implicit. The specific definitional
pattern has remained essentially the same in later reports on dividends78 and in the final
version of the OECD Model, as far as dividend taxation is concerned.
What appears more clearly is the reason why that particular situation of double taxation
is addressed: “in the rest of this report, the taxation of the company's profits will not be
mentioned, as the report deals with the taxation of dividends as income of the
shareholder”. In other words, the concept of economic double taxation is introduced (for
the first time) just in order to exclude it from the scope of application of the dividend
provision under discussion.
A more structured approach was taken in the parallel proceedings of Working Party No.
15, appointed by the Fiscal Committee in that same November 1958 to address the study
of the methods to be used for avoiding double taxation79.
76
OEEC COUNCIL, Report by the Fiscal Committee on its activities, Paris, 28th May, 1958,
C(58)118 Part I, Para. II.
77
OEEC, Working Party No. 12 of the Fiscal Committee, Report on the taxation of dividends,
Paris, 28th November, 1958, FC/WP12(58)1 Part I, Para. 2. The Report further remarks that “This
type of double taxation, in which the company is taxed on its profits and the shareholder on the
dividend, exists in most States and is possible because their taxation laws do not regard the
company and its shareholders as being one entity for taxation purposes (…)”
78
See, in particular, the 1961 Fourth Report of the Fiscal Committee. The Annex F (Commentary
on Article XX Concerning the Taxation of Dividends) reported the “IV. SPECIAL POSITION OF
CERTAIN COUNTRIES DUE TO PECULIARITIES OF THE NATIONAL TAX LAWS” where
economic double taxation was defined in general terms as the “simultaneous taxation of the
company's profits in its hands and of the distributed profits in the hands of the shareholder”.
79
See OEEC FISCAL COMMITTEE, Minutes of the 10th Session held at the Chateau de la
Muette, Paris, on Tuesday 18th, Wednesday 18th, Thursday 20th and Friday 21st November,
1958, FC/M(58)5.
40
In the first document, presented a few months later, the Working Party write: “A
characteristic of the conflict of double taxation studied in this Report is that the same
income is taxable more than once in the hands of the same person. In limiting its study
to this conflict, the Report of the Working Party will embrace only the field of the so-called
juridical double taxation. The Working Party wish to point this out as the question of the
avoidance of the so-called economic double taxation, (i.e. a taxation of the same income
in the hands of two different persons both chargeable to tax) is one which the Fiscal
Committee may wish to consider later”80.
This time, a general-purpose definition of economic double taxation makes its
appearance. But again, the concept of economic double taxation is introduced in order
to exclude it (although not unrelentingly) from the scope of the work81. What is of interest
in the quoted sentence is the attempt to explicitly categorise and define juridical and
economic double taxation. This is done using in most part the same words, so that the
difference between the two situations arises more clearly, and may identified in the
circumstance that in one case taxation concerns the “same person” and in the other “two
different persons”.
The above categorisation and definition was upheld, with minor changes, in the 1960
draft Commentary, which essentially corresponds to the present text: “1. Double taxation
may arise in two forms: the so-called juridical double taxation, where the same income
or capital is taxable more than once in the hands of the same person, and the so-called
economic double taxation, i.e., a taxation of the same income or capital in the hands of
two different persons both chargeable to tax”. The OECD policy approach to the issue
was presented in the following Para. 2, which specified that “The Article deals only with
the first mentioned form of double taxation. If two States, as well, wish to solve problems
of economic double taxation they must do so in bilateral negotiations”82.
Several more years were necessary before the expression “economic double taxation”
was used also with reference to the associated enterprises provision.
The first report of Working Party No. 7 reads: “in order to prevent (…) double taxation it
is necessary to supplement the definition of permanent establishment by adding to it an
agreed set of rules by reference to which the profits made by the permanent
establishment, or by a company trading with a foreign member of the same group of
companies, are to be calculated”. The simultaneous reference to the allocation of profits
to a permanent establishment and to the rewriting of related party transactions (an
approach which was retained in the 1963 Commentary and in later versions until the
2010 revision) is partly due to the circumstance that Working Party 7 was in charge of
both matters, but may also be considered to reflect a unitary conception of double
80
OEEC WORKING PARTY N°15 OF THE FISCAL COMMITTEE (DENMARK-IRELAND),
Preliminary report on methods for avoidance of double taxation of income, Paris 2nd March 1959,
FC/WP15(59)1 Part I, Para. 2 – “Delimitation of the task of the working party”.
81
The later Supplementary report on methods for avoidance of double taxation, Paris, 25th April,
1960, FC/WP15(60)1, confirms the initial approach: “The question of economic double taxation
has previously been raised by the Working Party and has besides been discussed in connection
with the question of taxation of dividends. So far no final decision has been reached on the point
whether, and to what extent, this question is to be dealt with in the Convention. Consequently, no
account has been taken of this question in the Draft prepared”.
82
OEEC WORKING PARTY N°15 OF THE FISCAL COMMITTEE (DENMARK-IRELAND), Final
report on methods for avoidance of double taxation of income and capital. Paris, 28th September
1960, (FC/WP15(60)2). The language was reproduced, with minor changes into the 1961 version
of the Commentaries on Articles XXIII and XXIV Concerning the Methods for Avoidance of Double
Taxation
41
taxation, with no distinction between permanent establishment profit allocation (from
which juridical double taxation may arise) and associated enterprises profit allocation
(which may generate economic double taxation).
Such “unitary” conception of double taxation weakens to some extent in the subsequent
version of the draft Commentary, presented in 1960, where (although in specific
circumstances) corresponding adjustments are envisaged, but only with reference to the
apportionment of profits to permanent establishments, while no such adjustments are
mentioned in the Commentary on the associated enterprises provision83.
This does not mean that the authors of the 1963 Model Tax Convention did not
contemplate the possibility that a transfer pricing adjustment might have generated
economic double taxation. A clue of the awareness of the issue can be found at point 4
of the Commentary on Article 25, concerning the mutual agreement procedure, where
among the examples of cases where the procedure could have found application,
mention is made to “difficulties arising in the allocation of profits among associated
enterprises”84.
Such allocation of profits was the object of more detailed studies initiated soon after the
publication of the 1963 OECD Model Tax Convention85 but it was only in 1967 that the
expression “economic double taxation” was officially mentioned with reference to profit
adjustments. This happened in the context of a Session of the Fiscal Committee, where
it was discussed whether the mutual agreement procedure should be used when double
taxation arose as a result of the application of Article 986.
Reference to economic double taxation in transfer pricing matters recurs afterwards in
the minutes of the OECD proceedings87, and a definition was eventually included in the
first draft of the commentary to the proposed new Paragraph 2 of Article 9 of the Model
83
See Para. 20 of the, which reads: “It might well be that if the country in which the head office of
an enterprise is situated allocates to the head office some percentage of the profits of the
enterprise in respect of good management, while the country in which the permanent
establishment is situated does not, the resulting total of the amounts charged to tax in the two
countries would be greater than it should be. In any such case the country in which the head office
of the enterprise is situated should take the initiative in arranging for such adjustments to be made
in computing the taxable liability in that country as may be necessary to ensure that any double
taxation is eliminated”.
84
The sentence was included for the first time in WORKING PARTY N°14 OF THE FISCAL
COMMITTEE, Final report on mutual agreement procedure, FC/WP14(60)5, Paris, 21st October,
1960. There was no example in the prior version (WORKING PARTY N°14 OF THE FISCAL
COMMITTEE (AUSTRIA - SWEDEN), Report of general provisions to be inserted in conventions
for the avoidance of double taxation, FC/WP14(59)1, Paris, 3rd March, 1959) but no remark on
the allocation of profits can be found in the interim proceedings of WP 14.
85
See documents TFD/FC/158 of 22nd May, 1963 (where the US asked to examine the double
taxation effects of transfer pricing adjustments), FC/M(64)1 of 14th February, 1964, p.8 (where
the decision to revamp the proceedings of WP7 was made) and FC/WP7(67)1 of 27th February,
1967 (a Report on the proceedings, which addresses corresponding adjustment, but not
mentioning the issue of economic double taxation.
86
OECD FISCAL COMMITTEE, Notes on the 26th Session of the Fiscal Committee held from
29th November to 2nd December, 1966, TFD/FC/211, Paris, 24th March, 1967.
87
See documents TFD/FC/216 of 9 May 1967 where Belgium highlights the issue of economic
double taxation; TFD/FC/226 of 6 October 1967, in which The Netherlands mentions the possible
double taxation effects of transfer pricing adjustments,
42
Tax Convention88, which reads, at point 1: “The re-writing of transactions between
associated enterprises in the situation envisaged in paragraph 1 of the Article may give
rise to economic double taxation (taxation of the same income in the hands of different
persons), insofar as an enterprise of State A whose profits are revised upwards will be
liable to tax on an amount of profit which has already been taxed in the hands of its
associated enterprise in State B”.
The quoted text of the Commentary on Article 9, Para. 2, which takes over the definition
of economic double taxation already provided by the Commentary on Article 23, was not
further modified in the subsequent drafts89 and was finally included in the 1977 version
of the Model Tax Convention90.
This brief historical overview indicates that the term “economic” double taxation, in its
current, widely agreed, meaning was firstly introduced in the OEEC documents
addressing the treatment of cross border dividends in 1959. Shortly after, the expression
was used in the wider context of the treaty provisions on the avoidance of double taxation
and only much later with reference to the effect of transfer pricing adjustments.
II.3 The legal doctrine definitions of economic double taxation
II.3.a After the OECD Model Tax Convention

Although the criteria defining economic double taxation are not unanimously accepted91,
the approach underlying the OECD Model has had a vast influence on the subsequent
scholarly definitions.
Fantozzi and Vogel have conceived a precise and thorough definition of (juridical)
international double taxation, based on determined key factors, i.e.: the levy by two
different States (or by local Authorities of two different States) of identical or similar taxes,
in the hands of the same taxpayer. While the identity of tax period is not considered to
be necessary, this latter factor (in German, “Subjektidenticat”) is considered to be
decisive and, should it not occur, the resulting situation can “at least be defined as double
economic taxation”92
In a later publication, Vogel, after having provided a definition of juridical double taxation,
states even more clearly that “the term economic double taxation is used to describe the
situation that arises when the same economic transaction, item of income or capital is
88
The first draft of Article 9, Para. 2 and of the related commentary is in FC/WP7(71)1 of 12 March
1971.
89
See documents CFA(71)10 of 10 November 1971 (proposed amendments to the OECD Model,
which includes the text of Article 9, Para. 2 and the Commentary) and CFA(71)10rev1 of 10
February 1972 (revised proposal) and DAF/CFA/WP1(76)19 of 5 November 1976 (Revised
Commentary).
90
Adopted with the Recommendation of the Council of 11th April 1977, on the basis of the Report
on the revision of the 1963 draft convention for the avoidance of double taxation with respect to
taxes on income and on capital, released by the Committee on fiscal Affairs on March 7th 1977.
91
M. PIRES, International juridical double taxation of income, Deventer – Boston, 1989, p. 48 f.,
explains that the criteria are the involvement of different persons, the identity of legal cause, the
existence of an economic entity or the connection among the different persons.
92
A. FANTOZZI, K. VOGEL, Doppia imposizione internazionale, in Digesto IV, sez. comm., V,
Torino, 1989, p. 186 s.
43
taxed in two or more States during the same period, but in the hands of different
taxpayers (this has been called “lack of subject identity”)”93.
A definitional approach based on the OECD Commentary five factors is also adopted by
the most recent edition of the Uckmar manual, where the lack of subjective identity is
recognised as the differentiating element between the juridical and economic double
taxation94. Cordeiro Guerra refers to the OECD scheme, too, although merging the two
elements of the tax basis and the tax period95.
Lang further summarises the OECD approach, and affirms that juridical double taxation
is the “taxation of the same person with respect to the same income in two or more
states” while economic double taxation occurs when the same income is “taxed in the
hands of different persons”96. This definitional scheme (focused on a subjective element,
the taxable person, and an objective element, the taxable income) essentially coincides
with those of Rasmussen97 and Holmes98.
The preeminent relevance of the subjective identity in order to distinguish between the
juridical and economic double taxation has led Fregni to adopt the expression “subjective
double taxation” (rather than “juridical”) when referring to the first category99.
The OECD definitions are also the point of reference for most of the French literature100.
Gutmann101 proposes the same distinction to be found in the OECD Model Commentary,
but with a less rigid definitional approach, where double taxation is qualified as juridical
if the same person is taxed on the same revenue (no further conditions are mentioned)
or economic if two persons are taxed on the basis of the same financial flow or
(economically) same taxable event.
93
K. VOGEL, On Double Taxation Conventions, London, 3rd ed.,1997, p. 10. The same approach
has been maintained in the latest edition, see K. VOGEL, A. RUST, Introduction in (E. Reimer and
A. Rust eds) Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, at
m.no. 4 et seq.
94
V. UCKMAR, G. CORASANITI, P. DE’ CAPITANI DI VIMERCATE, Diritto tributario
internazionale, Padova, 2009, p. 42
95
R. CORDEIRO GUERRA, Diritto tributario internazionale, Padova, 2012, p. 319
96
M. LANG, Introduction to the law of double taxation conventions, Amsterdam - Wien, 2nd ed.,
2013, m.no. 14.
97
M. RASMUSSEN. International double taxation, Alphen aan den Rijn, 2011, p. 1 f
98
K. HOLMES, International Tax Policy and Double Tax Treaties, Amsterdam, 2nd ed., 2007, p.
37
99
M.C. FREGNI, Appunti in tema di “doppia imposizione” interna, in Rivista di diritto finanziario e
scienza delle finanze, 1993, II, p. 17.
100
A reference to the OECD Commentary definitions is made by B. GOUTHIÈRE, Les impôts
dans les affaires internationals, Levallois, 12th ed., 2018, where the juridical and economic double
taxation definitions are respectively at m.no 7570 and 7680; J. LAMARQUE, O. NÉGRIN, L.
AYRAULT, Droit fiscal général, Paris, 4th ed., 2016, p. 256 who furthermore attribute to the OECD
Model the rise of the distinction between juridical and economic double taxation; B.
CASTAGNÈDE, Précis de fiscalité internationale, Paris, 6th ed., 2019, p. 24; M. COLLET, Droit
fiscal, Paris, 7th ed., 2019, p. 78.
101
D. GUTMANN, Droit fiscal des affairs, 10th ed., Paris, 2019, p. 55
44
An influential and detailed analysis of the elements of double taxation is made by Gest
and Tixier102 who, although making reference to the OECD categorisation based on the
subjective identity, further elaborate on the identity of taxable basis and on the identity
of tax. If this latter element was missing there would be over taxation, but not double
taxation. As the Authors remark, the perfect identity of taxes is however difficult to be
found on an international level.
The Baker commentary to the OECD Model unavoidably refers to this latter definition
when underlining that Article 23 of the OECD Model refers only to cases where income
is taxed in the hands of the same person by more than one state while Article 9, Para. 2
and Article 25 also include economic double taxation (“taxation of the same income in
the hands of two different taxpayers”)103. Others more in general remark that “economic
double taxation is a broad term that covers any situation where income is taxed twice”104.
Schwarz does not elaborate a definition, but reminds that - as far as foreign tax credit is
concerned - the UK treaty approach is wider than the one of the OECD since it covers in
principle also economic double taxation where the same income or gain is subject to tax
in both contracting states. The Author reminds that according to the HMRC International
Manual (INTM 169040) there is no necessity that tax be charged on the same person
and makes reference to cases of duality (e.g., the duality settlor – beneficiary,
partnership – partner, company – director, see INTM 161040)105. By contrast, it is clear
from case law that relief for double taxation does not extend to distributed profits in
respect of the taxation of the distributing company profits.
The subjective duality of the definition of economic double taxation goes along, in specific
situations, with the existence of an economic unity. So, e.g., in the specific context of
transfer pricing, economic double taxation consists in the taxation of the same income
“in the hands of different persons who economically constitute one entity”106.
With reference to the economic double taxation of dividends (once at the company level
and again in the event of a distribution at the shareholder level) it may be remarked that
“the classical system of taxation is founded on the legal separation of entities, which in
substance constitute the same economic unit”107. And, still with reference to the case of
dividends, “the issue of economic double taxation of intercompany distributions across
102
G. GEST, G. TIXIER, Droit fiscal international, Paris, 1990, p. 23 f.
103
P. BAKER, Double taxation conventions and international tax law, London, 12th ed., 1994,
respectively, m.nos. 13-11 and 20-03.
104
A. MILLER, L. OATS, Principles of International Taxation, London, 2012, p. 77
105
J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed. 2018, p. 446. The
Author warns however that the HMRC view is not always consistent.
106
K. VOGEL, On Double Taxation Conventions, London, 3rd ed., 1997, p. 553. The revised
edition does no longer make reference to the economic unity, see G. KOFLER, Article 9, in (E.
Reimer and A. Rust eds) Klaus Vogel on Double Taxation Conventions, Alphen aan den Rijn, 4th
ed., 2105, at m.no. 109 et seq.
107
K. HOLMES, International Tax Policy and Double Taxation, Amsterdam, 2007, p. 37, where
economic double taxation is defined as the “double taxation of the same items of economic
income in the hands of different taxpayers”: the focus is “on the taxable object; viz. the economic
income”
45
borders exists because countries generally treat legally independent subsidiaries of
domestic parent companies as separate taxable entities”108.
The relevance of the subjective identity, from a legal perspective, for the distinction
between juridical and economic double taxation becomes more evident from the
comparison of the generally accepted OECD definition with the one proposed in a 1981
General Report of the International Fiscal Association109.
After having outlined a number of specific cases, the Report provides a definition of
juridical double taxation, as follows: “the same person (subjective identity) is subjected
in two or more States to comparable taxation; – on the same income or capital (objective
identity); – for the same period”. The notion of economic double taxation is then drawn
from the above definition: “If only one of these elements is missing, the case in question
may be one of economic double taxation”.
The reference made to any missing element attributes to economic double taxation a
residual role, in the same way as the OECD Model and the majority of scholarship do.
But, in the mentioned Report definition, although a prevailing role is attributed to the
subject identity110, it appears that any (other) missing element, such as the objective
identity, may as well depict a situation of economic double taxation.
The resulting notion is much wider than the one arising from the OECD Model and
Commentary. At the same time the IFA Report contributes to clarifying that the notion of
“economic double taxation” of the OECD Commentary is not truly residual, since it does
not actually include all possible cases of double taxation other than those of “juridical”
double taxation. In other words, only some of the cases which can generally be defined
of economic double taxation, in a wider sense constitute “economic double taxation” in
the sense adopted by the OECD Model.
There remain cases which – from a theoretical point of view – can be defined of
“economic double taxation” (especially those resulting from the overlap of different taxes)
but which do not fall within the definition of the OECD Model.
In this context it is also worth to recall the considerations of Adonnino, who looks at
economic double taxation as a phenomenon that "concerns the effects in terms of burden
(...) which hit individual activities or acts which constitute the basis of taxation"111. The
adoption of remedial measures, following the identification and qualification of the
described phenomenon, leads to juridical double taxation, defined as the legal profile of
such measures. In other terms, double taxation, according to the Author, is economic by
its own nature and becomes juridical to the extent that it is addressed by legal rules112.
108
G. KOFLER, Indirect Credit versus Exemption: Double Taxation Relief for Intercompany
Distributions, in Bulletin, February 2012, p. 77.
109
K. KOCH, Unilateral measures to prevent double taxation. General Report, in Cahiers de droit
fiscal international, Vol. 66b, 1981, p. 96.
110
K. KOCH, Unilateral measures to prevent double taxation. General Report, in Cahiers de droit
fiscal international, Vol. 66b, 1981, p. 96. clarifies that “This occurs principally where double
taxation affects not one and the same person, but rather separate and yet associated enterprises”.
111
P. ADONNINO, Doppia imposizione, in Enciclopedia giuridica Treccani, XII, Roma, 1989, p. 1.
112
The remarks of P. ADONNINO, Doppia imposizione, in Enciclopedia giuridica Treccani, XII,
Roma, 1989 p. 1, draw a connection between the definitional issue here examined and the debate
on whether double taxation was to be considered as an economic matter (thus belonging to the
economic science) or a legal matter (to be examined under by the legal science). A similar
46
II.3.b Before the OECD Model Tax Convention
The definitions of international double taxation elaborated before the publication, in 1963,
of the OECD Model Tax Convention were wide reaching and inspired by an economic
conception of the phenomenon.
The unavoidable reference is the 1895 Seligman delineation, according to which “double
taxation in the simplest sense denotes the taxation of the same person or the same thing
twice over”113. The Author warns that the term could be found used “with the utmost
looseness” and that “there are almost as many kinds of duplicate taxation as there are
kinds of taxes or industrial relations”114.
The Seligman definition does not consider the subjective identity as a necessary element
nor as a basis for categorisation. Rather, he introduces the concept of “unjust” double
taxation, which occurs “when one taxpayer is assessed twice while another in
substantially the same class is assessed but once”115; the underlying comparison and
evaluation of the effects would have assumed a central relevance in later studies. Also
extremely influential is the remark that – in the case of independent taxing authorities -
double taxation typically arises from the divergence of principles.116
A few years later, Garelli, in the context of a study which first used the expression
“international tax law”, defines plural or multiple taxation as the situation where “a same
fact, a same wealth, may be subject to tax in two or more different states”117
Also oriented to a wide conception of double taxation is Brunet who envisages double
(or multiple) taxation where a single tax source (“source fiscal”) is hit by two (or more)
taxes118 and includes in such category double taxation on company income119, on interest
when taxable in the hands of the creditor but not deductible by the debtor120 and even
the simultaneous application of taxes on income and on capital121.
connection was addressed by A. SPITALER, Das Doppelbesteuerungsproblem bei den direkten

Steuern, Reichenberg (Tschechoslowakei), 1936, p. 204, who reaches the conclusion that a legal
definition of double taxation is impossible, while an economic definition would be too wide to be
suitable. A summary of the debate is in H. DORN, Diritto finanziario e questioni fondamentali sulle
doppie imposizioni, in Rivista di diritto finanziario e scienza delle finanze, 1938, p. 117.
113
E. SELIGMAN, Essays in taxation, New York – London, 1895, p. 95
114
E. SELIGMAN, Essays in taxation, New York – London, 1895, p. 96
115
E. SELIGMAN, Essays in taxation, New York – London, 1895, p. 97. The concept of unjust
taxation is closely related to the distinction drawn by the Author, between double taxation by
competing jurisdictions (or authorities) and double taxation by same jurisdiction (or authority). In
this latter case, the taxes that overlap “are perfectly reasonable, as they fall equally on all”.
116
E. SELIGMAN, Essays in taxation, New York – London, 1895, p. 108: “it is plain that, if every
state or every tax authority followed the same principle, it would be easy to avoid double taxation.
The complications arise from the fact that one state follows one principle and that another state
follows an opposite or conflicting principle”.
117
A. GARELLI, Il diritto internazionale tributario, Torino, 1899, p. 58
118
R. BRUNET, Doubles impositions, Paris, 1913, p. 20.
119
120
121
47
Fasolis defines double taxation as the “repeated taxation of the same subject or the same
object” and further specifies the aim to make reference “both to persons and to things,
both to double taxation that occurs with respect to the same person, and to the one that
occurs with respect to more persons”122. Consistently, double taxation of corporate
income (in the hands of the company and in the hands of shareholders) is not treated as
a separate category123 and the Author implies that also the overlap between income
taxes and consumption taxes constitute double taxation. The categorisation proposed in
the treatise is based on the distinction between substantial double taxation and formal
double taxation on one side124 and the existence of one or more taxing authorities on the
other side). While the substantial double taxation may well concern different persons,
Fasolis describes the taxation of the same person on the same thing by two independent
authorities as “unjust double taxation in strict sense”.125
Other scholars also argued that the overlap of different taxes may constitute double
taxation126. At the time of the first introduction of the UK income tax, J. S. Mill and, later,
I. Fisher, theorised the double taxation of savings. According to the renowned theory,
savings being unconsumed after-tax income, the taxation of savings income is a form of
double taxation127. The necessary conclusion was, according to the authors, that the
equitable base of taxation should have been the consumed income rather than the
earned income. An approach, this latter, which was further developed and supported by
other economists and in particular by Einaudi, who devoted a significant part of his
research to the problem of taxation of saved income128.
Double taxation was also evoked with reference the taxation of capital gains. To the
extent that the value of assets be related to the (future) flow of (taxable) income
122
G. FASOLIS, Le doppie imposizioni, Città di Castello, 1914, respectively, p. 10 and 14.
123
G. FASOLIS, Le doppie imposizioni, Città di Castello, 1914, p. 239 ff.
124
Substantial double taxation occurs when a same thing is repeatedly hit by taxation (by one or
more authorities, in the hands on one or more taxpayers), while formal double taxation
(necessarily by one taxing authority and in respect of one taxpayer) is a technicality aimed at
achieving a higher levy corresponding to a higher ability to pay. See G. FASOLIS, Le doppie
imposizioni, Città di Castello, 1914, p. 24.
125
G. FASOLIS, Le doppie imposizioni, Città di Castello, 1914, p. 23.
126
The debate on double taxation of income also concerns, in the United States, sales taxes:
since consumption is made possible by post-tax income, taxing consumption is tantamount to
taxing income twice. See W. D. ANDREWS, Consumption-Type or Cash Flow Personal Income
Tax, in Harvard Law Review, Vol. 87, No. 6 (Apr., 1974), p. 1113.
127
See J. S. MILL, Principles of Political Economy with some of their Applications to Social
Philosophy (William J. Ashley, ed.), London, 7th ed., 1909, Para. V, II, 22., available from
http://www.econlib.org/library/Mill/mlP64.html: “To tax the sum invested, and afterwards tax also
the proceeds of the investment, is to tax the same portion of the contributor’s means twice over”.
Similar conclusions, albeit on different terms, were supported by I. FISHER, The nature of capital
and income, New York, 1906, p. 253, available from
https://archive.org/details/natureofcapitali00fishuoft, according to whom the taxation of savings
“is clearly unjust and discourages the saver”.
128
For an historiographical analysis of the debate about the double taxation of savings in the
international and Italian settings, see A. FOSSATI, The Double Taxation of Savings: The Italian
Debate Revisited, in History of Political Economy, 2013, Vol. 45, No. 1, p. 123 et seq.
48
associated with that asset129, then any additional capital gain tax on the disposal of the
underlying asset may be affirmed to shape double taxation of that same (future)
income130.
The contemporary study of Salvioli achieves a much narrower definition, according to

which double taxation arises when two states “exercise the right to tax the same income
in the hands of the same person” 131. The Author goes further drawing the distinction
between personal income taxation and impersonal (or objective) income taxation and
submitting that only double personal taxation or double objective taxation can be
qualified as double taxation in proper sense, while the coexistence of personal and
objective taxes (being each based on different grounds) constitutes a mere overlap.
Within this framework, Salvioli also holds that the taxation, by one single authority, of
corporate income and shareholder income constitutes overlap and not double
taxation132.
The Einaudi testimony of the activity of the Tax Committee of the League of Nations does
not contain any definition of double taxation but some examples suggest that at that
stage no specific relevance was attributed to the subjective identity133.
The contemporary description of the initiative of the International Chamber of
Commerce134 authored by Dall’Oglio refers to a principle of equitable distribution of taxes
according to which “the same person should not be hit at the same time in several
countries for the same income or the same thing”135. The reference to the “same person”
reflects the settings of the draft ICC resolution, which provides a remedy to double
taxation only where it concerns the same person. Actually, the draft uses the term double
taxation also with respect to dividends (i.e., having in mind the taxation of corporate
income in the hands of the company and of the dividend in the hands of the shareholder)
but does so only in order to specify that such kind of double taxation remains untouched
by its provisions.
With reference to the following League of Nations proceedings, Carroll takes the view
that “double taxation arises when a person resident in one country derives income from
129
As E. SELIGMAN, had it (Are Stock Dividends Income?, in American Economic Review, vol.
9, no. 3, September 1919, p. 526), “capital is a capitalization not simply of present or actual
income but of the present worth of all future anticipated incomes. There can be no permanent
change in the value of the capital unless there is at least an anticipated change in future income”.
130
The argument is still to be found in contemporary debate. See, e.g., B. BARTLETT, Why the
correct capital gains tax rate is zero, in Tax notes, September 6, 1999.
131
G. SALVIOLI, Le doppie imposte in diritto internazionale, Napoli, 1914, p. 59
132
G. SALVIOLI, Le doppie imposte in diritto internazionale, Napoli, 1914, p. 59 and footnote 1.
133
L. EINAUDI, La doppia imposizione nel pensiero del Comitato scientifico della Società delle
Nazioni, Milano, 1923, gives the examples of a real estate company (p. 12) and of a US company
with a French subsidiary (p. 13).
134
The International Chamber of Commerce, established in 1919, had placed double taxation on
its agenda since its first congress in 1920 and, ever since then, the work of its Standing Committee
on Double Taxation has been handed for consideration to the League Committees.
Representatives of the International Chamber of Commerce have also been invited to attend, in
an advisory capacity, the meetings held under the auspices of the League of Nations. See M. B.
CARROLL, Prevention of international double taxation and fiscal evasion, Geneva, 1939, p. 11
135
G. DALL’OGLIO, Les Doubles Impôts dans la Législation Fiscale Italienne, Bruxelles, 1923, p.
3.
49
business or investments in another and is subject to taxation in both, the country of origin
taxing income from sources within its frontiers and the country where the taxpayers
resides levying on his total income from all sources”136. This definition, which anticipates,
through the reference to origin and source, the developments of treaty practice and
model tax conventions in the years to come137, is confined to income derived from “one
person” and corresponds, i.e., to the present OECD Commentary notion of “juridical”
double taxation.
Griziotti, in his contemporary study, starts from the observation that there is no definition
in the works of the international institutions nor in domestic legislations or treaties of that
time and elaborates a notion according to which double taxation arises when the same
asset or the same taxpayer is hit twice, but in presence of one only justification138. The
definition, along with some accompanying examples indicate that double taxation can be
conceived, according to the Author, also in front of different persons. Central to the
analysis of Griziotti is the justification of the levy (“cause d’imposition”) which leads to the
distinction between situations where the simultaneous taxation may be considered as
legitimate (and defined “concours d’imposition”) or unjustified (and defined “conflit
d’imposition”); the application of a plurality of taxes by coordinated authorities (such as
different level of administrations within one state) is defined “surimposition”. In this
framework, the application of different taxes, as e.g. where income tax is levied in one
state and consumption taxes in another state does not constitute double taxation, since
the justification of each tax is different, but a case of multiple or plural taxation which,
just as in domestic situations, corresponds to the ability to pay of the taxpayer139.
Later analyses have not renounced to examining the phenomenon in a wide perspective.
Niboyet refers to a “same element of wealth taxed several times in different countries for
the same and identical period” without distinctions based on the identity of the
taxpayer140. The Author also examines double taxation arising from taxes of different
nature, as in the case of income taxes and customs duties.141 Later studies of Chrétien
do not elaborate a definition, on the argument that double taxation is considered to be
“extremely well known”142. Colarusso makes reference to the Seligman definitions and
136
M. B. CARROLL, Double taxation relief : discussion of conventions drafted at international
conference of experts, 1927, and other measures, Washington, 1928, p. 1.
137
The Carroll definition makes reference to “source” and “residence” taxation, while the League
of Nations draft adopted the categories of, respectively, “impersonal” and “personal” taxes. The
new language was proposed in the alternative draft (attached to the draft treaty) of Professor
Adams.
138
B. GRIZIOTTI, L’imposition fiscal des étrangers, Paris, 1927, p. 41.
139
B. GRIZIOTTI, L’imposition fiscal des étrangers, Paris, 1927, p. 42 s.
140
J. P. NIBOYET, Les doubles impositions au point de vue juridique. Recueil des cours de
l'Académie de droit international, Paris, 1931, p. 12. Interestingly, the Author remarks that double
taxation may arise also from similar systems and that the adoption of a common principles is not
resolving if then conflicts arise on its interpretation (p. 58). He also claims that double taxation
may be legitimate if corresponds to a double utility drawn by the taxpayer from the different
jurisdictions (p. 23 f.)
141
J. P. NIBOYET, Les doubles impositions au point de vue juridique. Recueil des cours de
l'Académie de droit international, Paris, 1931, p. 11.
142
M. CHRÉTIEN, La recherche du droit international fiscal commun, Paris, 1955, p. 81. The
analysis is centered on state sovereignty and addresses (at p. 117 f.) double taxation with
50
defines double taxation the situation where “an economic activity is hit twice by the levy
from two different taxing authorities”143.
The acceptance of an objective conception of double taxation remains even in
subsequent studies. Udina, after having premised that the term “double taxation” is a
generally accepted and not easily replaceable misnomer, investigates the overlap of tax
rules of different states, which occurs when “the same fact gives rise to tax obligations
in more states for the same or equivalent basis and for the same period or event”
excluding that the identity of tax subjects be essential.144 The almost contemporary
definition of D’Albergo, who refers to “repeated taxation, for the same title or the same
basis, of the same income or wealth”145 is also prevailingly objective and quite similar in
scope, if one considers that the time element is assumed by the Author to be embedded
within the concept of tax basis.
In the wake of Seligman and Udina, Uckmar considers that the essential element of
double taxation is the identity of the basis of the tax146.
The above brief overview of the main elaborations which preceded the OECD Model
depicts a scenario made of definitions quite different in scope and of categorisations
based on different criteria, in balance between the perception of an economic
phenomenon and the aim to reach a sharp legal definition.
The appearance of the OECD Model (or, even earlier, the related preparatory works) has
to some extent captivated the prior debate and introduced a definition based on a finite
number of elements and at the same time drawn a distinction between the newly defined
categories of juridical and economic double taxation. It may be also argued that some
factual situations that have been examined from a double taxation perspective (e.g.: the
overlap of income taxes and consumption taxes) have lost their relevance, being clearly
outside the OECD definition (and the scope of application of the OECD Model Tax
Convention).
If virtually all the doctrinal definitions elaborated after the OECD Model have to some
extent taken the OECD definition as a reference, it is important to remark that an
approach similar to that taken by the OEEC in the late 1950’s and then embedded in the
commentary to the 1963 OECD Model Tax Convention was foreshadowed by some
authors. It is in particular worth mentioning the definition formulated by Dorn in 1927
according to whom the “double (or multiple)” taxation occurs where “several independent
reference to possible international law prohibitions. In respect of the definition, the Author makes
reference to existing literature, see p. 81, footnote 3.
143
A. COLARUSSO, Le Doppie Imposizioni nei Rapporti Internazionali, Padova, 1930, p. 1. The
Author however excludes that there is double taxation when each of the two levies is justified by
the enjoyment of local services.
144
M. UDINA, Il diritto internazionale tributario, Padova, 1949, p. 252 f.. The Author focuses on
the identity of taxes and, in this perspective, considers that the identity of subjects is not essential,
since for the purpose of the comparison between two taxes, it is sufficient to examine “the
economic connection relationship among the different elements of the basis” (see p. 254 f.).
145
E. D’ALBERGO, Economia della finanza pubblica nel corso di lezioni universitarie di scienza
delle finanze, Bologna, 1952, p. 481.
146
V. UCKMAR, La tassazione degli stranieri in Italia, Padova, 1955, p. 71.
51
holders of tax jurisdiction (especially independent states) impose the same taxpayer at
the same time for the same object with a tax of the same species” 147.
According to the Author, the taxable object is the economic good hit by the tax148. The
identity of person (“subjektidentität”) should be inquired taking into account the principles
of the tax systems involved, so that e.g., a foreign subsidiary and the domestic parent
company may be considered – for the purposes of the definition - as “same taxpayer”
or as separate taxpayers depending upon the qualification attributed by the States
involved149. The same stands true for the “simultaneous” taxation requirement, which
refers e.g. to each State notion of business income for a given year, regardless of the
specific criteria adopted for timing allocation purposes150.
A relevant contribution to the categorisation of the effects of the overlap of tax jurisdiction
was made by Spitaler, who introduced the distinction between double taxation
(“Doppelbesteuerung”) and other figures which are only similar to double taxation but
should not to be confused with it, such as, in particular, the double charge
(“Doppelbelastung”)151. The double charge, according to Spitaler, may be consistent or
non-consistent with a tax system and occurs when one or more authorities (which may
be in a vertical, horizontal or obliquus relationship between them) impose different taxes
on the same person152.
II.4 The definition of economic double taxation and the economic

perspective
The OECD Commentary definitions, as most of the contemporary definitions of economic

(and also juridical) double taxation tent to look primarily at the overlap of tax jurisdictions.
So, e.g.: the OECD Commentary is focused on the “the imposition of comparable taxes
in two (or more) States”.
Some Authors have gone further and have extended their analysis, although still
essentially based on the legal element of the duplication, to the effects of such
147
H. DORN, Diritto finanziario e questioni fondamentali sulle doppie imposizioni, in Rivista di
diritto finanziario e scienza delle finanze, 1938, p. 131
148
diritto finanziario e scienza delle finanze, 1938, p. 134 s.
149
diritto finanziario e scienza delle finanze, 1938, p. 131. The Author further explains (p. 141) that
if in one Country taxation is in the hands of the company, and in another on the shareholder, there
may be just as well one taxpayer (and thus, double taxation) if it appears that in both countries
the basis of taxation is the company income as such. In other words, where the dualism of persons
is only formal and from a tax law perspective separate enterprises are considered to constitute
an economic unity, the construction for double taxation purposes should be consistent.
150
151
According to A. SPITALER, Doppelbesteuerungsproblem bei den direkten Steuern,
Reichenberg, 1936, p. 90 double taxation is to be distinguished from the planned (“fortgesetzte
Besteuerung”) or unplanned (“wiederholte Besteuerung”) repeated taxation of the same basis in
different years and also from the situation (“Doppelvorschrift”) where a single tax authority levies
twice the same tax in the hands of the same taxpayer.
152
A. SPITALER, Doppelbesteuerungsproblem bei den direkten Steuern, Reichenberg, 1936, p.
88
52
duplication, in terms of global resulting tax burden153. Others assert that the mere
replication of taxation is not sufficient and what matters is the total amount of tax levied,
so that only situations the where taxpayers bear a higher tax cost due to taxation in more
than one state can properly be referred as situations of double taxation154.
These definitions – which are based on the tax burden and not only on qualitative
elements155 - come close to the approach of recent public finance studies, which
concentrate on the economic effects of double taxation. This latter is framed in the more
general category of tax distortions, defined as obstacles to the efficient allocation of
resources and investments156.
As effectively summarised in a recent publication, what matters, from an economic
perspective, in order to avoid discouragement of cross-border investments, is not “how
many times” income is taxed, but “how much”157.
In this framework, double taxation has a negative connotation only to the extent that it
jeopardises – through loading cross-border income with a higher tax burden - efficiency
and tax neutrality158.
The economic approach to double taxation, is taken into account in the present
dissertation especially with regard to the implications that economic double taxation may
have in terms of obstacles to the EU fundamental freedoms (see Chapter VI below). In
this context, it is particularly relevant to ascertain whether domestic legislations imply a
difference in treatment between domestic and cross-border transaction. Such difference
in treatment will be investigated in the comparative analysis of Chapters III and IV below.
II.5 Conclusions on the origin and the purpose of the distinction

between juridical double taxation and economic double
taxation
International economic double taxation of income can be defined as the taxation of the
same income by two different States in the hands of different taxpayers. This latter
153
A. FANTOZZI, K. VOGEL, voce Doppia imposizione internazionale, in Digesto IV, sez. comm.,
V, Torino, 1989, p. 187, according to whom double taxation arises when the resulting total burden
exceeds the tax that would have been levied in each of the two states taken individually. The need
to refer to economic concepts for the identification of economic double taxation can – from a
different perspective – lead to the conclusion that a it is impossible to visualise economic double
taxation and solve the problem it creates through the tools of law. See J. VITA, Double/multiple
juridical and economical international taxation/imputation: an analysis based on the concept of
the matrix rule of tax incidence, in Diritto e pratica tributaria internazionale, 2007, n. 3, p. 1019 s.
154
G. GEST, G. TIXIER, Droit fiscal international, Paris, 1990, p. 23.
155
M. PIRES, International juridical double taxation of income, Deventer – Boston, 1989, p. 12.
156
C. GARBARINO, La tassazione del reddito transnazionale, Padova, 1990, p. 392.
157
D. SHAVIRO, Fixing U.S. International Taxation, Oxford, 2014, p. 6
158
See, e.g., M. SATO, R.M. BÌRD, International Aspects of the Taxation of Corporations and
Shareholders, in 22 International Monetary Fund Staff Papers, 1975, p. 384. In the context of a
wide analysis of remedies against double taxation from the perspective of efficiency and neutrality,
the Authors submit (p. 399) that the term double taxation “has unfortunate emotive connotations
which are not necessarily valid since in fact the major economic concern is with the level of total
taxation on profits and not with its distribution between taxing governments”. L. MUTÉN, Some
topical issues concerning double taxation, in (S. Cnossen ed.), Comparative Tax Studies,
Amsterdam - New York - Oxford, 1984, p. 318 et. Seq. observes that a modern approach to double
taxation is based on the tax neutrality concept.
53
element is what differentiates it from juridical double taxation, which concerns one same
taxpayer.
The above definitional framework, which has been largely accepted by scholars of all
Countries for many decades now, has its origin in the proceedings that led to the OECD
Model Tax Convention.
The definition made its initial appearance in a 1959 draft OEEC working document159,
was included without changes in the Commentary to the 1963 Model and was never
amended since then. Later, in 1977, Article 9, Para. 2, addressed (and implicitly defined)
economic double taxation with respect to the case of transfer pricing rules.
The OECD definition appears to have acted as a watershed: later scholarship definitions
are indeed, with large prevalence, based on the OECD definition, while earlier studies
had shaped definitions which were wider in scope (to the extent that the overlap of
different taxes, such as income taxes and consumption taxes was also considered by
some as double taxation) and did not contain the distinction between juridical double
taxation and economic double taxation.
The OECD definition is essential in the delimitation of the notion of economic double
taxation, especially with reference to the “same taxes” requirement. It consents to
exclude all situations where taxes of different kind are involved (e.g. income taxes and
consumption taxes) even though these situations could be included in a wider definition
of double taxation, especially when based on an economic approach.
The OECD definition can be considered to draw the “external border” of the present
research.
Rather than making reference to the Commentary definition, however, a definition of
double taxation shall be adopted which is derived from the mentioned first sentence of
Article 9, Para. 2 of the OECD Model Tax Convention. Accordingly, economic double
taxation is assumed to be the situation where “a State includes for taxation purposes in
the profits of an enterprise of that State profits on which an enterprise of the other State
has been charged to tax in that other State”. The notion of profit is meant to also include
losses.
The above definition, however, appears to be an “empty box”, too generic for the
purposes of understanding the causes of economic double taxation and evaluating
possible remedies. To this end, it seems necessary to adopt an empirical approach and
examine in some detail specific cases of double taxation and the rules which give rise to
it. Such examination is made in Chapters III and IV below.
159
OEEC WORKING PARTY N°15 OF THE FISCAL COMMITTEE (DENMARK-IRELAND),
Preliminary report on methods for avoidance of double taxation of income, Paris 2nd March 1959,
FC/WP15(59)1 Part I, Para. 2 – “Delimitation of the task of the working party”.
54
III PARADIGMS OF ECONOMIC DOUBLE TAXATION
III.1 Introduction
This chapter investigates and compares specific national rules which may potentially
generate economic double taxation within the meaning defined in Chapter II above.
The analysis is conducted:
 with reference to Italy, France and the UK;
 with respect to rules on transfer pricing, thin capitalisation, interest qualification
and mergers (all subject matters identified in more detail below);
 separately from the analysis of remedies (e.g., national rules which have the aim
or the effect of preventing or avoiding economic double taxation of income) which
shall be addressed at Chapter IV below.
National tax systems are examined in the light of the following research questions:
 whether rules can be grouped into categories on the basis of their function;
 whether the comparison of the rules indicates a common standard or the
consistency with any international standard;
 if national rules purports a difference in treatment between transactions with
residents and transactions with non-residents.
The study of each institution is carried out in several stages, which, in summary, consist
in the delineation of the institution, the investigation of its historical background, the
identification of sources and formants, the description of the rules and, finally, the
comparison of the solutions adopted.
The above outline draws from methodological principles elaborated in comparative law
literature, and at the same time considers that the adoption of a precise procedure would
not be possible nor advisable160. Comparative tax studies do not seem to have developed
a separate methodology161, although attempts have been made to draw more precise
prescriptions applicable to tax comparison on the basis of general criteria162.
160
See, e.g.: W. J. KAMBA, Comparative Law: A Theoretical Framework, in The International and
Comparative Law Quarterly, 1974, p. 510 s., who recommends a three- stage approach, which
includes the description of the norms concepts and institutions of the systems concerned, the
identification or discernment of differences and similarities between the systems under
comparison and the explanation of divergences and resemblances. At the same time, he
considers that ”it is not possible, nor would it be prudent to attempt to prescribe specific
comparative procedures to be followed”. Also K. ZWEIGERT, H. KÖTZ, An introduction to
comparative law, Oxford, 1998, p. 33, argue that “a detailed method cannot be laid down in
advance”.
161
See J. M. MÖSSNER, Why and how to compare tax law, in Liber Amicorum Luc Hinnekens,
Bruxelles, 2002, p. 305.
162
R. SUCCIO, Comparazione delle procedure di soluzione dei conflitti in materia tributaria nei
sistemi italiano e statunitense, Milano, 2012, p. 209, 48 considers essential the respect of sources
and of the perspective of the legal system examined and draws on this basis a list of five concrete
rules. which include. e.g.: the adoption of the interpretative criteria of the given system, the
appropriate consideration of local sources and their relationship. M. BARASSI, Circolazione dei
modelli tributari e comparazione, in Rivista di diritto tributario, 5, 2013, p. I, 541 recommends that
the study of foreign law includes not only the acquisition of sources but also the analysis of the
individual formants and of the law in the action, to avoid the risk of misleading conclusions based,
e.g., only on the legislative formant.
55
III.2 Transfer pricing
III.2.a Categorisation and definition of transfer pricing rules
The comparison of national rules, as mentioned in Para. III.1 above, presupposes the
identification of comparable rules, i.e., according to the functional method, of rules which
are functionally equivalent in that they fulfil the same function.
In this perspective, the identification of transfer pricing rules in the three jurisdictions
within the scope of the present research requires a preliminary attempt to define on a
non-jurisdictional basis which is the function of transfer pricing rules, followed by a
verification of the function performed by the identified rules in each jurisdiction.
The OECD Guidelines163 may constitute the first reference for the purpose of a
preliminary, jurisdictionally-neutral, identification of the function of transfer pricing rules.
In the OECD Guidelines, transfer pricing rules are depicted as the necessary companion
of the so-termed “separate accounting” approach. In such approach, the taxable income
of each entity, also where such entity be a subsidiary of a group of companies, is
determined on the basis of its own set of accounts. The alternative is represented by the
“unitary entity approach”, according to which income of a group of companies is to be
determined unitarily (on a global basis), and afterwards subject to apportionment within
the different entities or tax jurisdictions involved.
As the OECD Guidelines have it (at Para 6), the main purpose of the arm’s length
principle is “to ensure the correct application of the separate entity approach”, since
“individual group members must be taxed on the basis that they act at arm’s length in
their dealings with each other”.
The arm’s length principle as a basis for the allocation of taxable income among the
different parts of a multinational enterprise is considered to have firstly appeared in an
international setting between 1927 and 1933, in the course of the proceeds of the Tax
Committee of the League of Nations. The evolution from the 1927 Model to the 1935
draft Model thus marks the transition from the “unitary entity” approach to the “separate
accounting” approach164. The arm’s length principle was previously foreseen only in few
domestic tax legislations165,
163
OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators, Paris,
2017.
164
On the historical background and development of the arm’s length principle within the League
of Nations, pls. see J. WITTENDORFF, Transfer Pricing and the Arm's Length Principle in
International Tax Law, Alphen Aan der Rijn, 2010, p. 85 f.; H. HAMAEKERS, Arm’s length - how
long?, in International transfer pricing journal, Vol. 8 (2001), no. 2, p. 30 f.; G. MAISTO, Il “transfer
price” nel diritto tributario italiano e comparato, Padova, 1985, p. 25 f.. R. DWARKASING,
Associated Enterprises, Nijmegen, 2011, p. 44 submits that the arm’s length principle was already
present in the 1927 Report.
165
It is widely held that transfer pricing regulations were first introduced in the United States. See
H. HAMAEKERS, Arm’s length - how long?, above, p. 30 f.; L. EDEN, M. DACIN, W. WAN,
Standards across borders: cross border diffusion of the arm's length standard in North America,
in Accounting, Organizations and Society, 26 (2001), p. 1; R.S. AVI-YONAH, The rise and fall of
arm’s length: a study in the evolution of U.S. International Taxation, (Public Law and Legal Theory
Working Paper Series) Working Paper No. 92, September 2007 and John M. Olin Center for Law
& Economics, Working Paper No. 07-017. Professor Avi-Yonah identifies the earliest direct
predecessor of the current U.S. transfer pricing rules in a statutory provision dating back to 1921,
which authorised the Commissioner to consolidate the accounts of affiliated corporations “for the
purpose of making an accurate distribution or apportionment of gains, profits, income, deductions,
56
The obligation to comply with such principle was initially embedded in Article VI of the
1935 draft Model which defines the arm’s length standard as the set of “conditions (...)
which would have been made between independent enterprises” and constitutes the
forerunner of the corresponding provisions now included in Articles 7 and 9 of the OECD
Model. The principle has had a wide diffusion in bilateral tax treaties, became part of UN
and US Model Tax Conventions and is now established in almost all Countries of the
world166.
The adoption, in 1979, of the OECD Guidelines and the formal acknowledgement, in the
1992 revision of the OECD Commentary on Article 9, that such Guidelines represent
“internationally agreed principles” has further enhanced what has been defined – in
respect of the arm’s length principle – a process of “international fiscal harmonisation”167.
On such basis, it may be argued that the function of transfer pricing rules is the
apportionment of income among related parties.
The UN Manual reads that “Transfer prices serve to determine the income of both parties
involved in the cross-border transaction” and consequently influence the tax base of the
countries involved 168.
In Vogel, the function of the rules is to allocate income to where it arises economically169.
Schoueri argues that while the initial function of transfer pricing rules was to prevent tax
avoidance, that prevalence has later been attributed to the distributive function170. Also
Avi-Yonah insists on the purpose of preventing abuses and concludes that transfer
pricing rules seek to “determine whether transactions between related taxpayers reflect
their true tax liabilility”171. Schon regards the transfer pricing control under the arm’s
or capital between or among such related trades or business”. A subsequent 1928 reform led to
a wider formula, which was very similar to the present Section 482 of the U.S.Internal Revenue
Code.
166
See G. MAISTO, Transfer pricing in the absence of comparable market prices. General Report,
in IFA Cahiers de droit fiscal international, Deventer, 1992, p. 23.
167
J. CALDERÓN, The OECD Transfer Pricing Guidelines as a source of tax law: is globalization
reaching the tax law?, in Intertax, Vol. 35 (2007), No. 1, p. 5. On the arm’s length standard as a
possible general principle of international law, see C. GARBARINO, La tassazione del reddito
transnazionale, Padova, 1990, p. 43
168
UNITED NATIONS, Practical Manual on Transfer Pricing for Developing Countries, New York
2013, Para. 1.2.1.. The UN Manual has also in common with the OECD Guidelines the
specification that transfer pricing rules may the effect of preventing tax avoidance, but that transfer
pricing in itself does not necessarily involve tax avoidance (UN, Para. 1.1.7; OECD, Para. 1.2).
169
K. VOGEL, On double taxation conventions, London, 3rd ed., 1997, p. 518.
170
L. SCHOUERI, Arm’s length: Beyond the Guidelines of the OECD, in Bulletin, 2015, p. 691.
The Author highlights that “the very rationale of the transfer pricing legislation is to provide for
income derived by companies trading with related parties to be measured according to the same
parameters employed to determine the income of independent parties”, a rationale suitable to be
examined in the light of the principles of equality and ability to pay and also valid for domestic
income allocation purposes.
171
R. AVI-YONAH, The Rise and Fall of Arm's Length: A Study in the Evolution of U.S.
International Taxation, Universily of Michigan Public Law Working Paper No. 92, 2007, available
at http://ssrn.com/abstract=1017524
57
length standard as “a means for the international allocation of profits and taxing rights”172.
The distributive function is also predominant in the comparative analysis of Vann, who
refers to transfer pricing as the problem of allocating of profits among the parts of a
corporate group173. More recent studies identify the main aim of transfer pricing in the
sharing of income of multinational enterprises among the countries where they are doing
business174, or said otherwise, “to ensure that the allocation of taxing rights to the
involved countries” be evenly applied to independent enterprises and to those which
belong to a corporate group”175.
The aim of the arm’s length principle is to ensure that the taxable profits reported by the
members of a multinational group in the countries where they operate “reflect the
economic activity” in each of these countries without being “distorted by the relationship
that exists between the parties”.176
For the purposes of the present dissertation, the following definition is adopted: transfer
pricing rules, i.e., the object of comparison, are those rules (of the three selected
jurisdictions) which perform the function of allocating income among related parties (on
a domestic or cross-border level) and which do so on the basis of a comparison with
unrelated party transactions.
III.2.b Italy
III.2.b.1 Background and sources

Transfer pricing rules are contained in Article 110, Para. 7 of the Income Tax Code
(“ITC”). A provision in this matter was first introduced in Italian legislation by Article 17 of
Law No. 1231 of 8 June 1936, which had a relatively limited scope of application. The
provision was later replaced by Article 113 of Presidential Decree No. 645 of 29 January
1958. At the time of the 1973 tax reform, the provision was significantly amended and
further changes were made along the years until the adoption of the Income Tax Code
in 1986. 177
172
W. SCHÖN, Transfer Pricing, the Arm’s Length Standard and European Union Law, in (I.
Richelle et Al. eds.), Allocating Taxing Powers within the European Union, Berlin - Heidelberg,
2013, p. 73 s.
173
R. VANN, International Aspects of Income Tax, in (V. Thuronyi, ed.), Tax law design and
drafting, The Hague, 2000, p. 781
174
J. MONSENEGO, Introduction to Transfer Pricing, Alphen aan den Rijn, 2015, p. 7.
175
Richelle et Al. ads.), Allocating Taxing Powers within the European Union, Berlin - Heidelberg,
2013,, p. 78.
176
C. SILBERZTEIN, Transfer pricing, OECD Policy Framework, in A. BAKKER, B.
OBUOFORIBO (eds.), Transfer Pricing and Customs Valuation, Amsterdam, 2009, p. 33 et seq.
The Author clarifies that transfer pricing rules are also applied, in certain Countries, to domestic
transactions but that such circumstances does not interfere with the provisions of tax treaties.
177
For a wider description of the statutory evolution, see R. CORDEIRO GUERRA, La disciplina
del transfer price nell’ordinamento italiano, in Rivista di diritto tributario, n. 4, 2000, p. 421; C.
GARBARINO, Transfer price, in Digesto IV, Sezione Commerciale, XVI, Torino, 1999, p. 3.
58
The framework is completed by recent short guidelines178 and few official instructions179
issued by the Italian Tax Authorities and which, in most part, date back to the early 80’s
and by some (relatively few) Court cases publicly available.
III.2.b.2 Scope of application and the statutory limitation to cross-border transactions

There is no limitation as to the objective scope of application of the rule, which includes
any related party transaction (sale of goods, services, financial transactions, business
restructuring).
Article 110 of the ITC applies only to transactions with related parties which are “non-
resident in the State”. Indeed, beyond specific cases180, the Italian legislation does not
foresee the application of the arm’s length principle to domestic transactions, i.e.: to
transactions between parties both resident or established in Italy for tax purposes.181
An exception can be found at Article 160, ITC concerning transactions between
companies subject to the tonnage tax regime (introduced in 2004) and those ordinarily
taxable. These transactions are subject to Article 110, Para. 7 adjustments also where
both companies are resident in Italy. However, only income of the ordinarily taxable
company may be increased if the transaction with the tonnage tax company deviates
from the arm’s length standard; the tonnage tax company income would, by contrast, not
be subject to any upward adjustment, as it is not determined on the basis of accounts182.
178
On 14th May 2018, the Ministry of Economy and Finance has published a decree addressing
a few relevant points, some of which implement developments of the 2017 OECD Guidelines.
179
Circular Letter of September 22, 1980, n. 32, still today the most extensive instruction,
concerning the application of the (1979) OECD Guidelines; Circular Letter December 12, 1981,
n. 42, addressing the 1980 changes in Italian legislation; Resolution of January 31, 1981, n.
9/2555 concerning the applicability of the domestic transfer pricing provision to intra-company
dealings between an Italian permanent establishment and its home office; Resolution of
September 29, 1990, n. 9/281, regarding the determination of the transfer price in the case of
manufacturing and assembly services; and Circular Letter of May 17, 2000, n. 98/E (Para. 2.1.4.)
dealing with the application of the arm’s-length principle for IRAP purposes.
180
With respect to certain transactions, which by their own nature lack a specific consideration,
the Italian legislation imposes the adoption of the market value as a reference for determining the
taxable income or gain, regardless of the residence of parties. This happens, e.g., for barter
transactions (Article 9, Para. 2, ITC), for goods or merchandise intended for personal use by the
entrepreneur or for other use non related to the business (Article 85, Para. 2, ITC), for capital
contribution in kind to companies in exchange for shares (Article 9, Para. 2, ITC). On the concept
of market value in the context of income taxation, see P. BORIA, Il sistema tributario, Torino, 2008,
p. 166.
181
This approach dates back to the introduction of a transfer pricing rule. A proposal to extend the
rule to domestic transactions was set forth at the time of drafting the ITC in the 1980’s but was
rejected by the parliamentary commission in charge of its final revision on the grounds that it
would have been inappropriate and would have given “uncontrollable discretionary powers” to the
tax authorities.
182
This effect, foreseen by the statutory provision was also specified by Circular letter December
21st 2007, No. 72/E, Para. 9.3. On the relationship between the Italian tonnage tax regime and
the transfer pricing rule, see E. DELLA VALLE, Il transfer price nel sistema di imposizione sul
reddito, in Rivista di diritto tributario, No. 2, 2009, p. 137; A. SANTI, I. LA CANDIA, Tonnage Tax
e Decreto Correttivo IRES, in Fiscalità Internazionale, 1/2006, p. 42; A. MASTROBERTI, Transfer
pricing per le operazioni con soggetti in regime tonnage tax, in Azienda & Fisco, No. 1, 2006, p.
40; M. BASILAVECCHIA, Verso l’opzione per la “tonnage tax”, in Corriere Tributario, 47 / 2005,
p. 3690.
59
It has been debated whether the arm’s length principle could be applied to the domestic
transactions outside the mentioned case, on an interpretative basis.
Some statements by the Tax Authorities, dating back to the early eighties and backed
by sporadic decisions of the Tax Courts, had put forward such interpretation183. However,
later decisions have excluded the applicability of Article 110, Para. 7 to domestic
transactions184, thus inducing the publication of a new statement, where the Revenue
Agency has officially taken this latter view185. This was also the prevailing position of
scholars, who qualified the transfer pricing provision as a derogation, not suitable to be
extended beyond its scope, to the general rule according to which taxable income is
computed on the basis of agreed conditions, as reflected in the accounts186.
In more recent years, the Supreme Court case law has affirmed that the arm’s length
principle can be applied to domestic related party transactions on the basis of the abuse
of law doctrine. This construction has its origin in some decisions delivered since 2103187,
and has been largely criticised in the tax literature188, until when a legislative decree189
adopted by the Government upon delegation by the Parliament has specified (in the form
of an “official interpretation”, which by its own nature has retroactive effect) that article
110, paragraph 7, ITC does not apply to transactions between Italian resident
companies.
Domestic transactions are thus now excluded from the scope of application of Article
110, Para. 7, ITC, so that (outside the mentioned case of companies subject to the
tonnage tax regime) Italian transfer pricing rules apply selectively to cross-border
transactions only190.
183
Resolution March 10th 1982, No. 9/198 held that the market value rule could applied outside
cases statutorily foreseen, as a rebuttable presumption. The Central Tax Court, in Decision 28th
April 1983, No. 579 stated that income deriving from the sale of assets could be determined on
an arm’s length basis where the transaction is not consistent with the economic interest of the
seller and no evidence is given of the underlying reasons.
184
See the Provincial Tax Commission of Milan Decision of 28th October 1997, No. 577
(concerning intra-group sale of crude oil between related resident companies). Among the
comments to this landmark decision, see A. POZZO, L’applicazione della normativa sul transfer
pricing contenuta nell’originaria formulazione dell’Article 76, 5° comma, in Diritto e pratica
tributaria, 2000, p. 34 s.. The exclusion was later confirmed by the Supreme Court, in Decision
8th August 2005, No. 16700.
185
Circular Letter 26 February 1999, No. 53/E.
186
R. CORDEIRO GUERRA, La disciplina del “transfer price” nell’ordinamento italiano, in Rivista
di diritto tributario, No. 4, 2000, p. 426.
187
The leading case is Decision 17955/2013, followed by Decisions 8849/2014, 12502/2014
(where the arm’s length rule is seen as an expression of the general prohibition of abuse of law),
23124/2014 and 12844/2015 (which has asserted that the arm’s length provision is a general
principle of law).
188
Against the Supreme court interpretation, P. BORIA, Il transfer pricing interno come possibile
operazione elusiva e l'abuso del diritto, in Rivista di Diritto Tributario, No. 8/9, 2013, II, p. 427; L.
CARPENTIERI, Valore normale e transfer pricing "interno" ovvero alla ricerca dell'arma
accertativa perduta, in Rivista di Diritto Tributario, No. 8/9, 2013, II, p . 448; G. FERRANTI, Il
«transfer pricing interno» secondo la Corte di Cassazione tra elusione ed inerenza, in Corriere
Tributario, 33 / 2013, p. 2605.
189
Article 5, Legislative decree No. 147 of September 14th 2015
190
This does not mean that the conditions applied in domestic related party transactions cannot
be otherwise scrutinized under the mentioned “economic rationale” doctrine or under the new
60
III.2.b.3 The rule and the trend towards the alignment with the OECD guidelines
Under Article 110, Para. 7, ITC, transactions with non-resident related parties are
assessed on the basis of the respective arm’s length value.
The wording of the provision has been recently amended in order to ensure a closer
consistency with the OECD Model and the OECD Guidelines191.
III.2.b.4 The effects and the recent introduction of unilateral corresponding adjustments
Article 110, Para. 7, ITC states that items of income deriving from transactions with non-
resident associated companies can be adjusted on the basis of the market value, if the
assessment results in an increase of taxable income.
A downwards adjustment may be made, according to recently enacted legislation192
following mutual agreement procedures or even unilaterally, upon request by the Italian
resident taxpayer following an adjustment by the foreign Country.
III.2.c France
III.2.c.1 Background and sources
III.2.c.1.1 The statutory provisions of Article 57 of the CGI

The introduction of a French statutory provision on transfer pricing dates back to the
early 1930’s. Article 76 of Law May 31st 1933 (Budget Law for 1933), first endowed the
tax administration with the authority to adjust income of French enterprises in front of
indirect transfer of income deriving from related party transactions193. The rule was also
the object of an administrative regulation published in the following year194.
abuse of law legislation introduced at the end of year 2015, but only if further elements of abuse,
beyond the mere divergence of conditions made or agreed and the arm’s length conditions arise
M. BEGHIN, "Transfer pricing interno, interpretazione autentica “rovesciata” e prova della
fattispecie elusiva, in Corriere Tributario, No. 47-48, 2015, p. 4571; G. FERRANTI, Rettifica dei
corrispettivi delle transazioni domestiche: non basta lo scostamento dal valore normale, in il fisco,
No. 39, 2015, p. 3715
191
Article 59, Law Decree No. 50 of 24 April 2017.
192
Article 31-quarter of Presidential Decree 29 September 1973, No. 600 as introduced by Article
59, Law Decree No. 50 of 24 April 2017
193
According to mentioned Article 76 of Statute May 31st 1933, “lorsqu’une entreprise relevant
d’un État contractant a une participation dominante dans la direction ou dans le capital d’une
entreprise relevant d’un autre État contractant, ou lorsque les deux entreprises sont possédées
ou contrôlées par les mêmes intérêts et que, comme résultat de cette situation, des relations
commerciales et financières de ces deux entreprises se déroulent dans des conditions différentes
de celles qui se seraient réalisées entre entreprises indépendantes, tout élément du bénéfice ou
de perte qui, normalement, aurait dû apparaître dans les comptes de l’une des entreprises, mais
qui a été de cette manière transféré à l’autre, sera rétabli dans les comptes de la première
entreprise, sous réserve des droits de recours qui sont accordés en vertu de la législation de
l’État dont cette entreprise relève”.
194
Circulaire n° 2076 dated February 1st 1934
61
Before 1933, reference to dealings between associated enterprises was to be
sporadically found only in the treaties with Italy (signed on June 16, 1930), Belgium (May
16th 1931) and the United States (April 27th 1932)195.
On the occasion of the tax reform of 1948196, mentioned Article 76 of Law May 31st 1933
was recast into Article 57 of the Code Général des Impôts (“CGI”) and the text of the
provision has been unchanged since then. The French transfer pricing statutory
framework is thus prior to the introduction of the OECD Model in 1963.
Article 57, CGI, included in the provisions concerning the Impôts sur la Revenue but
applicable also to the Impôts sur le sociétés on the basis of the reference contained in
Article 209, CGI, is complemented by provisions concerning the tax assessment
procedures and the documentation requirements197.
Furthermore, the Ministry of Finance has issued along the years specific regulations,
published in the Bulletin Officiel des Impôts (“BOI”)198. Specifically devoted to the
illustration of the essential profiles of the French rules of the CGI is the 2014 regulation
BOI-BIC-BASE-80-10-10-20140218, while interaction with tax treaties is addressed, in
general, by BOI-INT-DG-20-40-20120912. Two regulations, both published on February
18th 2014, focus more specifically on the mutual agreement procedure of bilateral treaties
(BOI-INT-DG-20-30-10-20140218) and on the EC Arbitration Convention (BOI-INT-DG-
20-30-20-20140218). Official instructions recurrently make reference to the OECD Model
and the OECD Guidelines199.
In transfer pricing cases, Court litigation is relatively rare, however a certain number of
decisions have been delivered along the years.200
III.2.c.1.2 Special statutory rules on interest rates

The general provision of Article 57, CGI, which applies to all kind of transactions including
financial relationships, has traditionally been supported by more specific provisions
concerning the market value of interest rates and, more precisely, the maximum
deductible interest rate for the borrower. This is the case of Article 39, 1, 3°, CGI,
concerning shareholder loans and the partially overlapping Article 212, I, a), CGI which
refers to loans granted by related enterprises.
195
According to G. GEST, G. TIXIER, Droit fiscal international, Paris, 1990, p. 456 s., the treaty
provision have been inspired by Section 45 of the US Revenue Act, adopted in 1920.
196
Décret n° 48-1986 dated December 9th 1948
197
See Article 223 quinquies B, CGI (as to the contents of the transfer pricing documentation)
and Articles L13 AA and L13 AB, Article L13 B, Article L188 A and Article L189 A of the LPF (as to
the procedural rules for the documentation and the tax assessment).
198
Since September 12th 2012, all existing regulations have been repealed and recast in the
Bulletin Officiel des Finances Publiques-Impôts (BOFiP-Impôts) to constitute a systematic and
updated collection of all administrative guidance issued by the Direction Générale des Finances
Publiques (“DGFiP”).
199
See, e.g. BOI-BIC-BASE-80-10-10-20140218 which essentially consists in a summary of the
OECD Guidelines.
200
B. GIBERT, Transfer pricing and dispute resolutions. France, Amsterdam, 2019, Para. 3.1.. P.
ESCAUT, Transfer pricing. France, Amsterdam, 2019, has compiled a (non-exhaustive) list of
more than one hundred Court decisions from 1941 to the present date.
62
Both provisions find their roots in a 1941 statute, which first set a limitation to the
deduction of interest on related party loans201. Considering that the 1941 provision
referred to both the interest rate and the amount of the underlying loan and that the same
approach has been adopted in Article 212, CGI (as in force until 31st December 2018)
and in Article 39, 1, 3° CGI (to the extent that it subordinates the deduction of interest to
the full payment of the underwritten share capital), these rules have often been overall
categorised as thin capitalisation rules202.
For the purposes of the present dissertation, however, it is preferable to group the rules
in respect of their specific function: Article 39, 1, 3° and Article 212, I, a), CGI being
focused on interest rates, should then better be framed within transfer pricing rules, while
only the provisions of Article 212, II and III, CGI (as in force until 31st December 2018)
would fall within within the category of thin capitalisation rules.
The rule of Article 212, I, a), CGI is complemented by annual regulations concerning the
interest rate threshold and by official instructions which address the modalities of
application and the alternative market rate evidence.
III.2.c.1.3 The judicial doctrine of the acte anormal de gestion

Next to the statutory regulations the CGI, the authority to assess the economic conditions
of related (or even unrelated) party transactions has found roots in the doctrine of the
acte anormal de gestion (“AAG” or abnormal management act) developed in case law,
especially of the Conseil d’État, since the mid-1960s203.
Along the years, the doctrine has been applied to a large number of factual situations to
adjust taxable income where an act was found to have been undertaken by an enterprise
in the exclusive or prevailing interest of a subject other than the enterprise itself
(shareholders, directors, related parties or even, though less frequently, third parties).
Case law has qualified as abnormal those acts which imply the assumption by an
enterprise of an excessive risk, but this interpretation has been later dismissed204.
The theory of the AAG is essentially of case law origin, and it is generally held that its
statutory grounds are to be found in the general provisions of the CGI that define the
201
See O. DELATTRE, International aspects of thin capitalisation. National report. France, in
Cahiers de droit fiscal international, The Hague, 1996, p. 419 who also reminds of a prior
regulation of 1928 with the same aim which denied the deduction of interest in certain hypotheses.
202
Many French authors refer to Article 39 and 212 of the CGI as thin capitalisation rules, also for
the part which concerns interest rates. See, for instance, B. GOUTHIÈRE, Les impôts dans les
affaires internationales, Levallois, 12th ed., 2018, m. no. 26780; R. COIN, New tendencies in tax
treatment of cross-border interest of corporations. France, in Cahier de Droit Fiscal International,
2008, p. 298. By contrast, C. SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer
Pricing and Intra-Group Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para.
6.1.6.1. include within thin capitalisation rules only those of Article 212, II and III, CGI while refer
to those of Article 212, I, a) CGI as “maximum interest rate rules”. B. CASTAGNÈDE, Prècis de
fiscalité internationale, Paris, 6a ed., 2019, p. 112 also uses the term thin capitalisation in a narrow
meaning.
203
See, among the leading cases, CE 5 January 1965, No. 62099, CE 19 Janvier 1966, No.
54575, CE 13 November 1968, No. 72724.
204
On this evolution see P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed.,
2018, p. 74.
63
taxable revenue (Article 38) and the deductible costs (Article 39)205. These are, at least,
the provisions to which most case law refers to206.
It may be argued however, that the adjustment of abnormal costs (e.g., of purchase
prices higher than market value) has only a vague relationship with Article 39, CGI (which
states that taxable income is determined after deduction of charges) and that the
adjustment of abnormal revenue (e.g., of sale prices below the market value) can hardly
be based on Article 38 of the CGI207. It would thus seem more appropriate to say that the
criterion of the interest of the enterprise, which underlies the doctrine of the acte anormal
de gestion, is implied in (rather than stated by) the rules of the CGI208.
The most recent case law of the Conseil d’État has overcome the distinction between
cost and revenue abnormality, by making reference to the concept of intentional
deprivation of the enterprise209.
In more general terms, the notion of AAG can be framed within constitutional principles.
If, on the one side, the counteraction of acts which are not in the interest of the enterprise
may be based on the principle of equality in front of public charges and of the principle
of ability to pay; the theory of the AAG constitutes a significant exception to the freedom
of enterprise, which is one of the cornerstones of the French Constitution and has had
a relevant influence on case law in this matter210.
It is also worth highlighting that Article 57 of the CGI does not appear to have constituted
a statutory basis for the development of the doctrine of the AAG. On the contrary, case
205
See O. DEBAT, Droit fiscal des affaires, Paris, 4th ed., 2017, p. 137; M. COZIAN, F.
DEBOISSY, M. CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd ed., 2018, m.no.
287.
206
The Conseil d’Etat decisions most frequently make reference to Article 38 CGI , e.g., in the
following terms, which have been almost unchanged in fifty years: « En vertu de l'article 38 du
Code Général des Impôts, le bénéfice imposable est celui qui provient des opérations de toute
nature faites par l'entreprise, à l'exception de celles qui, en raison de leur objet ou de leurs
modalités, sont étrangères à une gestion commerciale normale».
207
See D. GUTMANN, Droit fiscal des affairs, 10th ed. , Paris, 2019, p. 385. See also P.
SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018, p. 62, who interestingly
remark that Article 38 CGI refers to revenue derived by the enterprise rather than to the
transactions undertaken, so that the provision does not appear at all to support the assessment
of a deemed revenue.
208
D GUTMANN, Droit fiscal des affairs, 10th ed. , Paris, 2019, p. 394 remarks that the principle
of the own interest of the enterprise can be inferred from different provisions, such as Article 39,
5, CGI (related to travel and entertainment expenses) or Article 39, 1, 7°, CGI (related to certain
gratuities).
209
CE, 21st Decémbre 2018, No. 402006, which reads as follows: “Constitue un acte anormal de
gestion l'acte par lequel une entreprise décide de s'appauvrir à des fins étrangères à son intérêt”.
210
See the overview in D. GUTMANN, Droit fiscal des affairs, Paris, 10th ed., 2019, p. 383 et seq..
The relationship between the freedom of enterprise and the theory of the AAG has been
addressed in a landmark decision of the Conseil d’État according to which “le contribuable n'est
jamais tenu de tirer des affaires qu'il traite le maximum de profit que les circonstances lui auraient
permis de réaliser” (CE 7th July 1958, No. 35977). On the extension of the principle of the freedom
of enterprise, see M. BOUVIER, Introduction au droit fiscal général et à la théorie de l'impôt, Paris,
13th ed., 2016, p. 42 s.
64
law has rather tended to frame Article 57 GCI within the more general doctrine of the
AAG, of which it is seen by Courts as a specific application211.
III.2.c.2 Scope of application
III.2.c.2.1 The statutory provisions of Article 57 of the CGI

Article 57 Para. 1 applies exclusively to cross border transactions, as can be inferred
from the language of the provision, which refers to relationships with enterprises
established outside France (“entreprises situées hors de France”). The legislation is quite
clear in limiting the application of Article 57, CGI to transactions with parties resident
outside France and that there is no contradictory position taken by the Courts or the
French tax authorities on this matter212.
A further condition set by Article 57, Para. 1 is the existence of a control relationship
between the parties213, which may derive from the ownership of shares but also from
economic dependence214. Such condition finds an exception in Article 57, Par 2, which
extends the application of the rule of Article 57, Para. 1 to uncontrolled transactions,
where the foreign enterprise is resident or established in a privileged tax regime or in a
non-cooperative country.215 The reference to non-cooperative countries is of relatively
limited practical relevance216 while the definition of privileged tax regimes is of much
wider effect, since it may include EU countries and France treaty partners217. The same
reference to market value underlies Article 238 A, CGI, according to which interest,
royalties and consideration for services are not deductible if paid to a person (even
211
Reference can be made, in this direction, to CE 18th March 1994, No. 68799-70814. See G.
TIXIER, T. LAMULLE, Les rapports entre l’article 57 du CHI, l’acte anormal de gestion er l’article
9 de la convention modèle OCDE, in Droit fiscal, 1994, No. 40, Comm. 1703; N. GHARBI, Le
contrôle fiscal des prix de transfert, Paris, 2005, p. 88
212
See G. GEST, G. TIXIER, Droit fiscal international, Paris, 2nd ed., 1990, p. 515 f., who quote
in this direction a decision of the CE dating back to 14th June 1963. The recent instruction BOI-
BIC-BASE-80-20-20140218, which outlines the scope and procedures of Article 57, CGI always
refers to relationships with foreign enterprises.
213
See CE, 7 juillet 1958, SARL X., Bull. contributions directes, 1958, 575, where it was held that
Article 57, CGI was not applicable to transactions between unrelated parties. The judges rather
stated that it was the duty of the tax administration to provide evidence that the taxpayer has
deliberately pursued a business purpose unrelated to the enterprise.
214
BOI-BIC-BASE-80-20, No. 40 makes the examples of a foreign company who has the power
to set the sale prices of a French distributor or has made to a French company loans without
whose the borrower could not survive. On the economic dependence, see D. GUTMANN, Droit
fiscal des affairs, Paris, 10th ed. 2019, p. 413; B. GOUTHIERE, Les impôts dans les affaires
internationales, Levallois, 12th ed., 2018, m.no. 76500.
215
Article 57, Para. 2 of the CGI reads “La condition de dépendance ou de contrôle n'est pas
exigée lorsque le transfert s'effectue avec des entreprises établies dans un Etat étranger ou dans
un territoire situé hors de France dont le régime fiscal est privilégié au sens du deuxième alinéa
de l'article 238 A ou établies ou constituées dans un Etat ou territoire non coopératif au sens de
l'article 238-0 A”.
216
The non-cooperative countries identified by the Arrêté of February 12 2010, as amended in
2014, are Botswana, Brunei, Guatemala, Iles Marshall, Iles Vierges britanniques, Montserrat,
Nauru and Niue.
217
According to Article 238, Para. 2, CGI a privileged tax regime is a regime which purports a tax
levy lower than half of the French one.
65
absent a control relationship) resident or established in in a privileged tax regime or in a
non-cooperative country unless the debtor demonstrates that the transaction was
actually performed and that the amounts paid are not abnormal or exaggerated in their
nature (“ne présentent pas un caractère anormal ou exagéré”). The rule applies
regardless of a control relationship between the parties involved.

The interest deduction limitation rule of Article 212, I, a) CGI is evenly applicable to both
domestic and cross-border financing from related enterprises. As mentioned, the
provision only sets a maximum rate with reference to deduction on the head of the
borrower (and does not foresees upwards adjustments of the rates) so that – as a matter
of facts – it does apply to cross border financing only where the borrower is a French
resident. The same stands for Article 39, 1, 3° CGI218.
III.2.c.2.3 The judicial doctrine of the acte anormal de gestion

The theory of the AAG applies without any territorial limitation and may so support the
adjustment of the economic conditions of a both cross-border and domestic transactions.
This circumstance may be seen – in the light of at least some of the landmark cases
where the theory has been applied in respect to transactions between related parties -
as the basis of a convergence between rules applicable in France to domestic
transactions and to cross-border transactions219.
A further remarkable feature of the doctrine is that it does not postulate that the parties
involved be associated enterprises220. The result is that a domestic transaction between
unrelated parties can be subject to adjustment, as well as a cross-border transaction
between unrelated parties.
III.2.c.3 The rule
218
The two provisions have, from a subjective (not territorial) perspective, a slightly different scope
of application, since Article 39, 1, 3° CGI applies to any direct shareholder, including individuals,
while while Article 212, I, a) concerns only enterprises but includes indirect relationships.
219
P.-Y. BOURTOURAULT, M. BEBARD, Relations intragroupe, prix de transfert et acte anormal
de gestion. Vers une convergence des règles de preuve applicables aux opérations nationales et
internationales?, in Droit fiscal, 2009, n° 50, p. 576. The authors take the view that although case
law has developed in the direction of convergence of rules, it would not be appropriate to reach a
point in which the two categories of transactions were subject to the same rules. See also A.
PUPIER, Transferts indirects de bénéfices : article 57 CGI et notion d’acte anormal de gestion, in
Droit prospectif, 1996, n° 1, pp. 129 et s.
220
The application of the doctrine of the acte anormal de gestion to cross-border transactions with
unrelated enterprises depicts a conflict with treaty provisions corresponding to Article 9 of the
OECD Model. However, the Conseil d’État has taken the view that the doctrine is independent
from tax treaties and that Article 9, in consenting the rewriting of related party transactions des
not interdict the rewriting of unrelated party transactions . See CE March 18th 1994, 68799-70814
(SA Sovemarco Europe) and B. GOUTHIÈRE, Les impôts dans les affaires internationals,
Levallois, 12th ed., 2018, m.no. 76350.
66
III.2.c.3.1 The statutory provisions of Article 57 of the CGI and the missing
reference to the arm’s length principle
Under mentioned Article 57 CGI, the French tax authorities are entitled (Para 1.) to add
back to the taxable income of French companies (or of French branches of foreign
companies) the profits indirectly transferred to foreign related enterprises221. Para. 4 of
the same Article provides that where precise elements are not available, taxable income
may be assessed on the basis of a comparison with the profitability of similar enterprises,
managed normally222.
The provision appears to diverge from Article 9 of the OECD Model in at least two
material respects.
Firstly, it makes reference (at Para. 1) to the indirect transfer of profits and to over or
under pricing of controlled transactions, but does not indicate at all on which basis
situations of indirect transfer of profits (or, of over/under pricing) are to be identified. It is
also evident that the language of the provision takes – in respect of the arm’s length
principle – a reverse approach, since it aims at the effects of deviations (the transfer of
profits) rather than at the deviation itself223.
Notwithstanding this, the rule is generally considered to contain an implicit reference to
market pricing224 and is has also been argued that, in the end, Article 57 CGI is quite
close to the spirit of Article 9 of the OECD Model225.
Secondly, Article 57, Para 4. may be attributed the meaning that recourse to comparison
with similar enterprises can be legitimately pursued only where “precise elements” are
not available.
It should be said beforehand that, in the present administrative and case law framework
(i.e., under the influence of the administrative and case law formants) these two
differences between French statutory rules and the OECD standards have faded.
However, this is a relatively recent achievement: official instructions issued in 1973 still
closely followed the statutory approach and indicated two methods, a main method
based on specific elements of the transaction at issue and an alternative method focused
on comparisons with the results of independent comparable companies226.
221
Article 57, Para.1 of the CGI reads “Pour l'établissement de l'impôt sur le revenu dû par les
entreprises qui sont sous la dépendance ou qui possèdent le contrôle d'entreprises situées hors
de France, les bénéfices indirectement transférés à ces dernières, soit par voie de majoration ou
de diminution des prix d'achat ou de vente, soit par tout autre moyen, sont incorporés aux
résultats accusés par les comptabilités".
222
Precisely, under Article 57. Para. 4, CGI “A défaut d'éléments précis pour opérer les
rectifications prévues aux premier, deuxième et troisième alinéas, les produits imposables sont
déterminés par comparaison avec ceux des entreprises similaires exploitées normalement”.
223
P. MOUSSET, S. TOLEDANO, Transfer pricing in the absence of comparable market prices.
National report. France, in Cahiers de droit fiscal international, Deventer, 1992, p. 380.
224
G. GEST, G. TIXIER, Droit fiscal international, Paris, 2nd ed., 1990, p. 477 ; D. GUTMANN,
Droit fiscal des affaires, Paris, 10th ed., 2019, p. 413 s.; N. GHARBI, Le contrôle fiscal des prix
de transfert, Paris, 2005, p. 136 remarks that the implicit character of the reference to the arm’s
length principle also derives from the circumstance that the French rule was adopted well before
the publication of the OECD Model Tax Convention and the OECD Transfer pricing guidelines.
225
B. GOUTHIÈRE, Les impôts dans les affaires internationals, Levallois, 12th ed., 2018, m.no
76350.
226
Instruction du 4 mars 1973. P. MOUSSET, S. TOLEDANO, Transfer pricing in the absence of
comparable market prices. National report. France, in in Cahiers de droit fiscal international,
67
Subsequent instructions openly make reference to the arm’s length principle227 and to
the OECD Guidelines, albeit the acceptance of these latter does not result from an
explicit position but rather from recurring quotations228.
Article 57, last paragraph, CGI, which corresponds to a transnational net margin method
approach229 may nonetheless be suitable to generate possible inconsistencies with other
country practice, to the extent that it provides a statutory selection of the method and
also indicates the French enterprise as the tested party.
The evolution of administrative practice is similar to that of case law, the Conseil d’État
having made reference to the OECD methods only in more recent decisions, such as a
landmark 1990 case centred on the comparability requirement230 or a 1993 decision on
the recognition of the resale price method231. Prior case law followed quite closely the
statutory and administrative approach232 while admitting the recourse to comparison with
the results of independent enterprises only where allowed by domestic law.

The French legislation defines in detail what market rate is, setting a safe harbour233 and
at granting the possibility to exceed the safe harbour trough an arm’s length test. The
definition of arm’s length conditions is similar to the one contained in Article 9 of the
OECD Model234. A relevant difference between Article 212, I, a) CGI and and Article 39,
1, 3°, is that this latter does not contain the arm’s length test, i.e.; the opportunity to
demonstrate that the interest borne corresponds to a market rate235
Deventer, 1992, p. 383 submit that notwithstanding the wording of the law and the instructions,
there was no priority of methods and no preclusion for the OECD Methods.
227
See BOI-BIC-BASE-80-10-10-20140218, Para. 30 : « L’article 57 du code général des impôts
(CGI) reprend ce même principe en exigeant que, aux fins de l’impôt, les conditions convenues
dans le cadre de leurs relations financières ou commerciales par des parties ayant un lien de
dépendance soient celles auxquelles on pourrait s’attendre si les parties n’avaient aucun lien de
dépendance ».
228
See BOI-INT-DG-20-40-20120912, Para. 10. P. ESCAUT, Transfer pricing. France,
Amsterdam, 2019, Para 2.6, highlights that the French regulations recognize the same methods
as the OECD.
229
P. ESCAUT, Transfer pricing. France, Amsterdam, 2019, Para. 4.2.
230
CE 21st February 1990, No. 84483.
231
CE 70446 (16 June 1993) (Laboratoires Wellcome). See for further reference to the adoption
of the OECD Guidelines in case law B. GIBERT, Transfer pricing and dispute resolutions. France,
Amsterdam, 2019, Para. 3.3.
232
See, e.g. CE 13th April 1964, No. 56173; CE 2nd June 1976, No. 94758; CE 11th June 1982,
No. 16187. For a more detailed analysis of the evolution of case law on the matter, see N.
GHARBI, Le contrôle fiscal des prix de transfert, Paris, 2005, p. 137 s.
233
Article 39, CGI refers to, literally, the «moyenne annuelle des taux effectifs moyens pratiqués
par les établissements de crédit et les sociétés de financement pour des prêts à taux variable aux
entreprises, d'une durée initiale supérieure à deux ans»
234
According to Article 212 CGI, « le taux que cette entreprise emprunteuse aurait pu obtenir
d'établissements ou d'organismes financiers indépendants dans des conditions analogues »
235
R. COIN, New tendencies in tax treatment of cross-border interest of corporations. France, in
Cahier de Droit Fiscal International, 2008, p. 300; B. GOUTHIERE, Les impôts dans les affaires
internationales, Levallois, 12th ed., 2018, m. no. 26808.
68
The arm’s length test of Article 212, I, a) overlaps with Article 57, CGI and there is no
reciprocal exclusion. As a result, consistency of interest with the maximum rate rule of
Article 39, 1, 3° or of Article 212, I, a) , does not prevent the assessment under Article
57 of possible differences between the arm’s length interest rate and the effective rate
borne by an enterprise236.
III.2.c.3.3 The judicial doctrine of the acte anormal de gestion: is it

equivalent to the arm’s length standard?
The Conseil d’Etat defines, in general terms, as abnormal those acts which due to their
purpose or their conditions do not belong to a normal business management; the notion
of what can be considered as normal has been progressively defined by case law in a
variety of factual circumstances.
In examining judicial decisions, one possible approach is to divide cases originating from
the undue surrender of a revenue from those based on the allocation of undue costs237.
Such categorisation can be further detailed by reference to the relationship between the
scrutinised enterprise and the beneficiary of the acte anormal, who can be a shareholder
or director of the enterprise or a different enterprise, frequently belonging to the same
group238.
In the specific perspective of the present analysis, which aims at grasping to what extent
the doctrine of the acte anormal has effects equivalent to those of the statutory arm’s
length rule, a further approach seems of special interest, which – starting from the case
law reference to the purpose or the conditions of transactions – identifies the two
categories of acts abnormal due to their purpose (i.e.: those which are entirely not
justified in the light of the interest of the enterprise) and acts abnormal due to their
conditions (i.e.: the transaction is in itself justified, but implies an excessive cost or a loss
of revenue239).
The first category would include, e.g., the purchase of goods or services for the private
use of directors or – according to the most recent case law– the assumption of excessive
risks, as it may be the case when a loan is granted to a subsidiary in a critical financial
situation240.
The second category, which is of higher interest for the present dissertation, concerns
cases (including sale of goods, services and financial transactions) where the
abnormality is of a more “quantitative” nature.
The acte anormal doctrine inhibits, as a general rule, the sale of goods or the delivery of
services free of charge. A relevant 1983 Conseil d’État decision241 affirmed the above
236
SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer Pricing and Intra-Group
Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para. 6.2.4.1..
237
See O. DEBAT, Droit fiscal des affaires, Paris, 4th ed., 2017, p. 139 s.; M. COZIAN, F.
DEBOISSY, M. CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd ed., 2018, m.no. 289
s..
238
P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018, p. 64 s.
239
D. GUTMANN, Droit fiscal des affairs, Paris 10th ed., 2019, p. 392 s. A similar approach is
proposed by C. BUR, L’acte anormal de gestion, Paris, 1999, p. 50 s. who explicitly mentions the
concept of quantitative abnormality (« abnormalité quantitative »).
240
CE, 19th November 2011, No. 326913.
241
CE, 11th July 1983, Nos. 40890 and 40893. It is quite remarkable that the decision validated
the application of the same resale price method which is applicable under the OECD Guidelines.
69
principle with reference to the pricing of goods (vegetables, in the case) between two
enterprises, subject to different tax regimes, but belonging to the same owner242. Under
the same doctrine, a service delivered at no charge from a parent company to its fully
owned subsidiary was also ruled to be subject to adjustment243.
The abnormality can be (and frequently is) identified through the comparison of the
disputed transaction with comparable transactions between independent parties on the
open market244.
This is, e.g. the approach adopted by the Conseil d’Etat in respect of the transfer of
shares, where the price is different from the market value245 or with reference to the sale
of goods246. Also in financial transactions (e.g., the granting of a loan to a related
company) the abnormality is to be determined through the comparison with the
remuneration which the lender may have obtained from the investment of analogous
amounts of capital at similar conditions247.
On the basis of case law, it may be thus argued that the quantitative dimension of the
doctrine of the acte anormal de gestion tends often to approximate the statutory arm’s
length rule of Article 57 of the CGI and of Article 9 of the OECD Model. This close liaison
has been recognised by the same Conseil d’Etat, in a 2008 decision where Article 57,
CGI was interpreted in the light of the criterion of the normal business management, as
if the parties were both resident in France248.
The depicted convergence of rules has the effect of fading the disparity of treatment
between domestic transactions and cross-border transactions and the related concerns
as to the consistency of Article 57, CGI with EU law249.
At the same time, it seems necessary to highlight that some difference may arise
between the arm’s length principle and the abnormal act rule with reference to the
importance attributed in this latter context to group relationships. In this respect,
deviations from the OECD Guidelines arise to the extent that the French Courts –
On the transfer of income to the benefit of a tax-exempt business, see CE, 18th December 1991,
No. 65466.
242
M. COZIAN, Les grands principes de la fiscalité des entreprises, Paris, 4th ed. 1999, pp. 381
et seq.
243
CE, 24th February 1978, No. 2373. For the application of the same reasoning to a related party
financial facility, CE, 30 September 1987, n° 50157 and, on the concession of a warranty CE, 27
Avril 1988, No. 57048.
244
D. GUTMANN, Droit fiscal des affairs, Paris 10th ed., 2019, p. 392.
245
CE 21st November 1980, No. 17055 (where the value was represented by the stock market
prices) and more recently CE 20th December 2011, No. 319029.
246
See, among the cases concerning the sale of goods and where the market value was taken
as a basis for comparison, CE 6th June 1984, Nos 35415 and 36733 (where it was expressly
stated that the benchmark is the price of comparable goods); CE 24th June 1994, No. 128420;
CE 28th July 1989, No. 73197; CE 19th November 2008, No. 308449; CE 29th December 1997,
No. 125208.
247
CE 7th October 1988, No. 50256. The same criterion, i.e.: the reference to interest rates of
comparable alternative investments, has been held in CE 31st July 2009, No. 301935
248
CE 11th April 2008, No. 280133.
249
The conclusion is submitted, on the basis of an analysis of both substantial and procedural
profiles concerning the burden of proof, by P. BOURTOURAULT, M. BÉNARD, Relations
intragroupe, prix de transfert et acte anormal de gestion, in Revue de Droit Fiscal, No. 50, 2009,
p. 9 f. (No. 576).
70
notwithstanding the general criterion under which the solidarity among group members
finds its limits in the legal autonomy of each company - have admitted economic
justifications250 such as the need to provide financial assistance to a related company or
have validated (as being “acte normale”) the resale of goods to a related party at the
mere cost251 or the granting of an interest-free loan252.
In such circumstances, the rules cannot be considered as having equivalent effect.
III.2.c.4 The effects

III.2.c.4.1 The statutory provisions of Article 57 of the CGI and the
reconstruction of the upwards adjustment as a constructive
dividend
The effect of Article 57, CGI is, according to the wording of the provision, the recapture
of taxable income into the accounting results. The language used by the French
legislature indicates that the result of the rewriting of the accounts be in the direction of
an increase of taxable income. There is conversely no provision on the decrease of
taxable income compared to that resulting from the accounts (e.g.: on the basis of an
adjustment upon initiative of the parties involved).
Nor there is any statutory provision on the possible decrease of taxable income resulting
from a mutual agreement or arbitration procedure based on bilateral treaties or the EU
arbitration convention253.
The (upwards) adjustment of taxable income is not only subject to corporation tax, but
also qualifies as a hidden distribution, subject to withholding tax in France254.
250
CE 2nd June 1982, No. 23342.
251
This approach dates back to the mentioned decision CE 24th February 1978, No. 2373 and
has been applied to services rendered by the parent company of a group to its subsidiaries (see
also, e.g., CE 6th January 1986, No. 42795). By contrast, a subsidiary is expected to make a profit
from transactions with the parent company, as in CE 4th March 1985, Nos. 41396 and 41399,
since the “group interest” justification concerns the parent company only. On this asymmetry of
evaluation see M. COZIAN, Les grands principes de la fiscalité des entreprises, Paris, 4th ed. ,
1999, pp. 394 et seq.
252
Further examples in P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed.,
2018, p. 68 and D. GUTMANN, Droit fiscal des affaires, Paris, 10a ed., 2019, p. 409 who also
highlights that – notwithstanding the present position of the Supreme Court – it has been
questioned whether it is sensible to apply the acte anormal doctrine to transactions between
companies within the same domestic group taxation regime.
253
Also, older French tax treaties do not generally contain the corresponding adjustments
provision of Article 9, Para. 2 of the OECD Model. See P. MOUSSET, S. TOLEDANO, Transfer
pricing in the absence of comparable market prices. National report. France, in Cahiers de droit
fiscal international, Deventer, 1992, p. 393; P. ESCAUT, Transfer pricing. France, Amsterdam,
2019, Para. 14.5.2. Corresponding adjustments are nonetheless provided by the Administrative
practice, especially in BOI-INT-DG-20-30-10-20140218, Para. 70.
254
On the domestic legal basis of the taxation of constructive dividends in France, see N.
GHARBI, Le contrôle fiscal des prix de transfert, Paris, 2005, p. 399 s.; B. GOUTHIÈRE, Les
impôts dans les affaires internationals, Levallois, 12th ed., 2018, m.no. 76960, P. ESCAUT,
Transfer pricing. France, Amsterdam, 2019, Para. 14.5.3. Secondary adjustments are illustrated
in BOI-RPPM-RCM-10-20-20-50-20120912.
71
The withholding tax is not applied if the deemed distribution is actually reimbursed by the
beneficiary to the French company255 in the context of a mutual agreement procedure.
Also, the French withholding tax may be avoided or reduced under an applicable tax
treaty, depending upon the wording of the specific treaty and the interpretation of Courts.
Indeed, although the French Administration argues that constructive dividends fall within
the definition of dividend given in the OECD Model (and in accordance with French
treaties256), the French Supreme Court has reached opposite conclusions, to the effect
that (unless a treaty provides for specific provisions) constructive dividend end up in the
residual clause of other income which, in most cases, prevents source taxation257 and,
the consequent (juridical) double taxation of transfer pricing adjustments.
III.2.c.4.2 Special statutory rules on interest rates and the reconstruction

of excess interest as constructive dividends
Excessive interest under Article 212, I, a) CGI is not deductible and also reconstructed
as a hidden dividend distribution258. The same effect is provided with respect to excess
interest under Article 39, 1, 3°, CGI259
III.2.c.4.3 The judicial doctrine of the acte anormal de gestion: profit

adjustment and case-by-case assessment of a constructive
dividend
Under the doctrine of the AAG, the adjustment of the economic conditions of a
transaction260 has effects for both the enterprise which has put in place the abnormal act,
and for the beneficiary.
As to the first enterprise, the consequence of the assessed abnormality of an act is the
uplift of the taxable income or the reduction of reported tax losses, with the corresponding
income tax implications261.
255
See OI-INT-DG-20-30-10-20140218, Para. 630 : «Toutefois, dès lors que la société accepte
de procéder au rapatriement des sommes considérées comme constitutives d’un transfert de
bénéfices, la retenue à la source notifiée ne sera pas maintenue. En effet, le désinvestissement
sera annulé par le biais du reversement effectué, soit par voie d’inscription d'une dette en compte
courant, soit par un rapatriement effectif effectué dans un délai de 90 jours à compter de la
réception de la proposition d'accord amiable par le contribuable».
256
See in particular BOI-INT-CVB-DZA-30, at Point 10.
257
For a more detailed analysis of the treatment of constructive dividends in the hands of foreign
residents under French treaties in French case law and practice, see N. GHARBI, Le contrôle
fiscal des prix de transfert, Paris, 2005, p. 401 s.; B. GOUTHIÈRE, Les impôts dans les affaires
internationals, Levallois, 10th ed., 2014, m.no. 60680: G. GEST, G. TIXIER, Droit fiscal
international, Paris, 2nd ed., 1990, p. 480 f.. The Revenue position on this matter is summarised
in BOI-BIC-BASE-80-20-20140218, Para. 410.
258
P. BURG, France – Corporate Taxation, Amsterdam, 2019, Para. 1.4.5 and Para. 6.1.5
259
B. GOUTHIERE, Les impôts dans les affaires internationales, Levallois, 12th ed., 2014, m.
no. 26780.
260
The abnormality of the act does not cause the denial of its legal consequences but only the
adjustment, for tax purposes, of the income arising from the conditions agreed by the parties. O.
DEBAT, Droit fiscal des affaires, Paris, 4th ed., 2017, p. 138
261
It has to be considered that the purchase of an asset at an excessive price may not necessarily
have income tax implications, to the extent that the purchased asset does not influence the
72
The adjustment has effects also for the beneficiary of the abnormal act, for whom (if the
assessed enterprise is subject to corporate income tax) the undue advantage received
is qualified as a distribution of profits in kind262. This reconstruction occurs even where
the beneficiary is not a shareholder of the enterprise whose income is adjusted263, and
has tax implications which depend on different circumstances.
More precisely, if the beneficiary is a French resident individual, the benefit received
qualifies as a capital income and is taxable under the regime of irregular distributions264.
The same would in principle apply where the beneficiary is a French enterprise or
corporate entity; in such case, however, the taxation of the undue benefit may already
be the intrinsic effect of the (abnormally) low purchase cost or the (abnormally) high sale
revenue deriving from the abnormal transaction. Case law has recognised that, in such
circumstances, the deemed profit distribution can be considered to have been already
subject to tax, so that no further taxation should be levied in respect of the deemed profit
distribution in itself265. Such interpretation, it may be argued, avoids domestic juridical
double taxation of the deemed income in the hands of the French beneficiary of the
abnormal act.
If the beneficiary is resident outside France, a final withholding tax would apply in
accordance with French domestic law266. It may be argued that, as in the above
examined case of adjustments based on Article 57 CGI, constructive dividends deriving
from adjustments based on the AAG doctrine are suitable to benefit from the more
favourable treatment recognised under an applicable tax treaty.
However, there is no remedy against the economic double taxation, especially in an
international context267.
III.2.d United Kingdom
III.2.d.1 Background and sources
taxable revenue. See P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018,
p. 72
262
See O. DEBAT, Droit fiscal des affaires, Paris, 4th ed., 2017, p. 138, P. SERLOOTEN, O.
DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018, p. 72.
263
On this point, CE 10th March 1972, No. 79927, see C. BUR, L’acte anormal de gestion, Paris
1999, m. no. 151. D. GUTMANN, Droit fiscal des affaires, Paris, 10th ed., 2019, p. 387 illustrates
that in the case where the beneficiary is a shareholder, the taxation of the deemed income would
be based on Article 109, 1, 2° of the CGI, while in respect of a third party beneficiary, Article 111,
c, CGI would apply which consents the taxation of hidden income.
264
M. COZIAN, F. DEBOISSY, M. CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd
ed., 2018, m. no. 294.
265
The principle has been stated in a case concerning the granting of an interest free loan. See
CE 25th July 1980, No. 15073 and C. BUR, L’acte anormal de gestion, Paris 1999, m. no. 155
266
M. COZIAN, F. DEBOISSY, M. CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd
ed., 2018, m. no. 294.
267
See the wide dissertation on the “prix normal” in both the (often overlapping and at times
diverging) French case law of the Conseil d’État and the the OECD Guidelines by T. MALESYS,
La théorie de l’acte anormal de gestion et le droit fiscal international, Paris, 1990, Vol. 2, p. 418.
73
III.2.d.1.1 Transfer pricing legislation
The UK Transfer Pricing legislation is contained in Part 4 of Taxation (International and
other Provisions) Act 2010 (“TIOPA 2010”) and in the annual Finance Acts subsequent
to the above act.
The arm’s length principle was initially introduced into UK domestic tax legislation in
1951268, following some unsuccessful attempts by the Inland Revenue to apply the arm’s
length provisions of tax treaties to transactions between UK companies and related
parties in treaty countries and notwithstanding the absence of domestic rules. The need
of specific legislation derived from the uncertainty as to whether treaties alone could
create a tax liability in the UK. Indeed, although the effect of tax treaties in the UK has
been rather disputed269, the prevailing opinion is that a treaty cannot create a charge not
existing under domestic law270.
The 1951 provision was subject to many limitations, since it applied only to “a body of
persons” and not to individuals, required a specific direction by the Board of the Inland
Revenue and included an exemption for domestic transactions.
The original legislation was later included in the Income & Corporation Taxes Act 1970
(Section 485) and – undergoing various changes which progressively extended its scope
of application and operation – in the Income & Corporation Taxes Act 1988 (Sections
770-773).
The legislation was entirely replaced by the Finance Act 1998 (to become Schedule
28AA Income & Corporation Taxes Act 1988 – “ICTA 1988”) and subject to significant
changes again in 2004 and in 2005. Finally, the TIOPA 2010 has restated, without
substantial changes and in the framework of the Tax Law Rewrite project, the rules
previously found in schedule 28AA of the Income and Corporation Taxes Act 1988.
III.2.d.1.2 Securities and the reasonable commercial return
The category of transfer pricing rules should also include the interest re-characterisation
rule of Section 1000(1)E of CTA 2010271 which concern interest arising from non-
commercial securities (i.e., those yielding returns in excess of a reasonable commercial
return).
That rule can be considered to be functionally equivalent, with reference to interest cost,
to those on transfer pricing of TIOPA 2010, Part 4. Both rules may have, in respect of
the borrower, the same function of limiting deduction to the portion of interest which does
not exceed a comparable market rate.
268
Income Tax Act 1952, Section 469
269
J. OLIVER, Double tax treaties in United Kingdom Tax Law, in British Tax Review,1970, p. 388
270
J, SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018, p. 42 who also
highlights that, presently, the view is unequivocally affirmed by the HMRC, International Manual,
INTM 152060, which reads that “a double taxation agreement cannot impose a charge to tax
where none exists at all in domestic law”.
271
Section 1000A of the CTA 2010, entitled “Meaning of distribution” reads that: “In the
Corporation Tax Acts “distribution”, in relation to any company, means anything falling within any
of the following paragraphs (…) Any interest or other distribution out of assets of the company in
respect of securities of the company which are non-commercial securities (as defined in section
1005), except— (a) however much (if any) of the distribution represents the principal secured by
the securities, and (b) however much (if any) of the distribution represents a reasonable
commercial return for the use of the principal”.
74
III.2.d.2 Scope of application

The legislation applies where there is an association between the parties by means of
common control.
While the main purpose of the legislation is to ensure that cross – border transactions
take place at arm’s length, TIOPA Part 4 applies also to domestic transactions, i.e. to
transactions between companies both resident in the UK.
UK legislation was changed to this end in 2003, through the removal of the so-called
“UK-UK exemption”272 and following some concern about the consistency of the existing
rules with the EU law as outlined by the Lankhorst-Hohorst decision of the CJEU273.

The scope of application of section 1000(1)E of CTA 2010 is limited to interest (or other
distribution) given by of a company in respect of securities.
The provision – differently from those concerning special securities (section 1000(1)F of
CTA 2010) - applies regardless of the nature and residence of the recipient.
However, when the recipient is also subject to the UK transfer pricing rules of TIOPA
2010, Part 4, so that both parties are subject to UK corporation tax, there is an overlap
between mentioned section 1000(1)E of CTA 2010 and the transfer pricing rules of
TIOPA 2010, Part 4. In such event, under the specific provision of TIOPA, 2010, section
155, it will be the transfer pricing rules that take effect274.
III.2.d.3 The rule
The basic rule on transfer pricing is set forth at section 147 of the TIOPA, under which
(and subject to certain other conditions) if a provision (defined as the “the actual
provision”) has been made or imposed as between any two related persons by means
of a transaction (or series of transactions) and said actual provision differs from the
provision which would have been made as between independent enterprises (“the arm's
length provision”), and confers a potential advantage in relation to United Kingdom
taxation on one or both of the affected persons, then the profits and losses of the
potentially advantaged person or persons are to be calculated for tax purposes as if the
arm's length provision had been made or imposed instead of the actual provision.
Profits and losses are thus to be calculated for tax purposes by substituting an arm’s
length provision for an actual provision if certain conditions are met and the actual
272
The domestic exemption derived from the definition of tax advantage provided into Paragraph
5 of schedule 28A A) and was subject to some requirements essentially referred to the liability to
UK income tax of the parties.
273
A. CASLEY, Rewrite of Transfer Pricing Rules, in International Transfer Pricing Journal,
May/June 2004, p. 114; A. CASLEY, L. WEBB-MARTIN, A Sledgehammer To Crack a Nut:
Proposed Changes to Transfer Pricing Rules Reach Far Further Than Anyone Had Cause To
Expect, in International Transfer Pricing Journal, July/August 2005, p. 138.
274
The conclusion is backed by HMRC, International Manual, INTM 655070.
75
provision confers on the person or persons a potential advantage in relation to UK
taxation.
A UK potential tax advantage is defined by Section 155 of the TIOPA 2010, as a
reduction of taxable profits or increase of tax losses “for any chargeable period”.
The term “provision” was introduced in 1998 and, being not defined in the legislation,
raised a considerable debate as to its meaning, which still remains to some extent
unclear and has been subject to wide interpretation by the Courts.275 HMRC have stated
that the expression refers to “all the terms and conditions attaching to the transaction or
series of transactions” and, remarkably, that, in accordance with the statutory
requirement to construe the transfer pricing legislation in accordance with the OECD
Model, the term “provision” is equivalent to the treaty language making reference to
“conditions made or imposed”276.
The UK legislation, rather than providing further specific criteria or more detailed
guidelines with reference to the concept of “arm’s length provision”, adopts the solution
of making an explicit reference to both the OECD Model and to the OECD Guidelines277.
The solution is aimed at ensuring consistency with the international standards and at the
same time avoiding conflicts with the arm’s length provisions contained in UK tax treaties.
Case law278 has further developed this approach by indicating that the reference to the
OECD Model and Guidelines apply even where there is not a tax convention with the
Country in question. The same position is adopted in official guidance.279
Next to the arm's length principle, specific legislation (e.g. section 17 of the Taxation of
Capital Gains Act 1992, TCGA 1992) and case law, relating to transfers into or from a
taxable trade, have adopted the criterion of the market value. It applies to a limited
number of situations: in most cases the rules of Part 4 of the TIOPA 2010 would apply,
especially since 2004, when domestic transactions alike were included within transfer
pricing rules.
275
A. CASLEY, United Kingdom. Transfer pricing, Amsterdam, 2019, Para. 2.4.
276
HMRC, International Manual, INTM412050
277
The provision dates back to Finance Act 1998. In the current text, Sec. 164 of TIOPA 2010
requires that the UK transfer pricing legislation “is to be read in such manner as best secures
consistency between (a) the effect given to sections 147(1)(a), (b) and (d) and (2) to (6), 148 and
151(2), and (b) the effect which, in accordance with the transfer pricing guidelines, is to be given,
in cases where double taxation arrangements incorporate the whole or any part of the OECD
model, to so much of the arrangements as does so”. The Commentary on Section 164 further
clarifies, at point 337, that “This section requires the Part to be read in a way that is consistent
with the way in which Article 9 of the OECD Model Tax Convention is read when included in a tax
treaty entered into by the United Kingdom” and, at point 339 that “This section imports into the
transfer pricing legislation not only the principles of Article 9 of the OECD Model Tax Convention
but also that organisation’s transfer pricing guidelines”.
278
DSG Retail and others v. Revenue and Customs Commissioners, [2009] STC (SCD) 397, at
424-425, at paragraph 70. See R. BRAMWELL et. Al., Taxation of Companies and Company
Reconstructions, London, Release 8, 2012, p. J1-207.
279
The Commentary on Section 164 states, at point 338, that “This requirement is regardless of
whether there is or is not a tax treaty between the United Kingdom and any particular non-UK
territory”.
76
The “market value” criterion (also referred to as the “alternative market value rule”) has
made its appearance in UK case law before the arm’s length principle was codified in
statutory tax provisions280.
Market value is considered to give, in most cases, the same or a similar result to the
arm’s length principle. However, it has been underlined that certain difference in meaning
and effect may arise: e.g., the arm’s length principle takes into account the specific
circumstances of one or both of the actual parties, whilst the market value rule is rather
focused on “the assumption of a hypothetical willing buyer and willing seller”281.
Under CTA 2010, section 1000(1) any interest (or other distribution) in respect of
securities, which are non-commercial securities (as defined in section 1005) is qualified
as a distribution.
According to mentioned section 1005, securities of a company are non-commercial
securities if the consideration given by the company under the securities for the use of
the principal secured by them represents more than a reasonable commercial return for
the use of that principal. However, there is no statutory definition of reasonable
commercial return nor any reference to the OED Guidelines.
The issue is addressed by the administrative practice, which provides some directions,
specifying, e.g., that the test be made “once and for all (…) at the time of issue of the
security”, looking at the position from the point of view of the lender and considering the
associated degree of risk282.
As a matter of fact, the UK administrative practice seems oriented to considering that the
two criteria lead in most cases to the same result, so that “interest paid at more than a
commercial rate will frequently represent a non-arm’s length transaction”283.
III.2.d.4 The effects

The UK transfer pricing legislation applies where the actual provision results in a tax
advantage for one or more persons and has the effect of disregarding the tax advantage,
through an adjustment the actual provision. The adjustment is not characterised as a
distribution for UK tax purposes.
Transfer pricing adjustments can only work to the detriment of the taxpayer, i.e.: can only
result in an increase of the taxable income or to a decrease of reported loss.
280
The principle was initially identified in Watson Brothers v. Hornby in 1942 (24TC506), although
fully established in Sharkey v. Wernher in 1955 (36TC275) and later further developed in Petrotim
Securities, Ltd v. Ayres (1964).
281
A. CASLEY, United Kingdom. Transfer pricing, Amsterdam, 2019, Paras 2.1 and 2.2.
282
HMRC, Company Taxation Manual, CTM15502
283
HMRC, International Manual, INTM655070
77
III.2.d.4.2 Securities and reasonable commercial return
In general, interest cost is deductible for the purposes of determining the taxable
corporate income of debtor, while distributions are not284. The effect of the re-
characterisation of the remuneration of non-commercial securities as a distribution is that
such remuneration would not be deductible for the issuer285. Non-deductibility concerns
only the portion of the remuneration which exceeds the reasonable commercial return286.
Economic double taxation may arise to the extent that the interest (and other
remunerations) is not correspondingly treated as an exempt distribution on the head of
the recipient.
However, where Section 1000(1)E of CTA 2010 overlaps with the transfer pricing
legislation of TIOPA2010, Part 4, it this latter that takes effect.
III.2.e Comparative considerations on transfer pricing rules

Transfer pricing rules, i.e.: those rules which have function of allocating income among
related parties and which do so by comparison of related and unrelated party
transactions were, indeed, expected to be similar among the three countries.
The approach of the three countries examined on this point is however rather different,
at least as far as the legislative formant (i.e.: the statutory enunciation of the arm’s length
principle) is concerned.
The UK legislation waives its own definition and makes plain and direct reference to the
OECD Model and the OECD Guidelines, with the aim of ensuring the best consistency
with rules included in the UK treaties287.
The French provision has a visible gap, in that it makes reference to the concepts of
indirect transfer of profits and to over/under pricing of controlled transactions, but does
not indicate on which basis the indirect transfer of profits or the over/under pricing are to
be measured288.
The Italian income tax code was different from both, since it contained an autonomous
and quite detailed definition of market value. This approach has now been replaced with
a substantial reference to the OECD definition289.
One possible explanation of said divergence is of an historical nature: the UK legislation,
in its current version, dates back to 1988, while the French text was written in 1933 and
the now abandoned Italian concept of “valore normale” in 1958, before the first adoption
of the OECD Model..
The actual extent of said differences has generally been reduced by the influence of
administrative and doctrinal formants, which tent to converge in the direction of the
OECD standards. This is also the effect of tax treaties (examined at Chapter 5 below),
284
Richard BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London,
Release 3, 2010, Para. E.1.6.1.
285
CTA 2009, sections 465 and 1305. See J. GHOSH et Al., Ghosh, Johnson and Miller on the
taxation of corporate debt and derivatives, London, 2009, Para. D2.2.
286
CTA 2010, section 1, indeed excepts from the re-characterisation “ (…) (b) however much (if
any) of the distribution represents a reasonable commercial return for the use of the principal”.
287
Para III.2.d.3.1
288
Para III.2.c.3.1
289
Para III.2.b.3
78
due to the pivotal influence which has been exercised by the arm’s length standard set
out in Article 9, Para. 1 of the OECD Model and further detailed in the OECD Guidelines.
In France and the UK, the main transfer pricing statutory rule is accompanied by some
additional rules which can be considered to perform the same function of the main
transfer pricing rule and adopt criteria which are generally aimed at the comparison with
open market transactions. However, these criteria are not entirely consistent with those
of the respective national main statutory rule or with the OECD Model and Guidelines.
Indeed, the French statutory rule on interest rates defines in detail a specific notion of
market rate and sets own safe harbours. An even more relevant example is the French
case-law concept of acte anormal de géstion which, in certain circumstances, identifies
the deemed normality through the comparison of a given transaction under scrutiny with
comparable transactions between independent parties on the open market, but admitting
cost-based pricing or economic justifications to abnormal acts which would find almost
no room in the OECD Guidelines, such as the need to provide financial assistance to a
related company.
Similarly, in the UK, interest rates should not exceed the “reasonable commercial return”,
a criterion which is not defined in the legislation and which is formally different from the
UK and OECD arm’s length standard.
It can be argued that, even where rules are similar, different criteria are likely to generate
diverging evaluations on the two sides of a cross-border transaction, and, as a
consequence, economic double taxation. On the contrary, rules as UK Section 164 of
TIOPA 2010290, which make clear reference to a common international standard
contribute to the prevention of possible conflicts, and of economic double taxation.
290
Para III.2.d.3.1
79
III.3 Thin capitalization and interest limitation
III.3.a Categorisation and definition of thin capitalisation and interest limitation

rules
Thin capitalisation has been the object of a wide comparative study at the time of the IFA
1996 Geneva congress of the International Fiscal Association. The General Report291
defines it as “excessive debt financing”, describing the related rules as those having the
purpose of protecting the tax revenue of States from the erosion of the tax base deriving
from the difference in tax treatment between debt financing and equity financing.
The General Report lists a number of countries which between 1971 (Canada) and that
same 1996 (Portugal), including France in 1991, introduced thin capitalisation rules
based on fixed debt to equity ratios or other criteria or conditions.
The General Report notes that “none of the reporting countries rely solely on the arm’s
length principle to prevent thin capitalisation”. The report also mentions that in some
countries interest deduction could be denied on the requalification of loan capital as
“hidden equity” under a substance over form principle, which takes into consideration
conditions such as the lack of provisions for repayment, convertibility into share capital,
remuneration depending on the borrower profits, etc.. According to the definition
eventually adopted for the purpose of the 1996 IFA comparative research, thin
capitalisation rules are those which “apply a fixed debt to equity ratio” 292
Some years before, the OECD had dedicated to thin capitalisation a report of the Fiscal
Committee293, which resulted in amendments to the Commentary.
The Report identifies the issue on the basis of options in corporate financing294 and
considers that the different tax treatment of loan finance and equity finance may “induce
the party concerned to provide what is essentially equity capital in the form of a loan”.
The OECD recognised that this situation is sometimes described as “hidden
capitalisation” (or “hidden equity capitalisation”).
The Report goes further by describing a variety of manifestations of the hidden
capitalisation, including hybrid financing (where, e.g., creditors may convert their loans
into capital or interest is dependent on the borrower profits) and thin capitalisation,
defined as a high proportion of debt to equity as a feature of the company’s capital
structure. However, in the Report, the expression “thin capitalisation” is used to describe
the whole range of hidden equity capitalisation.
A 2010 EU Council resolution295 provides a (non-exhaustive) list of indicators of possible
“artificial transfer of profit” which include not only the level of debt to equity (locally or in
comparison with the group worldwide), but also the ratio between the net interest cost
291
D. J. PILZT, International aspects of thin capitalisation. General report, 1996, p. 87 f.
292
Ibid., p. 105.
293
OECD, Thin Capitalisation. Issues in international taxation, No. 2, Paris, 1987
294
The Report starts with the consideration that “the methods by which companies are provided
with their capital affects the taxation of corporate income” and examines further the difference
between loan finance and equity finance under economic and legal profiles and the related
implications for taxation.
295
COUNCIL RESOLUTION of 8 June 2010 on coordination of the Controlled Foreign Corporation
(CFC) and thin capitalisation rules within the European Union (2010/C 156/01), in OJEU C156/1
of 16 June 2010.
80
and the earnings (EBIT or EBITDA, as the case may be). The resolution states that thin
capitalisation rules “will respect the arm’s-length principle”, but are not limited to it.
In the above scenario, a definition can be outlined for the purposes of the present
research that is centred on the notion of excessive debt financing. Such notion is
narrower than that of hidden equity capitalisation since it excludes cases where debt
financing is considered to be hidden equity financing due to qualitative criteria (such as,
e.g., lack of provisions for repayment, convertibility into share capital, result-related
remuneration, etc.) but is not limited to debt to equity ratio, so to include also other ratios
and arm’s length based evaluations
The outlined notion does not appear to be in conflict with the rationale which underlies
the OECD/G20 Final Report on interest deduction adopted in the context of the Base
Erosion and Profit Shifting project296. The report also covers the use of financing to fund
the generation of tax-exempt income but in most part refers to concept of excessive
interest297.
The report then confirms that there is a case for defining a category of rules on the basis
of said concept of excessive interest. The overview of national approaches to tackle base
erosion and profit shifting involving interest298 includes a variety rules: arm’s length tests,
rules which limit the level of interest expense or debt in an entity with reference to a fixed
ratio (such as debt/equity or interest/earnings) and those which limit the level of interest
expense or debt in an entity with reference to the group’s overall position.
The report does not define the category of thin capitalisation rules, but uses the term thin
capitalisation in a rather narrow meaning, to identify rules based on a debt/equity test,
other than interest barrier rules or general deduction rules.
Interest limitation is also addressed by the 2016 Council directive laying down rules
against tax avoidance practices that directly affect the functioning of the internal
market299. Article 4, under the title of “Interest limitation rule” provides that net interest
expenses will only be deductible up to a fixed ratio based on the taxpayer's gross
operating profit. The aim (as outlined at Recital No. 6) is to discourage practices of
reduction of the tax liability through excessive interest payments.
So, although economic double taxation of interest can be generated in a similar way by
rules based on the debt to equity ratio and by those based on other criteria (especially
the interest to earnings ratio), for consistency with the commonly used terminology, the
first rules are referred to in the present dissertation as thin capitalisation rules, while the
second rules are referred to as interest limitation rules.
III.3.b Italy
296
OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments,
Action 4 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, Paris, 2015.
297
This categorisation was already part of Action 4 of the initial Action Plan (OECD, BEPS Action
Plan, Paris, 2013) which referred to rules aimed at preventing “base erosion through the use of
interest expense, for example through the use of related-party and third-party debt to achieve
excessive interest deductions or to finance the production of exempt or deferred income”.
298
OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments,
Action 4 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, Paris, 2015, p.
19 et seq.
299
On the interest deduction rules in the ATAD, see Para VII.3.a.1.4 below.
81
The deduction of interest cost from corporate income is presently regulated by Article 96
of the Income Tax Code. This provision, largely inspired by the German model300, was
introduced by the Budget Law for 2008, and replaced the prior thin capitalisation rule
based on a debt-to-equity ratio and an arm’s length test.
III.3.b.2 Scope of application

The rule applies to interest due to any party, whether domestic or foreign, and whether
related or unrelated to the borrower.
The legislature has provided certain exemptions with regard to the activity of the
borrower, (e.g. banks, insurance companies, consortium companies which are subject
to industry specific rules)301.
The statutory definition of interest, as complemented by administrative guidance,
includes interest embedded in financial lease agreement or arising from any agreement
with a loan function. Interest arising from trade payables are conversely not subject to
the limitation rule302.
III.3.b.3 The rule

Interest cost is fully deductible up to the amount of interest revenue, while the difference
(if any) is deductible to the extent that it does not exceed 30% of the enterprise’s EBITDA
(i.e., gross operating margin, before interest, depreciation and amortization)303.
Some scholars have criticised the rule, either for its disregard of the factual situation of
the individual companies concerned304 or for being an anti-abuse rule deprived of an
300
M. BARASSI, Circolazione dei modelli tributari e comparazione, in Rivista di diritto tributario,
5, 2013, p. I, 528 regards the 2008 reform of Italian interest deduction rules as example of
circulation of models which concerns the legislative formant.
301
Also entrepreneurs and partnerships are excluded from the scope of application of the rule,
thus raising some doubts as to its consistency with constitutional principles. See E. BAGAROTTO,
Osservazioni critiche sulla disciplina degli interessi passive nell’ambito Ires, in Rivista di diritto
tributario, No. 10/2009, p. 865.
302
An extensive analysis of the objective scope of application is in A. DODERO, G. FERRANTI,
L. MIELE, Interessi passivi, Milano, 2010, p. 131 et seq.
303
For a description of the Italian rule, see P. FLORA, Limitations on deductibility of interest
payable: recent tax law developments, in Derivatives & Financial Instruments, 2008, No. 5, p. 210
et seq.; T. MARINO, M. RUSSO, Italian restyling of interest deduction rules: the amendments of
the Italian finance bill for 2008, in Intertax, 2008, No. 5, p. 204; G.A GALEANO, A.M. RHODE,
Italy sets the barrier to deduction of financing costs at 30 per cent of EBITDA, in Intertax, 2008,
No. 6/7, p. 292; M. E. PALOMBO, Financing : a global survey of thin capitalization and transfer
pricing rules in 35 selected countries : Italy, in International transfer pricing journal, 2008, No. 6,
p. 318.
304
G. FERRANTI, La disciplina degli interessi passivi tra crisi economica e incentivi alla
capitalizzazione, in Corriere Tributario, 13 / 2009, p. 1018; S. GIANNINI, Quali giustificazioni per
l’indeducibilità degli interessi passivi?, in Dialoghi Tributari, 1 / 2008, p. 13; D. STEVANATO, La
norma sull'indeducibilità degli interessi passivi e la sua interpretazione in chiave antielusiva, in
Dialoghi Tributari, 1 / 2008, p. 13.
82
exemption test305. Others, while admitting the incapacity of the rule to express a “normal”
level of debt in the variety of industries, have emphasised the structural nature of the
rule, and its aim to restrict the level of corporate debt rather than tackle tax avoidance306.
III.3.b.4 The effects

Interest exceeding the statutory limitation is not deductible for the purposes of corporate
income taxation of the borrower, and is not qualified as profit distribution.
Excess interest can be carried forward indefinitely or transferred to other group
companies within the group taxation regime.
III.3.c France

It is commonly held that the French transfer pricing rules of Article 57, CGI do not apply
to the amount of the loan, but only to the interest rate307. The non-applicability of Article
57 CGI to thin capitalisation was also expressly admitted by the French Authorities in the
(now repealed) instructions of 12th January 2005308
Similarly, case law has constantly excluded that the doctrine of the AAG applied to the
choice of financial sources made by an enterprise309.
305
It is widely believed that a specific anti-abuse rule requires an exemption test, capable of
rescuing cases where the factual conditions of the rule are met, but where there is no abusive
aim (see, G. ALDUINO VENTIMIGLIA, L’istituto disapplicativo di disposizioni antielusive, Napoli,
2006, p. 13 f.). In such context, some argue that the interest deduction rule has an anti-abuse
purpose and that an administrative disapplication procedure should be granted to taxpayers,
notwithstanding the contrary advice of the Italian tax authorities as expressed with Resolution No.
268/E of July 3rd 2008. See D. STEVANATO, Indeducibilità degli interessi passivi e “genuinità” del
finanziamento: istanza di disapplicazione preclusa?, in Corriere Tributario, 33, 2008, p. 2694.
306
G. FALSITTA, Manuale di diritto tributario. Parte speciale, Padova, 12th ed., 2018, p. 503
307
In this sense, CE, 30 December 2003, No. 233894. See the concurring opinions of R. COIN,
New tendencies in tax treatment of cross-border interest of corporations. France, in Cahier de
Droit Fiscal International, 2008, p. 295 ; P. ESCAUT, Transfer Pricing. France, Amsterdam, 2019,
Para. 8.1.1, where further case law is mentioned; C. SILBERZTEIN, E. BAGDASSARIAN,
Chapter 6 France, in Transfer Pricing and Intra-Group Financing (A.J. Bakker & M.M. Levey eds.),
Amsterdam, 2012, Para. 6.1.6.4.2..
308
BOI 13 O-2-05 dated 12th January 2005, read: “quand bien même l'endettement de la filiale
pourrait apparaître disproportionné au regard des facultés contributives de remboursement, les
dispositions de l'article 57 du CGI ne permettent de s'opposer qu'à la seule anormalité des
modalités du prêt, soit principalement le taux servi”. The instructions were issued in the peculiar
context which followed the CE decisions on the consistency of former French rules with EU and
treaty law.
309
See CE 7th July 1958, No. 35977, which has recognised the deduction of interest qualifying as
normal the issuance of bonds rather than shares increase and CE 20th December 1963, No.
52308, which eventually discharged a tax assessment where the deduction of interest was denied
on the basis of the argument that the company might have avoided the recourse to external
financing if it had used its own resources. On this latter decision and on the relationship between
the abnormal act doctrine and interest deduction, see N. GAOUA, La déductibilité des charges
financières en droit fiscal français des entreprises, Paris, 2013, p. 87 f.. See also, in accordance
83
The counteraction of thin capitalisation has this been entrusted to the specific rules,
which until 31st December 2018 were to be found in Article 212, II and III, CGI310 and
were first introduced with a statute of 13th January 1941, which limited the deduction of
interest with regards to the rate but also to the amount of the underlying loan311.
The 1941 provision was included in the CGI with the 1948 codification and was not
significantly modified until 2007, when it had been ruled contrary to the non-
discrimination rules of bilateral tax treaties and the EU treaty in two landmark decisions
of the the Conseil d’Etat312.
Also, in those years it became evident that the existing rule had a too narrow scope,
since it was applicable only to loans from direct non-resident shareholders313. New rules
were then introduced314, which have later been complemented by rather detailed
guidance issued by the French Tax Authorities315.
Alongside with said rules, the French tax legislation provides for a wide array of interest
deduction limitations (some of which have been repealed since 2019 along with the
implementation of Article 4 of the ATAD316), related and not related to the amount of the
loan.
The provisions of Article 39, 1, 3°, and 212, I, a) CGI) limit interest deduction in view of
a maximum interest rate317.
with case law, R. COIN, New tendencies in tax treatment of cross-border interest of corporations.
France, in Cahier de Droit Fiscal International, 2008, p. 295 ; J. HEMERY, S. MOSTAFAVI, Debt-
equity conundrum. National Report. France, in Cahier de Droit Fiscal International, The Hague,
2012, p. 290
310
Also to be mentioned is Article 39, CGI which subordinates the deduction of shareholder loans
to the full payment of the underwritten share capital, and – as mentioned in Para. III.2. above -
sets forth a limitation as to the interest rate. See B. GOUTHIERE, Les impôts dans les affaires
311
See O. DELATTRE, International aspects of thin capitalisation. National report. France, in
Cahiers de droit fiscal international, The Hague, 1996, p. 419 who also reminds of a prior
regulation of 1928 with the same aim which denied the deduction of interest in certain hypotheses.
312
The conflict with the freedom of establishment was identified by CE, 30th December 2003, No.
249047, without request to the CJEU of a preliminary ruling due to the similarities between the
French legislation and the German legislation which was scrutinised in the CJEU decision in the
Lankhorst-Hohorst case of 12th December 2002, C-324/00. The conflict with tax treaty non-
discrimination rules arose in CE 30 December 2003, No. 233894. The consistency of the former
French rules with the EU fundamental rights was already questioned years before. See O.
DELATTRE, International aspects of thin capitalisation. National report. France, in Cahiers de
droit fiscal international, The Hague, 1996, p. 436 ; B. GOUTHIERE, Les impôts dans les affaires
313
On the old regime, see O. DELATTRE, International aspects of thin capitalisation. National
report. France, in Cahiers de droit fiscal international, The Hague, 1996, p. 425.
314
On the rationale of the provisions and the legislative evolutions, see B. CASTAGNÈDE, Prècis
de fiscalité internationale, Paris, 6a ed., 2019, p. 112 et seq..
315
See BOI-IS-BASE-35-10-20140805 and the more detailed instructions there referred to.
316
Under Law No. 2018-1317 of 28th December 2018 (Loi de finances pour 2019), the provisions
of Article 212 bis CGI (limiting deduction to 75% of the interest cost), Article 212, II and III, CGI
(thin capitalisation) and Article 209, IX, CGI) are abolished with effect since 1st January 2019. The
interest deduction limitation rule provided by Article 4 of the ATAD has been implemented in the
new text of Article 212 bis CGI.
317
These provisions have been examined above at Para. III.2.c)
84
Others (amended in 2018 due to some concerns as to their consistency with EU law318
and eventually abolished with effect from 1st January 2019) subordinated the deduction
of interest cost to the purpose of the loan, impairing certain loans taken to acquire
shareholdings319.
The aim of achieving a better balance between the tax treatment of debt and equity in
larger enterprises has led to the adoption of a measure (referred to in the tax literature
as the “rabot” – the French for plane and also abolished with effect from 1st January
2019) under which interest was deductible only for 75% of the portion which exceeds, in
any financial year, the overall amount of euro 3 million320.
Further provisions, of more recent introduction, look at the taxation of interest in the
hands of the lender and deny the deduction where the effective tax rate is lower than
25% of the French statutory rate. This latter provision is usually referred to in France as
“anti-hybrid” rule321.
It should be observed, in the light of such scenario, that while all of the above rules may
have the purpose or the effect of counteracting the recourse to debt rather than equity
financing, in would seem inappropriate, for the purposes of the present comparative
analysis, to bring all of said rules into the category of thin capitalisation (as defined in
Para. III.3 above).
In particular, those rules should be excluded which refer to the interest rate (and which
have been examined within the transfer pricing provisions of Para. III.2.c) or to the
taxation in the hands of the recipient (which will be addressed in some more detail in
Para. III.4.c). below). Also, not classifiable within thin capitalisation rules are the provision
(not further examined in the present dissertation) which set forth an indiscriminate
interest deduction barrier (such as the “rabot”) or which take into account the destination
of the financial resources (such as those of Article 209, IX, CGI) rather than the financial
position of the borrower.
The described approach leads to considering as “thin capitalisation” rules only those
which look at the amount of the underlying loan. The following paragraphs will then focus
on the provisions of Article 212, II and III, CGI (as applicable until 31st December 2018)
which directly targeted thin capitalisation through a three-ratio test.
318
Law No. 2017-1837 of 30th December 2017 (Loi de finances pour 2018) 30 décembre 2017
has amended the provision in order to ensure that EU/EEA shareholdings be treated in the same
way as French shareholdings.
319
See Article 209, IX, CGI (as amended in 2011 with an item of legislation referred to as the
“Amendment Charasse”) in the version in force as of 31st December 2018, and B. GOUTHIÈRE,
Les impôts dans les affaires internationales, Levallois, 12th ed., 2018, m.no. 26850 et seq.; D.
GUTMANN, Droit fiscal des affairs, 10th ed., Paris, 2019, p. 331; B. CASTAGNÈDE, Prècis de
fiscalité internationale, Paris, 6a ed., 2019, p. 113 f.; SILBERZTEIN, E. BAGDASSARIAN,
Chapter 6 France, in Transfer Pricing and Intra-Group Financing (A.J. Bakker & M.M. Levey eds.),
Amsterdam, 2012, Para. 6.1.6.1.4..
320
See Article 212 bis, CGI and B. CASTAGNÈDE, Prècis de fiscalité internationale, Paris, 6a
ed., 2019, p. 114. On the rationale of the provision, see D. GUTMANN, Droit fiscal des affairs,
10th ed., Paris, 2019, p. 331.
321
See Article 212, Para. 1, letter b), CGI and A. LAGARRIQUE, B. HARDECK, Dispositif anti-
hybrides: retour sur les difficultés d’application à la lumière des premières commentaires de
l’Administration, in Revue de Droit fiscal, No. 22, 30 May 2014, p. 11
85
The thin capitalization rules of Article 212, II and III, CGI (in force until 31st December
2018), applied to French business borrowers, with few exceptions322 and concerned
loans made or secured by related parties323, regardless of the respective residence in
France or outside.
The definition of related party is provided by reference to Article 39, 12 of the CGI and
includes both French and foreign resident persons, so to possibly prevent further
infringements of tax treaty or EU law non-discrimination rules.
III.3.c.3 The rule

Interest from loans within the scope of application of French thin capitalisations rules was
not deductible324 if the following conditions were cumulatively met:
a) the overall related party indebtedness (with the exception of trade receivables)
exceeds one and a half times the net equity of the borrower (debt-equity ratio);
b) related party interest exceeds 25% of the profits of the borrower before interest
and taxes, increased of depreciation and amortization, and of certain lease
payments (interest coverage ratio);
c) interest on related party debt exceeds interest on related party credit (related
party interest ratio).
The limitations did not apply if the borrower was able to demonstrate that its own
debt/equity ratio was not higher than the debt/equity ratio of the group to which it
belongs325.
The described safeguard clause does not correspond to an arm’s length test. An arm’s
length on the amount of debt was not otherwise provided by the French legislation in
force until 31st December 2018326 which envisaged such a test only with respect to the
interest rate.

According to the legislation in force until 31st December 2018, excess interest was not
deductible for tax purposes in the year of accrual, but could be carried forward and
deducted in subsequent years, with some limitations327 and for a declining amount.
322
Exceptions concerned individuals, banks and financial institutions, and other specific entities
(établissements de crédit-bail and sociétés civiles immobilières de construction-vente).
323
The extention to loan secured by related parties was introduced at the end of 2010 with effect
for 2011 and following years. On the notion of loans made or secured by related parties see B.
GOUTHIÈRE, Les impôts dans les affaires internationales, Levallois, 12th ed., 2018, m. no.
26805.
324
Excess interest would still be deductible if it does not exceed the annual amount of euro
150.000,00.
325
See B. GOUTHIERE, Les impôts dans les affaires internationales, Levallois, 10th ed., 2014,
m. no. 26818.
326
B. CASTAGNÈDE, Prècis de fiscalité internationale, Paris, 6a ed., 2015, p. 113.
327
See SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer Pricing and Intra-
Group Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para. 6.1.6.1.3..
86
Interest which was considered excessive under the thin capitalisation rule was not re-
characterised as a deemed dividend (as provided by Article 112, 8, CGI328), with the
effect that also no source taxation would have been applicable. In this latter respect, the
2007 rule deviates from the prior regime329. The same difference arises from the
comparison with the rate limitation rule of Article 212, I, a), CGI with the transfer pricing
rules of Article 57, CGI and with the AAG case law doctrine, all of which provide for the
re-characterisation of the excess interest or the transferred income, as the case may
be330.

The UK rules concerning loans and thin capitalisation were subject to a major
amendment in 2004, following the concern raised by the CJEU Lankhorst-Hohorst
judgment331.
The new rules are contained in sections 152 to 154 of the TIOPA 2010, if both affected
persons are companies. In other situations (e.g., where one of the parties is a partnership
or an individual) the general rules in section 147 of the TIOPA 2010 would apply.
Although both set of rules are based on the arm’s length principle, sections 152 to 154
are more specific, so that different effects may arise332. In the practice of the UK Tax
Authorities, however, sections 152 to 154 are considered to contain general principles,
subject to be applied outside their strict scope of application333.
328
Article 112, CGI contains a list of exclusions from the category of hidden dividend distribution.
Para. 8 specifies that also excluded is the fraction of interest which is not deductible under Article
212, Para. II, 1, Subpara. 6. See B. GOUTHIÈRE, Les impôts dans les affaires internationales,
Levallois, 12th ed., 2018, m. no. 26815.
329
On the re-characterisation of excess interest in the former legislation, see DELATTRE,
International aspects of thin capitalisation. National report. France, in Cahiers de droit fiscal
international, The Hague, 1996, p. 430 s. The Author reminds that the deemed dividends did not
bring along any underlying tax credit (“avoir fiscal”) and examines the applicability of the domestic
parent-subsidiary dividend exemption and the recognition of treaty benefits to non-resident
shareholders.
330
B. CASTAGNÈDE, Prècis de fiscalité internationale, Paris, 5th ed., 2015, p. 108. The effects
of the thin capitalisation rule have no longer been addressed in (the short description of the rules
in force as of 31st December 2018) the 6th edition, published in 2019. On the treatment of excess
interest under the thin capitalisation rule and the difference with other interest deduction
limitations in the CGI, see B. GOUTHIÈRE, Les impôts dans les affaires internationales, Levallois,
12th ed., 2018, m. nos. 26813 and 26815. The difference in treatment of excess interest is also
highlighted by R. COIN, New tendencies in tax treatment of cross-border interest of corporations.
France, in Cahier de Droit Fiscal International, 2008, p. 299
331
M. BARASSI, Circolazione dei modelli tributari e comparazione, in Rivista di diritto tributario,
5, 2013, p. I, 525 accounts the 2004 change in UK legislation as an example of “negative
harmonisation”, or the repeal of national rules in conflict with EU law. Although not representing a
proper circulation of models, the negative harmonisation promotes the convergence of national
legislations.
332
A. J. CASLEY, United Kingdom. Transfer Pricing, Amsterdam, 2019, Para. 8.1.1
333
See HMRC, International Manual, INTM413040: “the explicit instructions regarding factors to
be considered as part of evaluating the arm’s length provision in TIOPA10/S152 and
87
Finance Bill 2017, published on 20 March 2017 has introduced, on the top of thin
capitalization rules, a interest deduction limitation under which net interest expense
should not exceed 30% of the taxable EBITDA. The rule does not apply to groups that
have net interest expense of less than GBP 2 million and the option is given to replace
the 30% limitation with a “group ratio”, i.e. the ratio of net interest to EBITDA for the
worldwide group334.
The thin capitalisation rules, as here described, apply to persons wherever there is a
control relationship between them.
Financing arrangements335 – differently from other provisions - are subject, since 2005,
to transfer pricing rules (under Section 161 of the TIOPA 2010), also where a financing
arrangement is in place which concerns a person which acted together with other
persons and would have control if the rights and powers of all those persons were taken
into account. As a result, Part 4 of the TIOPA 2010 applies to financing provided by a
person who would not otherwise be considered to be within a control, as may happen in
a wide array of financing transactions, frequently associated with private equity
investments. With the exception of the “acting together” rule, the subjective scope of
application is the same of the general transfer pricing provisions.
Also, there is no difference in the territorial scope of application: thin capitalisation rules
are applied since 2004 to both transactions between UK companies and cross-border
transactions336.
Interest deduction limitations may result from other legislation, such as the (world-wide)
debt cap contained in Part 7 of the TIOPA 2010. Such legislation is to be disregarded
when calculating the transfer pricing tax advantage337, at the same time the debt cap
applies after any transfer pricing adjustment has been made338.
III.3.d.3 The rule

The approach of the UK legislation is that transfer pricing rules focus on whether and
how much of a given debt could have been obtained at arm’s length. The application of
the arm’s length rule to the amount of debt (and not only to the remuneration) is the most
remarkable feature of the 2004 reform and requires some specifications, which are
contained in part in the legislation and in part in the guidelines of the Tax Authorities.
TIOPA10/S153 do not apply directly as legislation to loans by non-corporates. Even so, the factors
that are set out in TIOPA10/S152 and TIOPA10/S153 are generally those which are taken into
account by lenders and borrowers acting at arm’s length, so in practice the nature of the lender,
corporate or non-corporate will have little if any impact on how the arm’s length provision is
determined”.
334
Guidance on the new rules has been issued by HMRC, Corporate Finance Manual, CFM95000
Interest restrictions, last updated 28 February 2018
335
Under section 161, Para. 6 of the TIOPA 2010, financing arrangements are those “made for
providing or guaranteeing, or otherwise in connection with, any debt, capital or other form of
finance”.
336
With specific reference to thin capitalisation, see HMRC, International Manual, INTM413090.
337
See TIOPA 2010, section 155(6).
338
HMRC, International Manual, INTM 413010.
88
Section 152 of TIOPA 2010 stipulates the factors that have to be taken into account339
and also specifies that the circumstance that making loans is not part of the business of
the lender is to be disregarded. Finally, section 152 Para. 6, further indicates a number
of matters340 which are relevant to the determination of the arm’s length provisions,
specifying that, in determination of any of such matters, no account is to be taken from
any guarantee provided by a related company (Para. 5).
The same structure and similar contents are to be found in section 153, with reference
to the case where the transactions include the issuing of a security by a company which
is one of the affected persons and the provision of a guarantee by a company which is
the other affected person.
The UK Tax Authorities consider that “the amount of interest payable may be excessive
for one or more reasons - interest rate, excessive duration of lending, restrictions on
repayment, etc - so all terms and conditions should be considered in a thin capitalisation
review. Other less obvious issues of possible interest are the appropriateness of the
currency of the loan (e.g. forex risk) and the presence of guarantees”341.

The effect of rules contained in Part 4, TIOPA 2010 on financing arrangements is the
general effect stipulated at section 147, Para. 4, i.e., that “the profits and losses of the
potentially advantaged person are to be calculated for tax purposes as if the arm's length
provision had been made or imposed instead of the actual provision”. As mentioned
already in respect of general transfer pricing rule, the effect can only consist in the
increase of taxable income or decrease of taxable loss342.
With specific reference to the amount of the debt, it may be summarised that interest is
not deductible to the extent that the debt would have not been available at arm’s length
conditions343.
Disallowed interest is not characterised as a distribution for UK tax purposes.
339
The factors mentioned by Section 152, Para. 2 of the TIOPA 2010 include “ (a)the question
whether the loan would have been made at all in the absence of the special relationship, (b)the
amount which the loan would have been in the absence of the special relationship, and (c) the
rate of interest and other terms which would have been agreed in the absence of the special
relationship”.
340
According to Section 152, Para. 6 of the TIOPA 2010, “The matters are— (a) the appropriate
level or extent of the issuing company's overall indebtedness, (b )whether it might be expected
that the issuing company and a particular person would have become parties to a transaction
involving— (i) the issue of a security by the issuing company, or (ii) the making of a loan, or a loan
of a particular amount, to the issuing company, and (c) the rate of interest and other terms that
might be expected to be applicable in any particular case to such a transaction”.
341
HMRC, International Manual, INTM 413010.
342
See HMRC, International Manual, INTM413050: “The arm’s length provision is only substituted
for tax purposes when there is a potential advantage in relation to UK taxation, as defined in the
first set of bullet points above, so the thin capitalisation legislation - as with transfer pricing more
generally - operates as a ‘one way street’: the legislation can only apply to increase the taxable
profits or decrease the allowable losses in the UK”.
343
A. J. CASLEY, United Kingdom. Transfer Pricing, Amsterdam, 2019, Para. 8.1.2
89
III.3.e Comparative considerations on thin capitalisation and interest limitation
rules
Differences between national thin capitalisation rules or interest limitation rules, defined
for the purpose of the present research as those rules which deny the deduction of
interest on the basis of the deemed excessive amount of either the total interest or the
underlying finance, are much larger than those between transfer pricing rules.
The choice of the UK, inspired by the concern of assuring the consistency of the system
with EU fundamental rights, as outlined in the specific matter by the CJEU Lankhorst-
Hohorst judgment, is to provide the application of the arm’s length rule to the amount of
debt (and not only to the remuneration)344.
Italy has adopted an approach under which the deduction of interest is limited to a
certain, fixed, fraction of earnings345.
In France, which has had a specific rule since 1941, the deduction of interest has been
subject, until 31st December 2018, to a multi-tier test, based on the debt to equity ratio,
to the interest to earnings ratio and on the global debt to equity ratio of the group to which
the French company belongs346.
The differences here are evident and much more significant than the few similarities,
such as the French interest to earnings ratio (an element of the multi-tier test) which is
the same criterion adopted (albeit as the sole criterion) by the Italian ITC. Furthermore,
the present French and Italian provisions do not include any arm’s length test which could
reduce the difference with the UK system.
The above divergence of criteria (and especially the provision by the Italian and French
systems of fixed thresholds, not subject to an arm’s length test) is more likely to give rise
to economic double taxation than in transfer pricing rules. Indeed, it may be expected
that the Country of the lender is not willing to recognise an adjustment to agreed
conditions when made under the borrower Country legislation and based on different
criteria.
The described differences are particularly relevant considering that the national rules
have the same (more or less implicit) aim of counteracting excessive indebtedness.
But the rules diverge because were adopted at different times, and – in the case of the
UK – also under the influence of a temporary judicial interpretation on the consistency of
national thin capitalisation rules with the EU fundamental freedoms which was later
changed. Also, the Italian rule was greatly influenced by the German model, while France
has adopted a combination of criteria. The Italian policy objective (which goes beyond
taxation) of promoting the capitalisation of companies has also had a role.
The comparison with transfer pricing rules also suggests that a reason for the divergence
is the absence of an explicit and dedicated criterion in the OECD Model347.
344
Para III.3.d.3
345
Para III.3.b.3
346
Para III.3.c.3
347
Thin capitalisation is presently addressed only at Point 3 of the OECD Commentary on Article
9, according to which Article 9 also applies to the evaluation of the amount of a loan and “the
application of rules designed to deal with thin capitalisation should normally not have the effect of
increasing the taxable profits of the relevant domestic enterprise to more than the arm’s length
profit”.
90
III.4 Hybrid financial Instruments
III.4.a Categorisation and definition of hybrid financial instrument qualification

rules
The comparison of national rules, as mentioned in Para. III.1 above, presupposes the
identification of comparable rules, i.e. of rules which fulfil the same function.
This Paragraph aims at the comparison, from the perspective of the borrower, of national
rules which control the deduction, for income tax purposes, of the remuneration of
financial instruments348, on the basis of the respective qualitative features (i.e.: other than
the amount of the loan or of the remuneration). In other words, the rules addressed are
those which have the function of classifying financial instruments for tax purposes349.
Those rules are frequently rooted in the distinction between debt and equity, which
derives from corporate law and is reflected in accounting rules350.
The distinction generally leads to a major difference in treatment for income tax
purposes. Indeed, the return on debt is in principle deductible at the level of the borrower
and is taxed in the hands of the lender. Conversely, the return on equity is generally not
deductible at the level of the distributing company and benefits, at the level of the
shareholder, from exemption or imputation rules351.
The mentioned difference in treatment may have a relevant distributive effect in an
international tax context, since in broad terms equity return is taxed in the country of
residence of the issuer and debt return is taxed in the country of residence of the
investor352.
It is easy to distinguish equity from debt at the extremes of the two categories (e.g.:
common stocks on the one side and short-term unsubordinated debt on the other side).
However, the compartmentalisation of corporate finance into equity and debt does not
truly capture the diversity of financial instruments created by the market practice. A wide
range of financial instruments combine elements of equity and debt and are generally
referred to as hybrid instruments353, to reflect the difficulty of a sharp attribution to either
category.
348
International Accounting Standards IAS 32 and 39 define a financial instrument as "any
contract that gives rise to a financial asset of one entity and a financial liability or equity instrument
of another entity".
349
J. DUNCAN, Tax treatment of hybrid financial instruments in cross-border transactions.
General report, in Cahiers de droit fiscal international, Rotterdam, 2000, p. 21
350
W. SCHÖN et Al., Debt and Equity: What’s the Difference? A Comparative View, July 8, 2009,
Max Planck Institute for Intellectual Property, Competition & Tax Law Research Paper No. 09-09.
Available at SSRN: http://ssrn.com/abstract=1457649, Para. III
351
Said rules, designed in order to avoid economic double taxation of dividends, limit the levy of
taxes in the hands of the investor. Dividends may also be fully taxable under the classical system.
352
W. SCHÖN et Al., Debt and Equity: What’s the Difference? A Comparative View, July 8, 2009,
Max Planck Institute for Intellectual Property, Competition & Tax Law Research Paper No. 09-09.
Available at SSRN: http://ssrn.com/abstract=1457649, para IV.
353
A different definition is proposed by J. DUNCAN, Tax treatment of hybrid financial instruments
in cross-border transactions. General report, in Cahiers de droit fiscal international, Rotterdam,
2000, p. 22, according to whom a hybrid instrument is differently “a financial instrument that has
economic characteristics that are inconsistent, in whole or in part, with the classification implied
91
The spectrum of hybrid instruments ranges from corporate shares with certain loan
features (such as, e.g., certain preference shares) to loans with equity investment
features (e.g., result related remuneration).
Elements which contribute to the hybrid nature of a debt instrument and which can raise
uncertainties and conflict of qualifications include conversion rights, participation in
profits, deferral of payments, the provision of long or indefinite term for repayment,
subordination. Similarly, the provision of returns not linked to earnings or mandatory
redemption may have hybridisation effects on equity instruments354
As effectively pointed out, “there is no principled way to draw a distinction between debt
and equity”355. National jurisdictions have adopted a variety of solutions based on
different criteria and this may easily lead to economic double taxation of the remuneration
of a financial instrument. This typically happens where the remuneration, due to different
qualification of an hybrid financial instrument, is non-deductible as equity return for the
issuer and taxable as debt return in the hands of the investor356.
The evaluation of the negative effects of such conflicts of qualification should take into
account that the issuance of hybrid instruments, particularly in the public markets, is
frequently based on considerations unrelated to taxes357.
The opposite may also be true, especially in cross-border intra-group transactions: the
hybrid features of a financial instrument may be specifically designed in order to achieve
tax arbitrage such as, e.g., deduction for the borrower and little or no taxation for the
lender.
Rules designed to curtail tax arbitrage transactions would thus typically determine the
tax treatment of the remuneration on one party of the transaction also taking into account
the treatment of the remuneration in the hands of other party358.
Such approach has in recent years become part of the OECD/G20 initiatives against
base erosion and profit shifting. The Action 2 Final Report359 formulates, in particular,
recommendations for hybrid mismatch rules that adjust the tax treatment of a hybrid
instrument in one jurisdiction on the basis of the tax treatment in the other jurisdiction
by its legal form”. Article 9, Para. 2 of Directive (EU) 2016/1164, as amended by Directive (EU)
2017/952 (both examined below at Para. VII.3.b.5) defines hybrid financial instruments on the
basis of the “differences in legal characterisation in two States”.
354
The bipolar approach and the examples are taken from J. DUNCAN, Tax treatment of hybrid
financial instruments in cross-border transactions. General report, in Cahiers de droit fiscal
international, Rotterdam, 2000, p. 27. Further examples can be found in P. BROWN, Debt-equity
conundrum. General report, in Cahiers de droit fiscal international, 2012, p. 23
355
P. BROWN, Debt-equity conundrum. General report, in Cahiers de droit fiscal international,
2012, p. 20.
356
A systematic analysis of the possible combination of rules which can lead to double taxation
or double non taxation of instruments has been drawn by E. EBERHARTINGER, M. SIX, Taxation
of Cross-Border Hybrid Finance: A Legal Analysis, in Intertax, 2009, no. 1, p. 4 et seq.
357
General report, in Cahiers de droit fiscal international, Rotterdam, 2000, p. 22
358
General report, in Cahiers de droit fiscal international, Rotterdam, 2000, p. 29 remarks that
outside the case of tax arbitrage rules little or no significance is usually attributed to the tax
treatment of the instrument under the laws of any other country.
359
OECD/G20, Base Erosion and Profit Shifting Project. Neutralising the Effects of Hybrid
Mismatch Arrangements. Final Report, Paris, 2015.
92
(“linking rules”) so to avoid situations where payments are deductible under the rules of
the payer jurisdiction and are not included in the income of the payee in its own
jurisdiction360. Such rules will be examined in more detail (at Para VII.3.b.5 below).
* * *
In what follows, national rules on the characterisation of financial instruments and their
remuneration of Italy, France and the UK are subject to a comparative analysis,
especially focused on:
- the general criteria of the debt-equity distinction for tax purposes and their adherence
to the corporate law or accounting categorisation;
- the possible difference in the deduction of the remuneration of domestic and cross-
border financial instruments;
- whether such general criteria or specific rules, if any, take into account, for the purposes
of the deduction of the remuneration, the treatment of the same remuneration in the
hands of the (either domestic or cross-border) investor.
III.4.b Italy

The reform of company law, enacted in 2004, has introduced new forms of corporate
financing361, which do not fit in the traditional categories of “debt” and “equity” that had,
until then, characterised the corporate law system and, consequently, the statutory tax
provisions362.
Having lost the opportunity to make reference to well-defined corporate law categories,
the tax legislature has introduced, since January 1st 2004, the new definitions of financial
instruments similar to shares and of financial instruments similar to bonds.
III.4.b.2 Scope of application

The rule applies regardless of the status or the residence of the investor and also
regardless of the tax treatment of the remuneration received in the hands of the investor.
360
An example of such rule is in Recommendation No. 1.1: “(a) The payer jurisdiction will deny a
deduction for such payment to the extent it gives rise to a D/NI outcome. (b) If the payer jurisdiction
does not neutralise the mismatch then the payee jurisdiction will require such payment to be
included in ordinary income to the extent the payment gives rise to a D/NI outcome (…)”.
361
Reference is made, in particular, to financial instruments provided by Article 2346, Para. 6, of
the Civil Code (issued in front of contributions in kind or in cash and attributing to the investor
certain administrative rights, but not the vote in the shareholders meeting) and by Article 2447 –
ter of the Civil Code (financial instruments related to a specific business initiative).
362
See M. LEO, Le imposte sui redditi nel testo unico, Milano, 2016, p. 611 et seq. who notes that
the earlier tax legislation did not contain any definition of debt or equity but was based on the
related corporate law definitions. It is also significant to remark that G. B. CALÌ, Tax treatment of
hybrid financial instruments in cross-border transactions. National Report. Italy, in Cahiers de droit
fiscal international, Rotterdam, 2000, p. 403, concluded that, at the time of the survey, “no specific
rules govern the classification of hybrid financial instruments for tax purposes”.
93
III.4.b.3 The rule
According to Article 109, Para. 9, ITC, financial instruments which directly or indirectly
purport the participation of the investor to the economic results of the issuer, of other
group companies, or of specific business initiatives are qualified as similar to shares and
are attributed the same tax regime363.
Those instruments which imply a refund obligation on the head of the issuer and which
do not attribute the investor any authority on the issuer, are conversely qualified as
similar to bonds.
Such distinction, which has been referred to as an “imperfect dichotomy” 364 leaves room
for the intermediate, undefined category of “atypical” instrument, whose tax regime is,
for the investor, analogous to the tax regime of bonds, and which ensures deduction on
the head of the issuer of that portion of the remuneration which is not related to the
economic results of the issuer, of other group companies, or of specific business
initiatives.
It is worth highlighting that, from the issuer perspective, the condition for the application
of the rule of Article 109, Para. 9, ITC is – in all cases - the participation of the investors
to the “economic results”. The connection to the economic results does not imply the
non-deductibility of the entire remuneration, but only of the connected portion, to the
effect that any other remuneration either fixed or subject to be determined on the basis
of parameters other than the economic result of the issuer, of other group companies or
specific business initiatives, would remain deductible.
III.4.b.4 The effects

The remuneration of instruments which are qualified as similar to shares is not deductible
in the hands of the issuer 365, while the remuneration of instruments which are qualified
as similar to bonds is deductible, within the general limitation posed by the Italian interest
limitation rules (see Para. III.b.3 above).
III.4.c France

In general terms, the French tax characterisation of debt and equity is closely linked to
the principles and categories of corporate law and GAAPs. Accordingly, shares (even
nonvoting preferred shares) would be generally treated as equity, while other instruments
(even subordinated, profit participating, perpetual or convertible) are generally treated as
debt for tax purposes366.
363
P. FLORA, Participating financial instruments: opportunities and risks, in Derivatives &
Financial Instruments, 2006, No. 2, p. 77 ff.;
364
See G. MAMELI, The debt-equity conudrum. National Report. Italy, in Cahiers de droit fiscal
international, Rotterdam, 2012, p. 381 ff.
365
P. FLORA, Participating financial instruments: opportunities and risks, in Derivatives &
Financial Instruments, 2006, No. 2, p. 77 ff.;
366
On the primacy of corporate law and accounting qualifications, J. HEMERY, S. MOSTAFAVI,
The debt-equity conundrum. National report. France, in Cahiers de droit fiscal international, The
Hague, 2008, p. 298 ; R. COIN, New tendencies in the tax treatment of cross-border interest of
94
The French tax authorities had issued, in 2007, an instruction referred to thin
capitalisation rules, which included within the scope of application also interest deriving
from hybrid financial instruments, to the extent that they could be qualified as debt
instruments. To this end, the instruction went on, a case by case analysis of the features
of the instrument would have been necessary367.
Some more specific guidance on the qualification of an instrument as debt or equity was
later provided on the occasion of an instruction concerning the treatment of Islamic
finance instruments368, which is of interest since those instruments can’t simply be
framed within the traditional categories of corporate law. The instruction (in its current
updated version) states that the remuneration is deductible if the instrument qualifies as
debt (Para. 220) and lists the elements taken into account for the purposes of such
qualification, i.e.: preference on all categories of shares (Para. 160) and absence of
voting rights (Para. 170). Conversely, other features such as the linkage to the
performance of the issuer (Para. 180) or the possibility of a partial – rather than full –
refund (Para. 200) do not prevent the debt qualification369.
Until 2013, the tax deduction of interest on the head of the borrower was not dependent
upon the tax treatment on the head of the lender370.
A relevant provision in this matter was introduced in 2014371, with retroactive effect to the
financial year in progress as of September 25th 2013, and is to be now found in Article
212, Para. 1, letter b) of the CGI, in force as of 31st December 2018. The rule at stake
does not directly refer to the qualification of interest in the hands of the recipient but –
with an indirect approach which has similar results - subordinates the deduction of
interest to the taxation (at a minimum effective rate) of the same interest in the hands of
the recipient. Its purpose is to avoid double non-taxation of interest and, in this
perspective, it is also referred to in French tax literature as an anti-hybrid rule372.
corporations. National report. France, in Cahier de droit fiscal international, Amersfoort, 2008, p.
292 f.. Also according to SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer
Pricing and Intra-Group Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para.
6.2.2., “the legal and accounting characterization of the instrument seems to be the determining
factor”. For a brief overview of corporate law categories and regulations, see F. BARRIER, Tax
treatment of hybrid financial instruments in cross-border transactions. National report. France, in
Cahiers de droit fiscal international, Rotterdam, 2000, p. 291 s.
367
See BOI 4 H-3-11, now recast into BOI-IS-BASE-35-20-20-10-20140415, Para. 10. On the
point see also SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer Pricing and
Intra-Group Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para. 6.2.2..
368
See BOI FE/S2/10, no.78 of 24 August 2010, recast since 12th September 2012 into BOI-DJC-
FIN-20-20120912. J. HEMERY, S. MOSTAFAVI, The debt-equity conundrum. National report.
France, in Cahiers de droit fiscal international, The Hague, 2008, p. 298 consider that it may be
to assumed that the reasoning referred to the specific instrument examined in the instruction
represents the broader view of the French administration in respect of debt–equity classification.
369
Reference is to the Paragraphs of BOI-DJC-FIN-20-20120912 currently in force.
370
With the exception of interest paid to persons resident in non-cooperative countries or
privileged tax regime under Article 238A of the CGI. See, e.g., R. COIN, New tendencies in the
tax treatment of cross-border interest of corporations. National report. France, in Cahier de droit
fiscal international, Amersfoort, 2008, p. 300.
371
LOI n°2014-891 du 8 août 2014 - Article 20.
372
See, e.g., P. ESCAUT, Transfer pricing. France, Amsterdam, 2019, Para. 8.1.1.; B.
GOUTHIÈRE, Les impôts dans les affaires internationals, Levallois, 12th ed., 2018 m.no. 26870,
A. LAGARRIQUE, B. HARDECK, Dispositif anti-hybrides: retour sur les difficultés d’application à
95
The deduction limitation of Article 212, I, b), CGI applies to related party financing (where
the definition of related party is given by Article 39, 12, CGI.
The lender must be an enterprise373 and the rule applies identically to both domestic and
cross-border transactions, although special rules are provided for the purposes of the
computation of the effective tax rate with reference to the non-resident lenders.
At a closer look, however, it arises that the domestic situations to which the rule would
actually apply are quite rare, and would include lenders which benefit from special tax
regimes of only marginal importance and recurrence. It may be then questioned whether
the rule actually does not produce a difference in treatment between domestic and cross-
border situations, in the perspective of EU freedoms and treaty-based non-
discrimination374
III.4.c.3 The rule

Under Article 212, I, b), CGI, interest paid to lenders which are subject, on such interest,
to a tax rate lower than 25% of the French statutory rate375 is not deductible.
The definition of interest for the purposes of the mentioned provision is the same which
applies to thin capitalisation376.
The core condition set forth by the provision is the comparison between 25% of the
French statutory corporate income tax rate and the taxation of received interest in the
hands of the recipient.
Where the recipient is a French resident, and since interest is ordinarily taxable in the
hands of the receiving entity, the comparison leads essentially to denying the deduction
of interest paid to borrowers which benefit from special tax regimes, such as the Société
d'investissements immobiliers cotée (SIIC) which are exempt from corporate income
tax377.
If conversely the recipient is not resident in France, Article 212, I, b) provides that the
actual tax rate on received interest is not to be compared with 25% of the French
statutory rate but with the French tax that would have been applied on that same interest
la lumière des premières commentaires de l’Administration, in Revue de Droit fiscal, No. 22, 30
May 2014; D. GUTMANN, Droit fiscal des affairs, 10th ed., Paris, 2019, p. 334.
373
Exceptions are foreseen in respect of transparent entities or undertakings for collective
investment, when resident in France or in Countries, other than those with a privileged tax regime,
which have entered into an agreement on administrative assistance with France. See P. BURG,
France - Corporate Taxation, Amsterdam, 2019, Para. 1.4.5.
374
The issue is raised by A. LAGARRIQUE, B. HARDECK, Dispositif anti-hybrides: retour sur les
difficultés d’application à la lumière des premières commentaires de l’Administration, in Revue de
Droit fiscal, No. 22, 30 May 2014, p. 16 f.
375
Article 212, I, b) CGI reads as follows: « l'entreprise qui a mis les sommes à sa disposition est,
au titre de l'exercice en cours, assujettie à raison de ces mêmes intérêts à un impôt sur le revenu
ou sur les bénéfices dont le montant est au moins égal au quart de l'impôt sur les bénéfices
déterminé dans les conditions de droit commun ».
376
BOI-IS-BASE-35-50-20140805, of August 5th 2014, Para. 20 refers for such purposes to BOI-
IS-BASE-35-20-10-20140415 of April 15th 2014.
377
The example is drawn from BOI-IS-BASE-35-50-20140805, Para. 50.
96
if the receiving enterprise had been established in France. The approach is further
detailed in the official instructions, which specify that the comparison does not concern
the overall tax rate of the receiving company, but the specific tax burden on interest, so
that e.g. if interest is taxed in the hands of the foreign enterprise only for half of its
amount, the actual tax rate would be half of the foreign statutory rate 378.
Such criterion does not perfectly match with the aim of counteracting hybrid financial
instruments and also goes beyond the OECD recommendations related to BEPS Action
N. 2, since it does not only apply to hybrid mismatches but to all cases where the lender
is subject to a low effective taxation379.

Interest in respect of which the condition of Article 212, I, b), CGI is not met, is not
deductible for tax purposes in the hands of the borrower. Non-deductible interest is not
re-characterised as a deemed dividend, so that also no source taxation would be
applicable380.

Until 1996, there was little specific legislation on the taxation of corporate debt. General
tax rules, along with case law, were applicable in order to determine whether amounts
were revenue or capital381. In such framework, interest was mostly taxed or relieved on
a paid basis.
A profound reform was achieved with Finance Act 1996, which introduced an
autonomous body of legislation applying to “loan relationships” and which largely
followed the accounting practice as to the recognition of profits and expenditure382.
The loan relationship legislation was later rewritten as part of the Tax Law Rewrite project
and now appears at Parts 5 and 6 of the Corporation Tax Act 2009. The legislation is
complemented by the administrative guidance of the HMRC Corporate Finance Manual.
378
See BOI-IS-BASE-35-50-20140805, Para. 80 to Para. 100.
379
This argument is further elaborated by A. LAGARRIQUE, B. HARDECK, Dispositif anti-
hybrides: retour sur les difficultés d’application à la lumière des premières commentaires de
l’Administration, in Revue de Droit fiscal, No. 22, 30 May 2014, p. 12
380
See BOI-IS-BASE-35-50-20140805, of August 5th 2014, Para. 230. The same qualification
is supported by A. LAGARRIQUE, B. HARDECK, Dispositif anti-hybrides: retour sur les difficultés
d’application à la lumière des premières commentaires de l’Administration, in Revue de Droit
fiscal, No. 22, 30 May 2014, p. 16
381
As explained in HMRC, Business Income Manual, BIM35002, there is no statutory definition
of what constitutes a capital item, and the concepts of capital or revenue receipts and expenditure
have evolved through the decisions of the courts over the last two centuries.
382
HMRC, Corporate Finance Manual, CFM30120; D. SOUTHERN, Taxation of loan relationships
and derivative contracts, Haywards Heath, 2007, p. 111 et seq.; J. TILEY, G. LOUTZENHISER,
Advanced topics in revenue law, Oxford, 2013, p. 100 et seq..
97
Still after the 1996 reform, there is no statutory definition of debt and equity383, as well as
no statutory definition of interest384 to the effect that the question of what constitutes
interest relies on accounting principles, case law and on administrative guidance385.
UK tax legislation, in certain circumstances, re-characterises interest (and other
remunerations) as a distribution. Such re-characterisation of interest as a distribution
does not follow the accounting divide between equity and debt386 and operates with
reference to two main categories of securities387:
 the “non-commercial securities” (Section 1000(1)E of the CTA 2010), i.e., those
yielding returns in excess of a reasonable commercial return.
 the “special securities”, which are addressed by Section 1000(1)F and defined by
Section 1015 of the CTA 2010 on the basis of implicit criteria of similarity with
equity388.
In accordance with the functional criteria presented at Para III.1 above, the rules on “non-
commercial securities” can be argued to be more similar to those on transfer pricing than
to those on income qualification. Indeed, the function of said rules is to set a (quantitative)
limitation to the debt return on the basis of a comparison with a market reference. For
this reason, the “non-commercial securities” rules have been examined at Para III.2.d.
above, while the present paragraph is devoted to the analysis of the rules on “special
securities” only.
383
HMRC has issued guidance on the matter with reference to thin capitalisation in International
Manual, INTM517020 and INTM517030. See also BRAMWELL et. Al., Taxation of Companies
and Company Reconstructions, London, Release 15, 2014, Para. J3.1.22 et seq.; M. PENNEY,
Tax treatment of hybrid financial instruments in cross-border transactions. National Report. United
Kingdom, in Cahiers de Droit Fiscal International, Rotterdam, 2000, p. 646.
384
D. SOUTHERN, Taxation of loan relationships and derivative contracts, Haywards Heath,
2007, p. 4 and p. 111.
385
Several cases have highlighted the characteristic of interest as the compensation for the use
of money over a period of time, see Bennett v Ogston, 15 T C 374, Wigmore v Thomas
Summerson, 9 T C 577, Willingale v International Commercial Bank, 52 T C 242, Westminster
Bank v Riches (28TC153). See also the discussion and summary of principles in HMRC,
CFM33030. Loan relationships: computational rules. What is interest?
386
G. MORSE, D. WILLIAMS, Davies: Principles of Tax Law, London, 7th ed., 2012, p. 236 et
seq.; N. LEE, Revenue Law, London, 30th ed., 2013, p. 1149; S. RELF, British Tax Reporter, Vol.
7th, Taxation of companies, Kingston upon Thames, 2004, Para. 743-500.
387
The re-characterisation does no longer apply with reference to thin capitalisation rules: since
April 1st 2004, Section 209(2)(da) of the ICTA 1988 was replaced by the provisions of Part 4 of
the TIOPA 2010, to the effect that excess interest is determined under transfer pricing rules and,
although not deductible, is not qualified as a distribution. There are other rules which limit the
deduction of interest without operating any requalification: unpaid interest between connected
parties (CTA 2009, s. 373), interest on loan relationships with an “unallowable purpose” (CTA
2009, ss. 441, 442) and worldwide debt cap (TIOPA 2010, s. 231–259). For an overview of interest
deduction rules in the UK, see D. SOUTHERN, Debt-equity conundrum. National Report United
Kingdom, in Cahiers de droit fiscal international, Vol. 97b, 2012, p. 766 f.
388
As explained in HMRC, International Manual, INTM655070, the legislation “re-characterises
as a distribution certain interest or other value passing from a company in respect of securities
which in reality amounts to the withdrawal of profit from a company”.
98
For sake of completeness, it should be mentioned that a further situation where interest
may be characterised as a distribution, is that of the “deduction schemes”389, which in
general terms are arrangements giving rise to a UK tax advantage and being
characterised by the risk that (on a global basis) either two deduction are given in respect
of the same expense or a deduction is given but there is no corresponding income
taxation on the recipient390. Specific rules were introduced with effect from 16 March
2005 to counter such arrangements to avoid UK tax. The characterisation of interest as
a distribution in presence of “deduction schemes”391, implies that said interest be non-
deductible.

For the purposes of the re-characterisation rules, special securities are those which meet
any of the conditions in A to E of CTA10/S1015 and include five sub-categories392: bonus
securities, (non-listed) convertible securities, result-linked securities, securities
connected with shares and, finally equity notes issued to an associated or funded
company. Each sub-category is addressed in more detail below.
A bonus security is a security issued otherwise than for new consideration. Any payment
in respect of a bonus security is considered to be a distribution, even if it represent a
repayment of the principal.
Special securities include convertible securities (as defined by Section 1015(3)), with the
exclusion of securities listed on a recognised stock exchange or issued on terms
reasonably comparable with those of listed securities is a security issued otherwise than
for new consideration.
Result-linked securities are those where the remuneration for the use of principal
secured is connected to the results of the business (or part of the business) of the
issuer393. Such connection appears to be given a wide interpretation: administrative
practice would include remuneration liked to results of a specific initiative (even
calculated before interest) or, arguably beyond the provision, remuneration linked to the
rise in value of an asset394. The connection would not arise if the remuneration is in
inverse proportion to the results of the issuer.
Securities are considered to be connected with shares for the purposes of the re-
characterisation rule if (under the legal terms of the shares or the securities or the related
389
See TIOPA 2010, ss. 231–259, under the heading “Tax Arbitrage”. The rules are explained in
a dedicated section of HMRC, International Manual, INTM590000 et seq..
390
J. LINDSAY, Tax Arbitrage, in Simon’s Taxes, 2015, p. D4-165 et seq.
391
TIOPA 2010, ss. 231–259, under the heading “Tax Arbitrage”.
392
See HMRC, Company Taxation Manual, CTM15515.
393
D. SOUTHERN, Taxation of loan relationships and derivative contracts, Haywards Heath,
2007, p. 115 suggests that it is a general principle that if a payment is linked to something other
than the principal, it is not interest. The Author makes reference to AW Walker & Co. v. IRC (12
TC 297) where the Court states that a payment by reference to the profits of the business is not
interest but “giving the lenders a share of profits”.
394
See HMRC, Company Taxation Manual, CTM15515, Example 2. Against this construction, R.
BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London, Release 8,
2012, Para. E.1.6.18, who consider that “unless the company’s accounts recognise such a rise
(…) this would seem to be too tenuous a connection to the company’s actual results” and
consequently, the HMRC interpretation exceeds “what could be considered a legitimate
construction of the provision”.
99
transfer rights) it is necessary or advantageous for the person who owns, acquires or
disposes of the security to also own, acquire or dispose of a proportionate portion of
shares. In essence, the requalification operates where the connection is such that “the
holdings of each can only sensibly be transferred together” with the other395.
The last sub-category consist of “equity notes”, when issued by a company which is – at
the time of interest payment - an “associated company” or a “funded company”396 of the
recipient. An equity note is a security which contains no date of redemption or whose
date of redemption falls (under the terms of the security or because of the submission to
a condition which is certain or likely to occur) after the end of the permitted period (i.e.,
a period of 50 years beginning with the date of issue of the security)397.
The regime for “special securities” applies in respect of issuers subject to UK corporation
tax, but finds a noteworthy exception where the recipient of the interest (or other return)
is “another company which is within the charge to corporation tax”398. In such case, the
“special securities” rules do not apply and interest remains fully deductible for the
borrower (and correspondently taxed as such in the hands of the lender).
The reference to companies being within the charge to corporation tax includes UK
resident companies and excludes non-resident companies, unless carrying on a trade in
the UK through a permanent establishment. The exception thus depicts a difference in
treatment between UK resident and non-resident corporate recipients399.
III.4.d.3 The rule
As an effect of loan relationships legislation, companies are generally taxable on the
debits and credits that are recognised in their statutory accounts in respect of their loan
relationships and related transactions400. As a result, interest relating to loan
relationships is deductible according to how interest cost is reflected in the accounts.
395
Richard BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London,
Release 8, 2012, Para. E.1.6.18.
396
A company is an “associated company” in case of a shareholding relationship of more than
75% and is a “funded company” when directly or indirectly funded by the issuer or an associated
company.
397
HMRC, Company Taxation Manual, CTM15515 clarify that this category is intended to prevent
hybrid mismatch, since equity notes are “loan instruments designed to take advantage of a
difference between their treatment in the UK and that in other countries, notably the USA. Such
notes would normally have been treated as debt instruments, and payments made in respect of
them as interest. (…) In the other country the notes would be recognised as equity instruments”.
398
CTA 2010, Section 1032(1). See J. GHOSH et Al., Ghosh, Johnson and Miller on the taxation
of corporate debt and derivatives, London, 2009, Para. D2.6.; S. RELF, British Tax Reporter, Vol.
7th, Taxation of companies, Kingston upon Thames, 2004, Para. 743-500
399
It is worth underlining that the exemption does not apply to “non-commercial securities”:
consideration in excess of a reasonable commercial return would be characterised as a (non-
deductible) distribution also where the recipient was subject to UK corporation tax. As just
mentioned, however, rules on “non-commercial securities” would rarely apply in transactions
between companies within charge to corporation tax, due to the likely overlap with the prevailing
transfer pricing rules.
400
The general rule according to which loan relationship credits and debits for tax purposes are
the amounts recognised in the company’s profit or loss for the period, in accordance with generally
accepted accounting practice (GAAP) can be found at CTA09/S307(2). FA04/S50 defines
‘generally accepted accounting practice’ as being either IAS (if the company uses that for its
accounts) or UK GAAP. A non UK company (unless it uses IAS) must therefore prepare its tax
100
The provision of CTA10/S1000(1)F applies to interest and other types of distribution in
respect of special securities and re-characterises as a distribution those interest or other
value in respect of special securities, unless the recipient is a corporation subject to UK
corporation tax.

In general, payments of interest are deductible for the purposes of determining the
taxable income of the paying company, while distributions are not401. So, the direct effect
of the re-characterisation of certain interest as a distribution is that the amounts paid are
not deductible402.
Economic double taxation may thus arise where the recipient is not subject to UK
corporate income tax (e.g., if is a non-resident company or a UK resident individual) to
the extent that interest (and other remunerations) is not correspondingly treated as an
exempt distribution403.
By contrast, according to CTA10 S1032 the provisions of CTA10, S1000(1)F do not apply
where the recipient is subject to UK corporate income tax.
III.4.e Comparative considerations on hybrid financial instruments

The comparative analysis of rules which control the deduction, for income tax purposes,
of the remuneration of financial instruments, on the basis of the respective qualitative
features (i.e.: other than the amount or the measure of the remuneration) has revealed
diverging approaches.
In Italy, the remuneration of financial instruments is not deductible for the portion which
directly or indirectly purports the participation of the investor to the economic results of
the issuer, of other group companies, or of specific business initiatives404.
In France, deduction is made dependent on the corporate law and accounting
qualification of the instrument, but subject to conditions as to the treatment of interest on
the head of the lender. Interest deduction would thus be denied where the remuneration
is subject to tax at a rate lower than 25% of the French statutory rate405.
In the UK, while interest relating to loan relationships is generally deductible according
to how interest cost is reflected in the account, statutory provisions re-characterise as a
distribution those interest or other value in respect of “special securities”, a category
which includes bonus securities, (non-listed) convertible securities, result-linked
computations as if it used UK GAAP. See HMRC, Corporate Finance Manual, CFM33070 and
CFM33090.
401
CTA 2009, s. 1305(1) reads: “13 “In the calculation of a company’s profits for corporation tax
purposes, no deduction is allowed in respect of a dividend or other distribution.”. See R.
BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London, Release 3,
2010, Para. E.1.6.1.; D. SOUTHERN, The debt-equity conudrum. National Report. United
Kingdom, in Cahiers de droit fiscal international, Rotterdam, 2012, p.753.
402
CTA 2009, sections 465 and 1305. See J. GHOSH et Al., Ghosh, Johnson and Miller on the
taxation of corporate debt and derivatives, London, 2009, Para. D2.2.
403
And indeed, distributions that fall within Section 1000(1) F cannot be exempt distributions (see
HMRC, International Manual, INTM653020).
404
Para III.4.b.3
405
Para III.4.c.3
101
securities, securities connected with shares and, finally equity notes issued to an
associated or funded company, a sub-category which includes notes with a maturity in
excess of 50 years406.
In summary, the criteria are almost completely different, the only similarity that can be
found being the one between the Italian rule and the UK sub-category of result-linked
securities. Differences also concerns the subjective profiles of qualification rules: the
Italian rules are subject to conditions which only take the issuer into account, while
French and UK rules – as mentioned - also take into consideration the treatment of the
remuneration on the head of the lender.
This large divergence derives from the attempt of national tax legislatures to capture the
diversity of financial instruments created by the market practice and which have blurred
the compartmentalisation of corporate finance into equity and debt in a context where
there are no international standards and no “principled way” to draw a distinction407.
Also, it may be generally argued that a divergence is more likely to emerge when it
concerns a qualification rule (such as those at stake) rather than an evaluation rule (as
those on transfer pricing and, to a certain extent, thin capitalisation408.
Such divergence is likely to generate economic double taxation in cross-border
situations. Indeed (the point will be addressed in Chapter IV) it can be expected that the
State of the investor may recognise the equity return qualification of certain
remunerations made by the State of the issuer only if such qualification is made on the
basis of similar criteria. So, e.g., Italy may in theory recognise that the remuneration of
UK result linked securities be qualified as equity return since UK and Italian rules are
similar on the point, but will likely not do so if the UK characterisation of the remuneration
as a distribution is made on the basis of the convertibility of the security into shares or
on the basis of its maturity exceeding 50 years, both criteria being unrelated to the Italian
corporate tax system.
III.5 Mergers and the taxation of transferred assets
III.5.a Categorisation and definition of mergers and rules concerning the transfer
of assets
Where a company resident in one State merges into a company resident in another
State, economic double taxation may arise if the merger implies taxation in the State of
the transferring company of capital gains on transferred assets, but the State of the
receiving company does not recognize a corresponding uplift in the tax basis of the same
transferred assets.
In the following Paragraphs, the tax regime of mergers is examined in Italy, France and
the UK in order to ascertain whether the respective legislations provide for the taxation
of capital gains on transferred assets in the hands of the transferring company and if
there is any difference in treatment, in this regards. between domestic and cross-border
mergers. In a following Paragraph, the recognition of the tax value of the transferred
406
Para III.4.d.3
407
P. BROWN, Debt-equity conundrum. General report, in Cahiers de droit fiscal international,
2012, p. 20.
408
This argument draws on the distinction made by G. MAISTO, Il transfer price nel diritto
tributario italiano e comparato, Padova, 1985, p. 256 et seq. between double taxation that results
from a qualification conflict and double taxation that results from a quantification conflict.
102
assets on the head of the receiving company will be examined in the same three
jurisdictions, also with a view to possible differences between domestic and cross-border
mergers.
In order to ensure, in this particular case, that national tax rules here examined are
actually comparable, it seems necessary to preliminarily define a common notion of
merger and cross-border merger. A significant contribution may come, to this end, from
the EU directives.
As far as cross-border mergers are concerned, the fundamental reference is represented
by Directive 2009/133/EC409 on certain tax profiles of cross-border reorganisations.
According to its Article 2, Para. A), a merger is an operation whereby one or more
companies “on being dissolved without going into liquidation, transfer all their assets and
liabilities” to an existing or newly formed company, in exchange for shares in the
receiving company (and possibly a cash payment not exceeding 10 %), unless all the
shares of the transferring company are owned by the receiving company. For the
purposes of Directive 2009/133/EC, cross-border operations are those “involving
companies from two or more Member States”, with the specification that a company is
from a Member State if it meets three requirements set forth by Article 3 with regards to
its company form410, its residence for tax purposes in a Member State411 and its liability
to corporate income tax in that State412.
Cross border mergers are also subject to the corporate law provisions of Directive
2005/56/EC.413 The definition of “merger” thereby provided (at Article 2, Para. 2) is
identical to the mentioned one of Article 2, Para. A) of Directive 2009/133/EC, while
differences arise in the scope of application, with respect to the notions of company and
of cross-border merger. In particular, in Directive 2005/56/EC, a merger is cross-border
where at least two of the companies involved “are governed by the laws of different
Member States”.
409
Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable 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 an SE or SCE
between Member States, in OJ L 310, 25.11.2009 p. 34.
410
The list of allowed company forms is listed in Annex, I Part A of Directive 2009/133/EC and
includes for France “companies under French law known as ‘société anonyme’, ‘société en
commandite par actions’, ‘société à responsabilité limitée’, ‘sociétés par actions simplifiées’,
‘sociétés d’assurances mutuelles’, ‘caisses d’épargne et de prévoyance’, ‘sociétés civiles’ which
are automatically subject to corporation tax, ‘coopératives’, ‘unions de coopératives’, industrial
and commercial public establishments and undertakings, and other companies constituted under
French law subject to the French corporate tax” , for Italy, “companies under Italian law known as
‘società per azioni’, ‘società in accomandita per azioni’, ‘società a responsabilitàlimitata’, ‘società
cooperative’, ‘società di mutua assicurazione’, and private and public entities whose activity is
wholly or principally commercial”; and for the UK “companies incorporated under the law of the
United Kingdom”
411
A company meets the residence requirement if “according to the tax laws of a Member State
is considered to be resident in that Member State for tax purposes and, under the terms of a
double taxation agreement concluded with a third country, is not considered to be resident for tax
purposes outside the Community”
412
The list of relevant income taxes is provided in Annex, I Part B of Directive 2009/133/EC and
includes impôt sur les sociétés in France, imposta sul reddito delle società in Italy and corporation
tax in the United Kingdom.
413
Directive 2005/56/EC of 26 October 2005 on cross-border mergers of limited liability
companies, in OJ L 310, 25.11.2005, p. 1–9
103
The definition of Directive 2009/133/EC should be chosen, in the present research, since
its focus is on the merger of companies resident for tax purposes in different States rather
than on the merger of companies subject to different corporate law rules.
The definitional framework of domestic mergers is quite different . Indeed, there is no EU
directive concerning the tax treatment of domestic mergers and, as a consequence, there
is no common tax definition to which reference can be made. Domestic mergers are
presently regulated, on a EU level, only with respect to corporate law profiles, by
Directive 2011/35/EU414. According to this latter, the operation implies that the acquired
companies “are wound up without going into liquidation” and transfer to the acquiring
company “all their assets and liabilities” in exchange for shares in the acquiring company
(and possibly a cash payment not exceeding 10%)415. The scope of the application of
Directive 2011/35/EU is extremely limited (as it was for Directive 78/855/EEC) since it
applies only to public limited liability companies416 and does not consider the case where
the acquiring company is the sole shareholder of the company being acquired.
In the light of the above, it seems appropriate to qualify as “domestic mergers” for the
purposes of the present research, operations which fall within the scope of Directive
2011/35/EU, but also those which concern private limited liability companies and those
where there is no exchange of shares due to the fact that the receiving company is the
sole shareholder of the transferring company.
Before proceeding with the analysis, it is worth considering that the size and likelihood
of the conflicts of evaluation between the countries involved may be limited by the
corporate law requirements applicable to cross-border mergers. A cross-border merger
within the EU (unless specific simplifications apply) indeed entails (just as domestic
mergers subject to EU corporate harmonisation rules) the drafting of a Report of the
management and an Independent expert report417 which include an evaluation of the
merging companies, suitable to provide a strong reference for the Tax Authorities
involved.
III.5.b Italy
414
Directive 2011/35/EU of of 5 April 2011 concerning mergers of public limited liability companies,
in OJ L 110, 29.4.2011, p. 1–11. Said directive has replaced, since 1 July 2011 and in the interests
of clarity and rationality, the Third Council Directive 78/855/EEC of 9 October 1978 concerning
mergers of public limited liability companies, which had been substantially amended several
times.
415
The full definitions of merger by acquisition and by formation of a new company are given at,
respectively, Article 3 and Article 4 of Directive 2011/35/EU. Also relevant, for the framing of the
transaction in a comparative perspective, are the effects of the merger, ruled by Article 19 of
Directive 2011/35/EU: “1. A merger shall have the following consequences ipso jure and
simultaneously: (a) the transfer, both as between the company being acquired and the acquiring
company and as regards third parties, to the acquiring company of all the assets and liabilities of
the company being acquired; (b) the shareholders of the company being acquired become
shareholders of the acquiring company; (c) the company being acquired ceases to exist”.
416
According to Article 1 of Directive 2011/35/EU, such notion includes, for France, the société
anonyme, for Italy, the società per azioni and, for the UK, public companies limited by shares, and
public companies limited by guarantee having a share capital.
417
See, respectively, Articles 7 and 8 of Directive 2005/56/EC and Articles 124 and 125 of
Directive (EU) 2017/1132.
104
III.5.b.1 Corporate law background
Domestic mergers are regulated, in Italy, by the Civil Code (Articles 2501 to 2505-
quater). The provisions have been modified along the years in accordance with EU
legislation, especially since the implementation of Directive 78/855/EEC which was
accomplished, with a relevant delay, in 1991418 . The EU harmonization process has
influenced mostly the procedural profiles of domestic mergers, since Italian corporate
law already provided a comprehensive set of rules on the matter, whose main features
(e.g., the distinction between merger with formation of a new company and merger with
absorption) have not required any change in order to comply with the EU directives.
A merger implies, according to Article 2504-bis, Civil Code, the transfer of the assets and
liabilities of the transferring companies to the receiving company. The language of the
provision seems to supports the qualification of the merger as a universal transfer, while
leading scholars419 and a Supreme Court decision420 rather view the transaction as an
amendment of the merging company regulations.
Cross border mergers have been at all ignored by the Italian legislation until 1995, a
circumstance which, along with the rather restrictive approach of case law421, has
resulted in such transactions being virtually inexistent before that year. The reform of
Italian conflict of law rules achieved through Legislative Decree May 31st 1995 has
introduced a statutory provision (Article 25, Para. 3 of said Legislative Decree) under
which cross border merger are effective if achieved in accordance with the legislation of
States where the merging companies have their seat. So, at the time of the adoption of
Directive 2005/56/CE (implemented in Italy by Legislative Decree May 30th 2008, No.
108) cross border mergers were already possible in the Italian company law system.
The introduction of a corporate law regulation of cross-border merger has also removed
a major obstacle to the full effectiveness of the tax provisions of Directive 90/434/CEE
(as amended), which had been implemented in Italy trough Legislative Decree December
30th 1992, No. 544. When transposing Directive 90/434/CEE, the definition of merger
provided at Article 2 (a), which makes reference to the “transfer all their assets and
liabilities” was not reproduced in the Italian legislation, and this circumstance supports
the theory according to which a merger is a mere amendment of the company
regulations422.
III.5.b.2 Taxation of hidden capital gains of the absorbed company in domestic mergers
Italian tax legislation contains, since 1973, a specific provision (currently, Article 172,
Para. 1, ITC) under which mergers do not imply the taxation or distribution of hidden
418
Legislative Decree January 16th 1991, No. 22.
419
C. SANTAGATA, La fusione fra società, Napoli, 1964, p. 157 f.; R. ROSAPEPE, Modificazioni
statutarie e recesso, in (B. Libonati ed.) Diritto delle società, Milano, 2014, p. 419 f.; F. GALGANO,
Il nuovo diritto societario, Padova, 2003, p.527 s.; F. DI SABATO, Manuale delle società, Torino,
1984, p. 785 f..
420
Supreme Court (United Sections) Decision No. 2637 of February 8th 2006.
421
See, e.g., the Court of Appeal of Milan, which, in a decision of May 7th 1974 ruled that the
merger of an Italian company into a foreign company was possible upon condition that such latter
company “be subject to all Italian law provisions”.
422
R. TOMBOLESI, La fusione di società, in (E. della Valle, V. Ficari and G. Marini eds.), Il regime
fiscale delle operazioni straordinarie, Torino, 2009, p. 151 f..
105
capital gains on assets (including goodwill and inventories) of the transferring
companies. The same applies to merger differences423.
The provision has the primary purpose of avoiding that the described uncertainties on
the legal nature of mergers (i.e.: whether a universal transfer or an amendment of the
company regulations) may have effect on the related tax regime424.
It should be highlighted that the tax neutrality (be it the effect of the mentioned statutory
provision or the effect of its legal qualification under one of the interpretative approached
outlined) applies irrespective of the accounting treatment and should, in principle, be true
for both domestic and cross-border mergers. A specific regime has been however
conceived for these latter operations, which is illustrated in the following paragraph.
III.5.b.3 Taxation of hidden capital gains of the absorbed company in cross-border

mergers
The Italian rules in force on 31st December 2018 with respect to the treatment of transfer
of assets in cross-border mergers are the close result of the implementation of the EU
tax directives on the matter (Directive 90/434/EEC, later modified by Directive
2005/19/EC, and codified into Directive 2009/133/EC, together, the “EU Merger
Directive”).
If an Italian resident company is merged into a company resident in an EU Member State
(and the other conditions set forth in the EU Merger Directive are fulfilled), the merger
will not give rise to the taxation of hidden capital gains to the extent the assets remain
with an Italian PE of the absorbing company. The rule (which corresponds to Article 4,
Para 1 and 2 of Directive 2009/133/EC) is not explicitly enunciated for cross-border
mergers, but is to be inferred from the general rules on mergers425.
With reference to those assets which do not remain with an Italian permanent
establishment, a specific provision has been introduced, to avoid that possible hidden
capital gains could have definitively escaped Italian taxation, due to the application of
the neutrality regime designed for domestic mergers but otherwise applicable also to
cross-border mergers. Paragraph 6 of Article 179 ITC (in force until 31st December 2018)
thus provides that such assets are deemed to be sold at their respective fair market value
(irrespective of the accounting entries), with the consequent taxation of the resulting
taxable gains.
This latter rule is equivalent to the one provided for in Article 166 of the ITC with reference
to the case where a company transfers its residence for tax purposes outside Italy. A tax
deferral regime has been introduced by Legislative Decree No. 1 of January 12, 2012 in
423
The mentioned rules, along with those concerning the tax basis of received assets in the hands
of the receiving company (Para. IV.6.a below) shape what is commonly referred to as the “tax
neutrality” of mergers. See in particular, R. LUPI, Profili tributari della fusione di società, Padova,
1989, p. 35; R. TOMBOLESI, La fusione di società, in (E. della Valle, V. Ficari and G. Marini eds.),
Il regime fiscale delle operazioni straordinarie, Torino, 2009, p. 148 f..
424
G. ZIZZO, Le riorganizzazioni societarie nelle imposte sui redditi, Milano, 1996, p. 49 f.
425
This is presently achieved through the reference made by Article 179, Para 1, ITC to the
provisions of Article 172, ITC. See N. SARTORI, Le riorganizzazioni transnazionali nelle imposte
sul reddito, Torino, 2012, p. 259. In legislation prior to 2004, which did not made reference to the
domestic merger provisions, the same conclusion could have been reached on an interpretative
basis, as argued by A. SILVESTRI, Il regime tributario delle operazioni di riorganizzazione
transnazionale in ambito CEE, in Rivista di diritto finanziario e scienza delle finanze, 1996, p. 475
s.
106
respect of companies transferring their residence for tax purposes to a country that is a
Member State of the EU or the European Economic Area (EEA), if further conditions are
met. Under said regime, the transferring company can request the deferral of the tax
payments until such time as the assets concerned are actually disposed of. The
legislation was aimed at making the Italian income tax system consistent with the EU
freedom of establishment principle, as interpreted by the CJEU, especially in the
National Grid Indus case426.
It might then have been questioned whether the rules on cross-border mergers (and,
specifically, Article 179, Para. 6, ITC) was not exposed to the same risk of inconsistency
with EU freedoms which had determined the amendments of Article 166, ITC). And
indeed, with Legislative Decree No. 147 of September, 14th 2015, the tax deferral regime
provided by Article 166, ITC was also made applicable to cross-border mergers. This
harmonization of the rules applicable to mergers with those applicable to other “exit”
situations has been eventually accomplished on the occasion of the implementation of
the ATAD in Italy, with effect from 1st January 2019427.
III.5.c France
III.5.c.1 Corporate law background

Domestic mergers are regulated, in France, by the Code de commerce (Articles L. 236-
1 to L 236-24) which draws the distinction between merger with formation of a new
company and merger with absorption428. The related provisions were modified from time
to time, to reflect changes to Directive 78/855/EEC, now replaced by Directive
2011/35/EU. According to Article L. 236-3, which has codified the prior elaboration of
scholars and case law429, a merger implies the dissolution without liquidation of the
transferring companies and the global transfer (“transmission universelle”)430 of their
assets and liabilities to the receiving company, against an exchange of shares, or no
exchange of shares to the extent that the receiving company owns shares of the
transferring company431.
Directive 2005/56/CE on cross-border mergers was implemented in France through Law
No. 2008-649 of July 3, 2008, completed by the provisions of Decree 2009-11 of January
5, 2009. The implementation was made through the insertion of a new Section in the
426
National Grid Indus, November 29th 2011, case C-371/10.
427
Legislative Decree 29 November 2018, No. 142 has repealed, with effect from 1st January
2019, Article 179, Para. 6, ITC. And rewritten Article 166, so as to make it applicable also to
mergers.
428
D. VIDAL, Droit des sociétés, Paris, 7th ed., 2010, p. 185 explains that the law of mergers can
be divided in three systems : the one provided by Article 1844-4 of the Code civil (applicable to
all civil and business companies), the one of Article L.236-1 to Article 236.6 of the Code de
commerce (the general rules applicable to all business companies) and the developed system of
joint stock companies (Article L. 236.8 to Article L. 236-22).
429
See, for further reference, M. GERMAIN, V. MAGNIER, Traité de droit des affaires. Tome 2.
les sociétés commerciales, Paris, 22th ed., 2017, p. 714 et seq..
430
The expression is used by Article L.236-1 of the Code de commerce. See V. MAGNIER, Droit
des sociétés, Paris, 8th ed., 2017 p. 133, J. M. MOULIN, Droit des sociétés et des groupes, Issy-
les-Moulineaux, 2015, p. 506.
431
B. DONDERO, Droit des sociétés, Paris, 5th ed., 2017, p. 276; M. GERMAIN, V. MAGNIER,
Traité de droit des affaires. Tome 2. les sociétés commerciales, Paris, 22th ed., 2017, p. 715.
107
Code de Commerce (Articles L. 236-25 to L. 236-32) 432. Article L 236-25 makes
reference to the general rules on domestic mergers, unless the more specific provisions
on cross-border mergers apply. Cross-border mergers involving companies subject to
French law were considered to be viable also before the EU directive433.
III.5.c.2 Taxation of hidden capital gains of the absorbed company in domestic mergers
According to its legal qualification, a merger implies the dissolution of the transferring
company, a transfer of its assets and liabilities to the receiving company and (unless the
shares of transferring company are owned by the receiving company) an exchange of
shares. The consequence of such legal qualification is that, under general tax rules
(“régime de droit commun”), the operation implies the ordinary taxation of hidden capital
gains on transferred assets according to Article 201, CGI concerning business
discontinuation (“cessation d’entreprise”) 434. The book value accounting does not
prevent taxation under the general regime.
However, the general tax rules come into play only in exceptional circumstances, since
the participating companies can generally claim the benefits of the special regime
provided by Article 210 A CGI, under which the merger is considered as a seamless
operation (“opération intercalaire”). The receiving company is regarded as continuing the
business operations of the transferring company and replacing it in the respective rights
and obligations. The special regime (referred to as the “régime de faveur”) looks at the
continuity of the enterprise rather than at the dissolution of the legal entities435.
The objective scope of application of the special regime is delimited by Article 210-0 A
CGI, which defines mergers with respect to their effect. As a result, the special regime
may also be applicable to the dissolution without liquidation of Article 1844-5 of the Civil
code436, which is not a merger but has equivalent effects. The interpretation has been
432
On the implementation of Directive 2005/56/CE in France, see M. GERMAIN, V. MAGNIER,
Traité de droit des affaires. Tome 2. les sociétés commerciales, Paris, 22th ed., 2017, p. 729;
LEXIDALE, Study on the Application of the Cross-Border Mergers Directive, 2013, p. 424 ; B.
DONDERO, Droit des sociétés, Paris, 5th ed., 2017, p. 281, P. LE CANNU, B. DONDERO, Droit
des sociétés, Issy-les Molineaux, 7th ed., 2018, p. 1055 (with further refererence to the prior
regime).
433
LEXIDALE, Study on the Application of the Cross-Border Mergers Directive, 2013, p. 424; M.
GERMAIN, V. MAGNIER, Traité de droit des affaires. Tome 2. les sociétés commerciales, Paris,
22th ed., 2017, p. 730
434
P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018, p. 584, D.
GUTMANN, Droit fiscal des affairs, 10th ed., Paris, 2019, p. 454. M. COZIAN, F. DEBOISSY, M.
CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd ed., 2018, m. no. 2340 remark that
under the general regime implies the distinct taxation of each individual stage of the operation.
435
D. GUTMANN, Droit fiscal des affairs, Paris, 10th ed., 2019, p. 454, reminds that the special
regime is of ancient lineage and illustrates the subsequent legislative evolutions. P. SERLOOTEN,
O. DEBAT, Droit fiscal des affaires, Paris, 17th ed., 2018, p. 581 remark that the rationale of the
special regime is thus economic (avoiding to obstacle the reorganisation of enterprises) rather
than legal. See, accordingly, M. COZIAN, F. DEBOISSY, M. CHADEFAUX, Précis de fiscalité des
entreprises, Paris, 42nd ed., 2018, m. no. 2342, submit that the special regime belongs to the
realm of real politik, since economic reasons take precedence on legal qualification. J.
LAMARQUE, O. NÉGRIN, L. AYRAULT, Droit fiscal général, Paris, 4th ed., 2016, p. 1338 et seq.
describe the special regime with the term tax neutrality (“neutralité fiscale”).
436
O. DEBAT, Droit fiscal des affaires, Paris, 4th ed., 2017, p. 372. D. VILLEMOT, Fiscalité des
fusions acquisitions, 4th ed., Paris, 2010, p. 63, and, more in detail,, P. COUTURIER, O.
108
confirmed in a landmark ruling of the Conseil d’Etat, interestingly based on the extension
to domestic mergers of the definition provided by Directive 90/434/CE and on the
argument that the aim of the legislature could not have been to treat domestic operations
less favourably than cross-border ones437.
The tax treatment of domestic mergers under the special regime, which applies only to
corporate entities subject to corporate income tax438, closely depends (a dependency
also endorsed in case law439) from the accounting treatment which, since the adoption
of dedicated accounting regulations in 2004440, strictly depends on the circumstances of
the operation.
According to the regulations, if the merger concerns companies under common control
or is a reverse merger441, assets acquired and liabilities assumed are to be measured at
their book value. Conversely, assets and liabilities are to be entered at fair market value,
at the acquisition date, in mergers (other than reverse mergers) of companies which are
not under common control.
In mergers accounted for at book value, there is no accounting gain or loss, and – if the
special regime is applicable – the operation also does not give rise to any taxable income.
If the merger is accounted for at fair market value, there is also no taxation in the hands
of the transferring company, but taxation of hidden capital gains on transferred assets
lies on the receiving company (see Para. IV.6.b.1 below).
III.5.c.3 Taxation of hidden capital gains of the absorbed company in cross-border

mergers
The French income tax code does not provide specific rules for cross-border mergers.
Rather, those latter operations fall within the French tax definition of merger442 and are
subject to the same rules provided for domestic merger, albeit at additional conditions.
FOUQUET, Cessions & acquisitions d'actifs, Restructurations d'entreprises: 20 études fiscales,

Paris, 2010, p. 157
437
CE, 17 June 20111, No. 324392. See on the decision, P. F. RACINE, Sur le régime fiscal de la
transmission universelle de patrimoine, in Droit fiscal, 2011, no. 37, p. 502 ; C. RAQUIN, Le statut
de la transmission universelle de patrimoine au regard des textes fiscaux, in Revue de
jurisprudence fiscale, 2011, n. 11, p. 1019
438
On the conditions of the special regime see, in particular, M. COZIAN, F. DEBOISSY, M.
CHADEFAUX, Précis de fiscalité des entreprises, Paris, 42nd ed., 2018, m. no. 2345; D.
VILLEMOT, Fiscalité des fusions acquisitions, 4th ed., Paris, 2010, p.. 64; J. LAMARQUE, O.
NÉGRIN, L. AYRAULT, Droit fiscal général, Paris, 4th ed., 2016, p. 1339 et seq..
439
CE June 8th 2005, No. 270697. See J. MERCIER, Fusions, apports partiels d'actif, scissions,
Levallois, 3rd ed. 2014, m.nos. 150 and 5015
440
COMITE DE LA REGLEMENTATION COMPTABLE, Règlement n°2004-01 du 4 mai 2004
relatif au traitement comptable des fusions et opérations assimilées. The regulation has presently
been replaced by Règlement n° 2014-03 du 5 juin 2014 Relatif au plan comptable général, which
addresses mergers at Titre VII – Comptabilisation et évaluation des opérations de fusions et
opérations assimilées.
441
The definitions of common control and the direction of the merger are those defined by the
French accounting principles. In particular, in a reverse merger (“fusion à l’envers”) the main
shareholder of the transferring company takes control of the receiving company.
442
D. VILLEMOT, Fiscalité des fusions acquisitions, 4th ed., Paris, 2010,, p. 138
109
According to Article 210-0 A CGI, the special regime applies to cross-border mergers
alike, unless one of the companies involved is resident is a State (other than a EU
Member State) which has not entered into a tax convention with France which contains
a clause on administrative assistance443.
Income tax code prescribed that the special regime was subject to an agreement with
the French Authorities. While initially validated by French case law444, such prior
agreement requirement was eventually considered to be in breach of EU law, by the
CJEU decision in Euro Park Service445 and the legislation has been amended
accordingly with effect from 1st January 2018.
Even before the CJEU decision, it had been be argued that the French Authorities could
not refuse to execute an agreement, other than where the anti-abuse clause of Directive
90/434/CEE could have been invoked446.
Where the special regime is not applicable, the ordinary regime would apply, to the effect
that – regardless of the how the merger is accounted for by the foreign receiving
company (book value or fair market value under French GAAP or in accordance with the
accounting principles applicable in the State of establishment of the receiving company)
the transfer of assets would be taxable in the hands of the transferring company for the
difference between the fair market value and the tax basis of the transferred assets.
III.5.d.1 Corporate law background

Directive 78/855/CEE was implemented in the UK by the Companies (Mergers and
Divisions) Regulations 1987447. Mergers were already lawful in UK company law for all
companies (and not only for public companies) and the implementation of the Third
directive is considered to have merely introduced the appropriate safeguards.
Under UK law, a merger may take the forms provided in the Third Company Law
Directive, specifically can be a “merger by acquisition” or a “merger by formation of a
new company” but also the form of an “upstream merger”, which is not within the terms
of Directive 78/855/CEE, since there is no issuance of shares.
The key features of a merger under UK law are the transfer of assets from the absorbed
company to the absorbing company and the dissolution of the absorbed company. In this
443
J. MERCIER, Fusions, apports partiels d'actif, scissions, Levallois, 3rd ed., 2014, m.no. 565
444
CAA Paris, 2nd Chamber, 11th April 2013, No. 11PA03447. The decision was influenced by
the visibly abusive aim of the specific transaction and thus has not addressed in a more general
way the consistency of the French procedural requirement with either Directive 90/434/CEE or
with the Internal market freedoms. See A. DE WAAL, L. RAGOT, Fusion transfrontalière: le défaut
de demande d’agrément (CGI, Article 210 C) suffit-il à remettre en cause le bénéfice du régime
spécial des fusions?, in Revue de droit fiscal, No. 16, 2014.
445
Euro Park Service, 8 March 2017, Case C-14/16
446
D. VILLEMOT, Fiscalité des fusions acquisitions, 4th ed., Paris, 2010, p. 138; J. MERCIER,
Fusions, apports partiels d'actif, scissions, Levallois, 3rd ed., 2009, m. no. 25050 argue that the
agreement is not discretionary but is due where the conditions of Directive 90/434/EEC are met.
447
J. BIRDS et Al., Boyle & Birds’ company law, Bristol, 8th ed., 2011, p. 841 s.
110
latter respect, UK company law448 refers to mergers as a case of “dissolution without
winding up”, a terminology may be considered equivalent to the reference in the Third
Directive to companies being “wound up without going into liquidation”. The dissolution
may also be achieved (and is most frequently achieved, in the UK practice) through the
liquidation of the absorbed company, a solution which is considered to be within the
scope of the Third Company Law Directive449.
Directive 2005/56/EC was implemented in the UK through regulations laid down in late
2007450. The UK Regulations were later amended according to the requirements of
Directive 2009/109/EC. Prior to the implementation, UK law did not have specific rules
on cross-border mergers which were in practice unfeasible451.
III.5.d.2 Taxation of hidden capital gains of the absorbed company in domestic mergers
UK legislation does not contain a comprehensive set of rules that applies to all mergers
(as above defined for the purposes of the present analysis)452. Rather, various items of
legislation address different profiles of mergers, e.g.: whether the transfer of assets is
subject to capital gain tax or whether the dissolution of the absorbed company may
qualify as a taxable distribution. Also, specific rules exist with reference to types of
transferred assets and relief depends also on the features of the merger. Overall, the
taxation of corporate restructuring is described as “a subject of immense complexity”453.
As far as capital gains are concerned, the general rule is in section 139 of the Taxation
of Chargeable Gains Act 1992 which provides that, at certain conditions, the assets are
deemed to be transferred at such value that gives rise to no gain or loss. So, the assets
and liabilities will be treated as having been acquired by the absorbing company at the
original cost (“roll-over relief”).
The quoted provision does not specifically refer to mergers. Rather, as indicated in the
heading, it applies to all transactions named “Reconstruction or amalgamation involving
transfer of business”. A merger would thus benefit from the relief only if it qualifies as a
reconstruction454, and meets the other conditions set forth by the legislation. Among
448
See section 900(2)(d) of the Companies Act 2006. The same sentence could be found in the
1985 Companies Act (section 427(3)(d)) and in the 1948 Companies Act (section 208).
449
G. HARDY, P. MILLER, Taxation of Company Reorganisations, Haywards Heath, 2012, p. 65
and p. 335 ff. remark that the liquidation of the absorbed company may be brought within the
terms of the Third Company Law Directive under Articles 3(2) and 4(2) which expressly consent
companies in liquidation to take part into a merger, provided that the distribution of assets to the
shareholders has not begun. The authors make reference to a leading case about company
reorganisations, the South African Supply case, where the absorbed company was indeed
liquidated.
450
Companies (Cross-Border Mergers) Regulations SI 2974/2007. Amendments to the UK
Regulations were implemented through the Companies (Reporting Requirements In Mergers and
Divisions) Regulations 2011 (SI 1606/2011). The UK Regulations were further amended
according to the requirements of Directive 2009/109/EC.
451
On the implementation in the UK of the cross-border mergers directive, see G. HARDY, P.
MILLER, Taxation of Company Reorganisations, Haywards Heath, 2012, p. 74 et seq.;
452
P. SMITH, United Kingdom - Mergers & Acquisitions, Amsterdam, 2019, Para. 4.2.
453
See R. BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London,
Release 6, 2011, m.no. W.1.1.1
454
On the meaning of “scheme of reconstruction”, and the statutory conditions see R. CAVE, C.
WILLIAMS, Capital Gains Tax Roll-over, Hold-over and Deferral Reliefs 2013/14, London, 2013,
p. 326 f.; S. RELF, British Tax Reporter, Vol. 7th, Transfer of Business between UK Companies,
Kingston upon Thames, 2004, Para. 758-600.
111
those conditions is the issuance of ordinary share capital by the absorbing company to
the shareholders of the absorbed company. Such condition would not be met by an
upstream merger by acquisition (i.e.: a merger where the absorbing company owns all
the shares of the absorbed company), as a result the transaction would not qualify as a
reconstruction under the Taxation of Chargeable Gains Act 1992.
However, where the absorbing company owns the absorbed company, the two
companies will most likely form or be a part of a (capital gains) group. In such event, a
tax neutral treatment similar to that ensured by section 139 of the Taxation of Chargeable
Gains Act 1992 may be achieved through section 171455 which applies to (all)
transactions taking place between members of the same (capital gains) group.
Should no relief apply, gains (or losses) deriving from the transfer of assets would be
taxable. Companies are ordinarily not chargeable to Capital Gains Tax: the capital gains
are computed in accordance with Capital Gains Tax principles (capital assets will be
deemed to be transferred at their market value) and are then subject to Corporate
Income Tax456.
III.5.d.3 Taxation of hidden capital gains of the absorbed company in cross-border
mergers
None of the UK capital gains relieve apply if one of the companies involved is resident
outside of the UK. However, a specific relief is acknowledged to cross-border mergers
by the legislation which has implemented the EU Merger Directive and its
amendments457.
Section 140E of TCGA 1992 refers to assets which were originally within the UK and
provides relief458 for mergers subject to various conditions, and in particular, the condition
that chargeable assets remain subject to UK taxation, being the transferee either a UK
resident company (section 140E(6)(a)) or the UK permanent establishment of a foreign
resident company (section 140E(6)(b)). Further provision of very similar effect are
referred to specific categories of assets and precisely intangible fixed assets (sections
821 to 823 CTA 2009), loan relationships (sections 431 and following of CTA 2009) and
derivatives (sections 682 and following of CTA 2009)459.
455
Section 171 provides that “(…) where a member of a group of companies disposes of an asset
to another member of the group, both members shall (…) be treated, so far as relates to
corporation tax on chargeable gains, as if the asset acquired by the member to whom the disposal
is made were acquired for a consideration of such amount as would secure that on the other’s
disposal neither a gain nor a loss would accrue to that other (…)”. Capital gain tax grouping is
ruled by section 170 of the Chargeable Gains Tax Act 1992.
456
On the relationship between chargeable gain and income, see R. CAVE, I. WUNSCHMANN-
LYALL, Capital Gains Tax, Haywards Heath, 2014, p. 5.
457
The Merger Directive was implemented in the UK by secondary legislation, enabled by section
110 FA 2007. The rules were then introduced by the Implementation of the Mergers Directive
Regulations 2007 (SI 2007/3186), which extended sections 140G to 140E of the TCGA 1992
(introduced in 2005 to permit the formation of SEs by merger) to include ordinary cross-border
mergers. The new rules were shortly after amended by SI 2008/1579.
458
Precisely, under the terms of section 140E(3), “qualifying transferred assets shall be treated
for the purposes of corporation tax on chargeable gains as if acquired by the transferee for a
consideration resulting in neither gain or loss for the transferor”.
459
On the conditions for the cross-border reorganisations relief, see R. CAVE, Capital Gains Tax,
London, 2015, p. A2-359 et seq.; P. MILLER, G. HARDY. Taxation of Company Reorganisations,
Haywards Heath, 2012, p. 352 et seq.
112
If a cross-border merger, where the transferring company is a UK resident, does not
meet the conditions for the relief provided by the EU Merger Directive (in particular,
where an asset is not allocated to any permanent establishment in the UK) the ordinary
rules on transfers of assets will apply. The UK company will be treated as having
disposed of the assets transferred in the merger. If the companies are connected or the
transaction is not a bargain at arm’s length, capital assets will be deemed to have been
disposed of at their market value on the date of the transfer460.
III.5.e Comparative considerations on cross-border mergers and the taxation of

transferred assets
The analysis has been based on the definition of merger provided by Directive
2009/133/EC and has been focused on a peculiar profile which is not addressed by said
Directive, i.e. the tax treatment of the transfer of assets which - in the context of a cross
border merger - do not remain subject to the tax jurisdiction of the State of the absorbed
company after the merger.
The three jurisdictions examined provide for taxation of capital gains in the described
situation. The rules are almost coincident, in that they provide that the taxable base does
not depend upon the accounting entries but is determined on the basis of the difference
between the market value of transferred assets at the time of the merger and the
respective tax basis.
Such similarity may be explained by the recent introduction of the rules concerning cross-
border mergers, which have become possible only with the adoption of national conflict
of law rules (as in Italy, in 1995) and Directive 2005/56/CE. Also, Directive 90/434/CEE
(whose provisions are now in Directive 2009/133/EC) is likely to have plaid a role.
Indeed, even if the mentioned directive does not address the matter and leaves Member
States free to define the tax regime of assets which do not remain subject to the tax
jurisdiction of the State of the absorbed company after the merger, implies to a certain
extent that gains on those assets be taxable on the basis of market value461.
The taxation of transferred assets does not necessarily result in double taxation. This will
depend on the recognition of the market value by the State of the receiving company. If
the receiving company country recognises the market value basis, economic double
taxation may arise only in the event of different evaluations of the market value of the
transferred assets. If the State of the receiving company adopts other criteria other than
the market value for the recognition of tax basis of the received assets (e.g., book value)
double taxation is more likely. This latter case would however not only be a case of
diverging criteria on a cross border basis, but also a case of internal inconsistency of
individual country rules (i.e.: the adoption of two different criteria for transferred assets
and received assets)462.
460
See P. SMITH, United Kingdom - Mergers & Acquisitions, Amsterdam, 2019, Para. 4.8.1.;
ERNST & YOUNG EUROPE, Survey of implementation of Council Directive 90/434/EEC, 2009,
p. 1103.
461
The tax regime of said assets can easily be inferred from an a contrario reading of Article 4,
Para. 1 of Directive 2009/133/EC.
462
The internal consistency of national rules, which shall be further examined in Chapter VII
below, finds an interesting precedent in the US interstate commerce case law. See R. MASON,
Made in America for European Tax: The Internal Consistency Test, 49 Boston College Law
review, No. 5, 2008, p. 1277 et seq.
113
The recognition of asset value in the State of the receiving company shall be examined,
for what concerns national rules, at Para. IV.6 below.
III.6 Answers to the research (sub) questions and conclusive

remarks
The analysis made in the paragraphs above has led to the identification of some key
features of the examined rules in the three selected Countries, which appear of special
interest for the purpose of looking at economic double taxation in a perspective which
goes beyond general definitions.
The comparative considerations and some further remarks about the rules examined can
be formulated with respect to three profiles, i.e., the meaning of a functional
categorisation of said rules, the comparison of the national rules in themselves and – a
profile which appears of major interest in a EU law context – the difference in treatment
that those rules may entail between domestic and cross-border situations.
Each of the profiles is described in more detail below.
III.6.a Functional categorization

The analysis performed indicates that, expectedly, the examined Countries have in place
(at the reference date of 31st December 2018) rules which belong the four selected
categories.
The identification of rules to be compared has been made on the basis of the function
performed within a national corporate tax system. This methodology has been necessary
since the identified categories do not correspond precisely to those generally assumed
in the individual jurisdictions.
A first example concerns transfer pricing rules. There should be little doubt as to what a
transfer pricing rule is463, but the functional qualification is nonetheless necessary,
considered that within a system there may be more than one rule, of different origin,
which has the functional profile of a transfer pricing rule.
The French judicial doctrine of the acte anormal de géstion can lead, in some
circumstances, to the adjustment of conditions made in transactions between related
parties on the basis of the comparison with unrelated party transactions464 and, in this
sense, performs the same function of a statutory transfer pricing rule.
The same conclusion may be reached for the French rules which set the maximum
deductible interest rates on related party loans465 and which are often referred to as thin
capitalisation rules, albeit they are functionally equivalent to transfer pricing rules.
Also to be functionally qualified as transfer pricing rules are the UK provisions on non-
commercial securities. Those provisions generally concern the qualification (as interest
or distribution) of the remuneration of certain financial instruments but, to the extent that
they imply the non-deduction of the portion of the remuneration which exceeds a
463
Richelle et Al. ads.), Allocating Taxing Powers within the European Union, Berlin - Heidelberg,
2013, p. 73 defines those on transfer pricing “time-honored provisions under domestic law,
international law and European law”.
464
See Para. III.2.c.3.3.
465
See Para III.2.c.3.2.
114
reasonable commercial return466 they also perform the same function of transfer pricing
rules.
By contrast, UK transfer pricing provisions apply to determine how much of a given loan
could have been obtained at arm’s length467 and in this respect can well be included
within the category of thin capitalisation rules.
The same category should, in a functional perspective, include Italian rules on interest
deduction, notwithstanding a pretended different local qualification based on the fact that
the interest deduction limit is determined on the basis of profit and loss account criteria
rather than on the basis of balance sheet criteria468.
The functional approach is essential also for the purposes of detecting possible
differences in treatment between domestic and cross border transactions. This is the
case of UK rules on domestic mergers: the reconstruction relief, which ensures a tax
neutral treatment to certain company reorganisations, does not apply to those mergers
where the receiving company is the sole shareholder of the transferring company.
However, in domestic mergers, the same effect can be achieved on the basis of group
relief provisions469, which are functionally equivalent – for that kind of transaction - to the
Italian neutrality regime and to the French régime de faveur470. The conclusion may than
be drawn that in all countries examined domestic mergers are tax neutral while cross-
border mergers (outside the scope of Directive 2009/133/EC) entail the taxation of
hidden capital gains on the transferring company assets and thus a disparity of
treatment.
The functional categorisation of domestic rules is not only relevant for comparative
purposes, but may also play a role in assessing whether a case falls within the scope of
application of treaty remedies against economic double taxation (a topic to be addressed
in more detail in Chapter 5). For example, it may be questioned whether the Italian
interest deduction limitation rule or a French income adjustment based on the doctrine
of the acte anormal de gestion may be in conflict with treaty rules corresponding to Article
9, Para. 1 of the OECD Model, with the consequent access of taxpayers involved to a
treaty based mutual agreement procedure. Or whether the corresponding adjustment
clause of a UK treaty can be invoked in front of the denial of interest deduction based on
the UK non-commercial security rule. In other words, it can be submitted that the
functional qualification of the domestic rules concerned may play an important role in the
prevention or elimination of economic double taxation in a cross-border context.
III.6.b Comparison of the rules

The comparison of national rules within each of the established categories makes it
possible to identify similarities and differences and also shed some light on the reasons
466
Para III. 2.d.4.2
467
Para III.3.d.2
468
Para III. 3.b.3. Italian provisions on interest deduction are qualified as thin capitalisation rules
also by COUNCIL RESOLUTION of 8 June 2010 on coordination of the Controlled Foreign
Corporation (CFC) and thin capitalisation rules within the European Union (2010/C 156/01), in
OJEU C156/1 dated 16 June 2010. In the text of the proposed directive laying down rules against
tax avoidance practices that directly affect the functioning of the internal market (COM(2016) 26
final) reference is made to “inflated interest payments” rather than to “thin capitalisation”; the
proposed directive provides the adoption of an harmonised rule very similar to the Italian rule.
469
Para III.5.d.2
470
Paras III.5.b and III.5.c, respectively.
115
behind such similarities and differences. The comparative remarks with respect to each
category have been formulated at the end of each sub-Chapter above.
III.6.c Difference in treatment between domestic and cross-border transactions

The analysis of the subjective and territorial scope of application of the relevant national
rules has led to the identification of relevant differences in the treatment of domestic and
cross-border transactions.
Statutory transfer pricing rules of Italy and France explicitly apply exclusively to cross-
border dealings, while the UK legislation applies indistictively to both domestic and cross-
border transactions. The divergence is mostly of an historical nature, since the UK rules
were amended in 2004 in the wake of concerns caused by the Lankhorst-Hohorst
decision of the CJEU. In the case of France, the difference in treatment is faded by the
judicial docrtine of the “acte anormal de gestion” which has been applied by Courts also
to domestic transactions.
The investigation concerning thin capitalisation rules has highligted that in the countries
examined, the current rules apply without distinction to both domestic and cross border
loan finance.
The results are more varied with respect to interest requalification rules. Italian rules
apply without regards to the residence or place of establishment of the lender. Also
French rules are the same for both domestic and cross-border transactions. At a closer
look, however, it arises that the domestic situations to which the French rule would
actually apply are quite rare, and would concern lenders which benefit from special tax
regimes of only marginal importance and recurrence. It may be then argued that the rule
delivers a difference in treatment between domestic and cross-border situations. The UK
legislation on “special securities” openly applies only where the recipient of interest is not
subject to UK corporation tax. Such circumstance depicts a visible difference in treatment
between UK resident and non-resident corporate recipients.
A sharp difference in treatment also arises with respect to mergers. Indeed, while cross-
border mergers imply (outside the scope of the relief provided by Directive 2009/133/EC)
taxation of hidden capital gains on transferred assets, domestic mergers benefit in all
countries examined of a form of relief.
This applies to all domestic mergers under the Italian rules, while the French and UK
systems provide for a general taxation rule, derogated by releif rules with a wide scope
of application that limits taxation only to exceptional cases.
Whether the described difference in treatment is in breach of treaty rules or EU
fundamental freedoms will be examined, respectively, in Chapters 5 and 6.
In the perspective of assessing whether the described rules actually generate economic
double taxation, the examination of domestic remedies is necessary. Chapter 4 below is
dedicated to such examination.
116
IV DOMESTIC LAW REMEDIES AGAINST ECONOMIC DOUBLE TAXATION
IV.1 Introduction
Once identified and described the selected sources of economic double taxation of
cross-border corporate income, it should be analysed on a comparative basis whether
national tax systems provide for remedies against economic double taxation.
As mentioned already in the introduction to Chapter 3 above, the analysis of national tax
systems is based on the distinction between causes and remedies. Such distinction is
functional to both the association of causes with remedies (i.e.: evaluate whether the
available remedies match properly with causes) and the comparison among different
remedies (in terms of their relative effectiveness).
The first part of this Chapter analyses whether the Italian, French and UK tax jurisdictions
contain rules which can have the effect of a general prohibition of double economic
taxation; the second part investigates whether specific remedies are provided.
The first research (sub) question is thus whether the national rules provide for either
general or specific remedies.
The subsequent (sub) question is whether such remedies, where existing, imply a
difference in treatment between domestic and cross border situations.
The analysis of national tax systems made in the present Chapter makes use of the
methodology described above at Para. 1.3.e..
IV.2 Is a general prohibition of double taxation provided under

national law?
IV.2.a Italy
IV.2.a.1 The general prohibition of double taxation provided by Article 163 of the Italian
Tax Code
Under Article 163 of the Italian Income Tax Code (“ITC”), entitled “Prohibition of double
taxation”, it is provided that “the same tax can’t be levied more times on the same taxable
event, even if in the hands of different persons”471.
The same wording can be found in Article 67 of Presidential Decree 29th September
1973, No. 600, concerning tax assessment procedures.
Both provisions find their roots in Royal Decree No. 421 of 24th August 1877, which
excluded from taxation “income which under this same Statute has already been subject
one time to the tax hereby provided”.472 The present wording was introduced by
471
In Italian, the provision reads as follows: “163 - Divieto della doppia imposizione. 1. La stessa
imposta non può essere applicata più volte in dipendenza dello stesso presupposto, neppure nei
confronti di soggetti diversi”.
472
Article 8, Para. 3b). See also O. QUARTA, Commento alle leggi sull’imposta di ricchezza
mobile, Milano, 1917, p. 573 who questions the usefulness of the provision; and L. EINAUDI, Il
sistema tributario italiano, 1958, p. 182, who on the contrary recognises the risk that income be
subject to multiple taxation in the hands of different persons and due to different possible
qualifications.
117
Presidential Decree No. 645 of January, 29 1958 and kept unchanged since then. At the
time of the wide-reaching tax reform of the early 1970’s, the prohibition of double taxation
was simply transcribed in mentioned Article 67 of Presidential Decree 29th September
1973, No. 600.
In 1986, the prohibition of double taxation was copied also in mentioned Article 163, ITC
(the code containing income tax rules), with the same wording, and with the aim
(elucidated in the Explanatory Notes to the ITC) of attributing to the prohibition a
substantial (and not only procedural) purpose473.
The comparison of the different language utilised along the years shows quite well the
developments of the rule: reference to income tax and income has been replaced with a
more general reference to, respectively, taxes and taxable events; furthermore it has
been openly stated that the prohibition applies also where different persons are
concerned.
The prohibition has always been, from a formal point of view, an item of ordinary
legislation, and thus has, within the Italian legal system, the same ranking of any other
statutory tax provision. As a result, the rule can’t be attributed any effect of limiting the
power of the legislature: specific statutory provisions, which intentionally created a
double taxation effect would prevail – as lex posterior or lex specialis having the same
rank in the hierarchy of sources of law, as the case may be - over the general
prohibition474.
Notwithstanding this limitation, the prohibition of double taxation can be regarded as a
general principle of the Italian tax system475 arguably deriving from the constitutional
principle of the ability to pay476. The consequence of the above construction is that “the
473
The provision (renumbered with effect from January 1st 2004 and formerly Article 129) was
included, until the 1996 adoption of the ITC, under Article 67 of Presidential Decree No. 600/1973,
which is devoted to tax assessment rules and procedures. The re-statement was justified, in the
Explanatory Memorandum to the ITC, on the grounds that the prohibition dues not concern the
tax assessment procedures, but consists in a substantial principle, which is then given a more
correct systematic location.
474
Scholars are unanimous on the points. See, ex multis, P. ADONNINO, Doppia imposizione
(dir. Trib) in Enc. Dir., Milano, 1964, XIII, p. 1016, D. STEVANATO, Divieto di doppia imposizione
e capacità contributiva, in (L. Perrone e C. Berliri, eds.) Diritto tributario e Corte costituzionale,
Roma, 2006, p. 78, G. FALSITTA, Manuale di diritto tributario. Parte generale, Padova, 8th ed.,
2012, p. 250; M. FREGNI, Appunti in tema di “doppia imposizione” interna, in Rivista di diritto
finanziario e scienza delle finanze, 1993, II, p. 19
475
The construction of the prohibition of double taxation as a general principle of the tax system
is maintained by C. BERLIRI, Il testo unico delle imposte dirette, Milano, 1960, p. 12; P.
ADONNINO, Doppia imposizione (dir. Trib) in Enc. Dir., Milano, 1964, XIII, p. 1017 and, more
recently, by D. STEVANATO, Divieto di doppia imposizione e capacità contributiva, in (a cura di
L. Perrone e C. Berliri) Diritto tributario e Corte costituzionale, Napoli, 2006, p. 78; E. MARELLO,
Il divieto di doppia imposizione come principio generale del sistema tributario, in Giurisprudenza
costituzionale, 1997, p. 4127 s.; M. FREGNI, Appunti in tema di “doppia imposizione” interna, in
Rivista di diritto finanziario e scienza delle finanze, 1993, II, p. 15. Contrary to this construction is
G. ARDIZZONE, Doppia imposizione – Interna, in Digesto IV, 1990, Torino, p. 177 s., according
to whom the general prohibition has a merely procedural function, aimed at avoiding the
duplication of administrative activities; also contrary to this construction is F. PEPE, Spunti sul
divieto di doppia imposizione “interna”, in Rassegna Tributaria, 5/2010, p. 1387.
476
Arguments in this direction can, in particular, be found in C. BERLIRI, Il testo unico delle
imposte dirette, Milano, 1960, p. 12; P. ADONNINO, Doppia imposizione (dir. Trib) in Enc. Dir.,
Milano, 1964, XIII, p. 1017, E. MARELLO, Il divieto di doppia imposizione come principio generale
del sistema tributario, in Giurisprudenza costituzionale, 1997, p. 4127 s.
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prohibition of double taxation should be a binding criterion of interpretation when double
taxation can be avoided through interpretation, without openly violating the contents of
any statute”477. In concrete terms, when an income tax provision is capable of different
constructions, preference should be given to the constructions which does not generate
double taxation478.
IV.2.a.2 Is the prohibition applicable to cross border situations?

While the wording of Article 167, ITC does not limit its scope to domestic situations, the
provision is not considered to be applicable to cross border situations (i.e., in cases
where double taxation is due to the co-existence of Italian taxation and of a foreign tax
levy)479. The point was expressly mentioned in the explanatory notes to the ITC.
A rare example of case law on the matter is represented by a decision of the Regional
Tax Court of Emilia Romagna. The taxpayer had claimed that the application of the Italian
withholding tax on outbound royalties paid to a US resident company (subject to tax in
the residence State) would have resulted in double taxation, allegedly prohibited by
Article 163, ITC. The Court ruled that the provision “operates only within the Italian
system” and can’t be applied in respect of facts occurring outside the Italian jurisdiction,
while in the case at hand there was a “legitimate double taxation”.480
In more recent times, also the Supreme Court has affirmed (although incidentally) that
the provisions of Article 163, ITC and 67, Presidential Decree 600/1973 are devoted to
exclude double taxation in the perspective of domestic rules.481
Scholars have traditionally taken the same position, stating that the prohibition of double
taxation operates only with respect to domestic double taxation. The unilateral provisions
against international double taxation (and namely, those concerning the foreign tax
credit) are considered by some as an extension of the principle underlying Article 163,
ITC482, but the same is not held true for the corresponding adjustments provision of
Article 110, Para. 7, ITC.483
It has been also submitted that international double taxation does not pertain to the
relationship between a taxable event and the related taxation, but to the overlap of taxing
power of different sovereign States, which may be inappropriate from an economic or
477
D. STEVANATO, Divieto di doppia imposizione e capacità contributiva, in (a cura di L. Perrone
e C. Berliri) Diritto tributario e Corte costituzionale, Napoli, 2006, p. 78
478
G. FALSITTA, Manuale di diritto tributario. Parte generale, Padova, 8th ed., 2012, p. 250. See
also, M. FREGNI, Appunti in tema di “doppia imposizione” interna, in Rivista di diritto finanziario
e scienza delle finanze, 1993, II, p. 18 according to whom the prohibition is addressed to the
interpreter.
479
While reference is made to Article 163, I.T.C, the considerations that follow reference are also
valid for Article 67, Presidential Decree 600/1973.
480
The Court has further remarked that the solution to such international double taxation was to
be found in the applicable tax convention. See Regional Tax Court of Emilia Romagna, Decision
No. 120 of June 13th 2003.
481
Cassazione civile, sez. Tributaria, 17 December 2008, No. 29455
482
A. MIRAULO, Doppia imposizione internazionale, Milano, 1990, p. 11. See also A. MANZITTI,
Disorientamenti giurisprudenziali in materia di tassazione dei lavoratori dipendenti all’estero, in
Dialoghi Tributari, n. 4/2009, p. 416;
483
A. MIRAULO, Doppia Imposizione Internazionale, Milano, 1990, p. 12.
119
political perspective, but does not constitute a violation from a legal perspective484 and
appears consistent with the consideration that – lacking a general prohibition of double
taxation in international law – the behaviour of a State can’t become illegal for the mere
fact that another jurisdiction legitimately taxes the same event485.
IV.2.a.3 Which tax is double? Criteria from case law.
The prohibition of double taxation may concern the issuance of more than one notice of
assessment, by e.g. different offices, or the reconstruction of a set of facts which was
already subject to tax 486. Examples are the denial of deduction of intra-group services
(while the corresponding revenue was taxed in the hands of the provider), assessment
of income in the hands of the allegedly interposed person or on persons other than the
reported taxpayer, denial of deduction of alimonies that were taxed in the hands of the
recipient.
It is not questioned that those situations constitute a violation of the prohibition of double
taxation. However, the point is that the prohibition rule does not indicate any criteria for
the identification of which of the two levies should be void. Should e.g., the later notice
be retained void (for the mere fact of being the later) or the legal basis of both should be
scrutinized?
This latter is the position predominantly taken by Courts, on the grounds that the
prohibition of double taxation should not lead to levying taxes on the person who is not
the legitimate taxpayer487. It has however been remarked that such position devaluates
the effects of the prohibition, since the rejection of one of the two notices (either the first
or the second) for its intrinsic lack of legal basis should have taken place anyway, even
if there was no prohibition of double taxation at all488.
More recent case law has taken the opposite view, voiding the later notice for the mere
fact that it followed a prior notice489. This interpretation mirrors the position taken,
especially, by some authors490 who argued that the rule at stake is meant to prohibit the
484
G. PORCARO, Il divieto di doppia imposizione nel diritto interno, Padova, 2001, p. 473 s. The
Author concludes that the recognition of a foireign tax credit is justified by reasons of opportunity
but that it does not reflect a legal principle derived from the Constitution.
485
A. FANTOZZI, K. VOGEL, Doppia Imposizione Internationale, in Digesto IV, sez. comm., V,
Torino, 1989, p. 183.
486
M. FREGNI, Appunti in tema di “doppia imposizione” interna, in Rivista di diritto finanziario e
scienza delle finanze, 1993, II, p. 21 proposes, in this respect, the shareable distinction between
substantial prohibition (which pertains to interpretation) and formal prohibition (which is a criterion
for eliminating the logical antinomy between administrative acts).
487
See Cass. No. 2537, of 19 October 1967 and, in identical terms, Cass. No. 4921 of 27 April
1984.
488
G. ARDIZZONE, Doppia imposizione – Interna, in Digesto IV, Torino, 1990, p. 176 s.. Contra,
D. STEVANATO, Divieto di doppia imposizione e capacità contributiva, in (a cura di L. Perrone e
C. Berliri) Diritto tributario e Corte costituzionale, Napoli, 2006, p. 72, who highligths that the two
Supreme Court decisions do not jeopardize the effects of the prohibition, but focus on which of
the two notices should be discarded.
489
See Cass. No. 10937 of 7 October 1992; No. 2739 of 22 March 1994 and No. 3951 of 19
March 2002.
490
G. ARDIZZONE, Il principio del ne bis in idem nell'imposizione diretta, in Rivista di diritto
finanziario, 1972, p. 275; ID., Doppia imposizione - interna, in Digesto Discipline Privatistiche,
Torino, 1990, 180. In favour of the application of the time criterion (leading to considering the later
notice of assessment intrinsically void, see also G. PORCARO, Il divieto di doppia imposizione
nel diritto interno, Padova, 2001, p. 359.
120
“duplication of administrative activity” by the tax Authorities; in this perspective, the tax
Authorities would remain entitled to issue a new notice of assessment, to the extent that
the prior notice be explicitly (or implicitly) annulled491. More recently, the Supreme Court
has taken the view that the annulment of the prior notice is not a requisite but an effect
of the issuance of a new notice492.
Where different taxpayers are involved, case law has taken the view that the prohibition
of double taxation must be coordinated with the principle under which tax should be
levied in respect of the statutorily designated taxpayer493 , who is not free to allocate
income on the head of different persons and consequently avoid the levy of due taxes.494
In a case concerning the erroneous allocation of partnership income to a ceased partner
(rather than to the existing partners), the Supreme Court has argued that the solution
adopted by the taxpayer at the time of filing the tax return cannot be binding on the Tax
Administration495.
The same conclusion was reached in cases of double taxation arising from the
application of the “fictitious interposition” rule, leading to the assessment of income taxes
in the hands of the beneficial owner, notwithstanding the circumstance that the assessed
income was previously taxed in the hands of the interposed person. In these cases, the
solution against double taxation was found in the judicial recognition of the right of refund
of taxes initially paid by the interposed person496.
An exception, which can be retrieved in the Supreme Court case law, concerns only the
payment of taxes. According to this interpretation, Article 163, ITC inhibits the collection
of taxes from the designated taxpayer who has correctly filed a return, where the
payment was made by a different person.497
Lower Courts have reached different solutions. The Provincial Court of Genoa, for
example, has ruled – in a case concerning the taxation of alimonies – that the proceeds
491
G. FALSITTA, Manuale di diritto tributario. Parte generale, Padova, 8th ed., 2012, p. 251 and
Cass. 20 November 2006, No. 24620.
492
Cass. 21 April 2011, No. 9197. The same solution was proposed by G. ARDIZZONE, Doppia
imposizione – Interna, in Digesto IV, Torino 1990, p. 181.
493
Cass. 19 October 1967, No. 2537 and, in the same terms, Cass. 27/04/1984, No. 4918.
494
Cass. 14 February 1997 No. 1412
495
Cass. 27 April 1999, N. 4200. The decision is based, among else, on the argument that the
prohibition of double taxation comes into play only where there is a reiterated assessment and
that the Tax Authorities do not have any obligation to refund the tax paid initially if not upon a
specific request by the taxpayer..
496
Cass. 23 May 2005, N. 10838. It should be remarked that this is also the solution adopted by
Law Decree No. 69/1989, which has introduced a statutory rule in respect of fictitious interposition
(now Article 37, Para. 3 and 4, of Presidential Decree 600/1973, please see below). Conversely,
the Tax Court of First Degree of Florence, in a decision delivered on 17 February 1993, had stated
that the Tax Authorities can only claim the payment of the difference between the assessed tax
and the tax initially paid.
497
See Cass. 14 March 1991, No. 1922; Cass. 1 April 1992, No. 2365; Cass. 08 October 1998,
No. 9955. All mentioned decisions concerned the payment of local income tax of partnerships,
made by one or more of the partners instead than by the partnership itself. The Supreme Court
has ruled that the payment made by the partners was to be recognised. Although the decision
mentions the provisions about double taxation, it was correctly submitted by G. ARDIZZONE,
Doppia imposizione – Interna, in Digesto IV, 1990, p. 181, that a reiterated request of payment
is, in essence, a request to meet an extinct obligation, and the solution should be rather searched
in the regime of obligations or of administrative rules concerning tax payments.
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received by the divorced spouse were not subject to “new taxation” in the hands of the
recipient if the same proceed were not deducted by the payor, thus validating a tax
allocation which was opposite to the one provided by the relevant legislation498. A similar
approach was taken by Provincial Tax Court of Reggio Emilia. The case arisen from the
denial of adjustment of intra-group service fees on the head of the service recipient; the
Court has rejected the assessment in order to ensure compliance with the prohibition of
double taxation and on the argument that the same service fee had concurred to the
determination of the taxable income of the service provider499.
The above summary of Italian case law indicates that in respect of double taxation, a
prohibition is of uncertain effect if not accompanied by criteria that define which of the
two levies is in breach.
IV.2.b France
In French law, there is no statutory provision explicitly forbidding double taxation of the
same revenue in the hands of the same person or different persons.
Nevertheless, double taxation may lead to a potential conflict with the constitutional
principle of equality vis-à-vis public expenditure (“principe de l'égalité devant les charges
publiques”) enshrined in Article 13 of the 1789 Déclaration des Droits de l'Homme et du
Citoyen500 as interpreted in recent years by the Constitutional Court (Conseil
constitutionnel).
The principle of Article 13 should be differentiated from the principle of equality in front
of the law (“egalité devant la loi”) resulting from Article 6 of the same Déclaration des
498
Commissione Tributaria Provinciale di Genova, Sentenza 28/04/2004, No. 78.
499
Commissione Tributaria Provinciale Emilia Romagna, Decision of March 8th 2010 (Para. 14).
The decision is criticised by A. PEPE, Spunti sul divieto di doppia imposizione “interna”, in
Rassegna Tributaria, 5 / 2010, p. 1387, on the grounds that it applies the prohibition of double
taxation to a context where there is no interpretative uncertainty, so “re-writing” the rule of law.
Conversely, D. STEVANATO, Servizi «intercompany», divieto di doppia imposizione e simmetria
dei flussi reddituali, in Dialoghi Tributari, 1/2011, p. 65, remarks that the circumstance of the
particular case justified the recourse to general principles. Also in agreement with the decision is
G. FERRANTI, I presupposti per sindacare l’economicità delle operazioni imprenditoriali, in
Corriere Tributario, 3 / 2016, p. 167
500
Article 13 of the Déclaration des Droits reads : « Pour l'entretien de la force publique, et pour
les dépenses d'administration, une contribution commune est indispensable: elle doit être
également répartie entre tous les citoyens, en raison de leurs facultés ». The Déclaration des
Droits is still part of the French Constitution due to the direct and explicit referral made in the
Preamble of the 1958 Constitution (which is the founding text of the Fifth Republic).
Notwithstanding its remoteness, the Déclaration des Droits still provides the most important
principles of taxation, especially at Article 13 (equality in front of public expenditures) and 14 (the
principle of legality). Also important are Article 6 (principle of equality in front of the law), Article 8
(non-retroactivity of criminal law, a provision which case law has extended to administrative tax
penalties), Article 16 (guaranty of rights) and Article 17 (protection of property rights). See L.
PHILIP, Droit fiscal constitutionnel, Paris, 2014, p. 7 s..
122
Droits501, since the former purports an equal apportionment on the basis of the ability to
pay502.
The distinction is indeed not always so sharp in the case law of the Constitutional Court,
which has adopted along the years the concepts of equality in front of law, equality in
front of taxation and equality in front of public expenditure in different configurations.
Indeed, there is a relevant collection of case law referred to taxation and the examination
of statutory tax provisions by the Constitutional Court has become increasingly frequent
in recent years, since constitutional reforms have granted the possibility to rise a
prejudicial claim not only in the course of a judgment but also during the legislative
procedure, with the result that every year the budget law is almost entirely submitted for
examination.503
What is most relevant for the purposes of the present analysis is that case law of the
Conseil constitutionnel has come to develop, on the basis of the principle of equality, the
concepts of “imposition confiscatoire” and of “charge excessive”504.
The elaboration of the mentioned notions of excessive/confiscatory taxation has
eventually lead the French Constitutional Court, in at least one decision (of 2010) to
achieve the conclusion that double taxation may fall within these notions and ultimately
represent a breach of the principle of equality vis-à-vis public expenditure.
The decision has its origin in a request for a preliminary ruling issued by the Supreme
Court in the context of a case centred on Article 155 of the CGI. The provision was
adopted in two stages in 1973 and 1980 with the aim to contrast the practice of the so-
called “star companies”, or the incorporation of a company (preferably in a low tax
jurisdiction) which would have employed the artists or sportsmen for a nominal salary
and then received the remunerations deriving from the activity of the employed artist or
sportsman and the royalties from the licence of the respective image rights. Article 155
of the CGI provided that – upon conditions – the remunerations so accrued were
attributed to the artist or sportsman and taxed accordingly.
The provision had been object at the time of the referral of a number of decisions of the
Supreme Court which had concluded for its consistency with tax treaties and the UE law.
In the case referred to the Constitutional Court, the tax payer had submitted that the
effect of Article 155 of the CGI was the taxation of income not actually collected, thus
shaping an alleged conflict with the principle of the ability to pay of Article 13 of the
Declaration of Rights.
501
According to Article 6 of the Déclaration des Droits, “La Loi est l'expression de la volonté
générale. (…) Elle doit être la même pour tous, soit qu'elle protège, soit qu'elle punisse. Tous les
Citoyens étant égaux à ses yeux sont également admissibles à toutes dignités, places et emplois
publics, selon leur capacité, et sans autre distinction que celle de leurs vertus et de leurs talents ».
502
J. LAMARQUE, O. NÉGRIN, L. AYRAULT, Droit fiscal général, Paris, 4th ed., 2016, p. 429 et
seq.
503
See L. PHILIP, Droit fiscal constitutionnel, Paris, 2014, p. 5 s..
504
The doctrine can be traced back to Décision n° 2005-530 DC du 29 décembre 2005, where
the French Costitutional Court, in the context of the analysis of a proposed limitation to the overall
income tax charge, stated that it would be against Article 13 of the Déclaration des Droits « si
l'impôt revêtait un caractère confiscatoire ou faisait peser sur une catégorie de contribuables une
charge excessive au regard de leurs facultés contributives ». See F. PEZET, Le caractère
confiscatoire de l’impôt et les exigences constitutionnelles françaises, in Revue de droit fiscal,
No, 22, 2013, p. 30 ; D. GUTMANN, Droit fiscal des affairs, Paris, 10th ed., 2019, p. 36; M.
COLLET, Droit fiscal, Paris, 7th ed., 2019, p. 40; J. LAMARQUE, O. NÉGRIN, L. AYRAULT, Droit
fiscal général, Paris, 4th ed., 2016, 450 s.
123
The Court rejected the submission on the basis of the constitutional nature of the purpose
to counteract tax evasion and the reasonableness and rationality of the criteria adopted
by Article 155 CGI. At the same time, the Court expressed a reservation with reference
to the fact that – on the basis of existing provisions – income attributed to the artist or
sportsman and taxed at the time of accrual under that provision would have been subject
to double taxation at the time of actual receipt and on the basis of the general provisions
of the French CGI.
Such double taxation would have represented, according to the Constitutional Court, a
breach of the principle of equality in front of public expenditures of Article 13 of the
Declaration of rights as interpreted by the Court in its prior case law, with reference to
the concepts of “imposition confiscatoire” and “charge excessif” to the effect that Article
155 is consistent with the Constitution only to the extent that double taxation be
eliminated.
It is noteworthy that the decision specifies that double taxation matters for Constitutional
purposes only if it concerns the “same tax” while conversely the Court has underlined
that no constitutional rule prevents the legislature from introducing a charge on a taxable
base which is already subject to other taxes505.
This definition, and specifically the reference to the “same tax” is in accordance with the
idea, arising from prior Court decisions, that the equality principle is to be assessed on
a tax by tax basis rather than with reference to the combined of the complex of charges
borne by a taxpayer506.
IV.2.c United Kingdom
A provision purporting a kind of prohibition of double taxation in the UK tax system can
be found in Section 32, Paragraph 1, of the Taxes Management Act 1970 (“TMA 1970”),
aimed at providing relief against double assessments507.
The provision is of ancient lineage and dates back to Section 164 of the Income Tax Act
1803 which also contained a provision allowing the assessing authorities to vacate all or
505
Reference is made by the Constitutional Court on this point to its prior decision n° 84-184 DC
of 29 December 1984.
506
See, e.g., Conseil constitutionnel, Décision n° 90-285 DC du 28 décembre 1990 ; Décision n°
97-393 DC du 18 décembre 1997 ; Décision n° 2010-44 QPC du 29 septembre 2010 ; Décision
n° 97-390 DC du 19 novembre 1997 ; Décision n° 2010-28 QPC du 17 septembre 2010 ; Décision
n° 2011-180 QPC du 13 octobre 2011. In a more recent decision (Décision n° 2012-662 DC du
29 décembre 2012) the Conseil constitutionnel has ruled a surcharge on personal income tax
(which would have resulted in a marginal tax rate of 75% on income in excess of 1 million euro to
75%) to be in conflict with the Constitution; the decision indicates that to a certain extent the Court
may take into account the different taxes borne by a taxpayer. See F. PEZET, Le caractère
confiscatoire de l’impôt et les exigences constitutionnelles françaises, in Revue de droit fiscal,
No, 22, 2013, p. 30 ; L. FERIEL, Le législateur et le principe d’égalité devant les charges
publiques, in Revue de droit fiscal, No. 22, 2013, p. 19. Also in Decision No. 2005-530 of 29th
December 2005 the Court has taken into account the overall tax burden. See J. LAMARQUE, O.
NÉGRIN, L. AYRAULT, Droit fiscal général, Paris, 4th ed., 2016, p. 450.
507
According to Section 32, TMA 1970 “if on a claim made to the Board it appears to their
satisfaction that a person has been assessed to tax more than once for the same cause and for
the same chargeable period, they shall direct the whole, or such part of any assessment as
appears to be an overcharge, to be vacated, and thereupon the same shall be vacated
accordingly”.
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part of an assessment if there was a double charge. Differently from the current statute,
the 1803 Act did not yet contain the requirement that tax be levied for the “same cause”:
that term was included in 1806 and modified in “matter or cause” in the equivalent Section
171 of the Income Tax Act 1842. The term “matter” disappeared in 1918, but – in case
law – it is still today considered helpful to elucidate the meaning of “cause”.508
The present provision has a rather limited scope. It only concerns the assessment
procedure and refers to taxes applied for the same chargeable period. Reference to “a
person” indicates that the rule may concern only juridical double taxation and not
economic double taxation. The hypothesis of its application to cases of cross-border
double taxation although not inconsistent with the wording of the provision, does not
seem to have been envisaged in British tax literature, case law or practice.
Section 32 of TMA 1970 concerns cases where the UK Authorities may have raised
alternative assessments under different provisions, where doubts exist on the correct
basis of charge509. According to case law, the issuance of a first assessment does not
preclude the issuance of a second assessment: the effect of the provision is rather that
where the second assessment is upheld, there is a right of the taxpayer to claim
repayment of tax paid on the basis of the first assessment510. Due to the “same year”
requirement, where the two assessments refer (at least, in part) to more than one year
(e.g., because different income categorisation implies different timing allocation rules),
there would be no double taxation for the purposes of Section 32 of the TMA 1970511
and, so, no protection for the taxpayer.
An analogous provision, Schedule 50, Para. 50 of the Finance Act 1998, applies for
corporation tax purposes and grants to a company which believes having been assessed
to tax more than once for the same cause and the same period, the right to file a claim
against the double assessment512.
Other provisions can be found in the UK tax legislation which prevent double taxation in
specific circumstances. Some of those rules concern transfer pricing and the other
508
See the wide overview of provisions against double taxation (with special reference to capital
gain tax) in Appendix 2 to Alistair Norman v Revenue & Customs [2015] UKFTT 303 (TC) (22
June 2015)
509
S. DEEKS, Claims and election, in Simon’s Taxes, London, 2008, Para. A.4.222
510
Bye v. Coren, 1986. The case concerned a married couple who had bought and sold metals
and who were initially addressed a capital gain assessment and later a business income
assessment. See A. DOLTON, Tolley's Tax Cases 2015, London, 2015, Para. 5.10.
511
In Salt v Fernandez, 1988, a taxpayer was first assessed on his income as an author and later
on his profit as a publisher and appealed against the second assessment on the grounds that the
profits were already included in his author income. The Court dismissed the appeal considering
that the publishing profits were correctly assessed and that any double taxation should have been
removed through a claim of refund of author income taxes to the extent that income was included
in the publishing profits for the same year. See S. DEEKS, Claims and election, in Simon’s Taxes,
London, 2008, Para. A.4.222., A. DOLTON, Tolley's Tax Cases 2015, London, 2015, Para. 53.12
512
Schedule 50, Para. 50 of the Finance Act 1998, entitled “Relief in case of double assessment”
provides that “(2) If on a claim being made the Board are satisfied that the company has been
assessed to tax more than once for the same cause and for the same accounting period, they
shall amend the assessment or assessments concerned, or give relief by way of discharge or
repayment of tax or otherwise, so as to eliminate the double charge”. The provision is explained
in the same terms in CTM90670 - Corporation tax self-assessment (CTSA): Claims: Relief from
double assessment.
125
subject matters that will be addressed in detail in the following paragraphs; among the
others it is worth mentioning Section 37 of the Taxation of Chargeable Gains Act 1992
(“TCGA 1992”) under which the tax does not apply on sums taken into account for the
purposes of income taxation513.
It has been argued that a provision of this kind may be seen as the expression of an
implicit “mutual exclusion” rule, which would apply even where no specific statutory rule
existed, since “a form of income can be charged to tax one time only” 514. At the same
time, it must be recognised that there is no expressed general prohibition of double
taxation in the UK tax legislation.
Nor it seems that any such prohibition can be derived from constitutional principles.
Indeed, the UK Constitution515 is based, as far as taxation is concerned, on the cardinal
principle, stated the Bill of Rights of 1688/89, under which taxes cannot be imposed
without parliamentary authority.516 The supremacy (or unlimited law-making power517) of
Parliament, implies that there is no statutory or constitutional restraint as to the amount
of tax which can be imposed, the only limitation being the consent of Parliament518. This
513
Section 37, Para. 1 of the TCGA 1992 reads: “There shall be excluded from the consideration
for a disposal of assets taken into account in the computation of the gain any money or money’s
worth charged to income tax as income of, or taken into account as a receipt in computing income
or profits or gains or losses of, the person making the disposal for the purposes of the Income
Tax Acts”. As an effect, every capital gain accruing on the disposal of an asset should only be
chargeable if it not subject to income tax. See R. CAVE, I. WÜNSCHMANN-LYALL, Capital Gains
Tax, Haywards Heath, 2014, p. 5.
514
See, with reference to Section 37, TCGA 1992, D. W. WILLIAMS, G. MORSE, Davies
principles of tax law, London, 7th ed., 2012, p. 34, who also mention a decision dating back to
years prior to the adoption of the TCGA 1992 and which established the alternative collection of
income tax and capital gain tax (Bird v. IRC [1989] A.C. 300; [1988] 2 W.L.R. 1237). According to
the Authors, such implicit rule would apply only to similar taxes, while no exclusion relationship
exists, e.g., between VAT and income tax.
515
The UK is rather unique in not having a written constitution in the formal sense, albeit what is
referred to as the UK constitution can be described by reference to a variety of sources and is
composed by written documents, statutes, cases and unwritten rules and understandings. On the
nature and composition of the UK Constitution, see A. CARROLL, Constitutional and
administrative law, Harlow, 4th ed. 2007, p. 16; J. MC ELDOWNEY, Public law, London, 3rd ed.,
2002, p. 14; A. BRADLEY, K. EWING, Constitutional and administrative law, Harlow, 16th ed.,
2015, p. 6; H. BARNETT, Constitutional & administrative law, London, 10th ed., 2013, p. 8: P.
LEYLAND, The Constitution of the United Kingdom, Oxford, 2nd ed., 2012, p. 25.
516
See J. TILEY, G. LOUTZENHISER, Revenue Law, Oxford - Portland, 7th ed., 2012, p. 30;
(especially about the present significance of the Bill of Rights in case law) and D. W. WILLIAMS,
G. MORSE, Davies principles of tax law, London, 7th ed., 2012, p. 35. On the tax provisions of
the bill of rights and their historical background, D. W. WILLIAMS, Three Hundred Years On: Are
Our Tax Bill Right Yet?, in British Tax Review, 1989, p. 370 f. Some authors find the seed of the
principle of legality in the Magna Carta, see D. FELDMAN, English Public Law, Oxford, 2009,
m.no,. 1.109; A. ARLIDGE, I. JUDGE, Magna Charta Uncovered, Oxford – Portland, 2014, p. 153.
517
H. BARNETT, Constitutional & administrative law, London, 10th ed., 2013, p. 114.
518
In one of the most influential contributions to the study of UK constitution (A. V. DICEY,
Introduction to the Study of the Law of the Constitution, London, 8th ed., 1915, reprinted
Indianapolis, 1982, p. 3) the sovereignty of parliament is the described in the following terms:
“Parliament (…) has under the English constitution the right to make or unmake any law whatever
(…) the sovereignty of Parliament is a fundamental rule upon which no legal limits could be
placed”.
126
is the fundamental safeguard of law, “the undisputed right to pay only what Parliament
has consented to”519.
As a consequence, courts may not hold an act of parliament to be invalid, and the term
“unconstitutional” does not have a defined content520.
Furthermore, the UK tax systems does not recognise the principle of the ability to pay.
Its influence should however, not be underestimated. An important role in this respect is
played by the doctrinal formant: most British academic tax manuals indeed present the
ability to pay as one of the fundamental principles of taxation, especially through
reference to the work of Adam Smith521. And it is remarkable that reference to the Adam
Smith canons is also often found in official documents supporting the introduction of new
legislation522. It may also be argued that the principle of ability to pay operates on a
political – rather than legal – field, as was shown in the poll tax crisis of the early
1990’s523.
Case law, where invested of issues concerning cases of double taxation not explicitly
addressed in the legislation, has regarded the avoidance of double taxation as a
substantial canon of construction.
The decision of the House of Lords in the case of Vestey v IRC (Nos 1 and 2)524 requires
that an unlikely construction of tax legislation must be avoided if it results in a double tax
charge.
More recently, it has been considered that “Parliament must be assumed not to have
intended double taxation”525. In a decision, the construction of the relevant statutes
stems from the consideration that “one of the most important unwritten rules of income
tax is that income generally can be taxed only once” 526.
The wide acceptance of the avoidance of double taxation as a canon of construction may
however be ineffective, by its own nature, where it appears that double taxation was
accepted by Parliament or where there is no room for a purposive interpretation of the
pertinent statutes.
A recent case is of great interest, in this latter respect, since it envisages a situation
where double taxation can’t be avoided either under specific legislation or the general
519
See the analysis of constitutional safeguards in taxation from an historical perspective in C.
STEBBINGS, The Victorian Taxpayer and the Law, Cambridge, 2009, p. 4.
520
A. BRADLEY, K. EWING, Constitutional and administrative law, Harlow, 16th ed., 2015, p. 49;
P. LEYLAND, The Constitution of the United Kingdom, Oxford, 2nd ed., 2012, p. 49; D. FELDMAN,
English Public Law, Oxford, 2009, m.no 2141 et seq.
521
The Smithian canon of ability is mentioned among the inspiring principles of tax legislation in,
e.g.: J. TILEY, G. LOUTZENHISER, Revenue Law, Oxford - Portland, 7th ed., 2012, p. 10; A.
OLOWOFOYEKU, J. KIRKBRIDE, D. BUTLER, Revenue Law, 3rd ed., Liverpool, 2003, p. 4; A.
LYMER, L. OATS, Taxation, Birmingham, 20th ed., 2013, p. 51 f.; A. SHIPWRIGTH, E. KEELING,
Textbook on Revenue Law, London, 2nd ed., 1998, p. 12.
522
D. W. WILLIAMS, G. MORSE, Davies principles of tax law, London, 7th ed., 2012, p. 5.
523
P. SMITH, Lessons from the British Poll Tax Disaster, in National Tax Journal, Vol. 44, no. 4,
(December, 1991), pp. 421-36.
524
[1979] 3 All ER 976
525
Bowring & Anor v Revenue & Customs [2013] UKFTT 366 (TC) (25 June 2013)
526
PA Holdings Ltd & Anor v Revenue & Customs [2009] UKFTT 95 (TC) (07 May 2009)
127
criteria of construction and where, in the absence of an overarching prohibition in
domestic law, a remedy has been sought in the outside sphere of international law.
The case originates from certain rules on timing allocation of professional income, which
resulted for the taxpayer in an assessment concerning a row of three tax years. As a
result of the correct application of the true and fair basis of allocation, further tax was
payable for two of those years but, for the intermediate year, tax had been overpaid. The
taxpayer had agreed to HMRC’s revised computations, but claimed that the overpayment
for the intermediate year should have been offset against the payments due for the two
assessed years.
In the circumstances, Section 32 of TMA 1970 was not applicable. The Court has then
examined whether double taxation arising from the HMRC assessment was in breach of
Article 1 of the 1952 Protocol of the European Convention on Human Rights527.
The Tribunal concluded in favour of the application of the ECHR to the case, arguing that
“it is nevertheless at least arguably disproportionate for HMRC to collect tax for the 2005-
6 period when it has already collected tax on those profits in the now closed 2006-7 self-
assessment return”528. The UK Court, with this decision, has gone beyond the traditional
approach of the European Court of Human Rights in tax matters529: it thus seems that
the case should rather be regarded as an indication of the difficulty of identifying a legal
basis against double taxation within the UK tax system rather than a sure evidence that
the ECHR can be relied upon for said purpose.
IV.2.d Interim conclusions concerning general prohibitions of double taxation

Italy is the sole Country, among those examined, whose tax system includes a general
statutory prohibition of double taxation, explicitly applicable also to economic double
taxation. The provision, which dates back to 1877 and is considered since the adoption
of the 1946 constitution a direct expression of the principle of the ability to pay, has
however limited effect due to its legal nature of ordinary statute which can be derogated
by posterior or more specific statutes and is referred to only for the purposes of
interpretation. Furthermore, notwithstanding its wide reaching language, scholars and
case law consider the provision not applicable to cross border situations530.
The uncertain results of the judicial application of the rule are important for the purposes
of the present dissertation, since they highlight that a general prohibition is not an
527
Under said provision, “Every natural or legal person is entitled to the peaceful enjoyment of his
possessions. No one shall be deprived of his possessions except in the public interest and subject
to the conditions provided for by law and by the general principles of international law”. The ECHR
was ratified in the UK with the Human Rights Act 1998, which attributes to the individual rights of
the ECHR constitutional relevance, as noted by P. LEYLAND, The Constitution of the United
Kingdom, Oxford, 2nd ed., 2012, p. 26.. A. BRADLEY, K. EWING, Constitutional and administrative
law, Harlow, 16th ed., 2015, p. 7, further remark that the ultimate protection of fundamental rights
is in general terms a matter for Parliament, not courts but that with the Human Rights Act 1988,
the role of courts in protecting human rights has been significantly extended. As T. PROSSER,
The Economic Constitution, Oxford, 2014, p. 90 has it, the ECHR contains substantial principles
which are of considerable importance and which supplement the UK constitutional principle of no
taxation without Parliament approval.
528
Mr Ignatius Fessal v Revenue & Customs [2015] UKFTT 80 (TC) (17 February 2015)
529
On the traditional case law of the European Court of Human Rights in tax matters, which is
rather permissive, see J. WADHAM et Al., Blackstone’s guide to the Human Rights Act 1998,
Oxford, 7th ed., 2011, p. 344 et seq.
530
Para IV.2.a
128
effective solution if not accompanied by criteria suitable to solve the overlap of the two
taxes. This may be even more evident in a cross-border context, where the two
overlapping taxes are the expression of the tax jurisdiction of two independent taxing
authorities.
In French law, there is no statutory provision explicitly forbidding double taxation of the
same revenue in the hands of the same person or different persons. Nevertheless,
double taxation may be in breach of the constitutional principle of equality vis-à-vis public
expenditure (“principe de l'égalité devant les charges publiques”) The case law of the
Conseil constitutionnel has come to develop, on the basis of such principle the concepts
of “imposition confiscatoire” and of “excessive taxation”. This has led, in at least one
decision (of 2010) referred to a cross-border case (but giving rise, due to anti-abuse
rules, to domestic double taxation) to achieve the conclusion that double taxation may
be “excessive” or “confiscatoire” and ultimately represent a breach of the mentioned
principle of equality vis-à-vis public expenditure531.
The UK tax system contains a provision purporting a prohibition of double taxation, but
it only concerns the assessment procedure and refers to taxes applied for the same
chargeable period. Reference to “a” person indicates that the rule may concern only
juridical double taxation and not economic double taxation. Also, the hypothesis of its
application to cross-border double taxation (although not inconsistent with the wording
of the provision) has not been envisaged in practice. Other items of legislation prevent
the overlap of different taxes on the same taxable events (e.g., avoiding that a capital
gain be subject to both chargeable gain taxation and income taxation) but those are
rather rare and specific. The UK constitution also does not set any constrains to double
taxation.
Nonetheless, case law considers the avoidance of double taxation as a substantial canon
of construction and, in at least one case has ruled that (domestic) double taxation is in
breach of the Protocol to the European Convention of Human Rights532.
The analysis made thus seem to indicate that there are no general rules or principles, in
the States examined, which have the effect of eliminating economic double taxation in a
cross-border scenario.
Specific rules would be necessary for the above purpose. And indeed, some rules exist
on specific subject matters, which shall be examined in the following paragraphs.
IV.3 Transfer pricing and corresponding adjustments
IV.3.a Italy
IV.3.a.1 Domestic situations

Since the Italian transfer pricing legislation only apply to cross-border transactions, there
is no corresponding adjustment rule with respect to domestic transactions.
531
Para IV.2.b
532
Para IV.2.c
129
IV.3.a.2 Cross-border situations
Article 110, Para. 7, ITC states that items of income deriving from transactions with non-
resident associated companies can be adjusted on the basis of the market value, if the
assessment results in an increase of taxable income. Downwards adjustment can be
made upon the conclusion of a mutual agreement procedure or also unilaterally, upon
request by the taxpayer and following an adjustment in a State which has entered into a
tax convention with Italy533.
IV.3.b France
IV.3.b.1 Domestic situations
IV.3.b.1.1 The statutory provisions of Article 57 of the CGI

Since the transfer pricing rules of Article 57 CGI only apply to cross-border transactions,
the French tax legislation does not provide for a corresponding adjustment rule with
respect to domestic transactions.
IV.3.b.1.2 Special statutory rules on interest rates

Remedies to domestic economic double taxation are provided in respect of adjustments
made on the basis of Article 212, I, a) CGI under which deduction of interest in related
party financing is limited to the amount resulting from the application of the average
bank rate of that year or, if higher, to the rate that would have been charged to that
specific borrower by independent lenders in the same circumstances.
The portion of interest which exceeds said limit qualifies as a hidden profit distribution
and might benefit – if the relevant conditions, set by Article 145, CGI, are met - from the
participation exemption (or affiliation) regime in the hands of the lender534. Among the
conditions for the exemption of the (open or hidden) profit distributions there is the
ownership by the recipient, of shares representing at least 5% of the voting share capital
of the subsidiary: as an effect, economic double taxation of reconstructed interest can
be avoided, since interest which is non-deductible on the head of the borrower is (almost
entirely) exempt in the hands of the lender.
533
Article 31-quater, Presidential Decree No. 600 of 29 September 1973.
534
P. BURG, France – Corporate Taxation, Amsterdam, 2019, Para. 1.4.5 and Para. 6.1.5. The
exemption, upon conditions, of the excess interest under Article 212, Para. 1, CGI is confirmed
by BOI-IS-BASE-35-20-10-20140415(IS - Charges - Limitation des intérêts dans le cadre du
dispositif de lutte contre la souscapitalisation - Champ d'application du dispositive) which reads:
“Toutefois, il est admis que le régime fiscal des sociétés mères soit applicable à la fraction
d'intérêts non déductibles en application du I de l'article 212 du CGI versée à une société mère».
The same position is taken in respect of excess interest deriving from the application of Article
30, Par 3, SubPara. 1, CGI in BOI-IS-BASE-10-10-20-20150401, at Para. 30: “Le régime spécial
est applicable à tous les produits que la société mère reçoit de sa filiale en sa qualité d'actionnaire
ou de porteur de parts. Il y a lieu de prendre ainsi en considération non seulement les bénéfices
proprement dits, mais également : (…) - les intérêts excédentaires versés à la société mère et
réintégrés dans le bénéfice imposable de la filiale en vertu des dispositions du 3° du 1 de l'article
39 du CGI”.
130
IV.3.b.1.3 The judicial doctrine of the acte anormal de gestion
Remedial measures to economic double taxation deriving from the application of the acte
anormal doctrine are rather fragmentary and incomplete.
First, it is far from being recognized that the hidden profits attributed to the beneficiary of
an abnormal management act can be benefit from the participation exemption regime.
The Supreme Court has taken the view in at least one case that such a distribution does
not fall within the scope of application of the statutory provisions concerning the
exemption of dividends535. The decision is mentioned in the official instructions536 only
with reference to the specific situation that was addressed by the Supreme Court, i.e.,
the hidden profit distribution deriving from the sale, by a subsidiary to its parent company,
of securities at a price below the market value. Scholars however seem to attribute to
the decision a more general effect537.
It is worth highlighting that the exemption of the hidden distribution would not be sufficient
to eliminate the economic double taxation originating from the adjustment of the
conditions of the abnormal act.
Indeed, in the case of Article 212, I, a), CGI the reconstruction of interest into dividends
concerns the transaction itself, to the effect that the non-deduction for the borrower
corresponds to a (possible, subject to conditions) exemption in the hands of the lender,
and double taxation is avoided. Conversely, if in the case of an abnormal act, the
transaction is adjusted only in the hands of the enterprise which has performed it, but no
corresponding adjustment is made in the hands of the counterpart, economic double
taxation would remain, and the exemption of hidden profits attributed to the same
counterpart only avoids one further taxation that might otherwise occur.
French case law seems to have only occasionally addressed the double taxation effects
of the abnormal act doctrine. Two decisions deserve to be mentioned in this respect.
The first decision was related to an interest-free loan granted by a subsidiary to its parent
company, both resident in France. The subsidiary income was adjusted on the basis of
the abnormal act doctrine, so as to include fair market interest on the loan. The dispute
arose with reference to the assessment, on the head of the parent, of a deemed profit
corresponding to the interest which should have been charged by the subsidiary. In
accordance with the claim made by the parent company, the judges have recognised
that interest that were not charged were also not deducted by the borrower (not having
been entered in the accounts as costs) and such non-deduction already gave rise to a
corresponding taxable income, so that no further income tax should have been levied in
respect of the deemed profit distribution in itself538.
The rationale of the decision indicates awareness of the effects and peculiarities (also
with reference to the accounting representation of the questioned transactions) of the
abnormal act doctrine, but limitedly to the (juridical) double taxation of the deemed profit
on the head of the beneficiary, while the (economic) double taxation caused by the
535
CE, No. 35415 and 36733 of 6th June 1984.
536
BOI-IS-BASE-10-10-20-20150401, at Para. 50.
537
See M. COZIAN, Les grands principes de la fiscalité des entreprises, Paris, 4th ed. 1999, p.
402 et seq.; D. GUTMANN, Droit fiscal des affairs, Paris, 10th ed., 2019, p. 212.
538
The Court held that the benefit received by the borrower could not have been included in the
income a second time on the basis of general rules for determining the taxable income, laid down
at Article 38, CGI, See CE 25th July 1980, No. 15073 and C. BUR, L’acte anormal de gestion,
Paris 1999, m. no. 155, p. 76.
131
adjustment on one company and the lack of corresponding adjustment on the head of
the other company seem to remain out of the picture. The judges seem to consider the
economic double taxation as an ordinary consequence of the qualification of the
abnormal act as deemed profit distribution, so that the issue is one of economic double
taxation of distributed profits rather than of income adjustments.
The second decision more directly refers to corresponding adjustments and thus,
indirectly, to the avoidance of economic double taxation. The company involved had
acquired an asset at an abnormally low price, which was adjusted on the head of the
seller. In these circumstances, the Supreme Court has recognised the right of the buyer
to replace – for tax purposes – the purchase price paid with the market value assessed.
The Court decision is based on Article 38, 2 of the CGI, under which the cost basis is
represented by the price paid or, for assets acquired free of charge, by the respective
market value.
The conclusions reached by the Court depict a solution to economic double taxation539
based on a mechanisms which has equivalent effects to those of a corresponding
adjustment, but that needs to be evaluated in the wider context of the French tax system,
in which an increase of equity (such as the one generated by the above described
qualification of the free portion of the asset acquired) constitutes taxable income.
Indeed, the Court remarks that such taxable income corresponds to the hidden profit
distribution attributable under Article 111, CGI, to the beneficiary of an abnormal act. At
a closer look, then, the decision does not purport the elimination of economic double
taxation, but merely the transformation of its origin, which instead of being the adjustment
of the conditions of the transaction becomes the hidden profit distribution.
It may be conclusively argued that the two decisions have in common more that it
appears, since both accept that the adjustment of an abnormal act generates economic
double taxation in what such act creates a hidden profit distribution and both only provide
(although different) basis for avoiding an additional juridical double taxation on the
beneficiary of the abnormal act.
It ca thus be argued that no remedy thus presently exists against economic double
taxation deriving from adjustments based on the acte anormal doctrine.
IV.3.b.2 Cross-border situations

French domestic legislation does not contemplate any downwards rewriting of income
resulting from the accounts.
This occurrence, together with the circumstance that older French treaties do not contain
the corresponding adjustment provision of Article 9, Para. 2 of the OECD Model540,
depicts a significant legislative gap on the matter.
Corresponding adjustments are provided only in official instructions. The instruction on
mutual agreement procedures addresses the case where the primary adjustment made
by the French authorities has to be withdrawn on the basis of the mutual agreement, but
539
CE 5th January 2005, No. 254556 and P. SERLOOTEN, O. DEBAT, Droit fiscal des affaires,
Paris, 17th ed., 2018, Paris, p. 72 et seq.
540
See Para. V.5.a.2 below.
132
not the implementation in France of an agreement which partially recognises a foreign
country adjustment541.
Such latter hypothesis is taken into consideration by the instruction on treaty aspects of
transfer pricing, according to which corresponding adjustments are intended not only in
those few cases where the treaty includes a specific provision but also as a possible
outcome of a mutual agreement procedure542.
In conclusion, remedial measures against economic double taxation deriving from
transfer pricing adjustments are entrusted, in France, to the administrative practice543.
There is no statutory provision, case law or scholarly interpretation addressing the case
of possible effects in France of an income adjustment, made in a foreign country, on the
basis of local doctrine equivalent to the one of the acte anormal de géstion. It may be
argued that, where such an adjustment concerned a related party transaction and was
based on the arm’s length principle, the mutual agreement procedure should be
available. On the contrary (and in the light of the case law of the Conseil d’État)544, the
recourse to the mutual agreement procedure might face some resistance from the
French side, when a foreign adjustment concerned unrelated party transactions.
IV.3.c.1 Domestic situations

Since the removal, in 2004, of the UK-UK exemption, transfer pricing adjustments have
become possible on transactions between companies being both liable to UK income
taxation. Such adjustments, by increasing the taxable income one of the parties (the
“advantaged person”) may generate the economic double taxation of the portion of
income which was initially taxed in the hands of the other party (“disadvantaged person”)
under the actual provision.
Legislation has thus been introduced in 2004, along with the removal of the UK-UK
exemption, to avoid the described double taxation, through a compensating adjustment
541
See BOI-INT-DG-20-30-10-20140218, at Para. 600 : « Dans le cas de la France, l'autorité
compétente informe le service à l'origine du rehaussement le cas échéant, ainsi que le service
gestionnaire du dossier du contribuable des termes de l'accord amiable et leur demande d'en tirer
les conséquences financières sans délai. Si l’accord se traduit par un abandon total ou partiel
des impositions mises à la charge du contribuable, suite au rehaussement effectué, le service est
invité à prononcer sans délai la décharge des impositions concernées, ainsi que le cas échéant
des intérêts de retard, majorations et pénalités y afférents ».
542
See BOI-INT-DG-20-40-20120912, Para. 170 : « Il peut être également la conséquence d'un
accord entre les autorités compétentes dans le cadre d'une procédure amiable ouverte sur le
fondement de l'article 25 du modèle de convention fiscale de l'OCDE ».
543
B. GOUTHIÈRE, Les impôts dans les affaires internationals, Levallois, 12th ed., 2018, m. no.
85810; N. GHARBI, Le contrôle fiscal des prix de transfert, Paris, 2005, p. 417 f.; G. GEST, G.
TIXIER, Droit fiscal international, Paris, 1990, p. 483 who underline the wide discretionary powers
of the tax administration.
544
Reference is made to CE March 18th 1994, No. 68799-70814 (SA Sovemarco Europe) which
has hold that treaty provisions corresponding to Article 9 of the OECD Model does not preclude
the adjustment of unrelated party transactions based on the acte anormal doctrine.
133
of the disadvantaged party income. These adjustments, in domestic situations545, are
now governed by section 174 of TIOPA 2010, under which – at certain conditions – the
disadvantaged person may claim that its profits and losses “be calculated for tax
purposes as if the arm's length provision had been made or imposed instead of the actual
provision”546.
The legal practice has highlighted that “in many routine cases, it should be possible to
manage these three processes to ensure that the effect of applying the arm’s length
principle within the United Kingdom is limited. Where a transfer pricing adjustment is
made, a corresponding adjustment is likely to be available; the relative positions of the
two companies can be equalized and, provided that a group payment arrangement is in
place, no additional tax may need to be paid”547.
Excess interest arising from non-commercial securities (i.e., those yielding returns in
excess of a reasonable commercial return) are re-characterised as a distribution under
Section 1000(1) of CTA 2010.548 However, such distribution does not fall within any of
the exempt distribution classes549, and would thus be fully taxable in the hands of the
recipient.
The application of non-commercial security rules in themselves would then generate
economic double taxation of re-characterised interest.
It should be borne in mind, however, that the scope of application of non-commercial
securities rules corresponds to the scope of application of transfer pricing rules: those
latter would prevail and apply to both the borrower and the lender. As a consequence,
when a security yields return in excess of market return, the adjustment on the head of
the borrower is made on the basis of transfer pricing rules and this would grant the lender
a right to claim the corresponding adjustments as foreseen by transfer pricing rules550,
thus eliminating double taxation in domestic situations.
545
The technical explanation to section 174 of TIOPA 2010 specifies that “The claim prevents
double taxation and is only relevant where both the advantaged and disadvantaged persons are
liable to UK taxation”.
546
Section 174, Para. 2 of TIOPA 2010. The conditions are set in that same section 174 as well
as in sections 175 (claim not allowed in some cases where actual provision relates to a security
issued by one of the affected persons) and 176 (claim cannot be made unless advantaged person
has made return on the basis that the arm's length provision applies). The claim must be made in
accordance with the procedure of section 177.
547
See A. CASLEY, Rewrite of Transfer Pricing Rules, in International Transfer Pricing Journal,
May/June 2004, p. 114 f.
548
Section 1000A of the CTA 2010, entitled “Meaning of distribution” reads that: “In the
Corporation Tax Acts “distribution”, in relation to any company, means anything falling within any
of the following paragraphs (…) Any interest or other distribution out of assets of the company in
respect of securities of the company which are non-commercial securities (as defined in section
1005), except— (a) however much (if any) of the distribution represents the principal secured by
the securities, and (b) however much (if any) of the distribution represents a reasonable
commercial return for the use of the principal”.
549
Under CTA 2009, Part 9A, a distribution received by a company (which is not a small company,
to which special rules apply) is not chargeable to corporation tax if the distribution falls into an
exempt class.
550
This point is well clarified by HMRC, International Manual, INTM 655070: the prevailing
application of transfer pricing rules “enables the recipient of the interest to make a claim under
TIOPA10/S174 also to be taxed on the basis of the arm’s length amount”.
134
IV.3.c.2 Cross–border situations
Double economic taxation arises in cross border situations, where a company liable to
tax in the UK is party to a transaction with a non-resident company whose profit have
been adjusted on the basis of the transfer pricing legislation of the foreign Country.
In such case, the UK company can’t claim for a compensating adjustment under section
174 of TIOPA 2010, which is applicable only in domestic situation. Nor, under UK
legislation, a taxpayer is entitled to make a unilateral adjustment to obtain a
corresponding relief551.
The UK company may nonetheless have recourse under the mutual agreement
procedure of such double taxation agreement (if any) in place with the other Country. If
the other party is a Member of the EU, the UK company may have recourse under the
EU arbitration convention.
Section 124 of the TIOPA 2010 has the purpose of giving effect to the solution or mutual
agreement reached on the basis of a bilateral tax treaty: as a result, an adjustment in the
UK may be made and, as specified in subsection 3, may consist in “discharge or
repayment of tax, the allowance of credit against tax payable in the United Kingdom, the
making of an assessment or otherwise”.
In respect of non-commercial securities, the issue concerns the possibility to obtain in
the UK a downwards income adjustment in front of the portion of interest that is not
deducted from the foreign income of the borrower on the basis of the circumstance that
such interest exceeds comparable open market remuneration.
The case would fall, from a UK perspective, within the scope of application of transfer
pricing rules and the prevention of double taxation would ultimately depend on
corresponding adjustments provided within those rules.
IV.3.d Comparative considerations on transfer pricing and corresponding

adjustments
Italian and French general transfer pricing legislation only apply to cross-border related-
party transactions. This circumstance explains the absence of a corresponding
adjustment rule for domestic situations.
The setting of the UK system has been significantly different, since the reform of transfer
pricing rules adopted in 2004, in the wake of the Lankhorst-Hohorst decision of the
CJEU. At that time, transfer pricing rules were extended to domestic related party
transactions, and at the same time legislation has been introduced with the purpose of
avoiding the possible domestic economic double taxation consequences.
The UK counterpart of a UK company whose income has been adjusted on the basis of
the arm’s length rule may thus claim that its profits and losses be also calculated on the
basis of the same arm's length conditions which underlie the primary adjustment. The
remedy is of easy access, so that it may be argued (as an author has) that the overall
effect of applying the arm’s length principle within the United Kingdom is limited552.
A very similar approach is taken by the French rule which limits the deduction of interest
cost to the market rate (as determined by French legislation): excess interest qualifies
as a hidden profit distribution and can benefit – if the further conditions are met - from
551
See HMRC, International Manual, INTM 423100.
552
Para IV.3.c.1
135
the participation exemption (or affiliation) regime in the hands of the French corporate
lender.
Both the UK and French remedial measures apply within a domestic context only.
Indeed, in the countries examined, there is no domestic law remedy to economic double
taxation which may derive from transfer pricing adjustments made by a foreign country.
The remedial measures are entirely delegated to treaty rules (whose contents and effects
are addressed at Chapter V below)
French legislation does not even contemplate any downwards rewriting of income
resulting from the accounts, a gap which is added to the absence of the corresponding
adjustment provision of Article 9, Para. 2 of the OECD Model in older French tax treaties.
The application in France of treaty remedies is thus entrusted to the administrative
practice553, an example of how the convergence of national rules may depend upon
different legal formants.
Overall, a significant difference between domestic and cross-border situation arises. In
domestic situations, the remedial measure are of immediate application (subject to
conditions) while in a cross-border context there is no remedy unless provided by a treaty
and subject to the successful completion of treaty dispute settlement procedures. The
sole exception is represented by the recent introduction of a unilateral corresponding
adjustment provision in the Italian tax legislation554.
IV.4 Thin capitalisation and interest limitation: the treatment of

excess interest in the hands of the lender
IV.4.a Italy

The interest deduction limitation rule of Article 96, ITC does not in any way address the
economic double taxation that it possibly generates. Nor the avoidance of such double
taxation would be easy to regulate, since the deduction limitation rule applies to overall
interest cost (and not to specific transactions) and it would not be possible to identify on
an objective basis the non-deducted interest flow suitable to be exempted in the hand of
the recipient555.
The double taxation effect that Article 96 may generate, even in domestic situations and
between unrelated parties, has generally been criticised, but at the same time it has been
pointed out that such effect is mitigated by the unlimited carry-forward of non-deducted
interest556.
553
Para IV.3.b.2
554
Article 31-quater, Presidential Decree No. 600 of 29 September 1973.
555
R. LUPI, Gli interessi nei gruppi di imprese come principale riflesso della mobilità
internazionale della ricchezza, in Dialoghi di diritto tributario, No. 1/2008, p. 13.
556
L. MIELE, Riduzione dell'aliquota IRES, ampliamento della base imponibile e semplificazione
degli adempimenti, in Corriere Tributario, No. 40/2007, p. 3223
136
The absence of a rule against domestic double taxation contributes to explain the
absence of any statutory rule aimed at preventing economic double taxation of foreign
source excess interest.
It should be questioned, however, whether an equivalent function can be performed by
the rules concerning corresponding adjustments in the domain of transfer pricing, at least
with reference to cases where the non-deduction of interest in the source country derives
from the application, on the head of the debtor, of an interest deduction rule based on
the arm’s length principle.
As illustrated with respect to transfer pricing (see Para IV.3.a above) Italian legislation
makes reference, in respect of corresponding adjustments, to treaty rules on mutual
agreement procedures. It will be examined at Chapter V below to what extent treaty rules
provide a remedy against double taxation deriving from national thin capitalisation or
interest limitation rules; as far as Italy is concerned, some resistance may be expected
in respect of application of corresponding adjustment rules to interest considered
excessive under foreign rules.
The official instructions on mutual agreement procedures do not mention their
applicability to thin capitalisation cases, nor publicly available case law has addressed
the issue. Furthermore, Italy has made a specific reservation on the matter in respect of
the Arbitration Convention 557.
IV.4.b France

As a general rule, interest is ordinarily taxable in the hands of the lender and the thin
capitalisation rules of Article 212, II and III, CGI (in force until 31st December 2018) do
not address the treatment in the hands of the lender of non-deducted interest.
Nor interest which have not been deducted due to the mentioned provisions qualified as
profit distribution558. French tax literature highlights the difference in treatment with
interest made non-deductible because of the interest rate.559
It is true that the excess interest carry-forward rule embedded in Article 212, II and III,
limits, as a matter of fact, the likelihood of double taxation. However, it may be that
excess interest is not actually deducted in years subsequent to the year of accrual (due
557
The reservation made to Para 1.2 of the Revised Code of Conduct for the effective
implementation of the Convention on the elimination of double taxation in connection with the
adjustment of profits of associated enterprises (2009/C 322/01) reads as follows: “Italy considers
that the Arbitration Convention may be invoked in case of double taxation due to a price
adjustment of a financial transaction not in accordance with the arm's length principle. Conversely,
it cannot be invoked to solve double taxation arising from adjustments to the amount of loans, or
double taxation occurred because of the differences in domestic rules on the allowed amount of
financing or on interest deductibility”.
558
This is expressly provided by a statutory provision (Article 112, Para. 8, CGI) with reference to
interest whose deduction has been limited by Article 212, Para. 3, CGI.
559
R. COIN, New tendencies in tax treatment of cross-border interest of corporations. France, in
Cahier de Droit Fiscal International, 2008, p. 299 ; B. GOUTHIÈRE, Les impôts dans les affaires
internationals, Levallois, 10th ed., 2014, m.no. 26780.
137
to lack of sufficient future earnings or due to the declining amount along time of the
interest excess) and in such case, economic double taxation will arise.

Foreign source interest is ordinarily taxable as business income in the hands of the
French lender.
French legislation does not contain any specific rule aimed at preventing international
economic double taxation of interest received by a French lender and that was not
deducted by the foreign borrower under local thin capitalisation or interest limitation rules.
The possible prevention of economic double taxation of foreign source non-deducted
interest should then be explored in the light of the French participation exemption regime
(provided by Article 216, CGI) which is evenly applicable to domestic and foreign source
dividends. The preliminary issue is whether foreign source non-deducted interest can
qualify for the purposes of such regime under the conditions set forth by Article 145, CGI.
Among such conditions there is one (at Article 145, Para. 6-b, CGI) which is of special
interest for the purposes of the present analysis and, precisely, the condition that the
proceeds be non-deductible for the distributing company560.
However, other conditions set by Article 145, CGI would be hardly met by a loan In
particular, Article 145, Para.1, CGI refers to shares (“titres de participation”) representing
at least 5% of the share capital of the issuing company.
It is also not worth further exploring the possibility to qualify excess interest within the
definition of participation proceeds (an hypothesis which would anyway require that the
French lender was a shareholder of the foreign borrower) since such qualification has
been excluded (either by legislation or interpretation) even where interest comes from a
French borrower561, and it undisputed that hidden profit distributions do not qualify for
the participation exemption regime562.

The disallowance of interest deduction on the head of a UK borrower may generate
economic double taxation to the extent that the UK lender remained taxed on the
received interest.
Since, under the UK legislation in force since 2004, the arm’s length rule applies to both
the interest rate and the amount of the loan, the rules on domestic corresponding
adjustments also apply where the disallowance of interest is caused by the amount of
the borrower’s debt. The aim of the legislation is to restore, after an interest adjustment
560
The condition is further illustrated by BOI-IS-BASE-10-10-20-20150401, at Para. 65, which
explains that it refers to the treatment of the specific item of income and not to the tax regime
applicable to the foreign distributing entity in general.
561
See BOI-IS-BASE-10-10-20-20150401 at Para. 30 to 50.
562
D. GUTMANN, Droit fiscal des affaires, Paris, 10th ed., 2019, p. 212
138
on the borrower, the balance between the interest deduction for the borrower and the
interest taxation for the lender563.
The general rule of section 174 of the TIOPA 2010 would then apply, granting to the
lender the right to claim that “the profits and losses (…) be calculated for tax purposes
as if the arm's length provision had been made or imposed instead of the actual
provision”. TIOPA 2010 contains special rules, at sections 181 and 182, for claims where
the actual provision relates to a security564 and the lender is a corporate taxpayer.
Interest subject to the new limitation rules introduced by Finance (No.2) Bill 2017 are
nonetheless taxable in the hands of the recipient and are thus fully subject to economic
double taxation.
IV.4.c.2 Cross border situations

The UK Authorities position is to recognise foreign interest deduction adjustments, even
in absence of reciprocity565.
Also, the practice about loans having an “equity function” may come into play with
reference to disregarded interest. Indeed, it may be argued that, if a loan is performing
in whole or in part (also considering the foreign rules of the Country of residence of the
borrower) the function of equity in the financial structure of the borrower, should therefore
be correspondingly treated as interest-free in the computations of the lender566.
The proposition may come into play where the all or part of the interest charge of the
borrower has been disallowed in accordance with the thin capitalisation rules of its
country of residence.
In this respect, the UK tax authority considers that “not all countries have thin
capitalisation legislation and those that do often have safe harbours and specific limits”
so local rules do not match the UK approach, which applies the arm’s length principle on
a case by case basis. So, for the purposes of evaluating the return on a loan in the
563
According to HMRC, International Manual, INTM413140, “The intention of the adjustment is
that for UK tax purposes the lender, as well as the borrower, should be treated as if the arm’s
length provision had been made. This means that if the interest deduction in the borrower’s
computations has been reduced, the corresponding interest income in the computations of the
lender will be similarly reduced”.
564
In respect of the timing, contents and other procedural requirements of the claim, see HMRC,
International Manual, INTM413140.
565
See HMRC, International Manual, INTM423060, “Some partners do not consider that the level
of capitalisation of a corporate borrower, as opposed to the rate of interest paid on its debt, is an
issue involving the arm’s length principle prescribed by the OECD and Arbitration Conventions.
Because it does not view thin capitalisation as a transfer pricing issue, the tax treaty partner may
be reluctant, or refuse, to enter MAP in respect of such adjustments. Conversely the UK takes the
view that thin capitalisation is an issue requiring application of the arm’s length principle in order
to achieve a correct transfer pricing result. To the extent therefore that the cost of funding in
question exceeds what the UK considers to be an arm’s length amount, the UK is prepared to
enter MAP in respect of adjustments made by the tax treaty partner and will consider whether it
is appropriate to give relief unilaterally for any disallowance of interest in excess of an arm’s length
amount”
566
See HMRC, International Manual, INTM502000, which addresses the “equity function”
proposition considering that it is sometimes put forward against HMRC’s imputation arguments
concerning outwards loans. As specified thereby, “there is no formal clearance process designed
for this issue, but it is perfectly reasonable to discuss the issue without HMRC being able to
provide certainty as to treatment”.
139
perspective of the UK lender, “the question of whether the borrower is thinly capitalised
is a consideration to be borne in mind, but it is not a conclusion that should be accepted
without persuasive evidence”: the UK tax authority is prepared to take into account the
tax treatment of a the transaction in the country of the borrower but considers that this
may provide an answer only “where tax treatment is broadly comparable with UK
treatment”567.
In the light of the above, the equity function argument may be considered to be an
additional domestic (unilateral) remedy, of an administrative nature, against economic
double taxation of cross-border interest. This stands true in at least a limited number of
cases resulting from a complex discretionary evaluation of circumstances, made by the
tax authority.
IV.4.d Comparative considerations on thin capitalisation, interest limitation and

the treatment of excess interest in the hands of the lender
As illustrated in Chapter 3, the thin capitalization and interest limitation rules in force on
31st December 2018 in the three Countries examined are significantly different: in the
UK, the arm’s length rule is directly applicable to the amount of debt and is supplemented
by a fixed interest to earnings ratio rule, Italy has a fixed interest to earnings ratio (with
no arm’s length test) and France had in place a three ratio test (also with no arm’s length
test).
All interest limitation rules do not provide any remedy against the economic double
taxation of excess interest. This is the case of the Italian interest limitation rule of Article
96, ITC568 and of the UK interest limitation rule. In France, Article 212 does not address
the treatment of non-deducted interest in the hands of the lender and excludes that such
excess interest qualify as hidden profit distribution, thus denying access to the French
participation exemption regime569.
It is true that non-deducted interest can be indefinitely carried forward by the borrower.
But excess interest is fully taxable for the lender and so (to the extent that it can’t be
deducted in future years by the borrower) it is subject to economic double taxation.
In the UK, the plain application of the arm’s length rule to the amount of related party
loans implies that the domestic corresponding adjustment rule applies, with the effect of
removing domestic economic double taxation in virtually all cases570.
The depicted divergence may be reduced, in cross-border cases, only by treaty-based
dispute settlement procedures.
There is indeed no Italian or French rule granting relief to foreign source excess interest.
It may theoretically be (this will be further explored at Chapter 5 below) the object of a
treaty-based settlement.
567
See HMRC, International Manual, INTM502020, further specifying that “where tax treatments
do not match, there is the option of the group using the MAP process (…) to resolve double
taxation issues”. The same position can be found at INTM502050: “the thin capitalisation practices
of the particular country are something to bear in mind in an equity function case, though it is not
a determining factor and the arm’s length principle applies, in accordance with OECD guidance
and UK legislation”.
568
Para. IV.4.a.2
569
Para. IV.4.b.2
570
Para. IV.4.c.2
140
The UK Authorities position is to recognise foreign interest deduction adjustments, even
in absence of reciprocity.
Notwithstanding this, in the UK domestic situations are treated more favourably, in terms
of remedies, than cross-border situations. In Italy and France, by contrast, the situation
is reversed, since remedial measure are at all excluded in domestic situations and may
only be envisaged, in the mentioned terms, for cross-border situations.
IV.5 Hybrid financial instruments and the treatment of non-

deducted interest in the hands of the lender
IV.5.a Italy

As mentioned in Para. III.4.b above, the Italian tax system has recognised the evolution
of the forms of company financing deriving from the corporate law reform of 2004,
through the introduction of the new categories of financial instruments similar to bonds
and of financial instruments similar to shares.
The tax regime of financial instrument similar to shares has been designed by reference
to the tax treatment of shareholdings571 and is thus inspired by the same purpose of
avoiding double taxation of corporate profits.
According to Article 44, Para. 2, letter a), ITC, financial instruments are assimilated into
shares to the extent that their remuneration is linked to the economic results of the issuer,
of another company of the same group or of specific business initiatives. According to
the Italian Revenue Agency, financial instruments qualify under Article 44, Para. 2, letter
a) only if represented by securities or certificates.
The above rules result from a recent statute572 which has implemented in Italy the
provisions of Directives 2014/86/EU and (EU) 2015/121 both amending Directive
2011/96/EU on parent companies and subsidiaries. The new legislation, with the
occasion of adapting Italian rules to the requirement set forth by Article 1 of Directive
2014/86/EU (i.e.: exempting only profits which are “not deductible by the subsidiary”) has
also introduced a new subparagraph to Article 89, ITC with respect to domestic
situations. As a result, exemption is now granted, with respect to domestic financial
instruments, to the portion of the remuneration which is not deductible for the issuer
under Article 109, ITC, also where there was a deductible portion.
571
As specified by Circular Letter No. 4/E dated January, 18th 2006, the circumstance that Article
44, Para. 2, Letter a) of the ITC defines the category of financial instruments similar to shares
implies that remuneration deriving from such financial instruments benefits on the head of the
resident corporate recipient, of the participation exemption provided by Article 89, ITC although
such latter provision does not explicitly provide for such exemption. See also G. ESCALAR, Il
nuovo regime di tassazione degli utili da partecipazione e dei proventi equiparati nel decreto
legislativo di “riforma dell’imposizione sul reddito delle società”, in Rassegna Tributaria, No. 6,
2003, p. 1922.
572
Law No. 122 of July 7th 2016, with effect from July 23rd 2016
141
The qualification rule of Article 44, ITC applies to financial instruments issued by non-
resident companies, at the further conditions that the issuer be resident in a Country
other than those having a privileged tax regime and that the remuneration of the financial
instrument be entirely not deductible on the head of the issuer573. Such circumstance
should result from a declaration of the non-resident issuer or by other certain and precise
circumstances574.
The regime of remunerations deriving from financial instruments issued by non-resident
companies has been amended with the mentioned implementation of Directives
2014/86/EU and (EU) 2015/121. Under the new legislation, which has inserted the new
Para 3-bis in Article 89, ITC, exemption is explicitly granted to the remuneration of hybrid
financial instruments assimilated to shares, for the portion of such remuneration which
is not deductible on the head of the non-resident issuer.
The above rule, however, is made applicable only to situations where all the conditions
set forth by the EU Parent - Subsidiary Directive were met. Cross-border financial
instruments where, e.g., the issuer is not a EU resident or the investor does not hold a
participation higher than 10%, remain subject to the general rules of Article 89, Para. 3
and would benefit from the exemption only if the remuneration is entirely non-deductible
for the issuer. Should the remuneration be deductible in part in the State of the payer,
not only such deducible part, but the entire remuneration would be taxable on the
investor (with double taxation of the non-deductible part of the remuneration)575.
IV.5.b France

Since, as mentioned above, the French tax characterisation of debt and equity follows
the corporate law and GAAPs criteria, it is expected that there should be no significant
discrepancy between the treatment of remuneration on the head of the issuer and on the
head of the investor576.
Indeed, consistency in the qualification implies that when the instrument is (re)qualified
as equity, the related remuneration – not deductible for the issuer – benefits (where the
573
This latter condition has been introduced in 2005 and is considered to be an example of rule
specifically addressing hybrid mismatch arrangements. See OECD, Hybrid Mismatch
Arrangements, Paris, 2012, p. 18. The condition is not different from the one set forth with respect
to domestic situations, but is set forth on different basis, since in domestic situations the non-
deduction is ensured by Article 109, ITC, while in cross-border situations it depends on local rules,
so reference is made to non- deduction rather than to its legal basis.
574
Further procedural details have been provided with mentioned Circular Letter No. 4/E dated
January, 18th 2006, where it is specified that the issuer declaration does not need to be ratified by
the tax authorities of the State of residence, but may be replaced by a statement of these latter
authorities or by recognised institutions (e.g.: stock exchange authorities, qualified information
providers, etc.).
575
See, on this point, R. MICHELUTTI, C. SILVANI, Modifiche alla direttiva madre – figlia e BEPS:
un’occasione per ripensare il regime degli strumenti ibridi, in Corriere Tributario, 11 / 2016, p. 857
f.
576
J. HEMERY, S. MOSTAFAVI, The debt-equity conundrum. National report. France, in Cahiers
de droit fiscal international, The Hague, 2012, p. 298.
142
related conditions are met) from the participation exemption on the head of the investor,
so that economic double taxation should be avoided.

In cross-border situations, the tax characterisation of a facility as debt or equity, and the
related tax treatment in the hands of the French investor follows in principle the same
setting deployed in domestic situations, i.e. the reference to corporate law and applicable
GAAPs categories.
Where the instrument is governed by foreign law, the French tax qualification and
treatment takes into account the pertinent principles of the foreign legal system
concerned. This line of reasoning has been validated by recent case law where the
French courts have taken the view that in case of conflict between the French
qualification and the classification under the foreign law of the issues, the foreign law of
the issuer should prevail577.
The above does not imply that any relevance be attributed to the tax qualification of the
instrument or its remuneration in the country of the issuer.
Once an instrument is characterised for corporate law purposes as debt, the related
remuneration would be taxable in the hands of the French investor regardless of whether
the same remuneration be non-deductible for tax purposes in the foreign Country (e.g.:
due to the connection between the remuneration and the economic results of the issuer)
578
.
The same does not apply where an instrument is characterised for corporate law
purposes as equity, since in such case not only the foreign corporate law qualification
but also the foreign tax treatment becomes relevant for the purposes of the recognition
of the French participation exemption regime. Indeed, under Article 145, Para. 6-b, CGI
the profit distribution must be non-deductible for the distributing company579.
In the above scenario, economic double taxation may be avoided only in respect of the
remuneration of hybrid financial instruments issued in countries where the qualification
577
C. SILBERZTEIN, E. BAGDASSARIAN, Chapter 6 France, in Transfer Pricing and Intra-Group
Financing (A.J. Bakker & M.M. Levey eds.), Amsterdam, 2012, Para. 6.2.3. and J. HEMERY, S.
MOSTAFAVI, The debt-equity conundrum. National report. France, in Cahiers de droit fiscal
international, The Hague, 2012, p. 299 f. quote the example of two decisions (CE September 7th
2009, No. 303560 and CAA Paris, November 2nd 2010, No. 09PA013076) referred to cases where
French investors had provided funds to respectively a Portuguese and a German entities. These
funds were considered by the respective local legislations as additional equity, while the
application of French corporate law criteria would have led to a debt qualification. Similar
conclusions were reached before the two decisions by F. BARRIER, Tax treatment of hybrid
financial instruments in cross-border transactions. National report. France, in Cahier de droit fiscal
international, Rotterdam, 2000, p. 302 (“il convient de s’attacher davantage aux qualifications
juridiques qu’aux traitements fiscaux du pays de l’émetteur“)
578
On the irrelevance of the foreign tax qualification see R. COIN, New tendencies in tax
treatment of cross-border interest of corporations. France, in Cahier de Droit Fiscal International,
2008, p. 300 and J. HEMERY, S. MOSTAFAVI, The debt-equity conundrum. National report.
France, in Cahiers de droit fiscal international, The Hague, 2012, p. 300.
579
The condition is further illustrated by BOI-IS-BASE-10-10-20-20150401, at Para. 65, according
to which it concerns hybrid instruments but also equity instruments which nonetheless consent
the deduction of distributed dividends.
143
of financial instruments for tax purposes closely follows the qualification under corporate
law or GAAPs.

UK legislation characterises as a distribution interest arising from either “non-commercial
securities” or “special securities”, as outlined in Para. III.4.d above.
However, in respect of “non-commercial securities”, the precedence taken by transfer
pricing legislation results in the applicability of the corresponding adjustments provided
for domestic situations (and illustrated at Para IV.3.c above): as a result, in relationship
between corporations, the issue of economic double taxation of “non-commercial
securities”, is not likely to arise.
As to interest on “special securities” characterised as a distribution, it does not fall within
any of the exempt distribution classes and would thus be generally taxable in the hands
of the recipient580.
Double taxation may prima facie arise. Nevertheless, and as mentioned already at Para
III.4.d.2. above, the characterisation of interest as a distribution under the “special
securities” rules does not apply according to Section 1032 of the CTA 2010 where the
investor is a company within the charge to corporation tax. .As a result, in domestic
transactions, the “special securities” regime “is of little effect”581 and does not cause any
double taxation.
IV.5.c.2 Cross-border situations

The avoidance of double taxation in the UK of any remuneration not deducted by the
foreign resident payer under local rules based on qualitative features of the hybrid
financial instrument (e.g., on the basis of rules equivalent to those of CTA10 s1000(1)F
on “special securities”) would ultimately derive on whether such remuneration qualifies
for the UK distribution exemption.
The related legislation (Part 9A of CTA09) was introduced by FA 2009 with effect for
distributions made on or after 1st July 2009 and applies to distributions582 to companies
within charge to UK corporation tax from both UK and foreign companies583.
580
See J. GHOSH et Al., Ghosh, Johnson and Miller on the taxation of corporate debt and
derivatives, London, 2009, Para. D2.2.; S. RELF, British Tax Reporter, Vol. 7th, Taxation of
companies, Kingston upon Thames, 2004, Para. 745-600
581
R. BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, London,
Release 8, 2012, Para. A.3.1.2.
582
According to Para. 1000 CTA 2010, distributions means, in addition to dividends, also “any
other distribution out of assets of the company in respect of shares in the company” and includes
“any interest or other distribution out of assets of the company in respect of securities of the
company which are special securities (as defined in section 1015)”..
583
See B. OBUOFORIBO, S. HEYDARI, J. D’AUVERGNE, United Kingdom – Corporate
Taxation, Amsterdam, 2015, Para. 1.2.3.; N. LEE, Revenue Law, London, 30th ed., 2013, p. 1158;
HMRS, INTM650000. Distribution exemption: contents and following.
144
Exemption from corporation tax of a distribution received by a a company (other than a
small company to which special rules apply) is subject to three conditions, set forth by
S931D of CTA09:
• The distribution falls into an exempt class;
• A deduction is not allowed to any foreign resident in accordance with any foreign tax
law in respect of the distribution;
• The distribution must not be an amount that is deemed to be a distribution under the
rules on “non-commercial securities”584 or “special securities”.
Statutory provisions do not address the specific case of foreign non-deducted
remunerations: the non-deduction is one of the conditions for exemption, but such
condition alone is not sufficient if the other requirements are not met.
In particular, it is unclear whether the definition of “special security” may capture financial
instruments issued by foreign companies (e.g., a profit participating bond issued by an
Italian resident company).
On this particular matter there are no administrative instructions, and the issue of
potential double taxation of foreign re-characterised interest does not seem to have been
covered in tax literature. Some authors take the view that the CTA 2010 definition of
distribution applies to the distributions of both resident and non-resident companies585;
others believe that foreign disguised dividend income cannot benefit from the
exemption586.
Under the prior foreign dividend regime (in force until 2009 and based on the imputation
system) it has been conversely argued587 that if an instrument is not treated as a loan
relationship it may be treated as equity for UK purposes “where it is treated as share
capital under the corporate law of the issuer’s jurisdiction”.
IV.5.d Comparative considerations on hybrid financial instruments and the

treatment of non-deducted interest in the hands of the lender
As illustrated in the relevant paragraphs of Chapter 3, in the three countries examined,
rules exist that qualify the remuneration of a financial instrument as equity return or
interest return on the basis of certain qualitative features (i.e.: other than the measure of
capital or the measure of interest). In all three countries, equity return is not deductible
for the issuer, so that double taxation would arise to the extent that it is taxable on the
investor.
In the Italian ITC, the qualification is based on a single criterion, under which result –
linked remuneration constitutes equity return. On this basis, and in accordance with the
584
It has been mentioned already that distributions out of “non-commercial securities” also fall
under the prevailing transfer pricing rules, so that the related remedies against double taxation
may be available.
585
R. BRAMWELL et. Al., Taxation of Companies and Company Reconstructions, Release 8,
2012, p. A3-104.
586
J. GHOSH et Al., Ghosh, Johnson and Miller on the taxation of corporate debt and derivatives,
London, 2009, Para. D2.3.
587
M. PENNEY, Tax treatment of hybrid financial instruments in cross-border transactions.
National Report. United Kingdom, in Cahiers de Droit Fiscal International, Rotterdam, 2000, p.
660.
145
fact that the Italian system generally avoids double taxation of dividends through the
exemption method, result-linked remuneration is exempt in the hands of the corporate
investor.
The qualification rule applies evenly to domestic and cross-border instruments (at least
within the EU), so that result-linked remuneration would be exempt also where the issuer
of the instrument be a non-resident company (provided that all the conditions for the
participation exemption be met)588.
In France, the tax characterisation of debt and equity follows the corporate law and
accounting criteria. So, there should be in principle no discrepancy between the
treatment of remuneration on the head of the issuer and on the head of the investor in a
domestic setting. This implies that when the instrument is qualified as equity, the related
remuneration – if not deductible for the issuer – benefits (where the related conditions
are met) from the participation exemption on the head of the investor. Economic double
taxation is this generally avoided in domestic situations.
In cross-border situations, the focus would still be on corporate law and applicable
accounting principles, but having regard to the country of the issuer. Furthermore, the
participation exemption applies to the extent that the equity remuneration is also non-
deductible for the issuer589.
In the UK, the distinction between equity return and debt return is also mostly based on
principles, unless derogated by the tax rules on special securities. The remuneration of
special securities qualifies as equity return (or “distribution”) regardless of the company
law or accounting qualification. However, the rules on special securities do not apply to
investors who be subject to UK corporate income tax, so that also no double taxation
may arise and there is no need of a remedial measure for investors. This leaves a gap
in the legislation, and equity return arising from financial instruments (other than shares)
issued by non-UK companies would then not qualify for the dividend exemption
regime590.
The above rules imply that, within each individual jurisdiction, the examined rules do not
involve the emergence of economic double taxation.
By contrast, the divergence of the qualification criteria implies that in almost all situations,
cross border equity return arising from financial instruments other than shares is
confronted with the absence of effective remedies against double taxation.
For example, result-linked remuneration of bonds issued by an Italian resident company
would qualify as non-deductible equity return for Italian tax purposes and would still be
taxable both in France, since French rules look at the Italian corporate law qualification
(rather than at the tax qualification), under which bonds are debt. The same would
happen in the UK, since for UK purposes bonds are not eligible for the distribution
exemption.
Result – linked remuneration of bonds issued by a UK resident company would qualify
as non-deductible equity return for UK tax purposes and would still be taxable in France,
since French rules look at the UK corporate law and GAAP qualification, under which the
588
Para IV.5.a
589
Para IV.5.b
590
Para IV.5.c
146
bond is debt. The remuneration would be exempt in Italy, if the other conditions for
exemption were met591.
Result-linked remuneration of bonds issued by a French resident company would be
deductible in France, to the extent that the same remuneration is taxable in the hands of
the investor592. This condition would likely be met for the UK investor (since, as
mentioned, bond remuneration does not qualify for the distribution exemption) but not for
the Italian investor, since the remuneration would likely qualify as equity return and be
exempt. So, in the case of a French issuer, double taxation would be avoided but at the
expense of the French revenue if the investor is a UK company and at the expense of
the Italian revenue if the investor is an Italian company.
The prevention of double taxation in this subject matter appears then particularly difficult
and to a certain extent unpredictable, due to the differences of the qualification criteria.
Additional difficulties derive from the circumstance that qualification is not made
exclusively on the basis of tax criteria, but also corporate law and accounting principles
have in all countries examined a relevant role.
It is, finally, of special interest to remark that, while the UK qualification of equity return
and debt return is made entirely through the application of UK criteria, the French and
Italian systems take into account, in cross-border situations, the foreign country
qualification.
This however happens in a rather different way. In France, reference is made to taxation
in the foreign country for qualifying outgoing remunerations, and to corporate and
accounting qualification in the foreign country for the purposes of qualifying incoming
remunerations. In Italy, the exemption of result-related investment return dpends on the
tax qualification in the foreign Country.
IV.6 Mergers and the recognition of the tax value of transferred

assets in the hands of the receiving company
IV.6.a Italy

In domestic mergers, the recognition of tax values on the head of the receiving company
is governed by the general principle of tax neutrality, which underlies the provision of
Article 172, Para. 2, ITC593. According to such provision, the assets received have the
tax basis that they most recently had in the hands of the transferring company,
regardless of the value attributed for accounting purposes. This feature of the tax regime
591
This conclusion applies only to those UK instruments which constitute special securities due
to their remuneration being linked to results, while no Italian relief would be available in respect
of those instruments which constitute special securities under other criteria, such as the maturity
exceeding 50 years.
592
Para III.4.c.3
593
On the necessary connection between Article 172, Para. 2 and the neutrality of mergers, see
G. ZIZZO, Le riorganizzazioni societarie nelle imposte sui redditi, Milano, 1996, p. 93 f. who also
highlights the similarity with the French régime de faveur.
147
of domestic mergers is referred to as continuity of fiscal values and has the effect of
preventing both double taxation and double non-taxation594.

Directive 90/434/CEE has been implemented in Italy through Legislative Decree 30
December 1992, No. 544, whose provisions have subsequently been transposed into
Article 178 to 181 of the ITC on the occasion of the 2004 Corporate Income Tax Reform.
Later, Legislative Decree 6th November 2007, No. 199, has implemented the
amendments brought by Directive 2005/19/EC.
The above rules are essentially aimed at governing the effects of mergers with reference
to the assets and liabilities of the absorbed company situated in Italy, with the objective,
as stated in the preamble to Directive 1990/434/EEC, to “avoid the imposition of tax in
connection with mergers (…) while at the same time safeguarding the financial interests
of the State of the transferring or acquired company”.
In contrast, there are no clear rules governing the case where an Italian company
absorbes a company resident of another Member State.
The more relevant issue which emerges, in such a case, is to determine which tax value
should be attributed, on the head of the Italian absorbing company, to the “foreign” assets
and rights belonging to the non-resident absorbed company.
In this respect, it is necessary to consider Article 172, Para. 2 I.T.C. (to which Article
179, Para. 1, ITC refers): according to said provision “received assets are recognized for
tax purposes at the same value that has last been acknowledged for income tax
purposes”. The aforementioned is one of the provisions that delineate the so-called “tax
neutrality regime” of mergers. The choice of regulating, in this respect, cross-border
mergers with a mere renvoi to rules governing domestic mergers would seem to suggest,
on the surface, that there are no disparities of treatment between domestic and cross-
border mergers. However, it should be considered that, in cross-border mergers, there
may simply be no Italian last recognised tax value.
The issue is not addressed by Directive 1990/434/EEC, which mainly deals (at Article 4,
Para. 1 and 3) with ensuring that the exemption in the State of the absorbed company is
matched, in the same State, by the keeping of tax values on the head of the (resulting)
permanent establishment of the non-resident acquiring company. In other words, the
Directive deals with the continuity of tax values in a purely domestic setting while it does
not address such a continuity on a cross-border situation.
As the Directive does not provide any backing and Italian provisions are indeterminate,
possible different solutions have been submitted by scholarship.
A first hypothesis would consist in adopting, for Italian tax purposes, the same tax value
that the assets of the acquired company had in the State of origin595 .
This derivation of the relevant tax values from “foreign” tax values presuppose that the
tax value, as meant by Article 172, Para. 2 I.T.C., not only refers to an “Italian” tax value.
594
N. SARTORI, Le riorganizzazioni transnazionali nelle imposte sul reddito, Torino, 2012, p. 259;
R. TOMBOLESI, La fusione di società, in (E. della Valle, V. Ficari and G. Marini eds.), Il regime
fiscale delle operazioni straordinarie, Torino, 2009, p. 148 f..
595
See, in particular, G. MAISTO, Implementation of the EC Merger Directive, in Bulletin, 1993,
p. 484. More recently, G. MAISTO, Shaping EU Company Tax Policy, Amending the Tax
Directives, in European Taxation, 2002, p. 298, highlights the issues not dealt with under the
Directive which in turn remain in the prerogative of the domestic legislation of concerned States.
148
Such approach may be justified, in a tax policy perspective, by the objective of avoiding
that the merger implied a tax-free revaluation of assets (“salto d’imposta”). At the same
time, it may be questionable that the State of the absorbing company so earns the right
to tax capital gains accrued before the merger.596
A second hypothesis foresees that the assets of the non-resident absorbed company be
attributed the respective fair market value at the effective date of the merger, so to
safeguard the necessary coherence with “a rule which is inherent to the regime of
business assets” 597. According to said rule, capital gains are taxable to the extent that
they have accrued in the hands of a business, but are not taxable for the portion which
has accrued before the acquisition in the sphere of the enterprise.
A third hypothesis, referred specifically to mergers by absorption with annulment of
shares foresees the assets of the non-resident absorbed company be attributed the
same tax value of the shareholdings annulled as a result of the merger598 . In other words,
the hypothesis under scrutiny implies that relevance is attributed for tax purposes to the
merger deficit: such an hypothesis, although justified by the need to avoid the “waste” of
values recognized for income tax purposes in the State of the absorbing company, finds
an obstacle in the language of Article 172, Para. 2 I.T.C., which postulates that cross-
border mergers shall receive the same treatment of purely domestic mergers (where the
merger deficit has no relevance).599
The above difficulties arise in particular where the assets of the absorbed company are
not transferred into a permanent establishment of the receiving company in the State of
the absorbed company. In such a case, the regime provided by Article 4 of the Directive
would not be applicable, as it only concerns “those assets and liabilities (…) which, in
consequence of the merger (…), are effectively connected with a permanent
establishment of the receiving company in the Member State of the transferring company
and play a part in generating the profits or losses taken into account for tax purposes”.
As a result, the prohibition of “the taxation of capital gains calculated by reference to the
difference between the real values of the assets and liabilities transferred and their
values for tax purposes” would not apply in respect of the State of the absorbed
company.
596
Such latter effect would constitute, according to some authors, a natural consequence of cross-
border mergers. See D. STEVANATO, Le riorganizzazioni internazionali di imprese, in (V. Uckmar
ed.), Diritto tributario internazionale, Padova, 2005, p. 526.
597
D. STEVANATO, Le riorganizzazioni internazionali di imprese, in (V. Uckmar ed.), Diritto
tributario internazionale, Padova, 2005, p. 526. In favour of the hyptothesis of the adoption of
current values, an early stance was taken by R. LUPI, Primi appunti in tema di fusioni, scissioni
e conferimenti “transnazionali”, in Boll. trib., 1992, p. 1031 and C. GARBARINO, Manuale di
tassazione internazionale, Milano, 2nd ed. 2008, p. 1556, who, after remarking that Article 172,
Para. 2 I.T.C. is not applicable to the foreign assets of the non-resident absorbed company,
observes that the appraisal for Italian tax purposes on the grounds of foreign tax values does not
appear as justifiable. See also J. WHEELER, What the Merger Directive doesn’t say, in European
Taxation, 1995, p. 142, who remarks that other solutions would give rise to a double taxation,
contrary to purpose of the Directive.
598
See A. SILVESTRI, Il regime tributario delle operazioni di riorganizzazione transnazionale in
ambito CEE, in Rivista di diritto finanziario e scienza delle finanze, 1996, I, p. 506 f.
599
See D. STEVANATO, Le riorganizzazioni internazionali di imprese, cit., p. 532. As remarked
by G. MARINO, Profili fiscali delle riorganizzazioni di imprese con elementi di ultraterritorialità, in
Dir. prat. trib., 1993, I, p. 2108, the Directive attributes the treatment of the merger deficit to each
Member State.
149
In this case, according to prevailing scholarship, the transferred assets should be
evaluated at their current value, that is, the value adopted for the taxation of the capital
gains in the State of the absorbed company is determined.600
A thoroughly similar interpretative framework emerges with reference to the effects of
the analogous hypothesis of the transfer of tax residence from the other Country to Italy.
Also in that case, there is a contrast between the cost-basis criterion (which attributes
relevance to the costs of acquisition, even if sustained abroad) and the fair market value
criterion.601
The case of the transfer of residence has been dealt with in Ruling 5 August 2008, No.
345/E. In the Ruling, the Revenue Agency comes to the conclusion according to which,
the transferred participations have to be evaluated at the original cost basis as recorded
in the foreign Country, as long as the transfer to Italy takes place under a regime of
“juridical continuity” and there has been no taxation of capital gains in the foreign Country
at the time of the transfer. Such an orientation, which shows uncertainties in its
motivation, has been the subject of some critical remarks602. Such an orientation appears
admissible only in those cases where the foreign taxation, although foreseen by the
domestic legislation of the foreign Country, has not been applied due to the absence of
a capital gain (that is, in the presence of a lower fair market value of the assets
transferred with respect to the tax basis in the foreign State).
The uncertainties related to the transfer of residence have been eventually removed by
new legislation enacted in 2015603, under which the market value of assets transferred
at the time of the transfer is recognized as the tax basis for Italian tax purposes, if the
State of origin allows a full exchange of information for tax purposes. The market value
is defined by reference to Italia legislation (and precisely, to Article 9, ITC). A residual
risk of mismatching remains, where divergences arise in the computation of such value
between Italy and the State of origin of the assets604.
The new statutory provision only refers to the transfers of residence for tax purposes, but
has been extended to mergers through a Resolution of the Italian Tax Authorities605,
600
G. ZIZZO, Le riorganizzazioni societarie nelle imposte sui redditi, Milano, 1996, p. 351 s. and
G. MAISTO, Implementation of the EC Merger Directive, in Bulletin, 1993., p. 486 share this view,
especially when the assets are not absorbed into a permanent establishment.
601
This latter position is held by the National Council of Notaries (Paper 51/2001/T), on the
consideration that the criterion of transferring enterprise assets at their fair market value would
seem preferable in all cases where the transfer of assets takes place following a final exit from
the tax sphere of the other State, that is, when the assets of the acquired company are not
transferred into a permanent establishment in the State of origin.
602
See G. ZIZZO, Le riorganizzazioni societarie: il trasferimento all’estero o dall’estero della sede,
in Corr. trib., n. 44/2008, p. 3581 s.. Auspicano ulteriori interventi, interpretativi o legislativi, L.
MIELE, V. RUSSO, Il «rimpatrio» e la valorizzazione dei beni fra costo storico e valore normale,
in Corr. trib., n. 38/2008, p. 3087 s.
603
Article 12 of Legislative Decree 147/2015, which has introduced the new Article 166-bis, ITC.
604
This kind of risk was pointed out in COMMISSION, Exit taxation and the need for co-ordination
of Member States' tax policies, COM(2006) 825 final, 19 December 2006. The Commission had
thereby recommended to adopt measures suitable to prevent double taxation and, in particular,
an approach based on mutual recognition, in accordance to which the Member States to which
the asset is transferred accepted “the market value established by the other Member State at the
moment of transfer as the starting value of the asset for tax purposes”.
605
Resolution No. 69 of 5th August 2016.
150
based on the argument that the merger of a foreign company into an Italian company is
equivalent to the transfer of residence of the same foreign company into Italy.
IV.6.b France

As illustrated at Para. III.5.c.2. above, domestic mergers may be subject to a general
regime or to a special regime. In either case the effects are dependent on the accounting
treatment.
When the general regime is applicable, hidden capital gains are subject to tax in the
hands of the transferring company on the basis of their market value.
If also the accounting of the merger is at market value (as it is in the case where the
merger is not a reverse merger and involves companies which are not under common
control), such market value would also be recognised as the tax basis for the receiving
company606.
The book value accounting of the merger does not prevent taxation of the transferring
company under the general regime. The official instructions (BOI-IS-FUS-10-10-20-
20120912) specify that the receiving company takes received assets on its balance sheet
at their transfer value (i.e.: the book value). Economic double taxation would thus arise,
on the difference. The consistency of the system is restored only in the event of the sale
of assets by the receiving company, when the fair market value at the time of the merger
is taken into account for the purposes of determining the capital gains realised by the
receiving company607.
When the special regime is applicable, taxation of hidden capital gains is deferred and
shifted on the head of the receiving company.
If the accounting of the merger is at book value, the receiving company enters the
received assets at book value also for tax purposes and adopts the same depreciation
plan of the transferring company608.
If the accounting of the merger is at fair market value, the receiving company is liable to
tax on hidden capital gains.
606
P. COUTURIER, O. FOUQUET, Cessions & acquisitions d'actifs, Restructurations
d'entreprises: 20 études fiscales, Paris, 2010, p. 153
607
See D. GUTMANN, Droit fiscal des affaires, Paris, 10th ed., 2019, p. 460, footnote 138, P.
COUTURIER, O. FOUQUET, Cessions & acquisitions d'actifs, Restructurations d'entreprises: 20
études fiscales, Paris, 2010, p. 151 BOI-IS-FUS-30-20-20120912, IS - Fusions et opérations
assimilées - Distinction entre transcription et rémunération des apports et conséquences fiscales
de la valorisation des apports, Paras. 180 ff.. The emergence of a double taxation situation was
pointed out in case law, see CE 8th June 2005, No. 270967.
608
D. VILLEMOT, Fiscalité des fusions acquisitions, 4th ed., Paris, 2010, p. 67 remarks that on
this point French statutory rules (Annex III, Article 38 quinquies, CGI) which simply provides the
tax recognition of the accounting value, diverge from the official interpretation (BOI-IS-FUS-30-
20-20120912, Para. 10). This latter is inspired – also for domestic mergers - by the provision of
Directive 90/434/CEE (now replaced by Directive 2009/133/CE), according to which (Article 4,
Para. 4 of the current text) the deferral of taxation “apply only if the receiving company computes
any new depreciation and any gains or losses in respect of the assets and liabilities transferred
according to the rules that would have applied to the transferring company or companies if the
merger (…) had not taken place”.
151
In respect of non-depreciable assets, taxation is deferred to the time of the sale609, while
hidden capital gains on depreciable assets are subject to tax in even parts, along a period
which is generally of five years and is extended to fifteen years in respect of certain
assets, such as, e.g., buildings. The tax recapture of the difference is balanced by the
fact that the received assets are subject to tax depreciation on the basis of the transfer
value610.

The recognition of received assets is subject to the same rules applicable to domestic
mergers and primarily depends on the accounting of the merger by the receiving
company.
So, as in the case of domestic mergers, the accounting value of the received assets
(book value or fair market value, as the case may be) also constitute the tax basis for
the French receiving company.
The tax treatment in the Country of the transferring company is not relevant for the above
purposes, to the effect that if the transfer has been subject to tax in the foreign Country
(and on the head of the foreign transferring company) on the basis of the fair market
value of transferred assets and the merger is entered into the books of the French
receiving company at book value, economic double taxation may arise. This issue is not
different from the situation of a domestic merger accounted for at book value and subject
to the ordinary regime of the “dissolution d’entreprise”.
The risk of economic double taxation would conversely be eliminated if the merger was
accounted at fair market value (a criterion which may be adopted only for mergers, other
than reverse mergers, of companies which are not under common control).
Economic double taxation of cross-border merger is also avoided where the transferring
company is replaced by a foreign permanent establishment of the French receiving
company. This is the effect of the general French rules on the territoriality of taxation
which generally exempt from French corporate income tax income attributable to a
foreign permanent establishment of a French resident company. Received assets
attributable to a foreign permanent establishment would, in the described circumstances,
be excluded from the scope of application of French income taxes611 and no double
taxation might then arise, regardless of the accounting principles applied.
609
The receiving company is due to take the assets into charge at the same tax value that those
assets had in the hands of the transferring company. See P. SERLOOTEN, O. DEBAT, Droit fiscal
des affaires, Paris, 17th ed., 2018, p. 584; J. MERCIER, Fusions, apports partiels d'actif,
scissions, Levallois, 3rd ed., 2014, m.no. 210
610
P. COUTURIER, O. FOUQUET, Cessions & acquisitions d'actifs, Restructurations
d'entreprises: 20 études fiscales, Paris, 2010, p. 153
611
J. MERCIER, Fusions, apports partiels d'actif, scissions, Levallois, 3rd ed., 2014, m. no. 25110,
P. COUTURIER, O. FOUQUET, Cessions & acquisitions d'actifs, Restructurations d'entreprises:
20 études fiscales, Paris, 2010, p. 288
152
If the reconstruction relief applies to the merger, no gain or loss will be deemed to arise
on the transfer of the assets and the absorbing company will take over the base cost of
the transferor company. The same would happen under the group transfer relief
regime612.
If no relief applies, there would be a disposal of assets by the absorbed company,
deemed to be for an arm’s length consideration, and the capital gain would be
determined accordingly613. The arm’s length consideration would correspondingly be
considered as the acquisition value for the absorbing company.
IV.6.c.2 Cross-border situations

Where a foreign resident company transfers its business to a UK resident company in a
merger, the UK company would acquire the assets transferred to it at the consideration
given in the merger transaction, or if different, at market value at the date of transfer614.
This treatment on the head of the receiving company is analogous to that applicable in
case of a foreign company transferring its residence in the UK. For both Corporation Tax
and Capital Gains Tax purposes gains are chargeable only if accrued since the company
becomes resident in the United Kingdom. Gains accruing before are not chargeable
gains: thus, indirectly, the UK tax rules recognise the market value of assets at the time
of acquisition of the UK tax residence615.
IV.6.d Comparative considerations on mergers and the recognition of the tax

value of transferred assets in the hands of the receiving company
In the specific context of a merger, the case of economic double taxation that has been
examined is the one that may arise where the “permanent establishment” condition of
the Directive 2009/133/EC is not met and the recognized tax basis of transferred assets
on the head of the receiving company is lower than the taxable value, for capital gain
taxation purposes, of the same assets on the transferring company.
Such difference is not likely to arise in a domestic context, as the analysis of the
jurisdictions examined has shown.
In Italy, there is only one regime for domestic merger, and the related rules provide for
the transfer to the absorbing company of same the tax basis that the assets has for the
absorbed company: no capital gain thus arises and the absorbing company is in the
same situation of the absorbed company as regards these assets. The Italian domestic
merger regime is functionally equivalent to the French special regime and the UK
reconstruction relief or capital gain group relief616.
612
P. SMITH, Mergers & Acquisitions. United Kingdom, Amsterdam, 2019, Para. 4.2.1
613
This is the effect of S. 17(1)(a) of TCGA 1992. See P. MILLER, G. HARDY, Taxation of
Company Reorganisations, Haywards Heath, 2012, p. 307.
614
See P. SMITH, United Kingdom - Mergers & Acquisitions, Amsterdam, 2019, Para. 4.8.1.
615
The illustrated rule results from an amendment, made by FA13/S219(1) to TCGA92/S2. See
CG42350 - Migration of companies: arrivals in UK: becoming resident in UK
616
Para IV.6
153
In France and the UK, mergers may also be subject to an ordinary taxation regime, under
which the transfer of assets is deemed to have taken place for an arm’s length
consideration, and the resulting capital gain is taxed accordingly. In the UK the arm’s
length consideration would be considered as the acquisition value for the absorbing
company, so that no double taxation would occur anyway. In France, the acquisition
value for tax purposes is determined on the basis of the accounting entries, so that
double taxation may conversely arise where the merger is accounted for at book value
617
.
The UK and French treatment of domestic mergers as taxable transactions (where
neutrality regimes do not apply) eases the recognition of asset values in cross border
mergers where the absorbing company is a UK or French resident.
By contrast, Italian legislation does not regulate the acquisition of foreign assets by the
Italian absorbing company. Only recently, the recognition of market value has been
admitted by a Resolution of the Italian Tax Authorities.
IV.7 Answers to the research (sub) questions and conclusive

remarks
The analysis of the three tax systems has shown that all of them provide some remedies
to economic double taxation in the subject matters concerned.
The analysis carried out indicates however that with only a few exceptions, domestic
rules are not capable of providing a remedy against cross-border double taxation.
This is due to the fact that the avoidance of economic double taxation requires a common
criterion as to the qualification or the quantification of the cross-border transactions.
Convergence can’t be excluded, but the analysis made indicates that such convergence
has occurred, as a matter of fact, only under the influence of an international or
supranational rule.
In transfer pricing, this influence has been exercised by the arm’s length standard
codified at Article 9, Para. 1, of the OECD Model.
In cross-border mergers, the taxation at market value of the transfer of assets (not eligible
for relief) seems to have been indirectly suggested by the EU merger directive618.
The analysis performed also indicates that divergence of criteria is wider for national
qualification rules than for those which concern quantification.
Indeed, in transfer pricing and mergers, national rules concern value measurement (and
are relatively more similar), while hybrid instruments qualification rules are entirely based
on qualitative criteria (and are much different).
Thin capitalisation rules can also be considered as having a quantitative nature (and this
is indeed the case in the UK system and in the OECD Guidelines) but at the same time
they have little in common in the countries concerned. This contradiction may derive from
617
Respectively, paras IV.6.b1 and IV.6.c.1
618
A remarkable example of the indirect influence of the EU merger directive on national criteria
can be found in Italy, at Article 179, Para. 6, of the ITC. As illustrated at Para III.5.b.3 above, the
provision was introduced along with the implementation of the directive, in a system which would
have otherwise granted a neutral treatment to all mergers, either domestic or cross-border.
Directive 1990/434/CEE, when providing that qualifying mergers could not imply taxation of the
difference between the market value and the tax basis of the transferred assets, was also
suggesting that such difference could have been the taxable base for non-qualifying mergers.
154
a variety of reasons such as the time of adoption of the national measures, non-tax
economic policies concerning company debt, the influence of different models and the
absence of a general understanding (also outside the science of taxation) on the concept
of excessive debt.
In general terms, economic double taxation deriving from conflicts of qualification
appears more difficult to be solved than double taxation deriving from conflicts of
quantifications.
The examination of national systems also suggests that the difficulty of envisaging
remedial measures increases with the divergence of rules. The comparison of transfer
pricing and merger rules, on one side, and hybrid financial instruments qualification rules,
on the other side, seems to confirm the above.
Furthermore, the adoption of a common criterion is not sufficient to avoid double taxation,
where a conflict may arise on the application of such common criterion to individual
cases. Transfer pricing rules, which are based on very similar criteria in the countries
examined, are a perfect example of the above. A conflict settlement mechanism is
necessary and, by its own nature, cannot be instituted by unilateral measures.
At the same time, a dispute resolution procedure would be ineffective without a common
criterion, so it can be argued that the avoidance of cross-border economic double
taxation needs both a common criterion for each subject matter and a dispute resolution
mechanism. This explains why treaty based solutions are suitable to have a major role
in this respect.
As to the difference in treatment of domestic and cross-border situations, the
comparative analysis performed shows that such difference does not only concern the
rules (examined at Chapter III) which potentially cause economic double taxation, but
also rules aimed at providing a remedy (examined in the present Chapter IV).
The comparison of Italian and UK transfer pricing rules is a meaningful example. In Italy,
transfer pricing rules are applicable only to cross-border transactions, and so portray a
difference of treatment with domestic transactions. In the UK, transfer pricing rules are
evenly applicable to both sort of transactions.
So, apparently, the Italian system entails a difference in treatment, while the UK system
does not.
However, if the analysis is enlarged to also include remedial measures, it can be seen
that the two system provide for precisely the same remedy to economic double taxation
in cross-border situations, i.e.: the recourse to treaty-based dispute settlement
procedures and the acceptance of possible downwards rewriting of accounts. So, both
countries apply to cross-border transactions the (almost) identical transfer pricing rule
and the same treaty-based remedy.
As to domestic transactions, the approach to remedial measures is entirely opposite:
there is no remedial measure in Italy and there is a plain and effective corresponding
adjustment rule in the UK.
Overall, in Italy there would be no arm’s length adjustment to related-party domestic
transactions, while in the UK there would be an adjustment on one of the parties,
balanced by a corresponding adjustment on the other party.
The avoidance of economic double taxation would be easily achieved (albeit in different
ways) in both countries for domestic transactions, while the complex and uncertain
recourse to dispute settlement procedures would be necessary for the same purpose in
respect of cross-border transactions.
The comparative analysis of the two systems in the perspective of economic double
taxation leads to the submission that the two Countries have an almost equivalent degree
155
of differentiation between domestic and cross border transactions. In other words, in can
be argued that a differentiating remedy is equivalent to a differentiating rule.
The implications of such submission in respect of treaty-based non-discrimination and
EU freedoms will be examined in the following chapters.
.
156
V ECONOMIC DOUBLE TAXATION AND INTERNATIONAL TREATY LAW
V.1 Introduction
The aim of the present chapter is to investigate whether and to what extent bilateral tax
treaties provide remedies against economic double taxation of corporate income, in the
selected paradigms.
To this end, the analysis is guided by the following research (sub) questions:
 Do tax convention (based on the OECD Model Convention) apply to all the
cases of economic double taxation examined?
 Does the combination of Articles 9 and 25 constitute the sole model of remedial
measures or can that result be achieved by other provisions, especially
distributive rules (e.g. can a remedial measure to economic double taxation of
hybrid financial instruments be provided by the definitions of Articles 10 and 11
of the OECD Model Tax Convention)?.
The analysis will start from the two provisions which more closely concern economic
double taxation, i.e., Article 9 related to the adjustments of the conditions of transactions
between associated enterprises (adjustments which “may give rise to economic double
taxation”619) and Article 25 which is the procedural complement of Article 9 and is suitable
to resolving “not only problems of juridical double taxation, but also those of economic
double taxation”620. For these rules, an historical analysis is also carried out, in order
especially to clarify the influence of the OECD approach to the distinction between
juridical double taxation and economic double taxation, described at Para. II.2.a. above.
Secondly, the application of tax treaties will be examined with respect to the four selected
paradigms of economic double taxation (transfer pricing, thin capitalisation and interest
limitation, interest requalification and mergers), having in mind the conclusions of the
comparative study of Chapters 3 and, especially, Chapter 4, which has pointed out that
in most cases national legislations provide remedies (in the selected cased) against
economic double taxation in domestic situations, but not in cross-border situations. The
weakness of domestic remedies in these latter situations is the starting point of the
analysis which follows and also defines its scope, in the sense that – differently from
what has been done in Chapters 3 and 4 – the present chapter is exclusively focused on
cross-border situations.
This second part of the analysis will involve to some extent also treaty provisions other
than those corresponding to Articles 9 and 25 of the OECD Model. However, since those
other provisions are only marginally involved in respect of specific paradigms, it does not
seem necessary to examine them from a general and historical perspective.
619
OECD Commentary on Article 9, at No. 5.
620
157
V.2 Article 9, Para. 1 and the arm’s length principle as a special
type of distributive rule
V.2.a Overview
Article 9, Para. 1, of the OECD Model, concerning the so-called “primary adjustments”621
refers to the situations where conditions “made or imposed” between associated
enterprises “differ from those which would be made between independent enterprises”.
It provides that in such event “any profits which would, but for those conditions, have
accrued to one of the enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and taxed accordingly”.
The provision applies to associated enterprises, defined by the same Article 9, Para. 1,
of the OECD Model as those which are in (or under common) position of “ownership,
management or control”622. The definition of association is extremely wide623 and doubts
may arise with regards to the undefined term “control”.
The scope of application is also defined by the reference to the comparison between
condition “made or imposed” between associated enterprises and “those which would be
made between independent enterprises”.
In these terms, Article 9, Para. 1, is the key provision dealing with the application of the
“arm’s length principle” to the relationship between associated enterprises624.
The provision can be seen as a “legal fiction”, according to which transactions should be
taxed in the same way as comparable independent transactions would have been
621
In the generally accepted glossary of international tax, as reflected in the OECD Commentary,
a “primary” adjustment is the one initially made by one contracting state on the basis of its
domestic transfer pricing rules, while a “corresponding” adjustment is the one which can be made
by the other contracting state either to the taxable profits of the respective enterprise or to the tax
chargeable on it, with the purpose of avoiding double taxation. A “secondary” adjustment is the
tax assessment that one contracting State can make in respect of the deemed transfer of the
“money representing the profits which are the subject of the adjustment”. On this latter notion,
see the OECD Commentary on Article 9, at Nos. 8 and 9. A more detailed definition of these terms
is in the Glossary which precedes the OECD Transfer Pricing Guidelines.
622
On the “associated enterprise” requirement, see in particular R. DWARKASING, Associated
enterprises, Nijmegen, 2011, p. 121 et seq., C. ROTONDARO, The notion of associated
enterprises: treaty issues and Domestic interpretations – an overview, in International transfer
pricing journal, 2000, p. 2; C. ROTONDARO, The application of Article 3(2) in case of Differences
between Domestic Definitions of “Associated Enterprises”. A problem of Treaty Interpretation and
a Proposed Solution, in International Transfer Pricing Journal, 2000, p. 166.
623
In this sense see P. BAKER, Double Taxation Conventions and International Tax Law, London,
2nd ed., 1994, m.no. 217.
624
The arm’s length principle is also the basis for Article 7, Para. 2 of the OECD Model. The main
difference is that Article 9, Para. 1 applies to actual transactions entered into by separate
enterprises, while Article 7 deals with the virtual dealings within the different parts of one same
enterprise. The provision is based on the “separate entity and arm’s length principles”
(Commentary, Point. 1) and has the function to allocate taxing rights, as also confirmed by its
position among the distributive rules (i.e. Articles 6 to 21) of the OECD Model. The identity of
approach of Article 7 and Article 9, as further increased with the 2010 revision, is duly underlined
in the Commentary (see, e.g., point 17 of the Commentary to Article 7, which reads: “Paragraph
2 does not seek to allocate the overall profits of the whole enterprise to the permanent
establishment and its other parts but, instead, requires that the profits attributable to a permanent
establishment be determined as if it were a separate enterprise.”.
158
treated625 and has the function to secure that “business profits should be taxed in the
state in which they originate economically”626.
The first reference to arm’s length principle, now enshrined in Article 9, Para. 1 of the
OECD Model was in Article 3, Para. 2 of the 1933 League of Nations Draft Convention
on the Allocation of Profits, whose core provisions were later included with some minor
changes in the Mexico Draft Model Treaty of 1943 and in the London Draft Model Treaty
of 1946627.
The 1933 Draft follows the appointment in 1930, by the Fiscal Committee of the League
of Nation, of a sub-committee with the specific task of examining the issue of the
apportionment of profits628 and the studies carried on by Mitchell B. Carroll (summarized
in the “Carrol Report”)629 on the taxation of business income in several jurisdictions.
In that context, the adoption of the “separate accounting methods” was recommended
along with the adoption of the “arm’s length principle” in respect of problems of allocation
of profits between branches and associated enterprises.
According to Article 5 of the 1933 Draft, when enterprises of different contracting states
are associated, and “as the result of such situation there exists, in their commercial or
financial relations, conditions different from those which would have been made between
independent enterprises, any item of profit or loss which should normally have appeared
in the accounts of one enterprise, but which has been, in the manner, diverted to the
other enterprise, shall be entered in the accounts of such former enterprise (…).”
The similarities with the present Article 9 of the OECD Model are quite evident, especially
with reference to the definition of the arm’s length principle. Article 5 did not use the
expression “at arm’s length”, which can however be found in that same 1933 Draft, at
Article 3, referred to the allocation of income to permanent establishments630.
625
L. SCHOUERI, Arm’ s Length: Beyond the Guidelines of the OECD, in Bulletin, 2015, p. 690
ff.
626
K. VOGEL, On Double Taxation Conventions, 3rd ed., London, 1997, p. 518, m.no. 10.
627
See J. WITTENDORFF, The Transactional Ghost of Article 9(1) of the OECD Model, in Bulletin,
2009, p. 107. See also V. SOLILOVA, M. STEINDL, Tax Treaty Policy on Article 9 of the OECD
Model Scrutinized, in Bulletin, 2013. p.130.
628
See League of Nations Fiscal Committee, Report to the Council on the Work of the Second
Session of the Committee, C.340.M.140.1930.II. During that session, the results of a
questionnaire on State practice were presented by Professor Adams, who highlighted the
prevalence of the separate accounting approach: “Practically all the replies state categorically
that the local company, which is a subsidiary of a foreign corporation, is a separate legal entity
and enjoys the same treatment as other national companies. It is therefore taxed on the basis of
its own accounts. A number of replies mention measures that may be taken to assess the profits
of a subsidiary company correctly when its accounts are inadequate or misleading”.
629
Reference is made to the Carroll Report of 1933: Taxation of Foreign and National Enterprises;
Vol. I, League of Nations Document No.C.73.M.38.1932.II.A;Vol. II, League of Nations Document
No. C.425.M.217.1933.II.A; Vol. III, League of Nations Document No.
C.425(a).M.217(a).1933.II.A; Vol. IV: Methods of Allocating Taxable Income, League of Nations
Document No. C.425(b).M.217(b).1933.II.A; and Vol. V: Allocation Accounting for the Taxable
Income of Industrial Enterprises, League of Nations Document No.C.425(c).M.217(c).1933.II.A.
The Carroll report analysed the taxation of business income in 35 jurisdictions and formed the
basis for the draft convention on the allocation of Business profit between states of 1933.
630
According to Article 3, Para. 2, “The fiscal authorities of the contracting States shall, when
necessary, (…), rectify the accounts produced, notably to correct errors or omissions, or to re-
159
V.2.b The effects of treaty-based transfer pricing provisions in respect of national
legislations
Article 9, Para. 1, affirms the arm’s length principle in a tax assessment perspective: it
refers to profits which, under arm’s length conditions would have accrued to one of the
enterprises, but “have not so accrued”. The mentioned perspective of Article 9, Para. 1
well arises from the comparison with the equivalent provision of Article 7, Para.2 which,
more neutrally, addresses the attribution of profits631 rather than their adjustment.
The Commentary confirms that Article 9, Para. 1 concerns the “adjustments to profits
(...) where transactions have been entered (...) on other than arm’s length terms” or, in
other words, where “the accounts do not show the true taxable profits arising in that
State”632.
In the envisaged circumstances, Article 9, Para. 1, states that the (differential) profits
which would have accrued to the enterprise of a contracting State under arm’s length
conditions “may be included in the profits of that enterprise and taxed accordingly”.
The Commentary (sub Article 9, point 2) explains that the paragraph “provides that the
taxation authorities of a Contracting State may, for the purpose of calculating tax
liabilities of associated enterprises, re-write the accounts of the enterprises”.
There is a wide consensus, among scholars of different jurisdictions, on the fact that
Article 9, Para. 1 is not suitable to generate an autonomous tax obligation633.
Lang holds that the provision does not create any tax liability and that, consequently, the
legal basis for any adjustment of profits should be found in domestic legislation.634
According to Vogel “a tax treaty neither generates a tax claim that does not otherwise
exist under domestic law nor expands the scope or alters the type of an existing claim”
so that the extent of the State jurisdiction to tax remains “within the boundaries drawn by
DTCs is determined exclusively by its own domestic law”. 635
establish the prices or remunerations entered in the books at the value which would prevail
between independent persons dealing at arm’s length”.
631
The present version of Article 7, Para. 2 of the OECD Model , after the amendments of the
2010 revision, reads: “the profits that are attributable in each Contracting State to the permanent
establishment (...) are the profits it might be expected to make, in particular in its dealings with
other parts of the enterprise, if it were a separate and independent enterprise (...)”.
632
The approach of Article 9, Para. 1 has raised a debate as to whether the provision can be said
to have an anti-abuse nature. See G. MAISTO, Transfer pricing in the absence of comparable
market prices. General Report, in Cahiers de droit fiscal international, Deventer, 1992, p. 23. For
a more recent overview on the matter, see L. SCHOUERI, Arm’ s Length: Beyond the Guidelines
of the OECD, in Bulletin, 2015, p. 690 ff.
633
M. PIRES, International juridical double taxation of income, Deventer - Boston, 1989, p. 240;
J. SASSEVILLE, The role of tax treaties in the 21st century, in Bulletin, 2002, p. 247; J.
WITTENDORFF, Transfer Pricing and the Arm's Length Principle in International Tax Law, Alphen
aan den Rijn, 2010, p. 190; P. BAKER, Double Taxation Conventions and International Tax Law,
London, 2nd ed., 1994, m.no 13-02
634
See M. LANG, Introduction to the Law of Double Taxation Convention, Amsterdam Wien, 2nd
ed., 2013, m.no. 475.
635
G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double Taxation
Conventions, Alphen aan den Rijn, 4th ed., 2015, at m.no. 6.
160
Schwarz remarks that a treaty cannot create a charge not existing under domestic law
636 and highlights that this is also the position officially taken by the UK tax authority.
Other UK scholars have the same opinion637. There is a wide agreement on this point
also in the Italian638 and French doctrine 639.
It is debated whether Article 9, Para 1, has restrictive or simply “illustrative” effects. In

other words, the issue is whether the provision may directly limit the powers of
contracting states (so that it may also be enforceable in front of national courts) or comes
into play, with illustrative effects, only in a treaty dispute resolution context (e.g., within a
mutual agreement procedure).
The doubt is actually fuelled by the OECD Commentary. On the one side, it specifies
(Para. 2) that “no re-writing of the accounts of associated enterprises is authorised if the
transactions between such enterprises have taken place on normal open market
commercial terms (on an arm’s length basis)”, thus crediting the “restrictive effect”
interpretation.
On the other side, the OECD Commentary highlights that, according to some member
states, Article 9, Para. 1 cannot limit the power conferred to tax authorities by domestic
rules640. Similarly, it indicates that “in some cases the application of the national law of
some countries may result in adjustments to profits at variance with the principles of the
Article”641.
An example of such member State position can be found in the Belgian administrative
practice. In a Circular Letter of 1999 on transfer pricing, the Belgian tax authorities have
taken the view that Article 9 OECD MC is an illustrative provision, aimed at framing the
arm’s length principle within the context of treaty rules) but that it does not restrict the
prerogative of the tax authorities to adjusting profits beyond the “arm’s length”
principle642.
636
J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018 p. 38 who also
highlights that, presently, the view is unequivocally affirmed by the HMRC in the International Tax
Manual (INTM, Para. 152060) which reads that “a double taxation agreement cannot impose a
charge to tax where none exists at all in domestic law”.
637
M. ULLAH, Avoidance of double non-taxation in the United Kingdom, in in (M. Lang ed.),
Avoidance of double non-taxation, Wien, 2003, p. 455 et seq.
638
M. VITALE , Doppia imposizione,. a) Diritto internazionale, in Enciclopedia del diritto, XIII,
Milano, 1964, p. 1012; P. ADONNINO, Doppia imposizione, in Enciclopedia giuridica Treccani,
XII, Roma, 1989, p 1 et seq.; A. FANTOZZI, K. VOGEL, Doppia imposizione internazionale, in
Digesto IV, sez. comm., V, Torino, 1990, p. 191.
639
D. GUTMANN, Avoidance of double non-taxation in France, in (M. Lang ed.), Avoidance of
double non-taxation, Wien, 2003, p. 91.
640
See OECD Commentary on Article 9, Para. 4, according to which: “A number of countries
interpret the Article in such a way that it by no means bars the adjustment of profits under national
law under conditions that differ from those of the Article and that it has the function of raising the
arm’s length principle at treaty level”.
641
Ibidem, where it is also suggested that “Contracting States are enabled by the Article to deal
with such situations by means of corresponding adjustments (…) and under mutual agreement
procedures”.
642
The Belgian position is mentioned in L. DE BROE, International Tax Planning and Prevention
of Abuse, Amsterdam, 2007, p. 513, at footnote 645 and arises from Circular Letter of 28 June
161
Most scholars conversely believe that Article 9, Para. 1 has a restrictive effect so that it
prohibits the rewriting of accounts of associated enterprises beyond the arm’s length
principle643.
A minority of authors maintains that Article 9, Para. 1 is only illustrative, so that it can’t
restrict national rules644.
In my opinion, the interpretation in favor of the restrictive effects seems preferable.
Although Article 9, Para. 1 is – in a certain respect - different from other distributive
rules645, there seem to be no reason to attribute to it an effect different from that
pertaining to the other distributive rules (i.e., the limitation of domestic power to tax).
This issue is closely connected with that of the extension of the restrictive effects. Indeed,
those who support the restrictive effects generally agree on the conclusion that
adjustments within the scope of application of the rule are restricted within the
boundaries of the differential profits as defined by comparison between agreed
conditions and arm’s length conditions.
The above being true, it should be concluded that Article 9, Para. 1 is suitable to restrict
adjustments of profits of associated enterprises that were based on criteria other than
the arm’s length646, such as statutory profitability ratios or formulary profit apportionment.
The convergence on a single criterion thus contribute to prevent conflicts of evaluation,
but these may arise where the arm’s length standard is applied differently to individual
cases by the Tax Authorities of the different States involved. The treaty solution to this
kind of remaining conflicts is examined in the following Paragraph.
1999, AFZ 98/0003, Bull. Bel., 1999, 2477 et seq. and Parl. Question No. 1083 of 12 January
2001, V.&A, Senaat, 2000-2001, No. 2-40, 2015.
643
In these terms G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double
Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, at m.no. 5. On Article 9, Par, 1 having
a direct delimitation effect, see also J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-
Thames, 5th ed., 2018, p. 296, P. BAKER, Double Taxation Conventions and International Tax
Law, London, 1994, m. no. 13-02 and J. WITTENDORFF, Transfer Pricing and the Arm's Length
Principle in International Tax Law, Alphen Aan der Rijn, 2010, p. 149, according to whom the
provision protects taxpayers against primary adjustments that conflict with the arm’s length
principle.
644
See the survey of J. WITTENDORFF, Transfer Pricing and the Arm's Length Principle in
International Tax Law, Alphen Aan der Rijn, 2010, p. 198.
645
M. LANG, Introduction to the Law of Double Taxation Conventions, 2nd ed., Amsterdam - Wien,
2013, remarks at m.no 474 that: “This provision is placed in between the allocation rules.
However, Article 9 OECD Model is not an allocation rule but has a special role. Although this rule
has a confining effect similar to that of the allocation rules, it addresses cases of economic double
taxation: domestic rules that provide for profit adjustments between affiliated companies must
apply the arm’s length principle”. So, although observing that Article 9, Para. 1 is different from
the other distributive rules, he also supports that the rule has a direct confining effect.
646
2009, p. 107. See also V. SOLILOVA, M. STEINDL, Tax Treaty Policy on Article 9 of the OECD
Model Scrutinized, Bulletin, 2013. p. 115.
162
V.3 Article 9, Para 2 and the corresponding adjustments
V.3.a Overview
Article 9, Para. 2 of the OECD Model addresses the “corresponding” adjustments (albeit
this adjective is not present in the OECD Model), whose application is subordinated to
two conditions647.
The first (which will be referred to here as the “double taxation” condition) requires that
“a Contracting State includes in the profits of an enterprise of that State —and taxes
accordingly — profits on which an enterprise of the other Contracting State has been
charged to tax in that other State”.
The second condition (or “arm’s length” condition) entails that “the profits so included”
be those which would have accrued if the conditions made “had been those which would
have been made between independent enterprises”.
Where both the above conditions are met, the other State “shall make an appropriate
adjustment to the amount of the tax charged therein on those profits”. The extent of such
obligation will be analysed in the following paragraphs.
Article 9, Para. 2 ends with the requirement (formulated with a rather loose language)
that, in determining the adjustment “due regard shall be had to the other provisions of
this Convention” and with the specification that the respective competent authorities
“shall if necessary consult each other”. As specified by the Commentary the “other
provisions” referred to in the last sentence of Article 9, Para. 2, include especially Article
25 which applies if “there is a dispute between the parties concerned over the amount
and character of the appropriate adjustment”648.
Article 9, Para 2, was not included in the 1963 OECD Model and has made its
appearance only at the time of its first revision in 1977.
Corresponding adjustments were however conceived much earlier: in the Protocol to the
1946 London draft a provision was contained649, which - although referred to the
allocation of income to permanent establishments - can be considered as the forerunner
of the present OECD Model clause.
The mentioned provision reads as follows: “If the accounts of the permanent
establishment in one contracting State are rectified as a result of such verification, a
corresponding rectification shall be made in the accounts of the establishment in the
other contracting State with which the dealings in question have been effected”650.
The point was no longer addressed in the works for the preparation of the OECD Model
Tax Convention, initiated in 1956, with the establishment of the Fiscal Committee651.
Nonetheless, between 1956 and 1977 some states in their treaty inserted provisions
647
Please see the following Paragraph for a more detailed analysis of the two conditions.
648
OECD Commentary on Article 9, m.no. 11.
649
See Article VI, Para. B of the Protocol of the London Draft Model Convention.
650
The verification mentioned are those which were provided in the first sentence of the article
according to which “The fiscal authorities of the contracting States shall, when necessary, (…)
rectify the accounts produced, especially (…) to re-establish the prices or remunerations entered
in the books at the value which would prevail between independent persons dealing at arm’s
length”.
651
The Fiscal Committee was set up by the Resolution of the Council C(56)49(Final) of 16th
March, 1956
163
aimed at eliminating double economic taxation via a “corresponding adjustment” and a
“mutual agreement procedure” between competent authorities652.
It was only years after the adoption of the 1963 Model Tax Convention, and upon initiative
by the United States (which requested to deal with the problem of application of Article
9) that Working Party 7 released in 1970 a study on the apportionment of profits of
permanent establishment and associated enterprises. In that occasion, Working Party 7
recommended that the Model Convention should provide for a corresponding adjustment
mechanism653.
Such first proposal of Article 9, Para. 2 was put in place in a subsequent report654 and
finally included by the Fiscal Committee in the OECD Model Convention of 1977.
The language of Article 9, Para. 2 has since then remained unchanged.
Only a part of the approximately 3.000 tax treaties currently in force655 include a provision
equivalent to Article 9, Para. 2 of the OECD Model.
A significant change in this respect may be brought by the signature in June 2017 of a
multilateral instrument resulting from the OECD/G20 Base Erosion and Profit Shifting
Project and that contains, at Article 17, a provision corresponding to Article 9, Para 2, of
the OECD Model. The signature and implementation of the instrument will – subject to
exceptions and reservation provided by that same Article 17 – potentially enact the
corresponding adjustment provision into more than 2000 tax treaties worldwide.
V.3.b The double taxation condition
Article 9, Para. 2 applies only where economic double taxation is implied, i.e., where “a
Contracting State includes in the profits of an enterprise of that State — and taxes
accordingly — profits on which an enterprise of the other Contracting State has been
charged to tax in that other State”.
It may be argued that the described double taxation has to be assessed on the basis of
the notion of tax given at Article 2 of the OECD Model656.
652
Examples can be found especially in the treaty between Iceland and Sweden of 1964 (Article
9), between Belgium and France of 1964 (Article 5, Para. 4), between France and the United
Kingdom of 1968 (Article 26), between Germany and the United States of 1954 (Article 25) and
between the Netherlands and the United States considering that a provision similar to Article 9,
Para. 2, was inserted in the Protocol of 1972.
653
See Report by the Working Party 7 of the Fiscal Committee, FC/WP7 (70) (1), Apportionment
of profits, 19 June, 1970, m.nos. 12 and 15.
654
Report by the working party 7 of the Fiscal Committee, FC/WP7 (70) (2), Apportionment of
profits - Corresponding adjustment, 12 November 1970, m.no 8.
655
See OECD, Developing a Multilateral Instrument to Modify Bilateral Tax Treaties, OECD/G20
Base Erosion and Profit Shifting Project, OECD Publishing 2014, p. 11.
656
In theory, double taxation might arise across the categories of taxes on income and capital
envisaged by Article 2, e.g.: in the hypothesis of the adjustment of the conditions agreed in a sale
between associated enterprises of an asset which be subject to a tax on capital in the hands of
the buyer. Or where enterprises are subject to tax on their total capital, where the total capital also
included profits.
164
Furthermore, the language of the provision seems to require an actual double charge to
tax of both enterprises in the respective States. And, indeed, it does not apply where
profits are not subject to tax in one of the contracting states657.
It has however been submitted that profits should be considered to have been taxed if
they are included in the taxable income in both contracting states, even where this
inclusion rather than resulting in a present charge is suitable to influence the future tax
liability (as in the case of losses)658.
It is worth highlighting that Article 9 refers to any enterprise “profits” and it might seem
that the notion of profits (rectius, “business profits”) to be adopted be the one provided
by Article 7 of the OECD Model. Such a conclusion can also be inferred by the
Commentary on Article 7 according to which the attribution of profits to permanent
establishments follows “the arm’s length principle which is also applicable, under the
provisions of Article 9, for the purpose of adjusting the profits of associated enterprises.”
Some authors suggested that income covered by specific articles does not constitute
business profit under Article 7, Para. 1, therefore it cannot be subject to Article 9.
However, according to the majority, Article 9, Para. 1, should be relevant for all the
categories of income that qualify as business profits under Article 7, Para. 1 regardless
whether the income is subsumed into another income category of the OECD Model
under Article 7, Para. 4.659
V.3.c The arm’s length condition

Under the second condition, Article 9, Para. 2 applies only to the extent that the
adjustment is based on the reference to profits resulting if conditions made “had been
those which would have been made between independent enterprises”.
This condition is crucial in that it limits both the scope and the effects of the provision.
Indeed, only adjustments based on the divergence between agreed conditions and arm’s
length conditions may give rise to a corresponding adjustments. Economic double
taxation arising from e.g., conflicts of qualifications or from diverging profit computation
rules would conversely not be eligible under Article 9, Para. 2660.
Article 9, Par 2, does not require that the two enterprises be associated. It may thus be
submitted that corresponding adjustments apply also in respect of unrelated party
transactions. However, this submission finds an obstacle in the provision itself, where it
657
There may be cases where the primary adjustment does not correspond to economic double
taxation of profits. For example, the counterpart of the adjusted transaction may be in a country
with no tax on income or profits or be taxable in principle, but benefits from an exemption or relief
provided by the law of that State. Or if the additional tax is credited at the time of a dividend
distribution. See OECD, Transfer Pricing, Corresponding Adjustments and the Mutual Agreement
Procedure, Report approved by the OECD Council on 24 November 1982, Para. 6. Accordingly,
Alphen Aan der Rijn, 2010, p. 242.
658
Conventions, Alphen Aan der Rijn. 4th ed., 2015, at m.no. 111; J. WITTENDORFF, Transfer Pricing
and the Arm's Length Principle in International Tax Law, Alphen Aan der Rijn, 2010, p. 242.
659
J. WITTENDORFF, The Object of Article 9(1) of the OECD Model Convention: Commercial or
Financial Relation, in International Transfer pricing Journal, 2010, p. 202 - 203.
660
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 107.
165
makes reference to the conditions which “would have been made between independent
enterprises”. If the concerned enterprises are indeed independent, the provision would
lose its logical grounds.
The Commentary, on its turn states establishes a close relationship between the two
Paragraphs of Article 9 when stating that “the re-writing of transactions between
associated enterprises in the situation envisaged in paragraph 1 may give rise to
economic double taxation” and limits corresponding adjustments to related party
situations where continues specifying that only in these circumstances the other State
"shall make an appropriate adjustment so as to relieve the double taxation”661.
Such construction leaves without relief situations where national rules provide for
possible price adjustments also with respect to unrelated party transactions (as, it is e.g.
the case of the French acte anormal case law).
V.3.d The corresponding adjustment obligation

Article 9, Para. 2 provides that where the conditions thereby provided are met, the State
other than the one which has made the primary adjustment “shall make an appropriate
adjustment to the amount of the tax charged therein on those profits”.
The provision seems to indicate that (economic) double taxation caused by the
adjustment made by one State purports the obligation (“shall”) of the other State to
recognize a corresponding reduction of tax paid in such other State. In this perspective,
the clarification of the Commentary on Article 9 (at No. 6) where it reads that “an
adjustment is not automatically to be made in State B simply because the profits in State
A have been increased” seems in contradiction with the language of the provision
Actually, the other State (State B in the example of the Commentary) has an obligation
under the treaty to eliminate the economic double taxation. However, such obligation
does not rise as a mere consequence of the adjustment made in the first State, but is
subject to the recognition - by the other State - that the conditions set forth by the
provision are met. So, the corresponding adjustment becomes due only where a
contracting State considers that the adjustment made by the other contracting State is
consistent with the arm’s length principle662.
The Commentary, explains that “State B is therefore committed to make an adjustment
of the profits of the affiliated company only if it considers that the adjustment made in
State A is justified both in principle and as regards the amount”. 663
Point 11 of the Commentary specifies that “If there is a dispute between the parties
concerned over the amount and character of the appropriate adjustment, the mutual
agreement procedure provided for under Article 25 should be implemented”.
This clarification highlights that the elimination of double taxation presupposes a
common criterion. The contracting States may agree on the application of such criterion
661
See OECD Commentary on Article 9, m.no. 5, and – in accordance with the thereby proposed
construction G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double Taxation
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 107; C. ROTONDARO, The notion of
associated enterprises: treaty issues and Domestic interpretations – an overview, in International
transfer pricing journal, 2000, p. 3.
662
Alphen Aan der Rijn, 2010, p. 242
663
See OECD Commentary on Article 9, m.no. 6. In the same sense, the OECD Transfer Pricing
Guidelines, m.no. 4.35.
166
to any given particular case (and in such case one State operates an adjustment and the
other operates a corresponding adjustment) or may disagree, and in such case the
ordinary procedure for the solution of controversy (provided by Article 25) applies.
The meaning of the expression “due regard shall be had to the other provision” is not
properly defined in the Commentary, therefore doubts may arise concerning which “other
provision” are contemplated by Article 9, Para. 2.
However, a direct relationship between Article 9, Para. 2, and the recourse to a mutual
agreement procedure under Article 25 can be assumed by the wording of Article 9, Para.
2, according to which it is stressed that the competent authority shall “if necessary consult
each other”. Such direct relationship have been also clarified in the Transfer Pricing
Guidelines according to which “the mutual agreement procedure of Article 25 may be
used to consider corresponding adjustment requests”.664
The Correlation between Article 9 and the mutual agreement procedure also arises from
the minutes of the discussions during the preparatory works to the OECD Model665.
Some states666 inserted some reservations to Article 9, Para. 2. Italy, for example,
reserved its right to insert in its treaties a provision according to which it will make
adjustments under Article 9, Para. 2, only via a mutual agreement procedure under
Article 25 of the OECD Model convention.667
In my view, the situation of the State which bears the burden of eliminating double
taxation in the context of Article 9, Para. 2, is comparable to the situation of the State of
residence in the context of Article 23.
In fact, under Article 23, the State of residence has the obligation to apply the exemption
or credit method in relation to an item of income (or capital) where, in accordance with
the Convention such item of income “may be taxed” by the State of source668. While the
obligation in itself is unconditional, there may be conflicts between the State of source
as to the qualification of a given item of income and the existence of conditions posed
by the treaty for its taxation in the State of source.
More precisely, reference is made to those conflicts that, in the language of the
Commentary, result from “different interpretation of facts or different interpretation of the
provisions of the Convention” which may influence the elimination of juridical double
taxation by the State of residence in respect of whether a given item of income “may be
taxed” in the source State669.
664
OECD Transfer Pricing Guidelines, m.no. 4.33, OECD Commentary on Article 25 m.nos. 11 -
12.
665
See, e.g., The Minutes of the 19th Session held at the Château de la Muette, Paris, on
Tuesday, 28 June, 1960, FC/M(60)4 which reads that “The Chairman stated that the question
raised by the Delegate for Belgium in connection with Article XVI, namely, the corresponding
adjustment of profits by the other State where the profits of enterprises of a State which were
covered by that Article were adjusted by that State, could be settled under the mutual agreement
procedure”.
666
Czech Republic, Italy, Australia, Hungary and Slovenia.
667
See OECD Model Commentary on Article 9, m.no. 17.1, added in 2008.
668
The mentioned obligation is expressed with the term “shall” (the same used by Article 9, Para
2) in both Article 23 A and 23 B.
669
See OECD Commentary on Article 23 A and 23 B, Point 32.5. It is worth highlighting that
conflicts of qualification may also lead to the opposite situation of double non taxation; to this end,
167
Interestingly, the Commentary specifies that in such cases “States should use the
provisions of Article 25 (Mutual Agreement Procedure), and in particular paragraph 3
thereof, in order to resolve this type of conflict in cases that would otherwise result in
unrelieved double taxation”.
The Commentary thus admits that juridical double taxation may remain unrelieved in the
mentioned situations of conflict. It may then be argued that also in respect of Article 23
(and with respect to certain cases of conflict of qualifications) the State of residence has
no obligation to provide relief trough credit or exemption for the mere fact that income
was taxed at Source. The State of residence has no relief obligation if it does not agree
that taxation at source is in accordance with the provision of the convention.
In this respect, Article 9, Para. 2 does not seem different from Article 23: in both situations
a State is obligated to provide relief (from juridical double taxation in Article 23, from
economic double taxation in Article 9, Para. 2) only to the extent that it agrees that the
conditions for taxation in the other State are met.
The above being true, it may be submitted that the lack of efficacy of Article 9, Para. 2
attributable to the subordination to an agreement of the State obliged to provide relief is
not the consequence of a choice of the drafters specifically referred to economic double
taxation, but the consequence of the kind of interpretative conflict which arises from tax
treaties.
V.4 Article 25 and the mutual agreement procedure
V.4.a Overview
Article 25 of the OECD Model (“Mutual Agreement Procedure”) contains procedural rules
aimed at enabling the competent authorities to resolve directly difficulties or gaps arising
from the application of the convention, without having to go through diplomatic
channels670. The provision envisages three different procedures, which are quite different
among them and are to be examined separately.
The common feature of the three procedures is their government to government nature.
Also common are the procedural specifications of Article 25, Para. 4, under which the
procedures are administered by the competent authorities of the contracting states, and
a joint commission might be set up in order to foster communication between the
competent authorities concerned.671
V.4.a.1 The specific case procedure: scope of application

The first procedure, usually referred to as the “specific case” procedure or “mutual
agreement procedure in a narrow sense”, is governed by Paras. 1 and 2, and by Para.
Para. 4 of Article 23 A was inserted in the OECD Model in 2000 along with the explanations now
enshrined in Para 56.1 et seq. of the OECD Commentary. See A. RUST, Article 23, in (E. Reiner,
A. Rust eds.) Klaus Vogel On Double Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2015,
at m.no. 101.
670
671
See Article 25, Para. 4, OECD Model.
168
5, concerning the arbitration phase672. It relates to individual cases of taxation “not in
accordance with the provisions of the Convention”.
The procedure is activated by taxpayers, irrespective of the remedies provided by the
domestic law, through the presentation of the case (within three years from the first
notification of the State action) to the competent authority of Contracting State of
residence.
The presentation of the taxpayer objections opens the first stage of the procedure, which
concerns the taxpayer and the respective competent authority. This latter has the
obligation to consider whether the objections appears to be justified and, in such event,
seek a unilateral “satisfactory solution”, i.e. “making such adjustment or allowing such
reliefs as appear to be justified” .
Where the competent authority was unable to do so (i.e., the taxation complained was
due to a measure taken in the other State) it has the obligation to set in motion the second
stage of the procedure, approaching the competent authority of the other State. This
second stage consists in a procedure between States, which are under the duty to
negotiate with the aim to “resolve the case by mutual agreement”.
The language used by the provision (“shall endeavour”) means that the contracting
States are not under any obligation to reach an agreement.
This circumstance is at the root of the introduction, with the 2008 revision of the OECD
Model, of a third stage of the procedure, the arbitration phase, aimed at providing a
solution to cases where the competent authorities have not been able to reach a mutual
agreement.
Under article 25, Para. 5, in case the competent authority fail to reach an agreement
within two years from the presentation of the case, it should be submitted to arbitration.
The agreement that implements the arbitration decision is binding on both Contracting
States.
Article 25 was included in the OECD Model since the first 1963 edition and – with the
exception of some clarifications related to time limitations in 1977 - has remained
unchanged until 2008, when Para. 5, concerning the arbitration stage, was introduced.
The predecessors of the provisions of present Article 25 are to be found in the London
(1943) and Mexico (1946) Models, while the prior League of Nation works had rather
envisaged the institution of a technical body, in charge of providing advisory opinions673.
The London and Mexico Models attributed taxpayers a right of appeal by providing a
procedure (similar to the present “specific case” procedure) intended “not to replace but
to supplement the procedures of tax appeal established by the tax legislation of the
contracting States”674. The procedure – referred to in the Commentary as devoted to the
“protection of taxpayer’s rights” was referred to cases of double taxation (Para. 1) and
672
See the Commentary on Article 25, at point 7: “This process is an integral part of the mutual
agreement procedure and does not constitute an alternative route to solving disputes concerning
the application of the Convention”.
673
Article 14 of the League of Nations Draft Model Tax Treaty of 1927. The related Commentary
noted that the solution was based on the experience made with other international conventions,
such as the Geneva Convention of 1923 for the Simplification of Customs Formalities. See M.B.
KNITTEL, Articles 25, 26 and 27 Administrative Cooperation, in (T. Ecker, G. Ressler eds.),
History of Tax Treaties, Wien, 2011, p. 688.
674
London and Mexico Model Tax Conventions Commentary and Text. C.88.M.88.1946.II.A.,
Geneva, November 1946, Commentary Ad Article XVII.—Taxpayers' Rights of Appeal
169
was aimed at “reaching an agreement for an equitable avoidance of double taxation”
(Para. 2).
Mexico Model 1943 - Article XVI and London Model 1946 - Article XVII
1. When a taxpayer shows proof that the action of the tax administration of one of
the contracting States has resulted in double taxation, he shall be entitled to lodge
a claim with the tax administration of the State in which he has his fiscal domicile or
of which he is a national.
2. Should the claim be admitted, the competent tax administration of that State shall
consult directly with the competent authority of the other State, with a view to
reaching an agreement for an equitable avoidance of double taxation.
The first attempt to draft a mutual agreement procedure was thus openly focused on the
notion of double taxation, without limitations as to the nature of double taxation involved
or reference to specific rules.
Some years later, the 1943/1946 clause served as a basis for the OECD Model Tax
Convention preparatory works. Working Party 14, in charge of general provisions,
presented on March 3rd 1959 a draft proposal of the Mutual Agreement Procedure rules
(Article E). The draft extended the “specific case” protection, already embedded in the
Mexico and London Models, to cases of impending double taxation (while, as just
mentioned, the Mexico and London Models required that double taxation had actually
occurred)675.
But still the procedure was centered on the two elements of double taxation and the
“principles of the convention”.
It was, in 1960, during the proceeds of the work, that the reference to double taxation
was abandoned in favor of the notion of “taxation which is not in accordance with the
provisions” of the Convention676.
The final version of Article 25, included in the Council Resolution adopted on July 30th
1963677 resulted from further discussion within WP14 and within the Fiscal Committee678
on time limits, on the connection between art 25 and the associated enterprise provision
and on the nature and forms of the competent authorities consultation.
After the release of the OECD Model in 1963, some issues arose with respect to time
limits for presenting a claim and for the implementation of the competent authorities
675
See. M.B. KNITTEL, Articles 25, 26 and 27 Administrative Cooperation, in (T. Ecker, G. Ressler
eds.), History of Tax Treaties, Wien, 2011, p. 690. The draft Commentary of the Report of general
provisions to be inserted in Conventions for the avoidance of double taxation (FC/WP14(59)1)
well summarises the division into three procedures and the situations addressed by each: “In
particular such procedure shall take place: 1) Where the taxpayer, through action by the taxation
authorities, way suffer prejudice in contradiction with the principles of the Convention; 2) Where
the taxpayer might suffer double taxation in cases not provided for by the Convention; 3) Where
difficulties and doubts arise as to the interpretation and application of the Convention”.
676
See Working party n°14 of the fiscal committee (Austria - Sweden), Second report on the draft
article on the mutual agreement procedure, FC/WP14(60)3, of 18th June, 1960.
677
See document C(63)113 dated 19th November, 1963. Two intermediate drafts were
presented, with no further change on the point, on June 18th 1960 and October 21st 1960. See
also the minutes of the meeting on June 28th 1960.
678
Of particular relevance the discussion reported in the Minutes of the 20th Session held at the
Château de la Muette, Paris, on Tuesday, 6th, Wednesday, 7th, Thursday, 8th and Friday 9th
September, 1960.
170
resolutions. The issues were addressed in two detailed reports presented on April, 21st
1965679 and April, 7th 1966680 and – following some further debate – ultimately found a
solution in two amendments related to time limits which had raised a considerable debate
within the Fiscal Committee and that were eventually approved with a firm reservation
from a relevant number of States (including Italy and the UK)681
The 1966 Report also suggested to treat the mutual agreement procedure as compulsory
and proposed a range of solutions (including the appointment of an independent
arbitrator) for cases where the competent authorities had not been able to reach an
agreement.
The hypothesis of an arbitration clause had been considered already before. In
particular, on July, 30th 1963 the OECD Council resolution which adopted the Draft
Convention, also instructed the Fiscal Committee “to consider the desirability of providing
for recourse to arbitration” 682. Arbitration was also occasionally mentioned in the course
of the sessions which led to the final draft of Article 25683.
But it was only after the adoption of the OECD Model that it became increasingly clear
that a solution was to be developed at the OECD level for cases where the competent
authorities were not able to find an agreement. And, while OECD member states soon
realised in the proceedings of the Fiscal Committee (later become the Committee on
679
Working Parties No. 14 and No. 22 of the Fiscal Committee (Sweden-Austria; France-
Switzerland), Preliminary Report on Additional Studies Concerning the Mutual Agreement
Procedure (FC/WP14(65)1). The document collects the two preliminary reports made by Working
Party No. 14 (composed of the Delegates for Sweden and Austria) who was instructed in early
1964 by the Fiscal Committee to make a study on the administration of agreements concluded by
the mutual agreement procedure and by Working Party No. 22 (Delegates for France and
Switzerland) who was contemporarily set up in order to study problems concerning the protection
of taxpayers. After making separate studies of their subjects, the two Working Parties concluded
that they related to two aspects of the same problem, that it would have been be of advantage if
the Fiscal Committee had discussed them together and then presented their two preliminary
reports in a single document.
680
Working Party No. 22 of the Fiscal Committee (France Switzerland), Second Report on
Additional Studies Concerning the Mutual Agreement Procedure(FC/WP22(66)1). The document
is a revision of the Working Party No. 22 section of the previous year Preliminary Report and was
prepared upon request by the Fiscal Committee in order to make the mutual agreement procedure
more effective and consequently a better instrument for the protection of taxpayers.
681
The reservation reads that “Canada, Greece, Ireland, Italy, Portugal, Spain and the United
Kingdom reserve their positions on the second sentence of paragraph 2. These countries consider
that the implementation of reliefs and refunds following a mutual agreement ought to remain linked
to time-limits prescribed by their domestic laws”.
682
The Resolution also instructs to “seek solutions to the problems mentioned in Paragraphs 53
and 54 of the Report of the Fiscal Committee”. Among such problems referred to in Para. 54 of
the Fiscal Committee Report, “several other problems as to which the solutions embodies in the
Draft Convention may be subject to augmentation or refinement. These include a wider measure
of agreement on the rules for allocating or re-allocating income to a permanent establishment or
among related enterprises, the mutual agreement procedure and the provision against
discrimination”.
683
See, e.g., the Minutes of the 20th Session held at the Château de la Muette, Paris, on Tuesday,
6th, Wednesday, 7th, Thursday, 8th and Friday 9th September, 1960 where “In connection with
paragraph 9, the Delegates for Switzerland and the Netherlands, felt that it was premature at this
stage to provide that the Special Commission envisaged could take executive decisions and that
its role should be simply advisory. The chairman recalled that the 1934 Convention between
Rumania and Czechoslovakia already provided or recourse to the arbitration of a body appointed
by the Fiscal Committee for the League of Nations”.
171
Fiscal Affairs) that the solution of an independent arbitrator was to be preferred to others
envisaged in the 1966 Report, it took more than 40 years to overcome the technical
obstacles and reach the agreement which lead to the adoption in 2008 of Article 25,
Para. 5684.
Arbitration had been again mentioned in reports published in the early eighties685 and
included in the agenda of working party 6 of the OECD CFA since the early 1990s686. A
more formal step was took place with the creation of a joint working group of delegates
from working party 1 and working party 6 which published, in 2003, the report “Improving
the Process for Resolving International Tax Disputes”.687 In 2007 the CFA approved the
final version of the report which contained the final proposal of new paragraph 5.688 A
recent study on the implementation of arbitration procedures in tax treaties highlights
that as of March 2014, 178 tax convention included an arbitration clause.689 Contextually
the Manual on Effective Mutual Agreement Procedures (MEMAP)690 was presented.
The absence of arbitration has been considered also in the OECD Action Plan on Base
Erosion and Profit shifting, in particular, under Action 14. Concrete developments may
come from the signature of a multilateral instrument resulting from the OECD/G20 Base
Erosion and Profit Shifting Project. Article 16 of the instrument contains a provision
corresponding to Article 25, Paras 1 to 3 of the OECD Model. The signature and
implementation of the instrument will – subject to exceptions and reservation provided
by that same Article 16 – potentially enact the mutual agreement provision into more
than 2000 tax treaties worldwide.
V.4.a.2 The specific case procedure and the “not in accordance” condition
As mentioned, the March 3rd 1959 draft referred to double taxation and the principles of
the Convention691. Both points were later amended, to implement comments made by
the Swiss delegation692, contrary to the double taxation requirement, and by the Dutch
684
See the OECD report “The 2008 Update to the OECD Model Tax Convention” adopted by the
OECD Council on 17 July 2008.
685
Debates concerning to possibility of a mandatory arbitration procedure have been undertaken
even before. See among others the OECD Report, Transfer Pricing, Corresponding Adjustment
and the Mutual Agreement Procedure, adopted by the OECD Council on 24 November 1982
686
R. BIÇER, The Effectiveness of Mutual Agreement Procedures as a Means for Settling
International Transfer Pricing Disputes, in International Transfer Pricing Journal, 2014, p. 79.
687
OECD CFA, Improving the Process for Resolving International Tax Disputes, of 27 July 2004.
688
OECD CFA, Improving the Process for Resolving International Tax Disputes, of February 2007.
689
H. M. PIT, Arbitration under the OECD Model Convention: Follow-up under Double Tax
Conventions: An Evaluation, in Intertax, 2014, p. 445.
690
OECD CFA, Manual on Effective Mutual Agreement Procedures (MEMAP), February 2007.
691
Article E, Para. 1 of the 1959 WP9 draft reads “Where a resident of one of the Contracting
States has evidence that the actions of the tax authorities of the two Contracting States result or
will result in double taxation which is contrary to the principles of this Convention …” See Working
party n°14 of the fiscal committee (Austria - Sweden). Report of general provisions to be inserted
in conventions for the avoidance of double taxation. (FC/WP14(59)1)
692
The Swiss Delegation suggested that “the provisions should apply not only in cases of double
taxation but also in each case, where the taxation in one of the Contracting States is contrary to
the principles of the Convention and that the taxpayer should be entitled to claim for the mutual
agreement procedure, if he is only taxed by one of the Contracting States, when this State has
no taxation right under the Convention”. See FC/WP14(60)2.
172
and Irish delegations693, concerned that reference to principles of the convention was too
wide in scope.
The discussion led to the adoption of a new wording (the one that can be found in the
current text of Article 25, Para. 1 of the OECD Model), according to which the procedure
can be accessed in front of “taxation which is not in accordance with the provisions” of
the Convention694.
The comparison between the 1959 draft and the present OECD Model provision
contributes to highlight that, in this latter, double taxation is not a requirement in itself, so
that the specific case procedure can be requested in front of alleged violations that do
not imply double taxation. By contrast, (a conflict with) a specific treaty rule is necessary
to access the procedure695.
The first submission is backed by the Commentary (at point 13), where it is specified that
“The mutual agreement procedure is also applicable in the absence of any double
taxation contrary to the Convention, once the taxation in dispute is in direct contravention
of a rule in the Convention”.
Also the relationship between the specific case procedure and double taxation is
highlighted by the Commentary on Article 25, which reminds that “the procedure applies
to cases — by far the most numerous — where the measure in question leads to double
taxation which it is the specific purpose of the Convention to avoid” (point 9). The
Commentary implies that not only juridical double taxation is concerned, but also
economic double taxation such as that “resulting from the inclusion of profits of
associated enterprises under paragraph 1 of Article 9” (point 10).
In other words, the OECD Model and the Commentary consistently point out that double
taxation is within the scope of the specific case procedure to the extent that it is
connected with a violation of a specific treaty rule.
Examples made in the Commentary include questions relating to the attribution of profits
to a permanent establishment (where the concerned treaty provision is paragraph 2 of
Article 7) taxation of the excess part of interest and royalties (paragraph 6 of Article 11
or paragraph 4 of Article 12), determination of residence (paragraph 2 of Article 4), the
existence of a permanent establishment (Article 5), or the temporary nature of the
services performed by an employee (paragraph 2 of Article 15).
The approach taken in the OECD Model (especially when compared with the 1959 draft)
represent a significant limitation to the application of the mutual agreement procedure
to situations of economic double taxation.
The Commentary points out that Article 25 is apt at resolving “not only problems of
juridical double taxation but also those of economic double taxation”. However, the
693
The Dutch and Irish delegations expressed a preference for “the term "provisions" instead of
"principles"; they think that "principles", if it means the underlying principles of the Convention,
would be extended too far by according a "right of complaint" of the non-observance of principles
which are not laid down expressly in the text of the Convention. It should be only a matter of the
Contracting States and not of the taxpayers to clear up disagreements on the principles of the
Convention”. See FC/WP14(60)2.
694
See Working party n°14 of the fiscal committee (Austria - Sweden), Second report on the draft
article on the mutual agreement procedure, FC/WP14(60)3, of 18th June, 1960.
695
The requirement is expressed in the Commentary on Article 25 with different terms: “incorrect
application of the Convention”, “in disregard of the provision of the Convention” “contrary to the
Convention”
173
necessary conflict with a specific rule (as opposed to the conflict with the principles)
requires that the treaty includes rules against economic double taxation.
Having regard to the OECD Model, this is true in the limited context of problems “resulting
from the inclusion of profits of associated enterprises under paragraph 1 of Article 9”. At
Point 10, the Commentary takes the view that “the corresponding adjustments to be
made in pursuance of paragraph 2 of the same Article thus fall within the scope of the
mutual agreement procedure, both as concerns assessing whether they are well-
founded and for determining their amount”696.
The statement is not in contradiction with the “not in accordance” requirement, it merely
confirms that the violation of a treaty rule is required and where there is a treaty rule
(such as Article 9, Para. 2) concerning economic double taxation, then Article 25 applies.
The question remains that there is hardly any treaty rule addressing economic double
taxation, so that most situations involving it would remain outside the scope of application
of the specific case procedure.
Finally, Article 25, Para. 1 makes reference to actions that “result or will result” in a
violation of the treaty. The inclusion of impending taxation (on the top of actual taxation)
dates back to the early stages of the elaboration of the OECD Model and has the aim,
well remarked at Point 14 of the Commentary, to grant access to the procedure when
taxation is only probable, but has not yet been charged or notified697.
Both the OECD Model and the Commentary are silent as to whether the requirement is
met where the violation of the treaty rule does not give rise to an actual taxation, in
particular because of current or carry-forward business losses. In this respect, the same
submission made in respect of Article 9, Para 2., can be made, i.e.: the reference to
future tax liability698.
V.4.a.3 The interpretative procedure

The second procedure (Article 25, Para. 3, first sentence) generally named
“interpretation procedure”, “consultation procedure”, “mutual agreement in a wide sense”
or “mutual agreement procedure for resolving difficulties”, relates to the difficulties or
doubts concerning the interpretation or application of the convention.
The procedure (differently from the specific case procedure) does not require the
initiative of an individual taxpayer and is generally referred to difficulties of a general
nature. There is however no foreclosure of consultations referred to individual cases, as
it is suggested by the Transfer Pricing Guidelines with reference to Advance Pricing
Agreements or by the Article 9, Para 2, of the OECD Model with reference to
corresponding adjustments.
696
See also Paras 4.29 et seq of the OECD Transfer Pricing Guidelines, which support the
position that the mutual agreement procedure “can be used to eliminate double taxation that could
arise from a transfer pricing adjustment”.
697
R. ISMER, Article 25, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double Taxation
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 25 remarks that in front of future
taxation, the procedure takes a preventive character, and that in respect of future taxation there
must be a reasonable expectation that the actions will be taken. See also M. LANG, Introduction
to the Law of Double Taxation Convention, Amsterdam - Wien, 2nd ed., 2013, m.no. 503..
698
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 111; J. WITTENDORFF, Transfer
Pricing and the Arm's Length Principle in International Tax Law, Alphen Aan der Rijn, 2010, p.
242.
174
The interpretation procedure is not an additional remedy for the taxpayers and is
essentially in the interest of the tax authorities. There is no specific procedural
requirement, from a substantial point of view the procedure can be set in motion in front
of difficulties of legal or factual nature, albeit the decision as to whether such difficulties
exist is left entirely with the tax authorities involved, which are not obliged to start the
procedure.
Working Party 14, in charge of general provisions, presented on March 3rd 1959 a draft
proposal of the Mutual Agreement Procedure rules (Article E). The draft gave the
interpretative provision the shape it currently has in Article 25, Para. 3 of the OECD
Model699.
V.4.a.4 The legislative procedure

The third procedure (Article 25, Para. 3, second sentence), also referred to as “legislative
procedure” or “mutual agreement procedure for filling gaps” concerns the elimination of
double taxation in cases not addressed by the convention.
The provision authorises the competent authorities to consult each other. The initiative
is left to the competent authorities themselves and the consultation may concern a wide
range of matters not provided for in the convention. The focal requirement is that “double
taxation” should be involved.
The consultations may concern, e.g., the case of a resident in a third state having a PE
in both contracting states or taxes other than those covered by Article 2 of the OECD
Model.
The precursors of the legislative provision can be found in the Mexico and London
Models provisions, where reference was made to provisions to be adopted – in
accordance with the “spirit of the Convention” – in respect of cases not provided for or of
changes in the tax laws of either contracting States.
Mexico Model 1943 – Article XVII London Model 1946 Article XIX
As regards any special provisions which may be As regards any special provisions which may be
necessary for the application of the present necessary for the application of the present
Convention, more particularly in cases not Convention, more particularly in cases not
expressly provided for, the competent authorities of expressly provided for, and in the event of
the two contracting States may confer together and substantial changes in the tax laws of either of the
take the measures required in accordance with the contracting States, the competent authorities of the
spirit of this Convention. two contracting States shall confer together and
take the measures required in accordance with the
spirit of the present Convention.
In the subsequent OECD proceedings, Working Party 14, in charge of general

provisions, presented on March 3rd 1959 a draft proposal of the Mutual Agreement
699
See. M.B. KNITTEL, Articles 25, 26 and 27 Administrative Cooperation, in (T. Ecker, G. Ressler
eds.), History of Tax Treaties, Wien, 2011, p. 690. The draft Commentary of the Report of general
provisions to be inserted in Conventions for the avoidance of double taxation (FC/WP14(59)1)
well summarises the division into three procedures and the situations addressed by each: “In
particular such procedure shall take place: 1) Where the taxpayer, through action by the taxation
authorities, way suffer prejudice in contradiction with the principles of the Convention; 2) Where
the taxpayer might suffer double taxation in cases not provided for by the Convention; 3) Where
difficulties and doubts arise as to the interpretation and application of the Convention”.
175
Procedure rules (Article E), where the legislative procedure was provided with the same
language that can still be found in Article 25, Para. 3 of the OECD Model700.
V.4.b Effects
As to the effects of Article 25 a distinction should be drawn among the different
procedures.
V.4.b.1 Specific case procedure

The effects of the specific case procedure are different depending upon the stage of
procedure.
As mentioned already, the wording of the provision (“shall endeavour”) means that in the
second stage of the procedure the competent authorities are under no obligation – based
on Article 25, Para 2, to reach an agreement and resolve the case.
According to Article 25, Para. 5, however, unresolved cases may be submitted to
arbitration (the third stage of the procedure) and the decision “shall be binding on both
Contracting States”.
There is no explicit provision concerning the effects of the first stage; it may be argued
that, since recourse to the mutual agreement stage is provided if the residence state of
the claimant “it is not itself able to arrive at a satisfactory solution”, where a solution is
possible, the state is obliged to adopt it.
V.4.b.2 Interpretative procedure
According to Article 25, Para 3, first sentence, the tax authorities “shall endeavour” to
resolve the difficulties or doubts concerned. The language of the provision (which is the
same of Article 25, Para 2) entails that the competent authorities are under no obligation
to actually agree on a solution.
Recourse to arbitration under Article 25, Para. 5, is not provided for the interpretation
procedure, so that difficulties or doubts may be left unsolved701.
In the event a mutual agreement is reached, the states are under a public international
law obligation to implement it within the respective jurisdiction. A distinction may be
drawn between agreements which merely clarify the interpretation of the treaty and
agreements which modify the treaty, in such latter case a specific implementation statute
may be necessary.
As to the basis of a solution of the case, it is worth mentioning that Point 38 of the
Commentary takes the position that “Should the strict application of such rules or
provisions preclude any agreement, it may reasonably be held that the competent
authorities (…) can, subsidiarily, have regard to considerations of equity in order to give
the taxpayer satisfaction”. It has been remarked that the procedures can be considered
to be “partially rule-based” since they may have traits of an equitable nature, provided
700
See the previous footnote.
701
J. MONSENEGO, Designing Arbitration Provisions in Tax Treaties: Reflections Based on the
US Experience, in Intertax, 2014, p. 166 – 167. See however the OECD Commentary on Article
25, at No. 73, which indicates that States wishing to extend the scope of the arbitration stage “to
also cover mutual agreement cases arising under paragraph 3 of the Article are free to do so”.
176
that the case should be resolved on its own merits and not on a general balance of
interest between the concerned States702.
V.4.b.3 Legislative procedure

The language of Article 25, Para. 3, second sentence, indicates that the authorities are
under no obligation to start consultations in front of cases of double taxation not
addressed by the convention and the language used (“may consult”) is even weaker than
the best effort obligation (“shall endeavour”) of Para. 2 and Para 3, first sentence.
It has been argued, based on the purpose of the treaty, that the consultation requires the
competent authorities to achieve a result703.
The provision does not even specify the possible result of the consultations, and
(differently from the case of the interpretation procedure) does not qualify it as a mutual
agreement. The difficulty in framing the results of the consultation in terms of public
international law also implies that its actual effects within the states concerned largely
depends on domestic law704.
V.5 Elements on the treaty policy and legislation of Italy, France

and the UK
V.5.a.1 Italy
Currently, more than 80 tax treaties signed by Italy are in force, which have been signed
in most part in the 70’s and 80’s.
No Reservation has been formulated on this specific issue with respect to the application
of Article 9, Para. 1. Also, domestic law does not seem to pose any obstacle (neither
substantial nor procedural) to the full application of the treaty rule of Article 9, Para. 1 of
the OECD Model. So, the solution of a possible conflict between the treaty rule and the
domestic rule is not entrusted exclusively to the mutual agreement procedure and may
well be submitted to a national judge, who is fully entitled to evaluate the conflict between
two rules which both belong to the Italian jurisdiction (on one side, the domestic rule, on
the other side the treaty rule implemented in Italy through a ratification instrument). The
availability of domestic judicial remedies for controversies deriving from the application
of Article 9, Para. 1 can also be inferred from the official instructions issued by the Italian
authorities with regard to the coordination of treaty mutual agreement procedures with
domestic litigation705.
702
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.nos. 7, 8 and 72.
703
J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018, p.613.
704
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 88. In some Countries, the provision
may even raise constitutional issues for possible breach of the principle of legality. See M.
LOMBARDO, International Tax Disputes Settlement, Milano, 2009, p. 56; P. HARRIS, D. OLIVER,
International Commercial Tax, Cambridge, 2010, p. 462. Reference to such difficulties is made at
Point 55.1 of the Commentary on Article 25 of the OECD Model: “There will be Contracting States
whose domestic law prevents the Convention from being complemented on points which are not
explicitly or at least implicitly dealt with in the Convention”.
705
See Circular Letter No. 21/E, Para. 4.2.5.
177
Since the 1977 revision and until the 1992 revision, Italy was among the OECD Member
Countries which made a Reservation to Article 9, Para. 2706.
As a result, only the more recent Italian tax conventions (virtually, only those signed after
the 1992 withdrawal of the mentioned Reservation) include a provision on corresponding
adjustments707. One remarkable exception was constituted by the 1984 tax convention
with the United States708, the first Italian tax convention which included a corresponding
adjustment provision. The convention with the United States was followed a few years
later by those, also signed before 1992, with the United Kingdom (1988), France and
Germany (1989), and The Netherlands (1990). Most, although not all, later conventions
include a corresponding adjustment clause.709
It is noteworthy that the phrasing of the corresponding adjustment provision, to be found
in those Italian tax conventions which include it, is different from the one of the OECD
Model. Indeed, the second sentence of Article 9, Par 2 of the OECD Model reads that “in
determining such adjustment, due regard shall be had to the other provisions of this
Convention and the competent authorities of the Contracting States shall if necessary
consult each other”, while the expression contained in Italian treaties is typically the
following: “any such adjustment shall be made only in accordance with the mutual
agreement procedure”.
The comparison between the two dictions portrays a link between the corresponding
adjustment clause and the mutual agreement clause which is, in Italian treaties, much
tighter than the one proposed at an OECD level. While in the OECD perspective the
connection between Article 9, Para. 2 and Article 25 is mentioned as an opportunity710,
the Italian stance clearly requires the recourse to Article 25 as a necessity. This clearly
706
Para. 11 of the Commentary on Article 9 of the 1977 Model Tax Convention read that Italy and
other Countries “reserve the right not to insert paragraph 2 in their conventions”.
707
A corresponding adjustment provision can be now found in the treaties with Armenia,
Azerbaijan, Belarus, Canada, Croatia, Denmark, Ethiopia, Georgia, Ghana, Iceland, Lebanon,
Moldova, Oman, Qatar, Slovenia, Syria, Turkey, Uganda, the United States, Uzbekistan and
Vietnam; in the protocols to the treaties with Albania, Estonia, France, Germany, Israel,
Kazakhstan, Latvia, Lithuania, Macedonia, the Netherlands, Russia, Senegal, South Africa and
the United Arab Emirates; and in the exchange of notes of 21 October 1998 between Italy and
the United Kingdom. See G. MAISTO, Italy in Transfer Pricing, Amsterdam, 2018, Para. 14.5.2..
708
Tax Convention between Italy and the United States, signed in Rome on April, 17. A new
Convention was signed on August, 26 1999 and entered into force on January, 1st 2010.
709
The turnaround of the Italian treaty policy was probably determined by the execution, in 1990,
of the EC Arbitration Convention, which opened the way to corresponding adjustments in a great
number of treaty Countries. At that point, arguably, maintaining a reservation at OECD level, while
having a corresponding adjustment clause in force with all EU Countries and the US, would have
made little sense and have appeared contradictory.
710
The OECD Commentary on Article 25, at Para. 10 explains that “Article 25 provides machinery
to enable competent authorities to consult with each other” and that “the corresponding
adjustments (…) fall within the scope of the mutual agreement procedure”. At the same time, the
Commentary on Article 9, at Para. 6 notes that a State is committed to make an adjustment (only)
if it considers that the adjustment made in the other state is justified, while the mutual agreement
procedure should be implemented (Para. 11) is “there is a dispute between the parties concerned
over the amount and the character of the appropriate adjustment”. The same approach underpins
the TP Guidelines 2010: Para. 4.33: “Paragraph 2 of Article 9 specifically recommends that the
competent authorities consult each other if necessary to determine corresponding adjustments.
This demonstrates that the mutual agreement procedure of Article 25 may be used to consider
corresponding adjustment requests”.
178
indicates the concern for the unwanted effect of any “automatic” application of Article 9,
Para. 2 711 without the formalities of the mutual agreement procedure712.
The MAP provision of Italian treaties follows quite closely Article 25 of the OECD Model,
in its version prior to the introduction of the arbitration paragraph in 2008.
Just a few include an arbitration clause. Some of the treaties have been signed before
the introduction of Article 25, Para. 5 of the OECD Model and have a different version
providing, in particular, that the arbitration phase may be initiated only upon a case by
case agreement of the competent authorities and the taxpayers involved.
In some of the treaties which include it, the actual implementation of the arbitration
provision is subject to a further exchange of notes between the competent authorities713.
The exchange of notes should confirm the intention to implement the arbitration clause
and define the operating details (e.g., composition of the commission, sharing of costs,
choice of a common language, etc.)714.
Article 110, Para. 7, ITC (which provides for downwards transfer pricing adjustments
pursuant to mutual agreement procedures) supports the argument that that Italy
considers such procedures applicable to transfer pricing cases also with respect to the
(many) treaties which do not include a corresponding adjustment clause. This
construction is widely held in tax literature715 and has found an indirect confirmation by
the Italian Authorities.716
V.5.a.2 France
Older French treaties do not contain the corresponding adjustment provision of Article 9,
Para. 2 of the OECD Model717.
711
The concern that Article 9, Para. 2, of the OECD Model implied a sort of obligation to make a
corresponding adjustment would seem excessive, in the light of the common understanding of
the provision as reflected in the OECD Commentary. In particular, Para. 6 of the Commentary on
Article 9 underlines that a State is committed to make an adjustment only if it considers that the
adjustment made in the other State is “justified both in principle and as regards the amount”.
Similarly, the OECD TP Guidelines 2010, Para. 4.35 clarify that “corresponding adjustments are
not mandatory, (…). Under paragraph 2 of Article 9, a tax administration should make a
corresponding adjustment only insofar as it considers the primary adjustment to be justified both
in principle and in amount” so that “one tax administration is not forced to accept the
consequences of an arbitrary or capricious adjustment by another State”.
712
See M. PIAZZA, Guida alla fiscalità internazionale, Milano, 2004, p. 1150
713
This is the case of treaties with Canada, Ghana, Kazakhstan, USA and Uzbekistan.
714
See Circular Letter No. 21/E of June 5th 2012, Para. 4.2.6.
715
See C. GARBARINO, Transfer Price, in Digesto IV, Sezione Commerciale, XVI, Torino, 1999,
p. 26; M. PIAZZA, Guida alla fiscalità internazionale, Milano, 2004, p. 1150
716
Circular Letter June 5th 2012, No. 21/E provides instructions about the handling of mutual
agreement procedures regardless of whether conventions contain a corresponding adjustment
provision. According to the Circular Letter, (Para. 2) “the correlation between transfer pricing and
the international treaty rules on double taxation” is to be found in Article 110, Para. 7.
717
P. ESCAUT, Transfer pricing. France, Amsterdam, 2019, Para. 14.5.2. The Author points out
that a notable exception is article 9(2) of the France-Canada Tax Treaty, which is identical to the
corresponding provision of the OECD Model. See also B. GOUTHIÈRE, Les impôts dans les
affaires internationals, Levallois, 10th ed., 2014, m.no. 85723 who reminds that France made a
179
Nonetheless, official instructions specify that corresponding adjustments are intended
not only in those few cases where the treaty includes a specific provision but also
generally, as a possible outcome of a mutual agreement procedure718.
The access to the procedure is limited to cases of actual double taxation (which is a duty
to the applicant to demonstrate)719 and can be denied where the initial assessment
concerns a case of fraud720.
According to the official instructions, the French Authorities can adopt the remedial
measures unilaterally, before starting the international stage of the procedure721. The
measure adopted in the context of the MAP is implemented by France, notwithstanding
any time limit provided by its legislation722.
V.5.a.3 UK
The UK has a network of more than 100 tax treaties.
The circumstance that UK transfer pricing legislation makes reference to the OECD
Model and Guidelines makes of little practical relevance the issue whether Article 9,
Para. 1 be considered as restrictive or illustrative.
A minority of UK treaties include provisions corresponding to Article 9, Para. 2 of the
OECD Model. The UK Authorities take the view that in respect of treaties which do not
include such provisions, double taxation may nonetheless be eliminated by other means
within the framework of the Mutual Agreement Procedure723.
The relationship between the tax treaty MAP clauses and the domestic tax system is
addressed by two specific provisions, sections 124 (entitled “Giving effect to solutions to
cases and mutual agreements resolving cases”) and 125 (“Effect of, and deadline for,
presenting a case”) of the TIOPA 2010.
Where a solution or mutual agreement is reached under the terms of a UK tax treaty, it
will be given effect “notwithstanding anything in any enactment” in accordance with
section 124, Para. 2 of the TIOPA 2010724. According to Para. 4, the claim for relief
reservation with respect to the adoption of Article 9, Para. 2, of the OECD Model, which was
withdrawn in 2005, so that more recent French treaties include the clause.
718
See BOI-INT-DG-20-40-20120912, Para. 170 : « Il peut être également la conséquence d'un
accord entre les autorités compétentes dans le cadre d'une procédure amiable ouverte sur le
fondement de l'article 25 du modèle de convention fiscale de l'OCDE ».
719
BOI-INT-DG-20-30-10-20140218, Para. 140 : «Lorsqu’un contribuable faisant état d’une
double imposition pour revendiquer le bénéfice d’une procédure amiable, n’apporte pas les
éléments de preuve de la réalité de la double imposition, l’administration peut rejeter sa demande.
Il s’agit, en effet, d’éviter de créer des cas de double exonération».
720
BOI-INT-DG-20-30-10-20140218, Para 150. The denial of access to the MAP in case of fraud
has been validated by CE, 12 March 2010, No. 307235,
721
BOI-INT-DG-20-30-10-20140218, Para. 410. « Si la demande du contribuable apparaît fondée
et qu’elle doit se traduire par un ajustement corrélatif ou une réduction des bases imposables en
France, l’autorité compétente française peut prendre à ce stade une décision unilatérale
d’admission de la demande du contribuable. La procédure est alors close”.
722
BOI-INT-DG-20-30-10-20140218, Para. 570.
723
HMRC, International Manual, INTM421005.
724
See INTM423100 - Transfer Pricing: methodologies: Mutual Agreement Procedure: SP1/11:
methods of giving relief
180
consequential to the solution or mutual agreements must be made within twelve months
following the notification of the solution or mutual agreement. Relief will be granted even
where the normal time limits may have expired and may be granted either by deduction
against UK profits or by tax credit725.
The UK competent authority may consider that the taxation of relevant transactions
proposed or applied by a tax treaty partner is in accordance with the treaty and may grant
relief on a unilateral basis726.
Otherwise, where a mutual agreement is reached under the terms of a UK tax treaty, it
will be given effect notwithstanding any different domestic provision727.
725
Section 124, Para. 3 reads that an adjustment may be made “by way of discharge or repayment
of tax, the allowance of credit against tax payable in the United Kingdom, the making of an
assessment or otherwise”. On the form of adjustment, see also INTM423100.
726
HMRC, Statement of Practice 1 (2011), Para 15
727
The prominence of the mutual agreement is provided by TIOPA 2010, section 124(2), See
HMRC, Statement of Practice 1 (2011), Para 49
181
V.6 Treaty remedies and transfer pricing
This paragraph aims at evaluating the applicability of treaty remedies to economic double
taxation which may result from a transfer pricing adjustment made with respect to one of
the parties of a cross-border transaction.
V.6.a The OECD Model and the limitations of domestic transfer pricing rules
The adjustment of related party transactions, based on domestic transfer pricing
legislations (as those in force in Italy, France and the UK) undisputedly falls within the
scope of application of Article 9 of the OECD Model.
The provision concerns the conditions “made or imposed between the two enterprises in
their commercial or financial relations”. The Commentary on Article 9 does not say much
about its material scope of application, some more indications can be found in the
Transfer Pricing Guidelines, where the term “transaction” is used with wide reference to
the supply of goods (including intangibles), to the provision of service, to cost
contributions agreements and to certain profiles of business restructuring728. Also, the
Transfer Pricing Guidelines show awareness (Para. 1.67) that “associated enterprises
are able to make a much greater variety of contracts and arrangements than can
independent enterprises (…)” and even support the idea that, in exceptional cases, the
tax administration might disregard the actual transactions or substitute other transactions
for them, giving rise to the so-called “transactional adjustments”)729.
Article 9 does not contain a more detailed definition of arm’s length conditions or the
related methodologies; the OECD Commentary on Article 9 makes reference to the
OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
(in brief, the “OECD Guidelines”) for its correct assessment.730
The role which Article 9, Para. 1 plays in respect of economic double taxation seems
twofold.
On the one side, through enabling profit adjustments by one of the contracting states,
the provision may be considered as one of the factors which generate economic double
taxation. This is the direct effect of the re-writing of transactions, and is explicitly
728
It is generally agreed that those provided by the OECD Guidelines are just examples and that
the existence, form and contents of a controlled transaction under Article 9, Para. 1, is to be
determined on the basis of domestic law. See B. J. ARNOLD, Fearful Symmetry: The Attribution
of Profits “in Each Contracting State”, in Bulletin, 2007, p. 334 and, accordingly, J.
WITTENDORFF, Transfer Pricing and the Arm's Length Principle in International Tax Law, Alphen
aan den Rijn, 2010, p. 222; G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On
Double Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 57. This approach
does not eliminate the risk of economic double taxation caused by conflicts of qualification, see
J. WITTENDORFF, The Object of Article 9(1) of the OECD Model Convention: Commercial or
Financial Relations, in International Transfer Pricing Journal, 2010, p. 200.
729
Whether transactional adjustment consistent with Article 9 of the OECD Model is however non
undisputed. The issue is examined in the present dissertation with respect to thin capitalisation
(see Para. V.7.a.1 below).
730
According to the OECD Commentary on Article 9, m.no. 1, the Transfer Pricing Guidelines
“represents internationally agreed principles and provides guidelines for the application of the
arm’s length principle of which the Article is the authoritative statement”. The sentence was
introduced with the 1992 update.
182
recognised at Point 5 of the Commentary on Article 9: “The re-writing of transactions
between associated enterprises (…) may give rise to economic double taxation”.
The language of the provision also indicates the direction of the possible profit
adjustment: “may be included” implies that the adjustment is necessarily upwards, “taxed
accordingly” indicates that the effect of the profit adjustment is the taxation of the
(additional) profit by the State which operates the adjustment.
On the other side, and where it is admitted that Article 9, Para. 1 has a restrictive effect731,
it prevents contracting States from applying national rules which deviate from the arm’s
length principle. As the Commentary (sub Article 9, Point 2) has it, “no re-writing of the
accounts of associated enterprises is authorised if the transactions between such
enterprises have taken place on normal open market commercial terms (on an arm’s
length basis)”.
The arm’s length principle, in a treaty context, thus becomes a common criterion for
allocating the tax base in each jurisdiction and, to the extent that it goes along with a
mechanism for the resolution of possible disputes on the application of such criterion in
individual cases, may also contribute to prevent overlaps of tax jurisdictions otherwise
attributable to the adoption of diverging criteria by the States concerned. In this
perspective (i.e., as a limitation to State jurisdiction to tax and as a common criterion),
the arm’s length principle can contribute to the prevention of double taxation732.
This argument finds support in the history of the provision733.
A significant portrait of the importance of the arm’s length principle as an allocation
criterion can be found in the 1930 Carroll Report, who described the earlier situation in
the following terms: “As there exists little law and less jurisprudence concerning
allocation, tax administrations are inclined to broaden the basis of assessment of foreign
and national enterprises to the largest extent possible, and thereby encroach upon the
jurisdiction claimed as well by other States, which results in the accumulation of high
rates upon the same profits”734.
731
See Para. V.2.b above for a summary of the discussion as to whether Article 9, Para. 1 has
restrictive or merely illustrative effects.
732
See, accordingly, G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double
Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. m.no. 7; R. DWARKASING,
Associated enterprises, Nijmegen, 2011, p. 23, who also notes how the international consensus
on such principle has avoided “unilateral responses to multilateral problems”; J. SCHWARZ,
Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018, p. 297; J. WITTENDORFF,
Transfer Pricing and the Arm's Length Principle in International Tax Law, Alphen Aan der Rijn,
2010, p. 146; E. BAISTROCCHI, I. ROXAN, Resolving Transfer Pricing Disputes, Cambridge,
2012, p. 34; V. SOLILOVÁ, M. STEINDL, Tax Treaty Policy on Article 9 of the OECD Model
Scrutinized, in Bulletin, 2013, p. 130.
733
Alphen aan den Rijn, 2010, p. 147
734
Carroll Report, 1930, p. 12. Carroll also noted (p. 11) that “Cases arise where the taxpayer has
tried meticulously to allot profits in a fair way between the various establishments, but the
authorities of the several countries are of a different opinion as to their share of the taxable
income. It may happen that one country to which the taxpayer has thrown a large share of his
profits will assess tax thereon, and then another country in which little profit is shown will increase
the assessment and thereby subject a part of the profit to double taxation”.
183
Hints in this direction also come from the examination the OECD Commentary and
Committee work reports.
A 1967 working paper on Article 9 reads that the provision is suitable to “minimize
disputes, limit the burden on the competent authorities, promote uniform treatment of
taxpayers, establish equitable allocation of tax revenues between Member countries and
minimize cases of double taxation (...)"735.
The effectiveness of the provision in preventing or otherwise minimising economic
double taxation is based on the replacement of possible national criteria with a common
treaty criterion, namely the “arm’s length basis”. In actual terms, however, the mentioned
effectiveness ultimately depends on the convergence on what can be considered, on a
case by case basis, the “normal open market commercial terms”.
This profile has gained importance progressively along the years. The turning point was
the adoption, in 1979, of the OECD Transfer Pricing Guidelines and the formal
acknowledgement, in the 1992 revision of the OECD Commentary on Article 9, that such
Guidelines represent “internationally agreed principles”.
The increased detail on the concept of arm’s length - through a process which has been
defined as “international fiscal harmonisation”736 – can then be said to reduce the room
for divergence and thus enhance the role of Article 9, Para. 1 of preventing or minimizing
economic double taxation.
V.6.b The OECD Model and the corresponding adjustments
If an adjustment is in conflict with the arm’s length principle, it is prevented by Article 9,

Para. 1 of the treaty (according to the interpretation illustrated at Para V.2.b above), if it
is consistent with such principle, it triggers the right to a corresponding adjustment737.
The Commentary explains that “The paragraph does not specify the method by which an
adjustment is to be made. OECD member countries use different methods to provide
relief in these circumstances”
Many treaties however do not include the corresponding adjustments provision. This may
be an obstacle also with respect to the mutual agreement procedure, if one only
considers that the treaty rule on which the recourse to the specific case procedure may
be based is Article 9, Para 2738.
735
FC WP (67) 2
736
J. CALDERÓN, The OECD Transfer Pricing Guidelines as a source of tax law: is globalization
reaching the tax law?, in Intertax, Vol. 35 (2007), No. 1, p. 5. On the arm’s length standard as a
possible general principle of international law, see C. GARBARINO, La tassazione del reddito
transnazionale, Padova, 1990, p. 43.
737
Alphen aan den Rijn, 2010, p. 149
738
The connection between Article 9, Para 2 and Article 25 of the OECD Model is underlined by
the wording of the first provision, according to which the competent authorities “may consult each
other” in respect of corresponding adjustments. The OECD Transfer Pricing Guidelines, at Para
4.33 consider that this language “demonstrates that the mutual agreement procedure of Article
25 may be used to consider corresponding adjustment requests”. Neither the Commentary nor
the quoted Guidelines clarify which precise procedure is pointed towards by Article 9, Para. 2.
According to R. ISMER, Article 25, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double Taxation
184
The position taken by the OECD Commentary (at point 11) is that where the bilateral
convention does not contain a corresponding adjustment rule, “the mere fact that
Contracting States inserted in the convention the text of Article 9, as limited to the text of
paragraph 1 (…) indicates that the intention was to have economic double taxation
covered by the Convention”. 739
Article 9, Para 1, can thus constitute the basis for making recourse to the specific case
procedure where a transfer pricing adjustment gives rise to economic double taxation740.
The rationale given by the OECD Commentary, that such double taxation “is not in
accordance with — at least — the spirit of the convention” may be misleading, since it
makes reference to the “spirit” rather than to a specific provision of the convention. More
convincing is the argument, directly connected to the text of Article 9, Para. 1, that the
price should be the same for both parties to the transaction and that an adjustment which
breached this price identity requirement would not be in accordance with the OECD
Model741.
V.7 Treaty remedies, thin capitalization and interest limitation

This paragraph aims at evaluating the applicability of treaty remedies to the situation of
cross-border economic double taxation which may derive from a limitation of interest
deduction in the country of the borrower under local thin capitalization or interest
limitation rules and where non-deducted interest is taxable in the hands of the lender in
its Country of residence.
Such kind of double taxation is, in facts, not unlikely. A study conducted in 2012 and
referred to all OECD member States took into consideration the 870 possible country
combinations of shareholder debt financing and reached the conclusion that double
taxation resulting from the of the lack of recognition by the State of the lender of the
characterisation made by the State of the borrower concerned 63% of those
combinations742.
V.7.a The OECD Model

The OECD Model Tax Convention is focused on the allocation of taxing rights, rather
than on national rules concerning the computation of the corporate income tax base,
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 17, the relevant provision is Article 25,
Para 3, although the specific case procedure remains possible.
739
The OECD Commentary position is reproduced in the OECD Transfer Pricing Guidelines, at
Para. 4.33. See also V. SOLILOVA, M. STEINDL, Tax Treaty Policy on Article 9 of the OECD
Model Scrutinized, Bulletin, 2013. p.132; H. M.M. BIERLAAGH, The CARICOM Income Tax
Agreement for the Avoidance of (Double) Taxation?, in Bulletin, 2000, p. 102.
740
The OECD Commentary, at Point 12, goes further by reminding that States would “generally
regard a taxpayer initiated mutual agreement procedure based upon economic double taxation
contrary to the terms of Article 9 as encompassing issues of whether a corresponding adjustment
should have been provided, even in the absence of a provision similar to paragraph 2 of Article
9”. Reference to Article 9, Para 1, of the OECD Model as a basis for the mutual agreement
procedure can be also found in the OECD Transfer Pricing Guidelines at Para 4.30.
741
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 29
742
R. ZIELKE, Shareholder Debt Financing and Double Taxation in the OECD: An Empirical
Survey with Recommendations for the Further Development of the OECD Model and International
Tax Planning, in Intertax, No.2, 2010, p. 62 et seq.
185
including those controlling the deduction of interest743. Tax treaties thus do not generally
concern the way a country taxes its residents744: as highlighted by the OECD Thin
Capitalisation Report, “the Model does not specifically require that any payment defined
as interest must ipso facto be deducted in arriving at the taxable profits”745; it is indeed a
widely shared opinion that national rules on interest deduction are “as a principle not
limited by tax treaty provisions”.746
This paragraph is aimed at examining whether treaty provisions may, in some
circumstances, either restrict the effects of specific national interest deduction limitation
rules of the State of the borrower or impose remedies against double taxation of interest
in the State of the lender.
V.7.a.1 The issue of transactional adjustments and the application of Article 9 to thin
capitalisation rules
There is no doubt that Article 9 applies to interest, as far as the assessment of the arm’s
length character of the interest rates is concerned. Indeed, the interest rate is one of the
“conditions” to which Article 9, Para. 1 refers to747.
The question, when it comes to thin capitalisation rules, is whether Article 9 may also
apply with respect to the evaluation of arm’s length nature of the underlying loan itself.
The OECD Commentary, since the 1992 revision, has expressed the position that thin
capitalisation rules are not necessarily in breach of Article 9, since this latter “is relevant
not only in determining whether the rate of interest provided for in a loan contract is an
arm’s length rate, but also whether a prima facie loan can be regarded as a loan”748.
743
The distributive rules, in particular, “lay down rules attributing the right to tax in respect of the
various types of income or capital without dealing, as a rule, with the determination of taxable
income (…).”. OECD, Commentary on Articles 23A and 23B, Para. 38. The distinction between
allocation rules and computation rules is particularly sharp in O. MARRES, Interest Deduction
Limitations: When To Apply Articles 9 and 24(4) of the OECD Model, in European Taxation,
January 2016, p. 2 et seq..
744
K. ASIMAKOPOULOS, Fixed Ratio Thin Capitalization Rules in Conflict with the Arm’ s Length
Principle and Relative Issues of Deductibility, in International Transfer Pricing Journal, December
2012, p. 408.
745
OECD, Thin Capitalisation, Paris, 1986, para. 54
746
P. HINNY, New tendencies in the tax treatment of cross-border interest of corporations.
General report, in Cahier de droit fiscal international, Amersfoort, 2008, p. 21.
747
See, ex multis, G. KOFLER, Article 9, in (E. Reiner, A. Rust eds.) Klaus Vogel On Double
Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 103; B. J. ARNOLD,
Deductibility of interest and other financing charges in computing income. General Report, in
Cahier de droit fiscal international, 1994, p. 491. The application of Article 9 to interest, albeit
widely accepted, encounters methodological difficulties which have not found shared solution, as
indicated by the circumstance that the chapter dedicated to loans in the 1979 edition of the OECD
Guidelines on “Transfer pricing and multinational enterprises” has been deleted in the later
versions.
748
At Point 3 of the Commentary on Article 9. See also Para. 1.65 of the Transfer Pricing
Guidelines, which reads: “An example of this circumstance would be an investment in an
associated enterprise in the form of interest-bearing debt when, at arm’s length, having regard to
the economic circumstances of the borrowing company, the investment would not be expected to
be structured in this way. In this case it might be appropriate for a tax administration to
characterise the investment in accordance with its economic substance with the result that the
loan may be treated as a subscription of capital”.
186
There is currently no reservation to the above position of the OECD Commentary749,
which has in this way recognised the conclusions of the 1986 Thin Capitalisation
Report750.
The OECD interpretation has found a wide backing along the years. The Resolution
adopted on the conclusion of the 50th IFA Congress in Geneva reads that “when applying
Article 9 of the OECD Model Tax Convention for the purposes of determining whether
an enterprise is thinly capitalised, the relevant standard is whether an unrelated lender
would make a loan to the taxpayer on the terms proposed (…)”751
The OECD position is shared by authoritative scholars. De Broe752 considers that the
choice between equity or debt is included in the term “conditions made or imposed in
their financial relations” and thus falls within the scope of Article 9, Para. 1. Also Fross
supports the OECD view753 and Marres754 submits that interest deduction restrictions are
within the scope of Article 9, if parties dealing at arm’ s length would not have concluded
the transactions.
Other authors endorse – also implicitly - the OECD interpretation, when examining the
relationship between Article 9 and the thin capitalisation provisions adopted in the
different Countries755.
749
A German reservation, expressing disagreement with the use of the term “arm’s length profits”
in the paragraph of the Commentary related to thin capitalisation, was made at the time of the
1992 revision but was deleted in 2010.
750
OECD, Thin Capitalisation. Issues in international taxation No. 2, 1987. The Report was
adopted by the Council of the OECD on 26 November 1986, and its paragraphs 48, 50 and 84
were added to the OECD Commentary by the report entitled “The Revision of the Model
Convention”, adopted by the OECD Council on 23 July 1992. The 1986 Thin Cap Report reads
at Para. 48 that it was agreed that Article 9 is “relevant not only in determining whether the rate
of the interest concerned is an arm’s length rate but also in determining whether a prima facie
loan can be regarded as a loan or should be regarded as some other kind of payment (depending
on whether or to what extent the funds would have been contributed as a loan in the arm’s length
situation)”. A summary of the rationale behind this conclusion is at Para 49. Also inspirational to
the present OECD Commentary is the conclusion (at Para. 50) on how Article 9 can restrict
domestic rules: “The Committee generally agreed that, in principle, the application of rules
designed to deal with thin capitalisation ought not normally to increase the taxable profits of the
relevant domestic enterprise to any amount greater than the arm’s length profit (…)”
751
IFA, Yearbook 1996, p. 72.
752
L. DE BROE, International Tax Planning and Prevention of Abuse, Amsterdam, 2007, m.nos.
258 et seq.
753
A. FROSS, Earnings Stripping and Thin Cap Rules: Maintaining an Arm’ s Length Distance, in
European Taxation, 2013, p. 5010.
754
O. MARRES, Interest Deduction Limitations: When To Apply Articles 9 and 24(4) of the OECD
Model, in European Taxation, 2016, p. 2 et seq.
755
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 103; A. MORAES DO RÊGO
MONTEIRO, The Brazilian Thin Capitalization Rules and Tax Treaties: A Critical Approach, in
Bulletin, 2015, par 3.2.; C. CAUMONT CAIMI, Treaty aspects of thin capitalisation, in Diritto e
pratica tributaria internazionale, 2003, No. 2, p. 417.
187
However, the OECD interpretation is not undisputed in the literature. A survey, made a
few years earlier in the 1996 IFA Report756, indicated a wider variety of national
positions757.
Some Authors argue that Article 9 only applies to profit shifting caused by the pricing of
a transaction (i.e., interest rate, in the case of a loan) and not to its qualification.
Wittendorff bases his submission on a detailed analysis of the origin of the provision, on
its wording and its relationship with other provisions of the OECD Model758, and suggests
that the interpretation advanced by the OECD may rather have been influenced by tax
policy considerations and precisely by the aim of avoiding the conflict of domestic anti
avoidance rules with Article 24, Para 4, of the OECD Model759. Others have also criticised
the OECD interpretation760.
The OECD position was also challenged by the decision of the French Conseil d’État in
the Andritz case. The French Court has ruled on that occasion that treaties entered into
before 1992 (i.e., before that the described amendments to the Commentary) authorise
the contracting State to evaluate the arm’s length character of the remuneration of a
related party loan, but not the choice between debt and equity funding761.
A difference between treaties based on the execution date (before or after the release
of the 1992 Commentary) was also made by the Supreme Court of the Netherlands,
according to which later treaties do not inhibit domestic rules which provide for an
arm’s length based limitation to debt. As to earlier treaties, the conclusion was opposite
than the one reached by the French judges in the Andriz case: according to the Hoge
Raad, lack of reference to the capital structure in these treaties (or in the OECD
Commentary at the time of their execution) implies that the national rules are
unaffected by the arm’s length provisions of the treaty762.
756
D. PILTZ, International aspects of thin capitalization. General Report, in Cahier de droit fiscal
international, Deventer, 1996, p. 129 et seq.
757
The national reporters of most countries considered that their respective thin capitalisation
rules were consistent with the arm’s length principle. In a few countries (Belgium, France) treaty
provisions were considered to have a blocking effect; in Italy and the Netherlands, it was
questioned whether article 9, para. 1 of the OECD Model could limit thin capitalization rules at all.
At that time there was yet no known case where treaty provisions corresponding to Article 9 of
the OECD Model were considered prevailing over national thin capitalisation rules
758
March 2009, p. 115 et seq. and Transfer Pricing and the Arm's Length Principle in International
Tax Law, Alphen aan den Rijn, 2010, p. 161 et seq.
759
On this possible explanation of the OECD approach to thin capitalisation, see also O.
MARRES, Interest Deduction Limitations: When To Apply Articles 9 and 24(4) of the OECD Model,
in European Taxation, January 2016, p. 5.
760
G.M.M MICHIELSE, Treaty aspects of thin capitalization, in Bulletin, December 1997, p. 565;
F.C. DE HOSSON, G.M.M MICHIELSE, Treaty aspects of the "thin capitalization" issue: a review
of the OECD Report, in Intertax, November 1989, p. 476; R.A. SOMMERHALDER, Approaches
to thin capitalization, in European taxation, March 1996, p. 82.
761
CE 233894 of December 30th 2013. The decision refers to the deduction, by a French
company, of interest arising from a loan made by its Austrian parent company, in the light of the
treaty between French and Austria of October 8th 1959.
762
Hoge Raad (“HR”), Case No. 10/05268, on which see A. FROSS, Earnings Stripping and Thin
Cap Rules: Maintaining an Arm’ s Length Distance, in European Taxation, October 2013, p. 507.
The case is also commented by O. MARRES, Interest Deduction Limitations: When To Apply
Articles 9 and 24(4) of the OECD Model, in European Taxation, January 2016, p. 2 et seq. along
188
Other Courts have upheld the application of the local thin capitalisation rules in front of
treaty arm’s length rules763 or within the limits of such rules764.
In my view, the first interpretation (according to which Article 9, Para. 1 applies with
respect to the evaluation of arm’s length nature of the underlying loan itself) is
preferable. The language of the provision, and in particular the reference to “conditions
made or imposed”, should not be limited to the declared aim of the parties, but should
look at the substance of the relationship established. Otherwise, the function performed
by the rule would be subject to an unjustified limitation.
V.7.a.2 The application of Article 9 to the different sorts of interest limitation rules
The approach according to which thin capitalisation rules are never consistent with the
treaty-based arm’s length provision (in all cases, as some Authors propose, or only in
respect of treaties signed before 1992, as ruled in the Andritz case) would lead to the
conclusion that economic double taxation of interest would be prevented in a (cross-
border) treaty context thanks to the inhibition of the effects of any thin capitalisation rule
If, on the contrary, the OECD interpretation is followed (as other Authors and case law
suggest) domestic thin capitalisation rules should be tested against the arm’s length
principle embedded in treaty provisions equivalent to Article 9 of the OECD Model.
Some categorisation of thin capitalisation rules is necessary to this end. Indeed, the
comparative analysis of Para III.3 and some wider surveys available765 point to a certain
variety of solutions. For the purposes of the present dissertation, these rules may be
categorised on the basis of two factors: the reference to the arm’s length principle (meant
as the comparison with independent party transactions) and the difference in treatment
between cross-border and domestic transactions, as summarised in the following table.
Arm’s length based Non-arm’s length based
Applicable to cross- There is currently no rule of this kind This is the case of e.g. the fixed ratio
border transactions in Italy, France or the UK rules (with no arm’s length test).
only There is currently no rule of this kind
in Italy, France or the UK
Applicable to both This is the case of UK thin cap rules This is the case of interest limitation
cross-border and introduced in 2004 rules in force in Italy since 2008 and
domestic transactions in the UK since 2017
with a consistent Hoge Raad decision of the following year, referred to the 1999 treaty with
Denmark (HR No. 29th November 2013, No. 1364).
763
Specialty Manufacturing Ltd. v. Her Majesty the Queen, 25 August 1997 confirmed by the
Canadian Supreme Court of Appeal in Specialty Manufacturing Limited v. Her Majesty the Queen,
18 May 1999.
764
Reference is made to the Spanish Supreme Court decision delivered on March 17th 2011,
Case No. 5871/2006, examined by A. FROSS, Earnings Stripping and Thin Cap Rules:
Maintaining an Arm’ s Length Distance, in European Taxation, October 2013, p. 507.
765
Reference is made, e.g., to the survey made in 1996 by the International Fiscal Association
and summarised in F. PILTZ, International aspects of thin capitalization. General Report, in
Cahiers de droit fiscal international, Deventer, 1996 or the one published in 2005 by European
Taxation in 2005, introduced by B. GOUTHIÈRE, A Comparative Study of the Thin Capitalization
Rules in the Member States of the European Union and Certain Other States, in European
Taxation, 2005, p. 367.
189
A conflict with Article 9, Para. 1 would arise only with those domestic rules which are not
arm’s length based, such as those based on a fixed ratio (with no arm’s length test) 766.
More precisely, Article 9, Para. 1 limits the effect of the interest deduction rule of the
country of the borrower within the borders of the arm’s length principle. The Thin
Capitalisation Report specifies that Article 9 does not apply only to the rate of interest
but also to the underlying loan and that the effect of Article 9 is to ensure that the
application of national thin capitalisation rules leads to attribution to the relevant
enterprise to “no more than the arm’s length profit”767.
Where, conversely, the thin capitalisation rule was arm’s length based, it would not be in
breach of Article 9.
In such event, the domestic thin capitalisation rule would also be consistent with the cost-
deduction non-discrimination provision of Article 24, Para. 4, under the exception thereby
provided in respect of cases where the provisions of paragraph 1 of Article 9, paragraph
6 of Article 11, or (…), apply”. This point is stated expressly by the OECD Commentary
with reference to thin capitalisation rules, which would not be considered discriminatory
to the extent that they comply with Article 9, Para. 1768.
If the national thin capitalisation rule is consistent with Article 9 and thus finds application,
the avoidance of economic double taxation generated can be achieved only through
corresponding adjustments on the head of the lender.
What is essential, for the purpose of avoiding economic double taxation is that the States
involved have the same approach as to the application of the treaty provision
corresponding to Article 9 of the OECD Model to their respective thin capitalisation rules.
Where such treaty provisions were applicable, a further issue arises, which is the
determination, in individual cases, of the arm’s length amount of debt. This issue also
concerns the (“ordinary”) application of the arm’s length principle to the price of a
transaction but becomes of extreme complexity in this case.
766
Conventions, Alphen Aan der Rijn, 4th ed., 2015, at m.no. 103; K. ASIMAKOPOULOS, Fixed
Ratio Thin Capitalization Rules in Conflict with the Arm’ s Length Principle and Relative Issues of
Deductibility, in International Transfer Pricing Journal, December 2012, p. 409; A. L. MORAES,
The Brazilian Thin Capitalization Rules and Tax Treaties: A Critical Approach, in Bulletin, 2015,
No. 11, Para. 3.2; O. MARRES, Interest Deduction Limitations: When To Apply Articles 9 and
24(4) of the OECD Model, in European Taxation, January 2016, p. 4.
767
The mentioned effect of Article 9 is referred to in the Commentary two times. First, it is clarified
that “the Article does not prevent the application of national rules on thin capitalisation insofar as
their effect is to assimilate the profits of the borrower to an amount corresponding to the profits
which would have accrued in an arm’s length situation”; second it is affirmed that “the application
of rules designed to deal with thin capitalisation should normally not have the effect of increasing
the taxable profits of the relevant domestic enterprise to more than the arm’s length profit, and
that this principle should be followed in applying existing tax treaties”.
768
Commentary, Point 74 reads that “Paragraph 4 does not prohibit the country of the borrower
from applying its domestic rules on thin capitalisation insofar as these are compatible with
paragraph 1 of Article 9 or paragraph 6 of Article 11. However, if such treatment results from rules
which are not compatible with the said Articles and which only apply to non-resident creditors (to
the exclusion of resident creditors), then such treatment is prohibited by paragraph 4”.
190
The Transfer Pricing Report recognised this complexity769, as well as the shortcoming on
this matter of the OECD Transfer Pricing Guidelines, but provided very little additional
contributions. As a result, the application of the arm’s length rule to company
capitalisation is not supported by a set of common criteria or methods.
The issue of double taxation would hardly find a solution in respect of the plain interest
limitation rules, especially where those rules were applicable (as they generally are) to
both related and unrelated parties and to both domestic and cross border transactions.
It has been argued that these latter rules concern the determination of tax base, a subject
matter which is beyond the scope of tax treaties770. Others also have reached the same
conclusion, after having considered that interest limitation rules (at least those which
apply indistinctively to related and unrelated parties) are tax base computation rules, that
– differently from profit allocation rules – are outside the scope of application of Article 9
of the OECD Model771.
This issue presupposes that a distinction be drawn between the allocation rule of Art 9,
Para 1. (i.e.: the arm’s length principle) and its scope of application (i.e.: the definition of
associated enterprises)772.
The OECD Model is silent as to the right of contracting States to e.g., make pricing
adjustments outside the scope of Article 9, Para 1., and scholars are divided along two
different interpretations.
According to one interpretation, adjustments that are not authorised by Article 9, Para 1,
are prohibited773.
According to a different interpretation, a treaty cannot limit the power of the contracting
States to make adjustments outside the scope of Article 9, Para. 1774
769
See the Transfer Pricing Report at Para 77: “There is a considerable amount of evidence about
the forms of financing which are in fact used in particular cases in the open market. But it may
sometimes be very difficult to discern what adjustment should be made in any particular case of
arrangements between associated enterprises in order to bring those arrangements into line for
tax purposes with the arrangements which would be made by independent parties in the relevant
circumstances”.
770
A. FROSS, Earnings Stripping and Thin Cap Rules: Maintaining an Arm’ s Length Distance, in
European Taxation, October 2013, p. 514.
771
A. LINN, Tax treaties and tax avoidance: application of anti-avoidance provisions. National
Report. Germany, in Cahiers de droit fiscal international, The Hague, 2010, p. 345. More recently,
O. MARRES, Interest Deduction Limitations: When To Apply Articles 9 and 24(4) of the OECD
Model, in European Taxation, January 2016, p. 3 substantiates that profit adjustments based on
interest barrier rule is not in violation of article 9, since the adjustment “clearly is not aimed at
making the profits of the enterprise conform to arm’ s length profits (which is evidenced by the
fact that the measure also applies to transactions between third parties), and cannot, therefore,
be considered a transfer pricing adjustment”.
772
Alphen Aan der Rijn, 2010, p. 195
773
A survey of the doctrinal positions in this sense can be found in G. KOFLER, Article 9, in (E.
Reiner, A. Rust eds.) Klaus Vogel On Double Taxation Conventions, Alphen Aan der Rijn, 4th ed.,
2015, at m.no. 16.
774
Alphen Aan der Rijn, 2010, p. 199 who remarks that the rule of Article 9, Para. 1 is to be interpreted
strictly. See also other authors in the same direction in G. KOFLER, Article 9, in (E. Reiner, A.
191
The history of the provision indicate that the aim of Article 9, Para. 1, is to provide a
criterion for the allocation of profits between associated enterprises. In the light of the
above, it may be argued that – even if the provision, due to the mentioned assessment
perspective, refers to one category of profit adjustments (i.e.: adjustments of related
party transactions which deviate from arm’s length conditions) - it would not be consistent
with the general criteria of interpretation of treaties, to argue that contracting states have
intended to surrender their powers to adjust profits in all other cases. It may be submitted,
in other words, that contracting states retain their autonomous prerogatives to define the
taxable base of business profits, unless restricted by a specific treaty rule.
V.7.a.3 Thin capitalisation rules, re-characterisation of the transaction and secondary

adjustments
Some further remarks can be made with reference to one peculiarity of thin capitalisation
rules (and transactional adjustment rules more in general) in respect of transfer pricing
rules.
Indeed, in the ordinary application of the arm’s length principle to the price of a related
party transaction, the result is (where a difference exists between the price made and
the arm’s length price) an adjustment of the price made. This means that for one of the
parties, the adjustment implies an increase of the taxable base (either a reduction of the
deductible portion of a cost or an increase of the taxable revenue beyond the actual
proceeds, as the case may be). For the other party to the adjusted transaction, a
corresponding adjustment would imply a corresponding decrease of the taxable revenue
(either respectively a reduction of the taxable portion of the revenue or the increase of a
cost beyond the actual expenditure).
In some jurisdictions (and in France, in particular, among the three Countries examined
in the comparative analysis in Chapter 3) these differences are the object of secondary
adjustments and taxed accordingly.
In the case of a (transactional) adjustment of amount of debt, there is an adjustment, on
the head of the borrower, of the deductible interest and of the taxable base. But the
underlying assumption is that also a portion of the debt is not considered to be a debt.
The difference between the actual interest cost and the arm’s length interest cost thus
goes along with the difference between the actual amount of the facility and the lower
amount of arm’s length debt.
An example of this overlap between qualification and evaluation rules can be find in the
OECD Commentary where it illustrates that Article 9, Para 1, is relevant in determining
“whether a prima facie loan can be regarded as a loan or should be regarded as some
other kind of payment, in particular a contribution to equity capital”775. This latter amount,
Rust eds.) Klaus Vogel On Double Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2015, at
m.no. 16.
775
Such requalification, for treaty purposes, may appear inconsistent in the perspective of those
countries which simply provide for limitations to the deduction of interest, without re-qualification
of excess debt or excess interest. An example of this approach is in the Observation of the United
States to the OECD Commentary on Article 9 (see Para. 15): “The United States observes that
there may be reasonable ways to address cases of thin capitalisation other than changing the
character of the financial instrument from debt to equity and the character of the payment from
interest to a dividend. For instance, in appropriate cases, the character of the instrument (as debt)
and the character of the payment (as interest) may be unchanged, but the taxing State may defer
the deduction for interest paid that otherwise would be allowed in computing the borrower’s net
income”
192
being capital provided in excess of the arm’s length loan by a related party can be
qualified as equity, and there may be a conceptual overlap between the secondary
adjustment (requalification of interest into dividend) and the remuneration of the equity
which results from the (transactional) requalification of the loan.
This coincidence may lead to unsatisfactory solution, when economic double taxation is
concerned and this is especially776 true in the case of thin capitalisation.
The OECD Commentary (sub Article 25, at No. 52) envisages, in thin capitalisation
cases, the recourse to the interpretative provision of Article 25, Para. 3, first sentence,
suggesting that “the competent authorities can (…) determine whether, and if so under
what conditions, interest may be treated as dividends under thin capitalisation rules in
the country of the borrower and give rise to relief for double taxation in the country of
residence of the lender in the same way as for dividends (for example relief under a
parent/subsidiary regime when provision for such relief is made in the relevant bilateral
convention)”777.
Reference to the dividend relief can also be found in mentioned Resolution of the 1996
IFA Congress, which considers that the state of the recipient should be obliged to accept
the characterisation made by the source country and, as the case may be, “should apply
the rules for avoiding double taxation of dividends”778.
The point is that, if Article 9 applies to thin capitalisation cases, then the (non-deductible)
excess interest should be the object of a corresponding adjustment under Article 9, Para
2. This should lead to a corresponding exemption in the hands of the lender. The
application of the dividend treatment, which the OECD Commentary indicates, may not
necessarily lead to the same results.
In my view, this approach is excessively focused on the “secondary adjustment”, and the
elimination of economic double taxation can’t be limited to this side of the matter. Not to
mention, of course, that the Commentary makes here reference to a treaty
parent/subsidiary relief which is not included in the OECD Model779 and that, indeed, is
also not common in bilateral treaties. A correlative adjustment should rather concern the
amount of the interest than its qualification.
776
On the adverse effect of secondary adjustments on the treaty-based elimination of economic
double taxation of transfer pricing adjustments, see J. WITTENDORFF, Transfer Pricing and the
Arm's Length Principle in International Tax Law, Alphen aan den Rijn, 2010, p. 244 et seq.
777
The approach dates back to the 1986 Thin Cap Report (see Para 69) according to which Article
25, Para 3, first sentence could have been the basis for solving “the general problem of whether
interest which was treated as a dividend under thin capitalisation rules in a country (being the
country of source) could qualify for reliefs under a parent/subsidiary regime granted by the other
country (being the country of residence of the recipient) when these reliefs were provided by the
relevant bilateral treaty”.
778
See IFA, Yearbook 1996, page 72. It is worth mentioning that the Resolution recommends -
as a separate point that “the countries concerned should be obliged, upon request of the
taxpayer, to attempt to eliminate (…) in accordance with the provisions of the relevant double
taxation convention” the double taxation arising out of the application of thin capitalisation rules.
779
Point 62 of the Commentary on Article 10 nevertheless reminds that “In their bilateral
conventions States have adopted different solutions (…)” with respect to economic double
taxation of dividends”.
193
V.7.b The impact of BEPS
The economic double taxation issue posed by interest limitation rulee are likely to
increase in the future, due to the progressive adoption of national interest deduction rules
of this kind. Furthermore, this is no longer an issue which merely concerns national rules.
Indeed, BEPS Action 4 report recommends to address base erosion and profit shifting
using interest and economically equivalent payments, through the adoption of a fixed
ratio rule which limits an entity’s net interest deductions to a fixed percentage of its profit,
measured using earnings before interest, taxes, depreciation and amortisation
(EBITDA)780.
The report – albeit containing signs of awareness of the implications of the measure in
terms of double taxation781 - does not lay down any remedy.
The report merely suggests to provide the carry forward and carry back of disallowed
interest and unused interest capacity as a way to allow for fluctuations of the amounts at
stake or for timing mismatches. The solution (as well as the adoption of a group ratio)
may be effective in limiting the recurrence of situations where interest cost is permanently
disallowed, but leaves any residual double taxation at all unsolved.
The report actually depicts a possible remedy against double taxation, where it reads
that “where excessive interest is re-qualified as a dividend” the re-qualified interest
“should be granted the benefits of the Parent Subsidiary Directive”782. It is somehow
remarkable that the only hint of a solution is found outside the domain of tax treaties; at
the same time (and maybe precisely for that reason) the report does not linger in any
details on how precisely the benefits of the mentioned directive should apply.
780
See, for a more detailed description of the recommended measure, OECD, OECD/G20 Base
Erosion and Profit Shifting Project. Limiting Base Erosion Involving Interest Deductions and Other
Financial Payments. Action 4 – 2016 Update, Paris, 2017, p. 19 et seq.
781
Ibidem, Para 159 admits that “A permanent disallowance of interest expense may also result
in double taxation, if the lender is taxed on the corresponding interest income”.
782
Ibidem, Para. 212.
194
V.8 Treaty remedies and hybrid financial instruments
V.8.a Introduction
The denial of interest deduction the State of the borrower, upon the qualification of a
hybrid financial instrument as equity on the basis of its features (other than its amount or
the interest rate) may generate economic double taxation if the State of the lender taxes
the full amount of the remuneration and does not correspondingly recognise the equity
qualification of the State of the borrower783.
The comparative analysis, carried out in Paras. III.4 and IV.5 above, has highlighted that
such conflicts of qualifications concern most cross-border situations, with few exceptions
(see Para IV.7.b.3 ).
A wider analysis, focused on the qualification and treatment of hybrid financial
instruments and the related remuneration in all EU Member States, has shown sensible
discrepancies in the classification criteria, to the extent that “it is hard to find two countries
that would require the same characteristics”784.
This asymmetry may generate situations of double non-taxation785, but also of economic
double taxation, which remain largely unsolved under national rules786.
In the described situation, it should be ascertained whether a contribution to the
avoidance of the described economic double taxation may come from bilateral tax
treaties. The OECD Model is examined, along with the most frequent deviations of the
treaties of Italy, France and the UK.
V.8.b Does the OECD Model provide criteria for the distinction between dividends
and interest?
The OECD Model deals with the distinction between equity financing and debt financing
and does this primarily in providing the definitions of dividends and interest (respectively,
at articles 10, Para 3. And 11, Para. 3).
783
The recognition of the qualification of the source State does not necessarily imply that the
remuneration be exempt in the State of residence of the provider of funds. However, the
recognition implies that the remuneration is qualified as a dividend and has access to the dividend
taxation regime (in most Countries, and – subject to conditions – in Italy, France and the United
Kingdom) providing for the exemption or the granting of a credit for taxes paid by the paying
company. The present paragraph is aimed at examining whether (re) qualified interest can benefit
from the same tax regime attributable to dividends (referred to in short as exemption).
784
C. KAHLENBERG, A. KOPEC, Hybrid Mismatch Arrangements – A Myth or a Problem That
Still Exists?, in World Tax Journal, February 2016, p. 37 et seq.
785
Still Exists?, in World Tax Journal, February 2016, p. 37 et seq. As the same Authors point out,
these situations and the related hybrid mismatch arrangements are addressed by anti-avoidance
measures developed by the OECD and the European Commission, essentially through the
provision of linking rules between the two tax jurisdictions involved.
786
An accurate scheme of all possible combinations of income taxes on hybrid financial
instruments and the resulting multiple taxation can be found in E. EBERHARTINGER, M. SIX,
Taxation of Cross border Hybrid Finance. A legal Analysis. Discussion Papers SFB International
Tax Coordination, 27, Wien, 2007 (http://epub.wu.ac.at/1150/). A similar scheme has been
proposed more recently by S-E.BÄRSCH, Taxation of hybrid financial instruments and the
remuneration derived therefrom in an international and cross-border context, Berlin, 2012. p. 242.
195
V.8.b.1 Exclusion of a possible distinction based on the arm’s length principle
When examining the Commentary, it has to be borne in mind that the OECD approach
to the matter is based on a comprehensive conception of hidden equity capitalisation,
which (under the expression “thin capitalisation”) includes both hybrid financing and thin
capitalisation in a stricter sense (defined as “high proportion of debt to equity”)787.
This approach explains why other provisions of the OECD Model are potentially involved
in the distinction between interest and dividends. This is especially the case of Article 9
and – in its interaction with this latter - of Article 24.
The Commentary on Article 9 (No. 3, b) reads that “the Article is relevant (…) in
determining whether (…) a prima facie loan can be regarded as a loan or should be
regarded as some other kind of payment, in particular a contribution to equity capital”.
The language is neutral in respect of the two categories (hybrid financing and high
proportion of debt to equity) which make up the OECD notion of “thin capitalisation”. In
theory, a national rule can be thought of which characterised a (related party) financial
relationship as equity financing or debt financing on the basis of a comparison with the
conditions “which would be made between independent enterprises”788.
Based on the evidence of the comparative analysis of Para. III.4 above and of other
surveys mentioned at Para V.6.a. above, characterisation rules of this kind do not seem
to exist in practice. The classification of hybrid financial instruments (differently from what
happens for thin capitalisation rules in the stricter sense adopted in the present
dissertation) is generally provided without any reference to the arm’s length principle and
without differences between related and unrelated party relationships.
Article 9 would thus hardly ever come into play, with the consequence that if any national
hybrid financial instrument characterisation rule purported a difference in treatment
between domestic and cross-border financial instruments (more, precisely, in the
deduction of the related cost), it would be prohibited by the treaty non-discrimination
provisions corresponding to Article 24, Para. 4, OECD Model, since the arm’s length
exception thereby provided would not apply789. Article 24, Para 4, OECD Model would,
in this way, eliminate the economic double taxation through the inhibition of the effects
of the discriminatory characterisation rule in the State of the issuer.
The comparative analysis of Para III.4 above indicates that a difference in treatment
between domestic and cross-border situations may occur in the Countries considered.
This seems, in particular, the case of the UK “special security” rules, which apply only
787
The described approach dates back to the 1986 Report on Thin Capitalisation and has been
recognised in the Commentary at the time of the 1992 revision. See above Para. III.3a).
788
The consistency of a re-characterisation rule of this kind with the treaty-based arm’s length
principle is supported by Para 1.65 of the Transfer Pricing Guidelines 2010, in situations where
“the arrangements made in relation to the transaction, viewed in their totality, differ from those
which would have been adopted by independent enterprises behaving in a commercially rational
manner and the actual structure practically impedes the tax administration from determining an
appropriate transfer price”. T. FEHÉR, Conflicts of qualifications and hybrid financial instruments,
in (Eva Burgstaller and Katharina Haslinger eds.), Conflicts of Qualification in Tax Treaty Law,
Wien, 2007, p. 249 makes the example of a subordinated loan by a parent company to a
subsidiary for an amount that an independent entity would have not granted. The Author remarks
that – while an adjustment could be justified in these circumstances - nothing in Article 9 supports
a re-characterisation of the transaction.
789
See the OECD Commentary on Article 24, at No. 74
196
where the investor is not within charge to UK corporation tax. There seem to be no
discriminatory rule of this kind in Italy and France.
A difference in treatment is more frequent where the remedial measures (i.e.: measures
granting dividend relief to hybrid financial instrument remuneration) are at stake, as
illustrated in Para. IV.4 above.
However, in such event, Article 24, Para 4, of OECD Model would be ineffective, since it
applies (asymmetrically) to the deduction of cost but not to the taxation of income.
Of more direct and frequent relevance in respect of national characterisation rules are
the two treaty provisions which contain the definitions of dividends and interest.
V.8.b.2 The definitions of dividends (Article 10) and interest (Article 11)
The function performed by the two definitions is making applicable the provisions of
either Article 10 or Article 11 of the OECD Model to the remuneration of a given financial
instrument. Different treaty rates of source tax are generally provided790.
Both Article 10 and Article 11 of the OECD Model attribute an unlimited right to tax to the
State of residence of the recipient791. Furthermore, Article 11 does not affect the
deduction of interest on the head of the paying entity792.
The two provisions are thus ineffective – where considered in themselves - in preventing
economic double taxation arising from conflicts of qualifications of (the remuneration of)
hybrid financial instruments793.
The above conclusions may change where individual treaties, departing from the OECD
Model, contained specific measures aimed at preventing the economic double taxation
of dividends (e.g., providing that dividends be exempt in the state of the recipient). In
such a case, the qualification under Articles 10 and 11 the treaty may become relevant
(to the extent that the related definitions apply under the relief provision) and deserves
some further considerations.
According to Article 10, Para 3, the term “dividend” is defined as income from (i)“shares
“jouissance” shares or “jouissance” rights, mining shares, founders’ shares” or from (ii)
“other rights, not being debt-claims, participating in profits” as well as (iii)“income from
other corporate rights which is subjected to the same taxation treatment as income from
shares by the laws of the State of which the company making the distribution is a
resident”.
790
The bias towards interest or dividends would thus depend on whether, in a given case, the
conditions for the lower dividend withholding rate are met. The difference in source taxation would
ultimately depend on the actual treaty provisions, which often depart from the OECD Model; see
the interesting comment of P. BROWN, Debt equity conundrum. General Report, in Cahiers de
droit fiscal international, 2012, p. 29: “although many earlier tax treaties provided for lower rates
of withholding taxes on interest than on dividends, there is a pronounced trend in recent treaties
toward eliminating withholding taxes on dividends paid by a subsidiary to its parent company”
791
See Article 10, Para 1 and Article 11, Para 1, OECD Model and S-E.BÄRSCH, Taxation of
hybrid financial instruments and the remuneration derived therefrom in an international and cross-
border context, Berlin, 2012, p. 95.
792
S-E.BÄRSCH, Taxation of hybrid financial instruments and the remuneration derived therefrom
in an international and cross-border context, Berlin, 2012, p. 95.
793
As remarked by HASLEHNER, Article 10, in (E. Reimer and A. Rust eds) Klaus Vogel on
Double Taxation Conventions, Alphen Aan der Rijn, 4th ed., 2105, at m.no. 12, Article 10 is not
generally designed to prevent economic double taxation.
197
Interest is defined by Article 11, Para. 3, as “income from debt claims of every kind,
whether or not secured by mortgage and whether or not carrying a right to participate in
the debtor’s profits (…)”, with the further support of some examples.
While this latter definition is in itself autonomous and exhaustive, the definition of
dividends is different, in that its third part makes reference to the “laws of the State” of
the distributing company794.
In the perspective of the present dissertation, this third part of the definition is relevant,
since it suggests that the re-characterisation made by the State of the debtor may trigger
an analogous re-characterisation for treaty purposes (the possible implications of which
shall be examined at a later stage).
However, on the basis of the definitions of Articles 10, Para 3 and 11, Para. 3, the
qualification as a dividend under the treaty, of interest characterised as a dividend under
the domestic rules applicable in the State of source, is subject to the solution of (at least)
three issues.
V.8.b.2.1 What is the meaning of “taxation treatment of income from

shares”
One first issue concerns the nature and effect of the characterisation made by the State
of source and arises from the requirement that the item of income be “subjected to the
same taxation treatment as income from shares”. This part of the definition leaves some
uncertainty, since the treaty definition does not specify whether the analysis of the
“taxation treatment” in the State of source should be made at the level of the distributing
company or at the level of the shareholders or, in other words, which profiles of the
taxation treatment are to be taken into account.
It may happen that the domestic provisions involved do not qualify or otherwise treat any
portion of the remuneration as a dividend but merely disallow it as a deduction. While
non-deduction is a general feature of “income from shares”, it may be questioned
whether non-deduction alone is sufficient for the purpose of the OECD Model definition.
It is unclear whether the non-deduction should be supported by an explicit qualification
provision, or if the item of income should also be subject to the same taxation treatment
of income from shares on the head of the recipients (be them non-resident recipients,
most frequently subject to source withholding tax, or resident recipients). Leading
authors take the view that a domestic classification rule be necessary, while a mere non-
deduction rule would not be sufficient795.
In my view, the interpretation which best serves the aim of eliminating economic double
taxation (on the assumption, subject to further analysis below, that the definition of
dividend at Article 10 be relevant for the purposes of possible treaty rules which –
departing from the OECD Model – provided dividend relief) is the one which focused on
794
In the 1963 version of the OECD Model, and until the 1977 revision, reference to domestic law
was made also by the definition of interest, which included “all other income assimilated to income
from money lent by the taxation law of the State in which the income arises”. On the history and
rationale of this language and its elimination, see J.F. AVERY JONES et al., The Definitions of
Dividends and Interest in the OECD Model: Something Lost in Translation?, in World Tax Journal,
No. 1, 2009 and British Tax Review, No. 4, 2009, at Para. 4.
795
J.F. AVERY JONES et al., The Definitions of Dividends and Interest in the OECD Model:
Something Lost in Translation?, in World Tax Journal, No. 1, 2009 and British Tax Review, No. 4,
2009, at Para. 4.; S-E.BÄRSCH, Taxation of hybrid financial instruments and the remuneration
derived therefrom in an international and cross-border context, Berlin, 2012, p. 104
198
non-deduction. Such interpretation would not seem to be in conflict with the wording of
Article 10, which does not make reference to the qualification in the source State, but
only to the taxation treatment. Also, according to the 1986 Thin Capitalisation Report (at
Para. 7), the non-deduction of the shareholder’s reward is a “basic difference” of
dividends as opposed to interest, which is “usually allowed as a deductible expense”.
V.8.b.2.2 What is a “corporate right”?

A second issue derives from the reference, made by the third part of the definition
provided by Article 10, Para. 3, of the OECD Model, to “corporate rights”.
It has been argued that because the term “corporate rights” has relevance to all parts of
the dividend definition, it must be interpreted in accordance with the domestic law of the
source state796.
Others argue that the term “corporate rights” simply means that only income from rights
in a company may be considered as a dividend797. A more accurate analysis, based on
also on the historical development of the definition, has led to the conclusion that “in
principle debt-claims are not corporate rights” but that “this does not exclude the
possibility that domestic non-tax law treats excessive debt in a thin capitalization case
as a membership right rather than debt”798.
Others, finally, argue that the term “corporate rights” is to be interpreted in the light of the
criterion of the enterprise risk, supported by the OECD Commentary on Article 10 799,
according to which (at No. 25) the provision “deals not only with dividends as such but
also with interest on loans insofar as the lender effectively shares the risks run by the
company, i.e. when repayment depends largely on the success or otherwise of the
enterprise’s business”800. The economic substance criterion set forth by the Commentary
entails that, e.g., the right to participate in profits does not alone change the nature of
debt to equity, but if other features indicate that a profit-participating loan actually shares
the enterprise risk, then that loan is equity rather than debt. A decisive feature in this
796
M. HELMINEN, Classification of Cross-Border Payments on Hybrid Instruments, in Bulletin,
2004, p. 58.
797
T. FEHÉR, Conflicts of qualifications and hybrid financial instruments, in (Eva Burgstaller and
Katharina Haslinger eds.), Conflicts of Qualification in Tax Treaty Law, Wien, 2007, p. 243. The
Author argues that the term “corporate right” should be attributed an autonomous interpretation
in the context of a treaty (otherwise the undisputed autonomy of the first two parts of the definition
would be jeopardised) and the only possible reference within the treaty is the concept of company
provided by Article 3, Para. 1.
798
J.F. AVERY JONES et al., The Definitions of Dividends and Interest in the OECD Model:
Something Lost in Translation?, in World Tax Journal, No. 1, 2009 and British Tax Review, No. 4,
2009, at Para. 3.3. The Authors highlight that many countries, in the light of the uncertainties
associated with the definition of corporate rights simply avoid using the term in their treaties.
799
in an international and cross-border context, Berlin, 2012, p. 100
800
A mirror interpretation is proposed in the Commentary on Article 11, Para. 3, which defines
interest as “income from debt-claim of any kind”. The Commentary remarks (at point 19) that “
Interest on participating bonds (…) should be considered as a dividend if the loan effectively
shares the risks run by the debtor company (…). In situations of presumed thin capitalisation, it is
sometimes difficult to distinguish between dividends and interest and in order to avoid any
possibility of overlap between the categories of income dealt with in Article 10 and Article 11
respectively, it should be noted that the term “interest” as used in Article 11 does not include items
of income which are dealt with under Article 10”.
199
respect would be the right of the investor to participate in any liquidation proceeds of the
debtor corporation 801.
This approach has been greatly influenced by the 1986 Thin Capitalisation Report and
its anti-avoidance perspective. Both well arise from the specification that “Articles 10 and
11 do not therefore prevent the treatment of this type of interest as dividends under the
national rules on thin capitalisation applied in the borrower’s country” and find support in
the Reservations made by a large number of States, all in the direction of broadening
the treaty definition of dividends802.
V.8.b.2.3 Are the definitions mutually exclusive?

A third issue pertains to the overlap between the two definitions. This is mostly due to
the mentioned circumstance that Article 11 definition is autonomous, while Article 10
definition makes reference (in the terms described) to national law. It may thus happen
that national law provides for dividend treatment (potentially recognised by the definition
of Article 10) in cases which would also fall within the definition of interest by Article 11.
This is e.g. the case of Italian source interest on profit participating loans, which as
illustrated (above, Para III.4.b) are characterised (and treated) as dividends for Italian
tax purposes and so, where the “corporate rights” requirement was met, would fall within
the definition of Article 10), but being “income from debt claims (…) carrying a right to
participate in the debtor’s profits” would also fall within the definition of Article 11.
This overlap has been addressed (since the 1977 revision) by the OECD Commentary,
which gives priority to the dividend definition803 and makes reference to the enterprise
risk criterion.
The uncertainties of the enterprise risk criterion has led some commentators to prefer a
distinctive factor based on the “debt-claim” requirement, contained (with opposite effects)
in both Article 10 and Art 11 of the OECD Model. According to this interpretation,
remuneration is interest or a dividend depending on whether the underlying instrument
qualifies or not as a debt-claim. This can be defined as a certain and unconditional right
801
M. HELMINEN, Classification of Cross-Border Payments on Hybrid Instruments, in Bulletin,
2004, p. 56 et seq. The Commentary explains that the assessment of the enterprise risk must be
done “in each individual case in the light of all the circumstances” and provides examples, which
include loans where “the creditor will share in any profits of the company” or “repayment of the
loan is subordinated to claims of other creditors or to the payment of dividends” or “the loan
contract contains no fixed provisions for repayment by a definite date”.
802
See Commentary sub Article 10, at points 78 to 82.1. Of particular clarity is the reservation of
Belgium, which “reserves the right to broaden the definition of dividends in paragraph 3 so as to
cover expressly income — even when paid in the form of interest — which is subjected to the
same taxation treatment as income from shares by its internal law” and the equivalent reservation
of Germany and Canada. France, Mexico, Portugal, Chile and Luxembourg make a more general
reference to payments which are treated as distributions of dividends under their domestic law
(without expressly mentioning the case of interest. Estonia – with similar effects – has reserved
the right to omit, in paragraph 3, the reference to “corporate” rights.
803
According to Para. 19 of the Commentary on Article 11, “(..) the term ‘interest’ as used in Article
11 does not include items of income which are dealt with under Article 10”. See M. HELMINEN,
Classification of Cross-Border Payments on Hybrid Instruments, in Bulletin, 2004, p. 56 et seq.
and – in an historical perspective which interestingly highlights how in the original OECD proceeds
and in the 1963 Model it could have been conversely argued that the favour was for interest
qualification, J.F. AVERY JONES et al., The Definitions of Dividends and Interest in the OECD
Model: Something Lost in Translation?, in World Tax Journal, No. 1, 2009 and British Tax Review,
No. 4, 2009, at Para. 4.
200
to the repayment804 or, in similar terms, a “legally non-contingent obligation which does
not share the entrepreneurial risk”.
The advantage of this approach is that it contributes to making the two definitions
mutually exclusive805.
V.8.c Article 23 of the OECD Model and the double taxation relief
Article 23 does not generally limit the jurisdiction to tax interest or dividends of the state
of residence. Also, the credit or exemption relief provided by respectively Article 23 A or
Article 23 B concerns only juridical double taxation806.
So, generally, the provision is of no effect with regards to economic double taxation.
Remedial measures can occasionally be found in treaties deviating from the OECD
Model, which are examined in Paragraph V.8.f below.
In this scenario, the subject matter of interest re-qualification is nonetheless dealt with in
the Commentary on Article 23, which reminds that, in the Model Convention, the State
of the borrower company may treat an interest payment as a distribution of dividends in
accordance with its domestic legislation, if certain conditions including the “enterprise
risk test” are met.
In such case, the Commentary goes on, the State of residence of the lender would be
obliged to give relief “as if the payment was in fact a dividend”.
The scheme envisaged by the Commentary, in other words is that where (i) a given
financial remuneration is characterised as a dividend under the source state domestic
legislation, and (ii) the “enterprise business test” is met, then that remuneration should
be treated as a dividend under the provisions of the treaty, including those which the
contracting states may have elected to include in a particular treaty for providing dividend
relief.
I would argue that – in such scenario - a treaty criterion (the “entreprise risk” criterion or
any other suitable criterion) may perform in respect of hybrid financial instruments a
function similar to that performed by the “arm’s length principle” in the realm of related
party transactions.
The prevention of economic double taxation of hybrid financial instruments, in other
words, is not structurally inhibited to a treaty, if the treaty regulates the taxation of
dividends in the State of residence of the investor and provides a qualification criterion
which may constitute a common point of reference for the two jurisdictions.
804
C. ROTONDARO, The right to redemption as a key characterization factor in the OECD Model
Convention passive income taxation system - the case of reverse convertibles, in Derivatives and
Financial Instruments, 2000, p. 258. The interpretation has found support by T. FEHÉR, Conflicts
of qualifications and hybrid financial instruments, in (Eva Burgstaller and Katharina Haslinger
eds.), Conflicts of Qualification in Tax Treaty Law, Wien, 2007, p. 244 et seq.; J. BUNDGAARD,
Perpetual and Super-Maturity Debt Instruments in International Tax Law, in Derivatives and
Financial Instruments, July/August 2008, p. 126 et seq.
805
in an international and cross-border context, Berlin, 2012, p. 100
806
See the Commentary at Article 23, point 2: “If two States wish to solve problems of economic
double taxation, they must do so in bilateral negotiations”.
201
In the above framework, the Commentary is however non convincing when, for the aim
of preventing double taxation sets forth other possible solutions807, such as the
recognition of the dividend qualification “when the State of residence of the lender applies
similar thin capitalisation rules and would treat the payment as a dividend in a reciprocal
situation”. Also not persuasive is application of the dividend treatment “in all other cases
where the State of residence of the lender recognises that it was proper for the State of
residence of the borrower to treat the interest as a dividend”.
The described approach weakens the focus on possible treaty relief, a measure which
would require the adoption of a single common criterion.
V.8.d Article 25 and its possible application to hybrid financial instruments

The application of an interest qualification rule in the State of source or the non-
recognition of domestic remedies against double taxation of dividends in the State of
residence does not generally constitute a breach of the convention. Since in either
country there is no taxation “not in accordance with the provisions of the convention”, the
specific case procedure of Article 25, Para. 1, 2 and 5 of the OECD Model would not be
applicable.
It would not be relevant, in such circumstances, to investigate whether the economic
double taxation was or not against the principles of the convention: the direct breach of
an expressed provision of the treaty is a firm requirement for access to the specific case
procedure.
Where, as in the generality of cases, the treatment of re-qualified interest does not
represent a case of taxation “not in accordance with the provisions of the convention”, it
is also unlikely that the double economic taxation be addressed through the interpretative
procedure of Article 25, Para. 3, first sentence, of the OECD Model.
The case may then fall within the scope of the legislative procedure of Article 25, Para.
3, second sentence, under which the competent authorities can “consult together for the
elimination of double taxation in cases not provided for in the Convention”.
The provision, as discussed above, is of limited effect by its own nature, since there is
no obligation on treaty parties to reach an agreement or not even start a consultation.
Furthermore, specific difficulties may arise – in my view - where the provision be

examined in the light of the specific case of economic double taxation of the
remuneration of hybrid financial instruments.
First, it may be questioned whether the “double taxation” of Article 25, Para. 3, second
sentence is such to include economic double taxation. It may be argued that the
elimination of economic double taxation in general falls within the scope of the treaty,
since it is addressed by Article 9.
The Commentary on the provision contains the example of an enterprise of a third State
having a permanent establishment in each of the contracting States, i.e. a case where
the subjective requirement is missing. It thus may be argued that the provision applies
also where other requirements are missing.
The only condition set forth by of Article 25, Para. 3, second sentence is that must there
be a case of “double taxation”, and (as earlier argued) economic double taxation can be
807
See the Commentary on Article 23, at No. 68.
202
considered to meet this requirement, even where originates from national rules not based
on the arm’s length principle.
Second, the economic double taxation at stake does not depend from a loophole in the
treaty, but from the tax provisions of the two States and, particularly, from the tax
qualification and treatment of income in the State of residence.
It may be, for example, that the State of the recipient adopts the classical system, so that
there would be no difference between the double taxation of dividends and that of re-
qualified interest. In such event, it would be at all unlikely that the states wish to address
in a treaty the case of re-qualified interest if one of the two states has never taken into
consideration (as a matter of domestic legislation or treaty policy) the issue of double
taxation of company profits.
Or it may be that the State of the recipient adopts a domestic remedy (e.g.: the
participation exemption) against economic double taxation of dividends but adopts a
domestic definition of dividend which does not include foreign source re-qualified
interest. In such circumstances, the elimination of economic double taxation of re-
qualified interest would require that the treaty (which, is generally not at all concerned
with taxation of dividends in the State of residence) adopted a rule concerning the
taxation in the State of residence of the recipient of re-qualified interest where no such
rule exists in the same treaty concerning the taxation of dividends.
In other words, even where the economic double taxation of re-qualified interest was
considered to fall within the scope of the legislative provision, the necessary consistency
with the treaty approach on dividends would make very difficult to adopt a specific
solution concerning dividends.
So, not only the Competent Authorities are under no obligation to seek a solution but
also should find the rules outside the treaty. A scenario which appears at all unlikely.
V.8.e BEPS Action 2 and the lack of rules concerning the application of treaties
to hybrid financial instruments.
It remains to be explored whether the application of tax treaties to hybrid financial

instruments, as examined in the previous paragraphs, may be influenced by the
developments brought by the OECD/G20 project against Base Erosion and Profit
Shifting.
Indeed, hybrid financial instruments have been addressed within the context of such
project and, together with hybrid entities (and dual resident entities), they constitute the
specific object of Action 2 which aims at “Neutralising the Effects of Hybrid Mismatch
Arrangements”808.
808
The definition of “hybrid mismatch” which underlies Action 2 is provided by OECD, Neutralising
the Effects of Hybrid Mismatch Arrangements, Action 2 – 2014 Deliverable, Paris, 2014, which (at
Para. 41) reads as follows: “A hybrid mismatch arrangement is an arrangement that exploits a
difference in the tax treatment of an entity or instrument under the laws of two or more tax
jurisdictions to produce a mismatch in tax outcomes where that mismatch has the effect of
lowering the aggregate tax burden of the parties to the arrangement”. It thus refer only to the
situation where the outcome of the “difference in the tax treatment” is a lower taxation. This
approach is similar to that adopted in the ATAD (see Para VII.3.b.4.1 below) and is different from
that adopted for the purposes of the present research which is based on a wider definition of
“hybrid financial instrument” (see Para. III.4.a above), focussed on the reverse case where the
outcome is a higher taxation and, specifically, economic double taxation.
203
The Action 2 proceedings have eventually led to the adoption of a Final Report809 which
sets out recommendations regarding the neutralisation of the tax effects of hybrid
mismatch arrangements through domestic rules and through treaty provisions. The
Report is accordingly divided into two parts: Part I contains recommendations for
changes to domestic law and Part II sets out recommended changes to the OECD Model
Tax Convention.
Part I recommendations take the form of linking rules, under which the tax treatment of
an instrument (or entity) is made dependent on the tax treatment of the same instrument
(or entity) in the counterparty jurisdiction810.
Part II recommendations have the aims of ensuring that hybrid instruments and entities
are not deployed in order to obtain unduly the benefits of tax treaties and that tax treaties
do not inhibit the application of the linking rules recommended in Part I.
As a matter of fact, Part II recommendations mostly concern dual resident entities
(Chapter 13) and transparent entities (Chapter 14) while hybrid financial instruments are
addressed only with respect to the possible conflict between linking rules and existing
treaty provisions (Chapter 15).
With respect to the primary rule, the Report remarks that “the provisions of tax treaties
do not govern whether payments are deductible or not and whether they are effectively
taxed or not, these being matters of domestic law” (Para. 437) and that this also stands
true for Article 7, OECD MC which, according to Para. 30 of the related Commentary
“does not deal with the issue of whether expenses are deductible when computing the
taxable income of the enterprise in either Contracting State”.
According to the Report, the primary rule would also not be in breach of the non-
discrimination provisions of Article 24 OECD MC (and, in particular of that of Para. 4
concerning cost deduction) “as long as the distinction is based on the treatment of the
payments in the hands of the payers and recipients” (Para. 448)811.
The Report also investigates on the possible interference between domestic linking rules
and treaty provisions against double taxation, in particular, those granting credit or
(departing from the OECD MC) exemption to dividend income in the country of residence
of the recipient812. The report recognises a conflict suitable to nullifying the effect of the
809
OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 – 2015 Final
Report, Paris, 2015.
810
In essence, the Report recommends the adoption of a “primary rule” under which the deduction
for a payment is denied to the extent that it is not included in the taxable income of the recipient
in the counterparty jurisdiction or it is also deductible in the counterparty jurisdiction; if the primary
rule is not applied, then the counterparty jurisdiction can generally apply a “defensive rule”,
requiring the deductible payment to be included in income or denying the duplicate deduction
depending on the nature of the mismatch. See OECD, Neutralising the Effects of Hybrid Mismatch
Arrangements, Action 2 – 2015 Final Report, Paris, 2015, especially Chapter I and – with respect
to the implementation of the OECD recommendations in the ATAD, Para. VII.3.b.4.2 below).
811
Accordingly, A. RUST, BEPS Action 2: 2014 Deliverable - Neutralising the Effects of Hybrid
Mismatch Arrangements and its Compatibility with the Non-discrimination Provisions in Tax
Treaties and the Treaty on the functioning of the European Union, in British Tax Review, 3, 2015,
p. 312 argues that under Article 24, Para. 4, a distinction based on criteria other than residence
is still permitted and that “residence and tax exemption are not identical criteria”.
812
The relationship between domestic linking rules and treaty rules is also addressed by OECD,
Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final
Report, Paris, 2015, especially Para 54, which points out that, with reference to hybrid mismatch
arrangements “the main objective of the work aimed at preventing the granting of treaty benefits
204
proposed linking rules and recommends changes to the treaties in order to restore those
effects.
This latter point also constitutes the object of a specific provision of the Multilateral
Convention signed on 7 June 2017, i.e., Article 5, which belongs to Part II, headed
“Hybrid Mismatches”813.
Para. 4 of Article 5 is of special interest since it closely reflects the domestic defensive
rule by providing that any treaty dividend exemption “shall not apply where such income
gives rise to a deduction for the purpose of determining the taxable profits of a resident
of the other Contracting Jurisdiction”.
What the report does not analyse is the (“reverse”) relationship between domestic linking
rules and treaty provisions. In other words, the question should be raised as to whether
a domestic linking rule is suitable to modifying the treaty qualification and treatment of
the remuneration of a hybrid financial instrument.
To this end, the BEPS Action 2 primary rule can be examined first. It denies the deduction
for the payment of the remuneration of a hybrid financial instrument if (and to the extent
that) such remuneration is not included in the taxable income of the recipient in the
counterparty jurisdiction.
It is worth highlighting that the rule does not concern the qualification of the payment, but
merely affects its deductibility814.
Nonetheless, and according to a possible interpretation of Article 10, Para 3, OECD MC
(see Para V.8.b.2.1 above), the circumstance that the remuneration of a hybrid financial
instrument is not deductible under a domestic linking rule may contribute to its
construction as a dividend for being “subjected to the same taxation treatment as income
from shares by the laws of the State” of the distributing company.
The above being true, that same State should be obliged to granting to the remuneration
the benefits provided by the treaty under the dividend provision (equivalent to Article 10,
Para. 2 of the OECD MC).
The outlined construction would hardly have effect on the (cross-border) economic
double taxation of the remuneration at stake. Indeed, it has been highlighted above (see
Para. V.8.c) that the OECD MC, and most treaties, generally do not concern the taxation
of dividends in the State of residence of the recipient (a matter which pertains to the
domestic law of the State concerned). Even where treaties grant dividend relief to the
recipient, the qualification for the purposes of such relief may not depend upon the
definition of the dividend provision (equivalent to Article 10, Para 3, OECD MC), as the
conclusions reached by the Court of Appeal of England and Wales demonstrate, in a
with respect to these transactions is to ensure that treaties do not prevent the application of
specific domestic law provisions that would prevent these transactions”.
813
Part II of the Multilateral instrument also concerns other hybrid mismatches within Action 2
which are outside the scope of the present dissertation, i.e. transparent entities (Article 3) and
dual resident entities (Article 4). See also the 2014 Report – Developing a Multilateral Instrument
to Modify Bilateral Tax Treaties, embedded into OECD, Developing a Multilateral Instrument to
Modify Bilateral Tax Treaties. Action 15 – 2015 Final Report, Paris, 2015, which at Para. 30
addresses hybrid mismatch arrangements, but only with reference to transparent entities and dual
resident entities.
814
S.B. LAW, M. KINDS, Hybrid Instruments in the Post-BEPS Era in (M. Cotrut et Al. eds.)
International Tax Structures in the BEPS Era: An Analysis of Anti-Abuse Measures. Amsterdam,
2015, Para. 5.3.2.6., remark that this circumstance is consistent with the aim of the BEPS
initiative, which is “to neutralize the effects of hybrid mismatches, rather than examine any
associated characterization issues”.
205
case concerning the interpretation to be given to the term dividend in the 1967 UK –
Germany tax treaty815.
The linking rule would thus have very little effect on the treaty qualification and treatment
in the State of the recipient816. It should be noted, however, that such conclusion is of
limited concern, considering that the application of the linking rule is caused by the
exemption in the State of the recipient granted under its own domestic rules. The treaty
exemption, where at all applicable, would uselessly overlap with the exemption anyway
provided by the mentioned domestic law.
A different scenario would result from the application of the defensive rule. According to
said rule, the remuneration of a hybrid financial instrument, where deductible for the
issuer in its own jurisdiction, should be included in the taxable income of the recipient.
Just as the primary rule, the defensive rule does not concern the qualification of income,
but only its tax treatment.
A defensive rule in the State of the recipient does not seem suitable to influence the
treaty qualification or treatment of the remuneration of an hybrid financial instrument in
the State of the issuer. Indeed, and as outlined at Para V.8.b.2.1 above, the definition of
dividend provided by Article 10, Para 3, OECD MC makes reference only to the laws of
the State of the distributing company.
The issue with defensive rules is rather the inference with the possible exemption of the
dividend in the State of the recipient provided by those bilateral treaties which depart
from the provisions of the OECD MC. This is precisely the case addressed by Para. 442
et seq. of the Action 2 - 2015 Final Report and already illustrated above.
In conclusion, BEPS 2 Recommendations do not seem to contribute to the application of
treaty rules to hybrid financial instruments.
It is worth pointing out that, at the same time, the linking rules of the 2015 Final Report
on BEPS Action 2 seem designed well enough to avoid generating new situations of
economic double taxation of remuneration of hybrid financial instruments.
As to the primary rule, the non-deduction (i.e., the possible cause of economic double
taxation) depends on the exemption in the recipient jurisdiction (i.e., the possible remedy
to that same economic double taxation).
As to the defensive rule, the denial of the exemption (i.e., the possible lack of remedy to
economic double taxation) depends on the deduction in the issuer jurisdiction (i.e., a
circumstance which prevents the insurgence of a situation of economic double taxation).
The adoption of the recommended linking rules should thus avoid that uncoordinated
national approaches to tackling cross-border tax arbitrage may otherwise lead to
815
MEMEC Plc v Inland Revenue [1998] EWCA Civ 941 (9 June 1998), 71 TC 77, [1998] BTC
251, 1 ITL Rep 3, [1998] STC 754. See Para. V.8.f above, also for further reference on the topic.
816
See, accordingly, OECD, Preventing the Granting of Treaty Benefits in Inappropriate
Circumstances, Action 6 - 2015 Final Report, Paris, 2015, Para. 33 which mentions that “as part
of its work on hybrid mismatch arrangements, Working Party 1 has examined whether the treaty
definitions of dividends and interest could be amended, as is done in some treaties, in order to
permit the application of domestic law rules that characterise an item of income as such”. The
conclusion is that such a change would have a very limited impact with respect to hybrid mismatch
arrangements.
206
economic double taxation where national prevention rules be in conflict with each
other817.
V.8.f Some remarks about the treaty practice of Italy, France and the UK
French treaties do not deviate, with reference to dividends received by French resident
shareholders, from the OECD Model and thus do not provide for remedies against
economic double taxation of dividends. The elimination of economic double taxation of
dividends in France is thus entrusted only to the domestic rules of the regime of the
“sociétés mères” (Articles 145 and 216 of the CGI), examined above at Para. IV.5.b.2.
It may just be worth mentioning that in recent French treaties, the OECD Model definition
is regularly enlarged in order to support the application of the dividend provisions to
constructive dividends, in accordance with the reservation made by France to the
Commentary on Article 10 of the OECD Model818. This is achieved through the
elimination, from the third part of the definition, of the reference to “corporate rights” and
the specification that only domestic tax law is to be considered819. The need of such
deviations has arisen from the case law of the Conseil d’État, which has denied the
application of treaty benefits to constructive dividends under the usual OECD Model
definition820.
By contrast, the treaties of Italy and the UK provide remedies against economic double
taxation of dividends, albeit to a different extent.
In the case of Italy, provisions aimed at avoiding economic double taxation of dividends
are presently821 in force in the treaties with Brazil and Germany. Article 23, Para. 3 of
the 1978 treaty with Brazil exempts dividends received by an Italian corporate
shareholder who owns at least 25% of the share capital of the distributing Brazilian
resident company; Article 24, Para. 2 (b) of the treaty between Italy and Germany, signed
in 1989, provides for the exemption on the head an Italian company (other than a
partnership) of dividends distributed by a German resident company, subject to the same
25% share ownership requirement of the Brazilian treaty822.
UK treaties generally provide for relief from economic double taxation of dividends
through the recognition (where certain conditions are met, usually a direct or indirect
control of at least 10% of the voting power of the distributing company) of an underlying
817
Still Exists?, in World Tax Journal, February 2016, p. 37 et seq.
818
See point no. 80: “France and Mexico reserve the right to amplify the definition of dividends in
paragraph 3 so as to cover all income subjected to the taxation treatment of distributions”.
819
B. GOUTHIERE, Les impôts dans les affaires internationales, Levallois, 12th ed., 2018, m.no.
60715.
820
The denial is essentially based on the argument that a distribution is a dividend only when
made in accordance with French company law rules, see CE 19th December 1986, No. 54101;
CE 10th June 1992, No. 72704; CE 20th July 1984, No. 16449.
821
Some treaties provided for the refund of (part) of the underlying tax credit by the State of
residence of the distributing company. Provisions of this kind can be found in the treaties with
France, Germany, The Netherlands and the UK. However, these provisions are no longer
applicable, due to the modifications in the national legislations of the Countries concerned.
822
On the exemption of German source dividends under the 1989 treaty with Germany, see S.
MAYR, Tassazione in Italia degli utili distribuiti da società “figlia” tedesca, in Corriere Tributario,
1994, p. 1889.
207
tax credit (in front of the income tax borne by the foreign company in respect of the profits
out of which the dividend paid)823.
One crucial point is which definition of dividend is to be adopted for the purposes of the
dividend relief based on treaties.
Italian treaties generally follow the OECD Model definition of interest and dividends,
albeit many of them, having been negotiated or executed before the 1977 revision, still
adopt the reference to domestic qualification also for interest.
The exemption provided by Article 24, Para. 2 (b) of the treaty with Germany expressly
refers to those dividends mentioned at Article 10, Para. 6, letter a), i.e., those
corresponding to the first two limbs of Article 10, Para. 3. of the OECD Model. The
definition is thus partially the same for both source taxation purposes and residence
taxation purposes. By contrast, the exemption does not apply with respect to German
source dividends falling within the definition of Article 10, Para. 6, letter b), of the treaty
(corresponding to the third limb of the OECD Model). This difference in treatment is
expressly provided by the dividend relief provision and does not depend from any
definitional mismatch.
The Brazilian treaty does not contain any (direct or indirect) definition of dividend for the
purposes of the exemption provided by Article Article 23, Para. 3 and it thus remains
open whether the definition provided by Article 10, Para 4 of the treaty (corresponding to
Article 10, Para 3 of the OECD Model) can be adopted or whether the general rule of
interpretation of Article 3, Para 2 of the treaty (identical to the corresponding OECD
Model provision) and thus the Italian domestic definition should be applied824.
There is no statutory definition of dividend in UK tax or corporate law; HMRC instructions
indicate that the question has to be answered in the light of the facts825 and make
reference to case law which has held that, where the foreign jurisdiction provides for a
definition, “that definition may be relevant”826.
In a landmark case specifically concerning the interpretation to be given to the term
dividends in the 1967 UK – Germany tax treaty, The Court of Appeal of England and
Wales827 has taken the view that the definition provided by the dividend article of the
treaty could not be applied to the underlying tax credit relief provision and that, under the
823
The vast majority of treaties adopt a 10% voting test, some require 25% of votes. See J.
SCHWARZ, Schwarz on tax treaties, 5th ed., Kingston-upon-Thames, 2018, p. 455 et seq..
824
On the relationship between the definition of dividends in Italian treaties and in in domestic
law, see C. GARBARINO, Manuale di tassazione internazionale, Milano, 2nd ed., 2008, p. 428 et.
seq.
825
HMRC, Company Taxation Manual, CTM15205 - Distributions: general: dividends,
distributions and company law
826
HMRC v First Nationwide [2012] EWCA Civ 278. The case concerned dividends paid by a
Cayman Islands registered company. The Court rejected the idea of dividends as necessarily
payments out of income and decided, in the context of a payment out of share premium that it is
the form of the payment and not its origin which determines the qualification.
827
MEMEC Plc v Inland Revenue [1998] EWCA Civ 941 (9 June 1998), 71 TC 77, [1998] BTC
251, 1 ITL Rep 3, [1998] STC 754. The case concerned the recognition of the underlying tax credit
in respect of income derived by a UK corporate taxpayer from the participation into a German
silent partnership. The definition provided by the dividend article (Article VI) of the treaty in force
included “income derived by a sleeping partner from his participation as such", while Article XVIII,
headed "Elimination of double taxation" provided underlying credit relief on dividends, but no
definition of dividend. On the case, see J. SCHWARZ, Schwarz on tax treaties, 5th ed., Kingston-
upon-Thames, 2018, p. 456.
208
general interpretative provision of that treaty (corresponding to Article 3, Para. 2 of the
OECD Model), the meaning was to be found in UK law828. Among the different arguments
that support that decision, there is one of special interest in the perspective of economic
double taxation: the Court endorses the search of "as much symmetry as can reasonably
be achieved between the distributive provisions (…) and the relieving provisions (…)”
where tax credit for dividend source taxation is concerned but remarks that “different
considerations apply to the giving of credit for underlying tax”.
The conclusion, which draws a line between the ordinary credit provision and the
underlying credit provision, finds support in the scholars’ analysis829.
V.9 Treaty remedies and cross-border mergers

Economic double taxation can arise, in cross-border merger, to the extent that the
taxation of assets in the absorbed company country is not recognised in the absorbing
company country. This can be due to the adoption of different criteria or to a different
evaluation of facts in front of one same criterion (e.g.: the fair market value of the assets);
in practice (as mentioned at Para. III.5.a above) a situation which may arise, even if not
so frequent due to the concurrence of corporate law rules concerning the evaluation of
the transferred assets.
This paragraph is aimed at examining whether a bilateral treaty between the two
countries involved in a cross-border merger can eliminate such double taxation by either
limiting the taxation in the absorbed company country or having the absorbing company
country recognise the other country taxes values.
V.9.a The OECD Model: General remarks on the taxation of capital gains
From the perspective of the absorbed company, the comparative analysis made at Para
III.5 above has shown that all the States concerned provide for the taxation of hidden
capital gains on the occasion of a cross border merger with reference to those assets
which do not remain with a PE in the State where the absorbed company was resident.
828
The absence of a statutory definition has led the Court to making reference to the similar
statutory notion of “distribution” and to the case law definition (in Esso Petroleum Co. Ltd v Ministry
of Defence [1990]) according to which a dividend is “a payment of a part of the profits for a period
in respect of a share in a company”.
829
J. AVERY JONES et Al., Whether the definition of dividend limited to the dividend article applies
to the double taxation relief article granting underlying credit, in Bulletin, No. 3, 1999, p. 107. The
interpretation was initially submitted in J. AVERY JONES et Al., Credit and exemption under tax
treaties in cases of differing income characterization, in European taxation, No. 4, 1996, p. 118 et
seq. Contra, S-E.BÄRSCH, Taxation of hybrid financial instruments and the remuneration derived
therefrom in an international and cross-border context, Berlin, 2012, p. 97, who submits that the
context requires that the residence State takes into account the qualification in the source state.
M. LEHNER, Article 10, in (E. Reimer and A. Rust eds.) Klaus Vogel on Double Taxation
Conventions, Alphen aan den Rijn, 4th ed., 2015, m. nos. 88 et seq. remarks that in cases of
conflicts of qualifications, and according to the OECD Commentary, priority should be given to
the source state qualification.
209
This taxation is levied in the hands of the absorbed company, so that it concerns the
taxation by one State of income of a person (the absorbed company) resident in that
same State, a situation where treaty relief would generally not apply830.
Article 13 of the OECD Model, in particular, does not limit in any way the jurisdiction to
tax of the State od residence.
Treaties would also not provide relief where the merger involved assets located in a
Country other than the State of residence of the absorbed company.
In such cases, Article 13 would apply, which does not provide for a definition of either
“capital gain” or “alienation”. This implies that, in accordance with the interpretation rule
of Article 3, Para. 2, the definition must be searched in the domestic legislation of the
State involved. In such framework, local taxation may also extend to virtual capital
gains831.
In either case, Article 13 only concerns the allocation of taxing rights and does not
concern the computation of capital gains, a matter which is left entirely with the tax
jurisdiction of the contracting States832.
V.9.b The possible application of Article 9 and the recognition of the taxed basis
as a corresponding adjustment
Whether a cross-border merger falls within the objective scope of application of Article 9
primarily depends on whether the merger (or more precisely, the transfer of assets under
a merger) can be framed within the concept of “commercial or financial relations”. The
OECD Model does not provide any definition; the Commentary and the Transfer Pricing
Guidelines use the term “transaction”, but similarly do not provide any definition (see also
Para V.6.a above).
Some remark that it is unclear whether the scope of application of Article 9 includes the
transactions like capital contributions or those where the consideration is the share
capital of the involved enterprise833.
The contextual interpretation of the expression “commercial or financial relationship”
would lead to considering within the scope of Article 9 any transaction suitable to give
rise to items of income falling within the category of business income, under Article 7 of
the OECD Model. However, the lack of an autonomous treaty definition of business
income implies the need to refer to domestic law also for the interpretation of “commercial
or financial relationship”834.
830
D. J. JIMÉNEZ-VALLADOLID DE L’HOTELLERIE-FALLOIS, Reorganization Clauses in Tax
Treaties, Amsterdam, 2014, Para. 3.5, remarks that “as long as the transactions involve the
taxation of resident persons, tax treaties are not of great help”.
831
R. DANON, A. FALTIN, Article 13, in Modèle de Convention fiscale OCDE concernant le revenu
et la fortune: commentaire (Robert Danon et Al. eds.), Basel, 2014, p. 498, m.nos. 4 and 5.
832
E. REIMER, Article 13. Capital Gains, in (E. Reimer and A. Rust eds.) Klaus Vogel on Double
Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 30.
833
C. SILBERZTEIN, Article 9, in (Robert Danon et Al. eds.) Modèle de Convention fiscale OCDE
concernant le revenu et la fortune: commentaire, Basel, 2014, page 347.
834
Alphen aan den Rijn, 2010, p. 222 et seq. See also J. WITTENDORFF, The Object of Article 9(1)
of the OECD Model Convention: Commercial or Financial Relations, in International Transfer
Pricing Journal, 2010, p. 200.
210
In any respect, mergers should be considered to fall within the definition to the extent
that they have effects on the taxable income and potentially imply a transfer of income
between related parties835.
This latter position is largely preferable.
One further argument which supports the application of Article 9 of the OECD Model to
the transfer of assets under a cross-border merger is the frequent reference to the
transfer of assets which can be found in Chapter IX (“Transfer Pricing Aspects of
Business Restructuring”) of the OECD Transfer Pricing Guidelines. So, e.g., Para. 9.49
refers to “conditions made or imposed in a transfer of functions, assets and/or risks (…)
between two associated enterprises” thus implying that a transfer of assets is a
“relationship” under Article 9.
The circumstance that a merger generates items of income which may fall within the
definition of “gains from alienation” of Article 13 does not appear to be an obstacle to
the above construction. Indeed, Para. 9.9 of the OECD Transfer Pricing Guidelines
clarifies that “the arm’s length principle and these Guidelines do not and should not apply
differently to restructurings or post-restructuring transactions than to transactions that
were structured as such from the beginning”.
To the extent that Article 9 is applicable in respect of the taxation of capital gains, and
where the merger qualifies as a “relationship” also for the State of the absorbing
company, the arm’s length rules also apply for the purposes of the recognition of the tax
basis of the transferred assets. As a consequence, possible conflicts in the evaluation of
the transferred assets may be settled within the framework of the mutual agreement
procedure836.
V.10 Answers to the research (sub) questions and conclusive

remarks
The application of tax treaties to the prevention or limitation of economic double taxation
mostly depends on choices made in the years of drafting the OECD Model Tax
Convention.
A tax treaty may thus provide a solution in respect of economic double taxation only
where there is a breach of a specific provision which includes economic double taxation
within its scope837.
According to the OECD Commentary, Article 23 of the OECD Model, inserted into a
Chapter (Chapter V) devoted to “Methods for elimination of double taxation”, only applies
835
Alphen aan den Rijn, 2010, p. 227; see, in the same direction and analogous grounds, G.
KOFLER, Article 9. Associated enterprises, in (E. Reimer and A. Rust eds.) Klaus Vogel on
Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 57
836
C. SILBERZTEIN, Article 9, in (Robert Danon et Al. eds.) Modèle de Convention fiscale OCDE
concernant le revenu et la fortune: commentaire, Basel, 2014, page 347.
837
This limitation does not apply to Article 25, Para 3., second sentence, of the OECD Model
which enables the competent authorities to consult together for the elimination of double taxation
in cases not provided for. The provision has however very limited effects and raises constitutional
issues in some Countries (see Para. V.4.b.3 above).
211
to juridical double taxation, while economic double taxation is excluded from the scope
of application of the provision838.
Article 9 is the only provision which concerns economic double taxation. According to the
widely accepted interpretation, it has restrictive effects in respect of national legislations.
At same time it constitutes the line of balance in disputes and, in this sense, it can be
said to contribute to their resolution.
In respect of the first research (sub) question, the conclusion is that the effects of Article
9 are however limited to transfer pricing cases.
There are also strong arguments in favour of the application of transfer pricing and
corresponding adjustment rules to the transfer of assets in the event of a cross-border
merger.
By contrast, its effect in respect of thin capitalisation rules are much more limited due to
the different approach of States to the matter. One consequence is that the avoidance
of double taxation on non–deducted interest also relies on national rules, if any, against
economic double taxation of dividends.
Interest deduction limitation rules which are not based on the arm’s length principle are
usually applicable without difference to related and unrelated parties, to domestic and
cross border financing. These rules are suitable to generating economic double taxation,
which however – due to such features - can’t be prevented by the rules of the OECD
Model.
Tax treaties are also generally ineffective in respect of double taxation generated by
different national qualification of interest and dividend (based on criteria other than those
– of a quantitative nature – which underlie thin capitalisation or interest limitation rules.
Indeed, tax treaties attribute an unlimited jurisdiction to tax to the State of residence of
the provider of funds and do not affect the deduction of interest for the borrower. Even
where individual treaties provided (departing from the OECD Model) dividend relief, lack
of uniform definition of dividends and the possible reference to the domestic definitions
of the State of the lender may constitute relevant obstacles to granting of relief to financial
remunerations that are qualified as dividends only in the State of residence of the
borrower.
As a conclusion, it can thus be argued that the present treaty rules, as contained in the
OECD Model Tax Convention, are not suitable to constitute a general remedy against
With reference to the second research (sub) question, the conclusion is that the
combination of Article 9 and Article 25 of the OECD Model Tax Convention (i.e., the
combination of a common criterion and a dispute resolution procedure) does represent
a model of reference but has a too limited scope of application.
The other treaty rules, especially those concerning the respective definition of dividend
and interest, are generally ineffective in respect of economic double taxation deriving
from conflicts of qualification. This happens because of an intrinsic shortage of the
definitions (which are not mutually exclusive and may leave some qualification conflicts
838
The Commentary reads as follows: “1. These Articles deal with the so-called juridical double
taxation where the same income or capital is taxable in the hands of the same person by more
than one State. 2. This case has to be distinguished especially from the so-called economic
double taxation, i.e. where two different persons are taxable in respect of the same income or
capital”.
212
unsolved) and also because Articles 10 and 11 of the OECD Model Tax Convention do
not concern the deduction of interest on the head of the borrower and at the same time
attribute unlimited jurisdiction to tax both dividends and interest to the State of
residence of the recipient.
213
VI THE ARBITRATION CONVENTION
VI.1 Introduction
The aim of the present chapter is to investigate whether and to what extent the EU
Arbitration Convention can provide remedies against economic double taxation of
corporate income, in the paradigm cases.
To this end, the analysis is guided by the following research (sub) questions:
 Is the EU Arbitration Convention suitable to provide a remedy to all the cases of
economic double taxation examined?
 Is Directive 2017/1852 (also in the comparison with the initial proposal) suitable
to provide a remedy to all the cases of economic double taxation examined?
VI.2 Overview
On July 23rd 1990, the twelve Member States of the (then) European Economic
Community have signed in Brussels an inter-governmental Convention on the
elimination of double taxation in connection with the adjustment of profits of associated
enterprises839.
The Convention had the aim of filling a gap of the network of bilateral conventions in
force. Indeed, the elimination of double taxation deriving from transfer pricing
adjustments was seen as a priority of the European action, and bilateral conventions
generally did not impose a binding obligation on the respective States to that purpose840.
The Convention is thus aimed at providing a dispute resolution procedure suitable to
ensure that double taxation arising from an upward adjustment of profits of an enterprise
of a Member State be removed. Consistently, most part of its provisions are of a
procedural nature and the convention itself is generally referred to as the “Arbitration
Convention”841.
To this end, the Convention provides a Mutual Agreement procedure, under which the
competent authorities shall endeavour to resolve the case “with a view to the elimination
of double taxation” (Article 6.2).
Where the competent authorities fail to reach an agreement that eliminates double
taxation within two years, the Convention provides (as its most relevant distinctive
839
Convention on the elimination of double taxation in connection with the adjustment of profits
of associated enterprises, 90/436/EEC, in Official Journal, L 225, August 20th 1990, p. 10.
840
The procedural shortage of bilateral treaties is one of the main reasons underlying the adoption
of the Convention, as indicated in COMMISSION, Guidelines on company taxation, SEC(90)601
final, Para. 13: “At the moment such double taxation can admittedly be resolved by way of the
amicable procedure provided for in bilateral conventions, in accordance with Article 25 of the
model OECD Convention. However, while the amicable procedure must be initiated In all cases,
it does not require the administrations concerned to reach an agreement. In practice, therefore,
the instrument has shown Itself Incapable of resolving all cases of double taxation”.
841
As noted by P. ADONNINO, La Convenzione europea 90/436 sulla cosiddetta procedura
arbitrale. Limiti e problemi, in Rivista di diritto tributario, No. 12, 2002, p. I, 1213 et seq., this
custom is not entirely precise, since the term “arbitration” only appears in the title of Section III of
the Convention, while the provisions rather use terms like “advisory” commission and “opinion”.
214
feature) for the establishment (Article 7) of an advisory commission which is in charge of
delivering an opinion on the “elimination of the double taxation in question”
This latter is the objective of all stages of the procedure and is again mentioned at Article
12, under which the competent authorities are due to make a decision “which will
eliminate the double taxation” within six months from the delivery of the advisory
commission opinion. The decision may deviate from the opinion, but this latter becomes
binding if no decision is made within six months.
The Convention does not only contain rules of procedure, but also two substantial
provisions.
The first of these provision is the statement of the arm’s length principle, to be found at
Article 4, Para. 1, with a language (“conditions (…) which would be made between
independent enterprises”) that is almost identical to Article 9, Paragraph 1, of the OECD
Model842.
The second provision is Article 14, which specifies when double taxation can be
considered to have been eliminated, i.e., when either “the profits are included in the
computation of taxable profits in one State only” or “the tax chargeable on those profits
in one State is reduced by an amount equal to the tax chargeable on them in the other”.
This provision contributes to the elimination of double taxation, in the terms better
explained below, and appears crucial insofar as the Arbitration Convention – differently
from Articles 9, Para. 2 and 7, Para. 3 of the (present) OECD Model Convention - does
not directly oblige States to make corresponding adjustments. It rather sets the obligation
to eliminate double taxation and then separately describes two possible ways of
achieving that elimination, i.e.: a corresponding adjustment of the taxable base or the
recognition of a tax credit. Many have remarked that this second method may have
limited effects in case of loss-making companies, unless an excess credit carry forward
mechanism is provided under domestic law843.
VI.3 History
A few weeks before the signature of the Arbitration Convention, on July 23rd 1990, the
Commission was still supporting the adoption of a directive on the same matter844.
However, Member States have eventually preferred to execute a multilateral treaty,
being unwilling to surrender their fiscal sovereignty in a subject matter where there were
not common rules845.
Most of the provisions of the Arbitration Convention find their roots anyway in a proposal
for a directive which had been presented in 1976846 as part of a more comprehensive
842
Paragraph 2, which refers to the allocation of profit to permanent establishments, is on its turn
identical to Article 7, Para 2 of the 1963 OECD Model.
843
G. KOFLER, Article 9. Associated enterprises, in (E. Reimer and A. Rust eds.) Klaus Vogel on
Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 137 and locally quoted
bibliography.
844
COMMISSION, Guidelines on Company Taxation, SEC(90) 601 fin., p. 7
845
D. SCHELPE, The Arbitration Convention: its origin, its opportunities and its weaknesses, in
EC Tax Review, 1995, No. 3, p. 71.
846
COMMISSION, Proposal for a Council Directive on the elimination of double taxation in
connection with the adjustment of transfers of profits between associated enterprises (arbitration
procedure), OJ EC vol. 19, n. C 301, 21 December 1976, p. 4. For a critical analysis of the
215
harmonization strategy and which was again included, without changes, in the framework
of the “piecemeal” approach adopted in 1990 by the Commission in view of the
forthcoming establishment of the Internal market847.
The hypothesis of a convention, albeit never supported by the Commission (which
upheld the directive proposal for many years even after the execution of the Arbitration
Convention848) was actually not new. The first proposal to address double taxation with
a convention based on Article 220 of the (then) EEC treaty was put forward by the
Netherlands in 1978849 and proceeded parallel with the 1976 directive proposal.
The topic of treaty dispute resolution was also being discussed in the early 1970’s within
the OECD Fiscal Committee.
It is of special interest, in this respect, the Third Report of the Working Group No. 22
(France, Switzerland) on Additional studies concerning the mutual agreement procedure,
dated July, 13th 1972850. The Report, after having recognized the reluctance of States to
“accept any restriction on their sovereignty in regard to this particular type of dispute”,
proposed, as “the beginnings of a solution” the adoption of an advisory opinion procedure
“under which two States in dispute agree to seek the opinion of an impartial third party
on a legal difference, while reserving their freedom of decision regarding the disposal of
the matter”. The proposal was designed not to affect the foundations of the mutual
agreement procedure, and the competent authorities would have retained complete
freedom of decision in regard to reaching mutual agreement.
The mentioned Report goes on remarking that the implementation of such advisory
procedure would have been facilitated if “the Committee on Fiscal Affairs periodically
drew up a list of eminent persons from among whom the competent authorities of the
two States concerned could appoint an independent person to issue an advisory
opinion”851.
It can be easily noted that the solution envisaged in the mentioned 1972 report has many
similarities with the one included in the 1976 Directive Proposal, and eventually adopted
in Articles 7, 9, 11 and 12, Para. 1 of the 1990 Arbitration Convention.
proposal, see J. SCHOLSEM, The Proposal for a Council Directive on the Elimination of Double
Taxation, in Intertax 1982, No. 11-12, p. 424.
847
COMMISSION, Guidelines on Company Taxation, SEC(90) 601 fin., para 6 explains that “the
Community action should concentrate on the measures essential for completing the internal
market”. In the field of taxation, the priority was the “removal of all of these tax obstacles currently
preventing or impeding cross-frontier business activity within the Community” (para. 16). Double
taxation “resulting from adjustments in transfer pricing” was identified (at para 13) as one of the
obstacles to be addressed urgently.
848
The directive proposal was withdrawn on January, 3, 1997 (Official Journal, No C2, p. 6).
849
See L. HINNEKENS, The Tax Arbitration Convention. Its Significance for the EC Based
Enterprise, the EC Itself, and for Belgian and International Tax Law, in EC Tax Review, 1992, p.
82.
850
CFA/WP1(72)6
851
As acknowledged in the Third Report, the hypothesis of a list of independent arbitrators was
initially formulated in the Second Report, although with reference to the (partially different) solution
of the appointment of an independent arbitrator. See CFA/WP1(72)6, Para. 11 and
FC/WP22(66)1, Para. 69.
216
These similarities depict an interplay between bilateral treaty solutions and EU solutions
to dispute settlements, which has continued also after the signature of the Arbitration
Convention, e.g., with the later adoption of arbitration in the 2008 OECD Model.
The Arbitration Convention was initially adopted only for a period of five years, but was
prolonged by a protocol of 1999 (“amending protocol”),852 on the basis of which it entered
into force again on January, 1st 2004, with retroactive effect since January 1st 2000.853
Since then, according to the new wording of Article 20, the Convention is automatically
extended for periods of five years each, until a Contracting State objects.
Further amendments to the Arbitration Convention became necessary on the occasion
of the enlargements of the European Community (and later European Union) which took
place after 1990.
Since 2006, the Convention has been supplemented by a Code of Conduct854 aimed at
ensuring its more effective and uniform application by all Member States. The Code of
Conduct essentially concerns procedural matters however, on the occasion of its
revision, in 2009, some clarifications on the scope of application of the Convention were
also included855.
Recourse to the Arbitration Convention has grown sensibly along the years. At the end
of the first 5 years of application (December 1999) pending cases were 96 856 while as
of December 2015, they have reached the considerable number of 2513857. Statistics
indicate that only a minority of cases has actually required the involvement of the
advisory commission; the arbitration stage has nonetheless a role in encouraging the
settlement of disputes at prior stages of the procedure858.
VI.4 The legal status of the arbitration convention and of the code
of conduct
The Arbitration Convention was adopted under Article 220 of the EEC Treaty (later
become Article 293 of the EC Treaty), i.e., the provision according to which “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 Community”.
852
Protocol amending the Convention of 23 July 1990 on the elimination of double taxation in
connection with the adjustment of profits of associated enterprises (1999/C 202/01), OJ C 202 p.
1 – 11, 16 July 1999.
853
See Article 3, Para. 2, of the amending protocol.
854
Code of conduct for the effective implementation of the Convention on the elimination of double
taxation in connection with the adjustment of profits of associated enterprises, OJ C 176,
28.7.2006, p. 8.
855
COUNCIL, Revised Code of Conduct for the effective implementation of the Convention on
the elimination of double taxation in connection with the adjustment of profits of associated
enterprises, (2009/C 322/01), in OJ, 30.12.2009, C 322/1
856
COMMISSION, Company Taxation in the Internal Market, SEC(2001) 1681, p. 272
857
EU JOINT TRANSFER PRICING FORUM, Statistics on Pending Mutual Agreement
Procedures (MAPs) under the Arbitration Convention at the End of 2015, Brussels, October 2016,
JTPF/014/2016/EN.
858
P. ADONNINO, La Convenzione europea 90/436 sulla cosiddetta procedura arbitrale. Limiti e
problemi, in Rivista di diritto tributario, No. 12, 2002, p. I, 1212; J. SCHWARZ, Schwarz on Tax
Treaties, Kingston-upon-Thames, 5th ed., 2018, p. 641.
217
The reference to Article 220, EEC, the territorial scope of application as well as the role
attributed to the Council, contribute to the Convention being considered as part of the
acquis communautaire. At the same time, the Convention is not EU law and – being
formally an instrument of international law – remains suspended at its borders859.
This circumstance implies that the provisions of the Convention do not have any direct
effect nor any general priority over national law860 and that the relationship with State law
is governed by the principles of international law and the rules of the States concerned.
Furthermore, the Convention is not subject to the jurisdiction of the Court of Justice of
the European Union861. This is a consequence of it not being part of EU law, but also of
the fact that, differently from some other treaties executed on the basis of Article 220 of
the EEC Treaty (Article 293 EC Treaty) or involving Member States, no election has been
made to that effect862.
The interpretation of the Arbitration Convention is thus left to the competent authorities,
and to national courts. This circumstance, in combination with the interpretation rule of
Article 3, Para. 2 of the Convention (which makes reference, for undefined terms, to the
meaning of those terms “under the double taxation convention between the States
concerned”) generates a relevant risk of non-uniform interpretation of the provisions of
the Convention, considering that in many cases the definition of national law may
ultimately come into play.863
The solution envisaged by the Commission in respect of the interpretative divergences
has been the establishment of the Joint Transfer Pricing Forum and the adoption of the
Code of Conduct on the Effective Implementation of the Arbitration Convention. In the
859
L.S. ROSSI, La convenzione relativa all'eliminazione delle doppie imposizioni in caso di
rettifica degli utili di imprese associate: uno strumento ai margini dell'ordinamento comunitario, in
Diritto e pratica tributaria internazionale, No. 3, 2001, p. 603 et seq.; G. KOFLER, Article 9.
Associated enterprises, in (E. Reimer and A. Rust eds.) Klaus Vogel on Double Taxation
Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 133; L. HINNEKENS, The Uneasy Case
and Fate of Article 293 Second Indent EC, in Intertax, No. 11, 2009, p. 604.
860
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 709 et. seq..
L. HINNEKENS, Different interpretations of the European Tax Arbitration Convention, in EC Tax
Review, No. 4, 1998, p. 247 et seq. initially submitted the hypothesis that “the Convention and
the arbitration decisions thereunder enjoy EC-wide supranational legal status, irrespective of their
form of ordinary international agreement” but has joined in later publications the mainstream
negative conclusion.
861
This conclusion is common ground in tax and EU law literature. See, for all, B. TERRA, P.
WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 709 et. seq..; M. HELMINEN,
EU Tax Law – Direct Taxation, Amsterdam, 2017, para. 5.4.1.1; O. ROUSSELLE, The EC
Arbitration Convention – An Overview of the Current Position, in European Taxation, No. 1, 2005,
p. 15; G. KOFLER, Article 9. Associated enterprises, in (E. Reimer and A. Rust eds.) Klaus Vogel
on Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 133;
862
The election of the jurisdiction of the European Court of Justice can be found in other treaties
executed under Article 220 EEC Treaty (later 293 EC Treaty), e.g., the Brussels Convention on
Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, but also the
bilateral tax treaty between Austria and Germany. See L. DE HERT, A New Impetus for the
Arbitration Convention?, in International Transfer Pricing Journal, 2005, p. 50.
863
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 712; M.
HELMINEN, EU Tax Law – Direct Taxation, Amsterdam, 2017, para. 5.4.1.1; P. PLANSKY, The
EU Arbitration Convention, in (M. Lang, P. Pistone, J. Schuch, E. Staringer eds.), Introduction to
European Tax Law on Direct Taxation, Vienna, 2012, p. 248; A. LAHODNY – KARNER, Transfer
Pricing, Mutual Agreement Procedure and EU Arbitration Procedure, in (W. Gassner, M. Lang and
E. Lechner eds.), Tax Treaties and EC Law, Vienna, 1996, p. 193
218
Communication which has proposed the adoption of the revised Code of Conduct, the
Commission has remarked that “the JTPF members were of the opinion that a common
view of the interpretation of some provisions could usefully be addressed”864.
The recourse to soft law in order to promote a more coordinated interpretation and
application of the Convention has led to improvements in certain matters (e.g., with
reference to the terms of the procedure, or to the application of the Convention to
triangular cases) but in some areas the achievements have been more limited. This is
e.g., the case of the clarifications, included in the 2009 revision of the Code of conduct,
on the application of the Convention to thin capitalization cases. The long list of
reservations (see below, at Para VI.6) indicates the enduring need of more effective
instruments, possibly within the sphere of EU law.
Finally, it should be reminded that the provision of Article 220 EEC Treaty and later 293
of the EC treaty have been abandoned in the transition to the new treaties under the
Treaty of Lisbon. Neither the TUE nor the TFUE any longer contain equivalent provisions.
While this evolution has no adverse impact on the full validity and effectiveness of the
Arbitration Convention, being it an instrument of international law, it is still unclear which
may be the effects of the repeal of the mentioned provision on the future tax policy of the
EU in the matter of double taxation865.
VI.5 Brief remarks on the material scope of application
VI.5.a The double taxation condition

The Arbitration Convention applies to taxes on income (Article 2, Para. 1) which are
identified through a country by country list rather than by means of a definition. The list
is complemented by a provision under which the Convention also applies to “any identical
or similar taxes which are imposed after the date of signature thereof in addition to, or in
place of existing taxes”; the overall provision is thus very similar to the one usually found
in bilateral treaties866. The individual country taxes covered may however happen to be
different from those to which bilateral treaties apply867.
The scope of application is defined by Article 1, under which the Convention applies
“where, for the purposes of taxation, profits which are included in the profits of an
enterprise of a Contracting State are also included or are also likely to be included in the
864
COMMISSION, Communication from the Commission to the Council, the European Parliament
and the European Economic and Social Committee on the work of the EU Joint Transfer Pricing
Forum in the period March 2007 to March 2009 and a related proposal for a revised Code of
Conduct for the effective implementation of the Arbitration Convention (90/436/EEC of 23 July
1990), Brussels 14.0.2009, COM(2009) 472 final.
865
L. HINNEKENS, The Uneasy Case and Fate of Article 293 Second Indent EC, in Intertax, No.
11, 2009, p. 606; P. PLANSKY, The EU Arbitration Convention, in (M. Lang, P. Pistone, J. Schuch,
E. Staringer eds.) Introduction to European Tax Law on Direct Taxation, Vienna, 2012, p. 241.
866
The circumstance that the Arbitration Convention lacks a general definition of taxes on income
does not seem a distinctive feature in comparison with bilateral treaties, considering that – as the
OECD Commentary on Article 2, at Point 6.1 remarks – some OECD Countries do not include
such definition in their bilateral treaties and prefer to simply list the taxes to which the treaties
apply.
867
See some examples in J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th
ed., 2018, p. 632.
219
profits of an enterprise of another Contracting State”. The above language frames double
taxation as one of the conditions for the application of the Convention, and the approach
is at all consistent with the purpose of the same Convention, which (as recurrently stated,
e.g., at Articles 6, Para. 2; 7, Para. 1 and 12 Para. 1 is the elimination of double taxation.
It should be pointed out that Article 1 does not use the term double taxation (as other
provisions of the Convention do) but rather identifies the scope of application through
the description of a situation of double inclusion.
In this scenario, it may be argued that such double inclusion only matters where it
concerns the taxable base of the taxes identified at Article 2. The above being true, the
list of taxes at Article 2 is also instrumental to the assessment of (the substantial
condition) of double taxation and to the pursuit of its elimination.
This interpretation finds support in the comparison between the two substantial
provisions of the Convention, i.e., Articles 1 and 14. The former, as just mentioned, refers
to double inclusion of profits, while the latter depicts two possible situations where double
taxation can be considered to have been eliminated. The first one is based on the same
structure of Article 1 (in that it refers to the inclusion of profits), while the second one
(Article 14, letter b) is centred on taxation, and prescribes that there is no longer double
taxation where “the tax chargeable on those profits in one State is reduced by an amount
equal to the tax chargeable on them in the other”. The taxes mentioned by Article 14,
letter b) can’t be others than those included in the scope of application of the Convention
under Article 2; as a consequence – and in order to ensure the equivalence of the two
parts of Article 14 – also the inclusion at letter a) can’t be other than in the taxable base
of the same taxes.
The definition of double taxation of Article 1 does not concern the effective tax burden
resulting from the profit adjustment, neither in any individual Member State nor at an
aggregate level868. The choice of defining double taxation through the reference to the
double inclusion (of profits) goes along with the clarification (at Article 1, Para. 3)
according to which double taxation (rectius, double inclusion) also exists where “where
any of the enterprises concerned have made losses rather than profits”. This clarification,
which is taken from the 1976 directive proposal and is conversely absent from the OECD
Model, implies that the Convention finds application also where double taxation takes
the form of reduced losses and may thus actually arise only in the future869.
It is worth highlighting that the convention makes reference to the elimination of double
taxation, with no distinction between juridical and economic double taxation.
In other words, the arbitration convention has left behind the distinction drawn in the
OECD Commentary between the two categories and has addressed the two phenomena
unitarily. Indeed, all the procedures apply identically to the adjustment of profits of
associated enterprises and of permanent establishments.
This approach has a special significance in comparison with the one of the OECD Model,
where the two situations (associated enterprise and permanent establishment) are ruled
by separate provisions (respectively, Articles 9 and 7), which are now of similar contents
but which have been substantially different until the 2010 revision.
868
M. HELMINEN, EU Tax Law – Direct Taxation, Amsterdam, 2017, para. 5.4.2.2.; L.
HINNEKENS, The Tax Arbitration Convention. Its Significance for the EC Based Enterprise, the
EC Itself, and for Belgian and International Tax Law, in EC Tax Review, 1992, p. 90.
869
M. HELMINEN, EU Tax Law – Direct Taxation, Amsterdam, 2017, para. 5.4.2.2.; L.
EC Itself, and for Belgian and International Tax Law, in EC Tax Review, 1992, p. 90.
220
VI.5.b The arm’s length condition
According to Article 1, not all cases of double inclusion of profits fall within the scope of
the application of the convention, but only those occurring, or likely to occur, “on the
grounds that the principles set out in Article 4 (…) have not been observed”870. Article 4
is the provision under which profits can be adjusted where “conditions are made or
imposed between the two enterprises (…) which differ from those which would be made
between independent enterprises”, i.e., arm’s length conditions.
The reference made by Article 1 to Article 4 entails that this latter (albeit included in
Chapter 2 – General Provisions rather than in Chapter 1 – Scope of the Convention) has
a crucial role in determining when the Convention is applicable.
The commonly agreed consequence is that Convention covers only those situations
where the double inclusion of profits derives from the “non-observation, by the
enterprises involved, of the arm’s length principle”871.
It may be argued that the Convention also applies where the non-observation of the
principles of Article 4 is attributable to the Contracting State which makes the adjustment.
Indeed, the language of the Convention is at all neutral in this respect (i.e.: refers to non-
observation without any subjective attribution) and – as a matter of fact - nothing in the
Convention indicates that the conclusion of the procedure cannot consist in the plain
endorsement of the conditions initially made between the associated enterprises.
Article 4 undisputedly means that the Convention is not applicable to double taxation
arising from profit adjustments (and thus, double inclusions) based on other than the
arm’s length principle. The procedures of the Convention are also not applicable to
disputes concerning the interpretation of any terms of the convention itself (e.g, the
concepts of profits, residence, permanent establishment, association, etc.) which are to
be resolved by the national courts872.
The arm’s length principle not only delimits the scope of application of the Convention
but also constitutes the focal point of its dispute resolution procedure.
In particular, Article 6, Para. 2, provides that the endeavour to resolve the case by mutual
agreement should be made “on the basis of the principles set out in Article 4”, Article
870
Article 1 makes reference to Article 4 or, alternatively, to the “corresponding provisions of the
law of the State concerned”. The language may be criticised in that it requires an examination of
domestic provisions and at the same time suggests that Article 4 alone can be the basis for an
adjustment, while this is a matter of domestic law, not suitable to be ruled by the Convention
itself). One possible interpretation is that Article 1 refers to domestic rules, to the extent that these
rules are consistent with the principles of Article 4. This interpretation finds support in the language
of Article 5, which refers to adjustments made by a Member State “in accordance with the
principles set out in Article 4”
871
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 718; in
similar terms see P. PLANSKY, The EU Arbitration Convention, in (M. Lang, P. Pistone, J. Schuch,
E. Staringer eds.) Introduction to European Tax Law on Direct Taxation, Vienna, 2012, p. 204; L.
EC Itself, and for Belgian and International Tax Law, EC Tax Review, 1992, p. 90.
872
L. HINNEKENS, The Tax Arbitration Convention. Its Significance for the EC Based Enterprise,
the EC Itself, and for Belgian and International Tax Law, EC Tax Review, 1992, p. 90.
221
11, Para 1, prescribes that the Advisory opinion should be based on Article 4873 and also
the decision of the competent authorities under Article 12, Para 1, should be based on
Article 4. A solution based on different criteria is acceptable, to the extent that it
eliminates double taxation, only at the outset of the procedure, i.e., only at the stage
where the competent authority which has received the complaint evaluates whether it is
“itself able to arrive at a satisfactory solution”874.
VI.6 The application to transfer pricing

The Arbitration Convention was conceived and executed with the aim of eliminating
double taxation deriving from the adjustment of profits of associated enterprises under
transfer pricing rules. In the light of the combined provision of Articles 1, Para. 1, and 4
there can be no doubt that those adjustments thus fall within its scope of application875.
An issue which has arisen in respect of the application of the Arbitration Convention to
transfer pricing cases is that Article 4 states the arm’s length principle with the same
language of Article 9, Para 1, of the OECD Model but does not provide any further
indication as to the application of said principle in individual cases876.
To the extent that the expression “conditions made (…) between independent
enterprises” can be considered as undefined, it can be argued that reference can be
made to bilateral treaties and – in this way indirectly to the OECD Guidelines877.
However, such solution does not appear to provide a sufficient degree of certainty and
uniformity.
The described gap has been addressed in the Code of conduct, which at Para. 6.1, reads
that “The arm's length principle will be applied, as advocated by the OECD (…)”878.
873
On the legal basis of the advisory opinion see, in particular, P. ADONNINO, Some Thoughts
on the EC Arbitration Convention, in European Taxation, November 2003, p. 405; L. HINNEKENS,
The Tax Arbitration Convention. Its Significance for the EC Based Enterprise, the EC Itself, and
for Belgian and International Tax Law, in EC Tax Review, 1992, p. 95 et seq.
874
L. HINNEKENS, European Arbitration Convention: Thoughts on Its Principles, Procedures and
First Experience, in EC Tax Review, No. 3, 2010, p. 110.
875
That the arbitration convention applies with respect to transfer pricing adjustment is common
ground in literature. As M. HELMINEN, EU Tax Law – Direct Taxation, Amsterdam, 2017, para.
5.4.2.2, has it “the Arbitration Convention applies in the case of a risk of double taxation caused
by transfer pricing adjustments”. P. ADONNINO, Some thoughts on the EC Arbitration
Convention, in European Taxation, 2003, p. 405, remarks that “transfer pricing issues are thus
not specifically referred to, although transfer pricing problems are the ones that normally lead to
an adjustment of the profits of associated enterprises”.
876
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 712 et. seq..
Conversely, J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018, p.
633 submits that even though no explicit reference to the OECD Guidelines, the adoption of the
OECD Model language means that the various OECD Studies on transfer pricing are implicitly
recognised.
877
P. ADONNINO, La Convenzione europea 90/436 sulla cosiddetta procedura arbitrale. Limiti e
problemi, in Rivista di diritto tributario, No. 12, 2002, p. I, 1227.
878
COUNCIL, Revised Code of Conduct for the effective implementation of the Convention on
the elimination of double taxation in connection with the adjustment of profits of associated
enterprises, (2009/C 322/01), Para. 6. 1. a). The same wording was in the initial Code of conduct
for the effective implementation of the Convention on the elimination of double taxation in
connection with the adjustment of profits of associated enterprises, at Para. 3.1.2.. L.
HINNEKENS, European Arbitration Convention: Thoughts on Its Principles, Procedures and First
222
The reference is made to the OECD, rather than to a specific OECD document. It may
be inferred that – for the purposes of the arbitration convention – not only the Transfer
Pricing Guidelines are relevant, but also other OECD sources, such as, e.g., the
Commentary on Article 9 of the OECD Model. This can have indirect effect for the
purposed of the definition of the scope of application of the Arbitration Convention, e.g.,
with respect to cases deriving from transactional adjustments.
Finally, some comments should be made on how the substantial provisions of the
Arbitration Convention contribute to the elimination of double taxation.
As mentioned, the Arbitration Convention does not explicitly provide for corresponding
adjustments (in the way Articles 9, Para. 2 and 7, Para. 3 of the OECD Model do) but
rather targets the elimination of double taxation879 (Articles 6, Para 2 and 7 Para. 1). The
elimination of double taxation is again provided as the subject matter of the opinion of
the advisory commission under Article 7, Para. 1. and the necessary effect of the
competent authorities decision under Article 12, Para. 1.
The concrete measures suitable to achieve the envisaged results are addressed, at
Article 14, under which double taxation can be considered to have been eliminated, when
either “the profits are included in the computation of taxable profits in one State only” or
“the tax chargeable on those profits in one State is reduced by an amount equal to the
tax chargeable on them in the other”. It has been argued that the first solution
corresponds to the exemption method and the second to the credit method880.
These specifications seems more clear than the reference to “an appropriate adjustment
to the amount of the tax charged therein on those profits” made by Article 9, Para. 2, of
the OECD Model.
Some uncertainty remains with respect to secondary adjustments. In their responses to
the questionnaire promoted by the Joint Transfer Pricing Forum (JTPF/018/REV1/2011),
most Member States which apply secondary adjustments stated that they do not
consider double taxation issues resulting from secondary adjustments as being covered
by the Arbitration Convention (AC), only a few consider them covered by the AC
Convention, and some other MS indicated that the applicability of the AC to secondary
adjustments remains an open question for them881.
VI.7 The application to thin capitalization and interest limitation

The Arbitration convention applies where there is a case of double taxation (as defined
at Article 1) and the arm’s length principle (as stated at Article 4) has not been observed.
Whether the Arbitration Convention applies to double taxation caused by thin
capitalisation adjustments is a rather disputed matter.
Experience, in EC Tax Review, No. 3, 2010, p. 111 points out that Para 6.1 of the Code of Conduct
concerns the mutual agreement stage and not the advisory commission stage, but that it is
reasonable and recommended that also the advisory commission uses the OECD Guidelines and
methodology.
879
KOFLER, Article 9. Associated enterprises, in (E. Reimer and A. Rust eds.) Klaus Vogel on
Double Taxation Conventions, Alphen aan den Rijn, 4th ed., 2015, m. no. 137
880
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 725.
881
EU JOINT TRANSFER PRICING FORUM, Final Report on Secondary Adjustments, Brussels,
18th January 2013 (JTPF/017/FINAL/2012/EN), p.
223
Article 4 has the same wording of Article 9, Para. 1 of the OECD Model Convention, and
poses the same interpretative questions as to transactional adjustments in general and
to thin capitalisation more specifically.
Some authors have argued in favour of the application of the Convention to thin
capitalisation ever since its entry into force882. This has also been the position of the
Commission883.
A contribution in the same direction was made with the adoption of the Code of Conduct.
Albeit no explicit mention of the thin capitalisation issue was made in the first version of
the Code of Conduct, the reference made to the OECD documents may be considered
as also a reference to the OECD position on the specific matter of thin capitalisation.
A more explicit contribution to this matter has ultimately come with the adoption of the
revised Code of conduct in 2009. A specific paragraph of the 2009 Revised Code of
Conduct affirms that “profit adjustments arising from financial relations, including a loan
and its terms, and based on the arm's length principle are to be considered within the
scope of the Arbitration Convention”.
The statement follows a JTPF Secretariat discussion paper released in January 2008884,
which takes the view that thin capitalisation rules can be considered to be based on the
arm’s length principle just as transfer pricing rules are and that when the AC makes
reference to adjustments it does not only mean adjustments made by tax authorities but
also those made by the taxpayers in application of thin cap rules.
The Commission has remarked that “a large majority of member states concluded that
the AC covers thin capitalisation (…)” and that consequently not only adjustments related
to interest rates, but also those concerning “the amount of the loan and the borrowing
capacity” are covered by the Arbitration convention885.
At the same time, both the Code of Conduct and the mentioned Communication of 14
September 2009 bear witness of some disagreement among Member States.
Article 1.2 of the Code of Conduct is accompanied by reservations from 10 Member
States886. A few of them seem aimed at safeguarding domestic anti-avoidance rules,
882
See, in particular, D. PILTZ, International aspects of thin capitalization. General Report, in
Cahiers de Droit Fiscal International, Deventer, 1996, p. 137; P. ADONNINO, Some thoughts on
the EC Arbitration Convention, in European Taxation, 2003, p. 405 argues that, with respect to
interest exceeding the debt/equity ratio, the effect “is identical to the effect deriving from the
denied deductibility of costs exceeding the arm’s length standard” thus implicitly supporting the
application of the Convention to thin cap cases.
883
COMMISSION, Company Taxation in the Internal Market. Commission Staff Working Paper,
SEC (2001) 1681, affirms (p. 363) that "it should be made clear that thin capitalisation rules are
covered. This, again, would in principle not require an amendment to the Convention".
884
COMMISSION, EU Joint Transfer Pricing Forum Secretariat Discussion Paper on Thin
Capitalisation, Brussels, January 2008, JTPF/005/2008/EN
885
and the European Economic and Social Committee on the work of the EU Joint Transfer Pricing
Forum in the period March 2007 to March 2009 and a related proposal for a revised Code of
Conduct for the effective implementation of the Arbitration Convention, COM(2009) 472 final,
para. 19
886
The reservations derive quite closely from the answers given by Member States to a
questionnaire by the JTPF on whether or not they considered a case of "thin capitalization" under
several scenarios to be solvable under the Arbitration Convention. The document is included as
Annex 4.2 to the COMMISSION STAFF WORKING DOCUMENT Accompanying the
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN
224
others contain the (arguably unnecessary) specification that the Arbitration Convention
does not concern interest deduction limitation rules which are not based on the arm’s
length principle. But most of the reservations are a serious threat to the effectiveness of
the Code of the Conduct, since they plainly refuse the application of the arm’s length
principle to the amount of the loan, in three cases (The Netherlands, Poland and
Portugal) pointing to the lack of agreed standards on the matter.
There is no reservation from France and the UK, while one is from Italy, which considers
that the Arbitration convention does not apply to “double taxation arising from
adjustments to the amount of loans” or “occurred because of the differences in domestic
rules on the allowed amount of financing or on interest deductibility”.
The Commission, in summarising the reservation, emphasises those which are based
on the argument that anti-avoidance rules and the application of the arm’s length
principle to a financial transaction are different concepts.
The opinion of the Commission, anyway, is that Article 4 is “sufficiently broad to cover all
aspects of thin capitalisation rules, whether they concern the interest rate or the amount
of the loan”.
This is also, at present, the opinion of the majority of scholars887.
VI.8 The application to hybrid financial instruments

Article 4 delimitates the scope of application of the convention to adjustments based on
the arm’s length principle, thus excluding double taxation deriving from rules of a different
nature888.
In other words, “any source of double taxation arising from reasons other than the
application of the arm’s length principle is outside the scope of the convention”889.
The Revised Code of Conduct makes reference to the “financial relations, including a
loan and its terms”, a language which includes not only the amount of the loan but which
seems capable of embracing also the qualitative terms such as the maturity, the
PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE on the work of
the EU Joint Transfer Pricing Forum in the period March 2007 to March 2009 and a related
proposal for a revised Code of conduct for the effective implementation of the Arbitration
convention (90/436/EEC of 23 July 1990) Final Report of the EU Joint Transfer Pricing Forum on
the Interpretation of some Provisions of the Arbitration Convention, Brussels, 14.9.2009,
SEC(2009)1169 final
887
M. HELMINEN, EU Tax Law – Direct Taxation, Amsterdam, 2017, para. 5.4.2.2; p. 233; X.
VAN VLEM et Al., The EU Arbitration Convention: Reinforcing the Procedure To Cope with an
Expected Flood of Double Taxation Disputes, in International Transfer Pricing Journal,
July/august, 2014, p. 233.
888
This circumstance evokes the distinction drawn in Italian tax literature between conflicts of
qualification and conflicts of quantification. See G. MAISTO, Il “transfer price” nel diritto tributario
italiano e comparato, Padova, 1985, p. 257; and, with specific reference to the Arbitration
Convention, S. F. COCIANI, Brevi note a margine dell’art.8 della convenzione per l’eliminazione
delle doppie imposizioni da rettifica dei prezzi di trasferimento, in Diritto e pratica tributaria, 1993,
I, p. 2138.
889
J. SCHWARZ, Schwarz on Tax Treaties, Kingston-upon-Thames, 5th ed., 2018, p. 633. In
similar terms, B. TERRA, P. WATTEL, European Tax Law, 6th ed., 2012, p. 718; P. PLANSKY,
The EU Arbitration Convention, in (M. Lang, P. Pistone, J. Schuch, E. Staringer eds.) Introduction
to European Tax Law on Direct Taxation, Vienna, 2012, p. 204; M. HELMINEN, EU Tax Law –
Direct Taxation, Amsterdam, 2017, para. 5.4.2.2,
225
convertibility and those others features that typically constitute elements of the
characterisation of the loan as debt or equity under Member State rules. Of course, the
Code of Conduct also confirms that the adjustments are within the scope of the
Arbitration Convention only where “based on the arm's length principle”.
So, where a national rule characterised a (related party) financial relationship as equity
financing or debt financing on the basis of a comparison with the conditions “which would
be made between independent enterprises”, and adjustments were made under such
rule, then the Arbitration Convention could come into play. However, as recognised in
respect of the analogous provision of Article 9, Para. 1 of the OECD Model (see Para.
V.8.b.1 above) characterisation rules of this kind do not seem to exist in practice.
Lack of connection with the arm’s length principle implies that, in the current setting of
the Arbitration Convention, cases of double taxation resulting from characterization
conflicts or from the disparities of the rules of the Member States on debt financing and
equity financing would be generally left unsolved890.
VI.9 The application to cross – border mergers

With respect to cross-border mergers, it has to be analyzed whether the Arbitration
Convention can apply to a possible dispute concerning the value to be attributed to the
transferred assets, for the purposes of taxation by the State of the absorbed company
and for the recognition of the same assets by the State of the absorbing company.
The question (already examined above with respect to bilateral treaties) is whether a
cross-border merger falls within the objective scope of application of the Arbitration
Convention and this on its turn depends on whether the transfer of assets, deriving from
a cross-border merger, can be framed within the concept of “commercial or financial
relations”.
The Arbitration Convention does not define this latter terms, so that (on the basis of
Article 3, Para. 2) unless the context otherwise requires, the meaning must be searched
in “the double taxation convention between the States concerned”.
The issue thus becomes the same that has already been examined at Para V.9 with
reference to bilateral treaties. The same positive conclusions there submitted would thus
hold true also with reference to the Arbitration Convention.
VI.10 The directive on tax dispute resolution: a possible solution for

conflicts leading to economic double taxation?
VI.10.a Introductory remarks

The shortcomings of the existing bilateral treaties and the Arbitration Convention and the
enduring aim of bringing dispute resolution within the scope of EU law891, have led the
890
See B. TERRA, P. WATTEL, European Tax Law, 6th ed., 2012, p. 719, who specifically give
the example of a loan between a parent company and its subsidiary company reclassified as
equity capital.
891
This has been the aim of the Commission, still many years after the withdrawal of the 1976
Proposal. See COMMISSION, Towards an Internal Market without Tax Obstacles, COM (2001)
226
Commission, within the context of a corporate reform package892, to presenting a
proposal for a directive on dispute resolution893.
The directive proposal is aimed at improving the dispute resolution procedures within the
EU but also at enlarging the range of cases where such procedures can be applied.
The proposal has been endorsed in the EESC opinion adopted on February 22nd 2017
and in the Report of the European Parliament of June 14th 2016, which includes a number
of proposed amendments.
Some critical remarks have been made by a few National parliaments894 and, following
discussions at the Council level, a Presidency compromise draft has been made
available on May 19th 2017895 which contains extensive amendments mostly concerning
the scope of application, the qualification of arbitrators and the option to setting up a
standing Alternative Dispute Resolution Commission. An agreement on the Presidency
Compromise was reached at the meeting of the Economic and Financial Council held on
May 23rd 2017.
The final text of the directive, was approved by the Council – without substantial changes
- on 10 October 2017896.
The following remarks are referred to the text of the finally adopted directive, even though
a comparison with the initial proposal will be made with respect to the scope of
application, in the following paragraph.
The directive is not designed to replace existing dispute resolution provisions (of either
bilateral treaties or the Arbitration Convention) but, as illustrated in Recital No. 7, “should
build on existing systems”.897 This sought interaction connotes many of the provisions of
the proposed directive, and in particular those concerning the scope (Article 1), the
definitions (Article 2), information to be included in the affected person complaint (Article
3, Para. 3, letter d) and the overlap between different remedies (Article 4, Para. 2 , Article
14, Para. 4 and Article 15).
With the implementation, procedural improvements will be achieved in respect of the
Arbitration Convention. These especially concern the access to the procedures, the set-
582, according to which the provision of the Arbitration Convention “should be made subject to
interpretation by the Court, preferably by turning it into an instrument of Community Law”.
892
The package proposal was presented on October 25th 2016 and is illustrated in COMMISSION,
Building a fair, competitive and stable corporate tax system for the EU, COM(2016) 682 final.
893
COMMISSION, Proposal for a Council Directive on Double Taxation Dispute Resolution
Mechanisms in the European Union, COM(2016) 686 final.
894
The Swedish Parliament has questioned the consistency of the proposal with the principle of
subsidiarity, while the Czech Senate has taken the view that dispute resolutions be addressed by
a Recommendation rather than by a Directive. See European Parliament, Legislative
Observatory, Procedure file, Document reference 2016/0338(CNS).
895
COUNCIL, Note on a general approach, Brussels, 19 May 2017, 9420/17
896
Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms
in the European Union, in OJEU, L265 of 14 October 2017, p. 1.
897
This means, inter alia, that Member States still have the competence to apply existing and
conclude future double taxation dispute resolution mechanisms. See F. DEBELVA, J. LUTS, The
European Commission’s Proposal for Double Taxation Dispute Resolution: Turning the Tide?, in
Bulletin, 2017, No. 5, Para. 3.1.2.
227
up of the advisory or alternative resolution commissions and the interaction with domestic
remedies898.
The improvements are even more significant where the comparison is made with the
present network of bilateral treaties between member states. Very few bilateral treaties
between Member States indeed include an arbitration clause899.
Further improvements are expected to derive from the fact that the new provisions are
embedded in a directive rather than in treaties under international law. This circumstance
implies that late or wrong implementation by Member States can be the object of an
infringement procedure and, even more important, the dispute resolution provisions will
fall under the jurisdiction of the European Court of Justice.
The CJEU would thus – upon initiative by the interested parties – rule on whether the
procedures have been properly followed and whether the conditions (including the
substantial conditions concerning the access to the procedures) have been correctly
applied in the context of EU law. Also, the CJEU will have jurisdiction on whether the
effects of the directive have been appropriately achieved.
At the same time, since the directive is essentially limited to procedural matters and does
not provide substantive criteria for the elimination of double taxation or distributive rules,
the CJEU will not be allowed to rule on the own merits of the cases submitted to its
examination900.
A further consequence of the introduction of the directive is that its dispute resolution
procedures may potentially be subject to the EU Charter of Fundamental Rights and, in
particular, to the fair trial protection provided by Article 47901.
VI.10.b Substantial provisions: the material scope of application
VI.10.b.1 The initial proposal

The 2016 initial proposal concerned, generally, “situations, in which different Member
States tax the same income or capital twice” (first Recital) and put forward rules “on the
mechanisms to resolve disputes between Member States on how to eliminate double
taxation of income from business (…)” (Article 1).
898
See in particular, for a critical evaluation of the procedural improvements, S. GOVIND, L.
TURCAN, The Changing Contours of Dispute Resolution in the International Tax World:
Comparing the OECD Multilateral Instrument and the Proposed EU Arbitration Directive, in
Bulletin, 2017, No. 3/4, Para. 3.3.
899
See F. DEBELVA, J. LUTS, The European Commission’s Proposal for Double Taxation Dispute
Resolution: Turning the Tide?, in Bulletin, 2017, No. 5, Para. 2.2. The Authors remark that only
14 treaties out of the 370 treaties in force between EU Member States have a mandatory
arbitration clause.
900
L. CERIONI, The Commission’s Proposal for a Directive on Double Taxation Dispute
Resolution Mechanisms: Overcoming the Final Hurdle of Juridical Double Taxation within the
European Union?, in European Taxation, 2017, p. 183.
901
For an evaluation of the mentioned relationship, see D. DE CAROLIS, The EU Dispute
Resolution Directive (2017/1852) and Fair Trial Protection under Article 47 of the EU Charter of
Fundamental Rights, in European Taxation, 2018, p. 495 s.
228
Article 1 of the 2016 proposal contained two substantial requirements, one concerning
the qualification of income (as “income from business”) and the other one referring
(implicitly) to the circumstance that such income was subject to “double taxation”.
The first requirement had the effect of excluding from the remedial procedures of the
directive all situations where business income was not concerned. So, for example
double taxation of employment income or portfolio dividends received by individuals
would have remained untouched by the new instrument. Uncertainties could have
derived from the fact that the proposed directive did not provide a definition of “income
from business”902, so that e.g., it may have been questioned whether items of income
subject to an autonomous characterisation in a cross-border context, and especially
under bilateral treaties, like dividends or royalties, were to fall within the scope of
application of the proposed directive where received by a business903.
The second requirement, that of “double taxation” conversely depicted a scope of
application which was extraordinarily wide.
The notion of “double taxation” was defined at Article 2, Para 3 of the initial proposal as
the “imposition of taxes (…) by two or more tax jurisdictions in respect of the same
taxable income or capital”904. The same provision further specified that double taxation
included the levy of “additional tax”, the “increase in tax liability”, and also the
“cancellation or reduction of losses”. The definition contained also two limitations. One
concerned the taxes to be taken into consideration: as in other EU directives, the
identification of eligible taxes was entrusted to a list, included as Annex I to the proposed
directive. The other limitation, provided by Article 1, Para. 3, excluded income “within
the scope of a tax exemption or to which a zero rate applies under national rules”.
It has been argued that a further limit derived from the reference (at Article 3, Para. 3,
letter d) to “applicable national rules and double taxation treaties”, which would have
implied that the dispute should have necessarily concerned a case within the scope of a
treaty rule905. This interpretation appears too strict, both from the comparison with the
Presidency Compromise (where the proposed limitation was explicitly introduced) and
from a contextual reading of the above provision, which may rather be attributed a merely
procedural function, so that if no treaty is applicable to a given case, this does not mean
that the entire directive is not applicable to that case.
Lack of any reference to the subjective profile of double taxation (i.e., of any requirement
that double taxation should concern the same person) supports the argument that the
902
On the interpretation of the notion of income from business for the purposes of the proposed
directive, see F. DEBELVA, J. LUTS, The European Commission’s Proposal for Double Taxation
Dispute Resolution: Turning the Tide?, in Bulletin, 2017, No. 5, Para. 2.2.4.6 (who propose the
distinct EU law interpretation of the terms “income” and “business”).
903
According to L. CERIONI, The Commission’s Proposal for a Directive on Double Taxation
Dispute Resolution Mechanisms: Overcoming the Final Hurdle of Juridical Double Taxation within
the European Union?, in European Taxation, 2017, p. 184, different provisions of the proposed
directive and its explanatory memorandum indicate that the notion is broad enough to include
portfolio dividend received by companies.
904
Reference to taxes on capital was made in the definition of double taxation and some other
provisions, but was missing in Article 1, Para. 1, which only referred to income (from business)
and in Annex (containing the list of taxes).
905
L. CERIONI, The Commission’s Proposal for a Directive on Double Taxation Dispute
Resolution Mechanisms: Overcoming the Final Hurdle of Juridical Double Taxation within the
European Union?, in European Taxation, 2017, p. 185.
229
proposed directive should apply to both juridical and economic double taxation906. The
same objective approach has inspired the drafting of Article 4, Para. 2, i.e. the delineation
of cases where double taxation shall be regarded as eliminated.
By contrast, Article 3, Para 1, stated that a complaint may have been submitted by “any
taxpayer subject to double taxation”, thus possibly suggesting that double taxation
should have concerned one single taxpayer (i.e. that only juridical double taxation did
matter). However, such a consequence (e.g., the exclusion of transfer pricing cases)
would be in conflict with most of the provisions of the proposed directive and with the
intention of the Commission907.
Visibly missing from the 2016 proposal was guidance on how the elimination of double
taxation – i.e., the objective defined by Article 4, Para. 2 – was to be achieved in the
specific cases. In other words, the proposal aims at being applied to a wide range of
double taxation cases and at not leaving any of those case unsolved, but – differently
from what happens in the Arbitration Convention, based on the arm’s length principle -
does not provide any substantial criteria which can support the Competent Authorities or
the Advisory Commission in the identification of the solution.
The reference to double taxation treaties (e.g., in mentioned Article 3, Para. 3, letter d)
and the specification in the Recitals that the directive should “build on existing systems”
indicate bilateral tax treaty criteria can be adopted, where possible. But tax treaties do
not address all possible cases, especially where economic double taxation is at stake.
Chapter 5 above highlights that treaties are ineffective in respect of, e.g., national interest
qualification rules, which deny the deduction of interest in the State of the borrower and
taxed the same interest in the State of the lender. A case of this kind would have likely
qualified as a case of double taxation under Articles 1 and 2, Para. 3 of the proposed
directive.
But, as also illustrated at Chapter 7 above there is no available qualification criteria at
either EU or treaty law level which can lead to a solution of the case. This shortcoming
would create difficulties, risks of lack of consistency in the solutions envisaged along time
and also possible conflict within the national system concerned (where, e.g., competent
authorities may not have the power to deviate from national statutory rules).
VI.10.b.2 The Presidency compromise and the final text

The Presidency compromise has defined the scope of application of the directive in a
rather different way.
The focus has been shifted from the elimination of double taxation to the solution of
disputes concerning the interpretation and application of treaties and to the matters
giving rise to such disputes, defined at Article 1 as a “question of dispute”.
Also, reference to “business income” has been eliminated and the concerned taxes are
designated by reference to existing treaties (at Article 2, Para. 1, letter c) rather than to
a specific list.
906
See, accordingly, F. DEBELVA, J. LUTS, The European Commission’s Proposal for Double
Taxation Dispute Resolution: Turning the Tide?, in Bulletin, 2017, No. 5, Para. 3.2.4.1
907
See, accordingly, S. GOVIND, L. TURCAN, The Changing Contours of Dispute Resolution in
the International Tax World: Comparing the OECD Multilateral Instrument and the Proposed EU
Arbitration Directive, in Bulletin, 2017, No. 3/4, Para. 3.2; F. DEBELVA, J. LUTS, The European
Commission’s Proposal for Double Taxation Dispute Resolution: Turning the Tide?, in Bulletin,
2017, No. 5, Para. 3.2.4.5.
230
Double taxation still permeates the text of the directive908 and is still relevant in the
definition of the scope of application of the amended proposal: under Article 15 “a
Member State may deny access to the dispute resolution procedure under Article 6 on a
case by case basis where a question of dispute does not involve double taxation”.
However, the substantial condition is the existence of a dispute under a treaty, to the
effect that cases of double taxation can be addressed only to the extent that they fall
within the scope of such treaties.
The directive, in essence, surrenders any ambition to provide a more general remedy
against double taxation and simply provides a procedural supplement to existing treaties.
In this sense, Article 1, Para 1 of the amended proposal reads that it “lays down rules on
a mechanism to resolve disputes” and precisely, only those which “arise from the
interpretation and application of agreements and conventions that provide for the
elimination of double taxation”. Accordingly, under the reworded Article 3, the complaint
by the affected person must make reference to “applicable national rules and agreement
or convention referred to in Article 1”.
Furthermore, according to Article 13, Para. 2., the Advisory Commission or Alternative
Dispute Resolution Commission “shall base its opinion on the provisions of the applicable
agreement or convention referred to in Article 1 as well as any applicable national
rules”909. This entails no change to the substantial set of rules of existing treaties
(examined in Chapters 5 and 6 above).
A relevant element for the delineation of the scope of the directive is the identification of
which “agreements and conventions” fall within the definition of mentioned Article 1. In
particular, the question may arise whether the definition includes only bilateral treaties
or also the Arbitration Convention.
This latter interpretation seems preferable.
Indeed, albeit Article 1 does not mention expressly the Arbitration Convention, this latter
is often referred to in the Recitals, especially through making joint reference to both
bilateral treaties and the Arbitration Convention910. Recital No. 7, in particular, makes
reference to the Convention when addressing one of the elements (the taxes covered)
which define the scope of application of the directive911.
So, one the one side, there is nothing in Article 1 which can exclude the Arbitration
Convention – which is indeed a convention and provides for “the elimination of double
908
Recital No. 2 mentions “in particular disputes leading to double taxation”, as well as Recital
No. 6. The definition of double taxation is still contained, and largely unchanged, at Article 2, Para
3.
909
No such boundaries are provided by Article 4 with reference to the Mutual Agreement
Procedure.
910
Recital No. 2 refers to “(…)the effective resolution of disputes concerning the interpretation
and application of such bilateral tax treaties and the Union Arbitration Convention (…)”; Recital
No. 3 points out the limits of “The mechanisms currently provided for in bilateral tax treaties and
in the Union Arbitration Convention (…)”; Recital No. 6 affirms that the resolution of disputes
should apply to the “interpretation and application of bilateral tax treaties and of the Union
Arbitration Convention”.
911
Recital No. 7 indicates that “This Directive should apply to all taxpayers that are subject to
taxes on income and capital covered by bilateral tax treaties and the Union Arbitration
Convention”.
231
taxation”912 - and, on the other side, there are multiple indications that the EU legislature
has not intended to limit the application of the directive to bilateral treaties.
The proposed interpretation is shared by early commentators913.
The demarcation of the scope of application of the amended proposal will have effect on
the effectiveness of its remedial measures in respect of economic double taxation.
Double taxation deriving from transfer pricing adjustments does not seem to pose
specific issues, considering that the directive applies, under Article 1, to cases dealt by
“agreements and conventions that provide for the elimination of double taxation (…)” and
that both bilateral treaties and the Arbitration Convention (also having in mind Recitals
No. 2) fall, as submitted above, within such category. The advantage brought by the
directive would in such case derive essentially from the procedural improvements.
The benefits of the directive may be more sensible with respect to thin capitalisation
cases, at least where the national rules concerned are based on the arm’s length
principle. Presently, many Member States oppose to the application of treaty-based
arm’s length rules to thin capitalisation controversies, as the reservations in the OECD
Commentary and in the Code of Conduct indicate. The access to the dispute resolution
procedures provided by bilateral treaties or by the Arbitration Convention may be
correspondingly impeded.
In the framework of Directive (EU) 2017/1852, the issue whether thin capitalisation falls
within the scope of application of bilateral treaties or the Arbitration Convention qualifies
as a “question of dispute”, to the extent that It arises from the interpretation of “agreement
and conventions”.
The above being true, the possible rejection of a complaint (likely on the basis of Article
5, Para. 1, letter b, i.e.,on the argument that “there is no question in dispute”) may be
subject to appeal “in accordance to national rules” (Article 5, Para. 3) when all States
reject the complaint or in front of the Advisory Commission (Article 6) where at least one,
but not all States reject the complaint.
In either case, a decision on whether the matter of the controversy constitutes a question
in dispute under Article 1 necessarily requires the examination of the scope of application
of the underlying convention. The case may ultimately be brought in front of the Court of
Justice of the European Union.
This may, although non immediately, lead to a uniform interpretation not only of Directive
(EU) 2017/1852 itself, but - arguably - also of the scope of application of the underlying
“agreement and conventions”..
The same should apply to disputes concerning the recognition of taxable value of assets
in cross-border mergers.
By contrast, it is more difficult to depict possible improvements with reference to
economic double taxation deriving from the different qualification of financial instruments.
For the reasons discussed above, at Chapters 5 and 6, a situation of this kind would not
912
This circumstance not only arises from the text of the Arbitration Convention but also from the
title, which is “Convention on the elimination of double taxation in connection with the adjustment
of profits of associated enterprises”.
913
In favour of the application of Council Directive (EU) 2017/1852 to the Arbitration Convention,
see H.M. PIT, Dispute resolution in the EU: The EU Arbitration Convention and the Dispute
Resolution Directive, Amsterdam, 2018, Para. 26.3.4; S. GOVIND, The New Face of International
Tax Dispute Resolution: Comparing the OECD Multilateral Instrument with the EU Dispute
Resolution Directive, in EC Tax Review, 2018, p. 311
232
generally fall within the scope of application of existing bilateral treaties based on the
OECD Model, nor of the Arbitration Convention. The above being true, also the directive
would not apply.
The conclusion may be different in respect of those treaties which – departing from the
OECD Model - address economic double taxation of dividends. In such circumstances,
the elimination of double taxation may depend (as shown in the UK Court decision in
HMRC v First Nationwide, discussed above at Para V.8.f) on the interpretation of the
concept of dividend for the purposes of the treaty, a matter of dispute which seems to be
within the scope of the directive.
VI.11 Answers to the research (sub) questions and conclusive

remarks
With reference to the first research (sub) question, it can be argued that the Arbitration
Convention has filled the gaps of the network of bilateral tax treaties between EU
Member States, not only because some treaties were simply missing at the time of the
adoption of the Arbitration Convention, but in more detail because some treaties did not
include provisions equivalent to Article 9, Para. 2 of the OECD Model or had limited
Mutual Agreement Procedures.
It can be then submitted that (not considering the procedural gaps914, which have not
been examined in the above analysis) the Arbitration Convention is suitable to providing
a remedy against double taxation caused by lack of coordination of transfer pricing
adjustments.
The same can’t be affirmed in general with respect to thin capitalisation. The Arbitration
Convention poses the same interpretative divergences and uncertainties raised by
bilateral treaties and the circumstance that it is not an instrument of EU law impedes the
formation of a uniform interpretation by the European Court of Justice on the matter. The
issue has been addressed in the 2009 version of the Code of Conduct which has only
partially achieved the inclusion of thin capitalisation cases within the scope of the
Convention, due to reservations made by many Member States.
Similar problems may arise about the application of the Arbitration Convention to the
transfer of assets under a cross-border merger. Lacking a uniform interpretation, the
solution will ultimately depend on the interpretation that the Member States concerned
attribute to the term “commercial or financial relationship” as used in Article 4.
The arbitration convention is plainly not applicable to economic double taxation deriving
from conflicts of qualification and different treatment of debt and equity in the Member
States.
In respect of the second (sub) research question, it can be submitted that the outlined
situation changes only to a limited extent after the approval of the Dispute Resolution
Directive.
914
The functioning of the arbitration procedure has shown along the years several gaps, which
have been examined in several documents by the Commission and the Joint Transfer Pricing
Forum, have been highlighted by many commentators and arise from the statistics of cases
completed, which are still a minor share of those initiated. For a detailed review of the most critical
points, see H. M. PIT, Improving the Arbitration Procedure under the EU Arbitration Convention,
in EC Tax Review, 2015, Part 1, p. 15 and Part 2, p. 78.
233
Indeed, the directive will entail some procedural improvements in comparison with the
Arbitration Convention and with the present network of bilateral treaties between member
states, very few of which include an arbitration clause.
However, the directive presupposes a dispute under a bilateral treaty or the Arbitration
Convention, so that it simply constitutes a procedural supplement in respect of cases
which already now fall within the scope of application of said treaties or Convention.
As a result, cases of economic double taxation which are outside the scope of application
of existing treaties will be left unsolved.
This is particularly the case of economic double taxation deriving from conflicts of
qualification and different treatment of debt finance and equity finance in the Member
States (except where individual treaties provide specific rules diverging from the OECD
Model Convention).
The adoption of the Dispute Resolution Directive will be beneficial in matters (thin
capitalisation and transfer of assets in the occasion of a cross-border merger) where the
application of the treaties or the Arbitration Convention may be disputed. As illustrated,
the improved rules of access to the procedure will likely expand the scope of application
of existing treaties and lead to a more uniform interpretation of their scope of application.
By contrast, further extensions of the scope of application of the Dispute Resolution
Directive would be necessary in order to provide effective solutions to other cases of
economic double taxation. However, a solution in this direction would necessarily require
also the provision of specific distributive rules, since a mere procedural instrument (as it
was the case of the proposed dispute resolution directive in its initial version of 2016 and
the case of the Italian general prohibition of double taxation addressed at Para. IV.2.a
above) may be ineffective or may create lack of consistency in the solutions adopted on
a case by case basis.
The resolution of double taxation cases requires both substantial allocation or
qualification criteria and an effective procedure. With the possible adoption of the
proposed directive, the EU will have achieved the second requirement. Further work has
to be done on the first one, and this would oblige to perform a detailed examination of
cases which fall outside the scope of application of existing bilateral treaties and the
Arbitration Convention.
234
VII ECONOMIC DOUBLE TAXATION IN THE TFEU AND THE CORPORATE TAX
DIRECTIVES
VII.1 Introduction
This chapter is aimed at investigating if economic double taxation is in breach of the
internal market freedoms of the TFEU and to what extent, and with the adoption of which
criteria, is addressed by the EU corporate tax directives.
The analysis will be carried out in the light of the following research questions:
1. Is economic double taxation in breach of the internal market freedoms,
especially with reference to the selected paradigms?
2. Can any criteria be inferred from the CJEU case law or from the EU corporate
tax directives that can guide the solution of unregulated situation of economic
double taxation?
The analysis will be conducted with the following methodology:

 examination of the decisions of the CJEU that may have directly addressed the
paradigms of economic double taxation within the scope of the present
dissertation;
 examination of the decisions of the CJEU that may have addressed other
situations of cross-border economic double taxation and in particular, the
economic double taxation of corporate dividends, or situations which have
relevant features in common with one or more of the paradigms of economic
double taxation within the scope of the present dissertation;
 examination of the relevant provisions of corporate tax directives also in the
light of the preparatory work;
 assessment of the applicability of any criteria possibly inferred from the
aforesaid examination to the four paradigm within the scope of the present
dissertation.
VII.2 The principles of judicial interpretation of the European Union

Treaties in tax matters
VII.2.a Double taxation in the European Treaties

Neither the Treaty on European Union (“TEU”) nor the Treaty on the Functioning of the
European Union (“TFEU”) presently include any provision containing the expression
“double taxation”915 or equivalent.
Indeed, the Treaty of Lisbon has not reproduced Article 293 of the EC Treaty, (formerly
Article 220 of the Treaty of Rome) which provided that “Member States shall, so far as
915
An exception is represented by Protocol No. 7 to the TFEU, which concerns the privileges and
immunities of the European Union and which provides at Article 13 special rules with respect to
the application of conventions on the avoidance of double taxation to officials and other servants
of the Union.
235
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 Community (…)”.
The tax case law of the Court of Justice had clarified in Gilly that the rule was not directly
applicable, since it merely defined a number of matters on which the Member States
were to enter into negotiations with each other “so far as is necessary” and the abolition
of double taxation was just “an objective of any such negotiations”916.
Nonetheless, the provision has played a significant role in the tax policy of the EU, having
constituted the legal basis of the 1990 Arbitration Convention, which has specifically
addressed economic double taxation.
The repeal of Article 293 EC has not reduced the prerogative of Member States to
conclude international agreements between them917, even in connection with EU
policies918, provided that such agreements comply with EU law, and in particular the
fundamental freedoms. On the contrary, it can be argued that the repeal of Article 293
clears the way for more incisive actions of the EU institutions in this matter 919.
The lack of a direct prohibition of double taxation or, more in general, of provisions
specifically related to income taxation, does not imply that double taxation is not relevant
for EU law purposes.
It indeed forms part of the established case law of the Court of Justice the principle
according to which “although, as Community law stands at present, direct taxation does
not as such fall within the purview of the Community, the powers retained by the Member
States must nevertheless be exercised consistently with Community law”. 920
So, in very preliminary terms, double taxation becomes relevant for EU purposes to the
extent that its effects constitute a breach of EU law and, in particular, an obstacle to the
realization of the internal market, “an area without internal frontiers in which the free
movement of goods, persons, services and capital is ensured in accordance with the
provisions of the Treaties”921. In such event, the elimination of double taxation can well
be said to be an objective of the Union922.
916
Gilly v Directeur des Services Fiscaux du Bas-Rhin, 12 May 1998, Case C-336/96. Para 16 of
the decision points out that “Although the abolition of double taxation within the Community is
thus included among the objectives of the Treaty, it is clear from the wording of that provision that
it cannot itself confer on individuals any rights on which they might be able to rely before their
national courts”.
917
L. HINNEKENS, The Uneasy Case and Fate of Article 293 Second Indent EC, in Intertax,
2009, p. 606.
918
H. HOFMANN, Double Tax Agreements: Between EU Law and Public International Law, in (A.
Rust ed.) Double Taxation within the European Union, Alphen aan den Rijn, 2011, p. 75.
919
E. KEMMEREN, After repeal of Article 293 EC Treaty under the Lisbon Treaty: the EU objective
of eliminating double taxation can be applied more widely, in EC Tax Review, 2008, pp. 156 et
seq..
920
Schumacker, 14 February 1995, Case C-279/93, Para. 21. The principle has been restated in
all following direct tax cases.
921
Article 26, Para 2., TFEU. Under Article 3, Para 3 of the TEU, "The Union shall establish an
internal market”. The language indicates that the establishment of the internal market, after the
Treaty of Lisbon, is an obligation and no longer a simple objective.
922
M. HELMINEN, The principle of Elimination of Double Taxation under EU Law – Does it exist?,
in (C. Brokelind ed.) Principles of law: Function, Status and impact in EU Tax Law, Amsterdam,
2014, Para. 17.2.; G. KOFLER, Double Taxation and European Law: Analysis of the
236
VII.2.b (Economic) Double taxation as an obstacle
It is a matter of general appreciation that “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 borders”923.
Double taxation and, more specifically, economic double taxation is often referred to as
an “obstacle” also in EU policy documents.
The 1975 proposal for a directive on dividend taxation read that “international
movements of dividends are hampered by a series of (…) double taxations”924.
In the 1990 Guidelines on company taxation double taxation resulting from transfer
pricing adjustments is mentioned as an obstacle925.
Reference to double taxation (including in some instances economic double taxation) as
an obstacle is recurring in the 2001 Commission Communication926 and, in more detail,
in the related Commission Staff Working Paper927.
A general reference to the removal of obstacles is also made in the Conclusions of the
Communication on dividend taxation928.
Economic double taxation is mentioned as one of the “numerous and varied tax
obstacles in the Internal Market” that hamper cross-border economic activities in the
Jurisprudence, in (A. Rust ed.), Double Taxation within the European Union, Alphen aan den Rijn,
2011, p. 105.
923
Opinion of Advocate General Colomer delivered on 26 October 2004 in D., Case C-376/03,
Para. 85. The statement evokes Para. 1 of the Introduction to the Commentary on the OECD
Model Tax Convention: “Its harmful effects on the exchange of goods and services and
movements of capital, technology and persons are so well known that it is scarcely necessary to
stress the importance of removing the obstacles that double taxation presents to the development
of economic relations between countries”.
924
COMMISSION, Proposal for a Council Directive concerning the harmonization of systems of
company taxation and of withholding taxes on dividends (OJEC, C 253 of 5 November 1975).
925
COMMISSION, Guidelines on Company Taxation, SEC(1990) 601 def., Para 13. The
document is however not exclusively focused on economic double taxation and mentions as
obstacles also the withholding taxes on dividends (Para. 12) but not the economic double taxation
of the same) and the taxation of transnational reorganisations as opposed to the usual deferral
applicable to domestic reorganisations (Para 11).
926
and the Economic and Social Committee. Towards an Internal Market without tax obstacles,
COM(2001) 582 final, especially at Para 4.; see also COMMISSION, Communication from the
Commission to the Council, the European Parliament and the European Economic and Social
Committee - An Internal Market without company tax obstacles: achievements, ongoing initiatives
and remaining challenges, COM(2003) 726 final.
927
COMMISSION, Commission Staff Working Paper. Company Taxation in the Internal Market,
SEC (2001)1681. The document recurrently describes double taxation as an obstacle. See, e.g.,
Para 2.4 where it is pointed out that both economic and legal double taxation on dividends outside
the scope of the Parent – Subsidiary Directive constitute a distortion of economic decisions; Para
3.3.2 where it refers to the double taxation of capital gains in cross-border restructuring operations
as one of the problems not resolved by the Merger Directive and which is “not acceptable from
an Internal Market perspective” and Para 5.5.1. where, with reference to transfer pricing, it reads
that “double taxation is a serious obstacle to the Internal Market”.
928
and the European Economic and Social Committee - Dividend taxation of individuals in the
Internal Market, COM(2003) 810 final, Para. 5
237
Communication on tax obstacles in 2005.929 More specifically, in that same year, the
Commission had the opportunity to highlight that “double taxation, tax-related business
restructuring costs and more general differences between Member States' tax rules
mean that firms may prefer to operate domestically rather than in another Member State.
These are significant obstacles to achieving the full benefits of a competitive internal
market”930. And, the following year, again the Commission stressed with even more
clarity that “international double taxation is (…) a classic example of an obstacle to the
Internal Market arising from a lack of co-ordination between national tax systems (…)”931.
The 2011 Communication on double taxation lists many adverse consequences of
double taxation, which is considered to create “barriers to cross-border establishment,
activity and investment”, to have “negative impact on capital investment” and to be “not
just a burden but even a barrier to economic activity” 932. The same concepts of
“disincentive” and “barrier” to cross-border establishment, activity and investments were
mentioned in the 2006 Communication on the coordination of tax systems which openly
states that “international double taxation is a major obstacle to cross-border activity and
investment within the EU”933.
The qualification of double taxation in general and of economic double taxation more
specifically as an obstacle is quite relevant from a policy perspective934. However, this
does not necessarily entail that economic double taxation is also in breach of the TFEU
rules. To this end, it should not only constitute an obstacle but also represent a
discrimination or a restriction (in the terms illustrated below) under the provisions of the
TFEU on fundamental freedoms.
929
and the Economic and Social Committee - Tackling the corporation tax obstacles of small and
medium-sized enterprises in the Internal Market - outline of a possible Home State Taxation pilot
scheme, COM(2005) 702 final, Para 2.1.
930
COMMISSION, Communication from the Commission to the Council and the European
Parliament - The Contribution of Taxation and Customs Policies to the Lisbon Strategy, COM
(2005) 532 final, Para. 1.1.
931
and the European Economic and Social Committee - Co-ordinating Member States' direct tax
systems in the Internal Market, COM(2006) 0823 final, Para. 2.2.
932
and the Economic and Social Committee. Double Taxation in the Single Market, COM(2011) 712
final
933
and the Economic and Social Committee. Co-ordinating Member States' direct tax systems in the
Internal Market, COM (2006) 823 final.
934
The Preamble to the TFEU reads that “the removal of existing obstacles calls for concerted
action” and, accordingly, the TFEU makes use of the notion of obstacle in many provisions related
to the adoption of directives or regulations in specific subject matters. See, e.g., Article 46, Para.
1, Letter b) in respect of the movement of workers; Article 50, Para. 2, Letter c) in respect of
establishment; Article 81, Para. 2, Letter f) with reference to judicial cooperation in civil matters
and Article 114, Para. 6 on the adoption of measures on the establishment and functioning of the
internal market.
238
VII.2.c Overt discrimination, covert discrimination, restrictions
The TFEU provisions on fundamental freedoms are permeated by the principle of non-
discrimination, enshrined in Article 18 and under which “within the scope of application
of the Treaties (…) any discrimination on grounds of nationality shall be prohibited”.
However not all the provisions concerning fundamental freedoms simply replicate, within
their respective scope of application, the principle of non-discrimination; the term
“restrictions” is also used.
Indeed, only Article 45 TFEU, related to the freedom of movement of workers, closely
follows Article 18 and states explicitly that such freedom “shall entail the abolition of any
discrimination based on nationality between workers of the Member States”.
Article 49, on the freedom of establishment, prohibits the “restrictions” to such freedom
at the same time making reference to the principle of non-discrimination in the form of
the obligation of the country of establishment to ensure the application of the “conditions
laid down for its own nationals”.
A similar approach is to be found at Article 56 TFEU which at the same time prohibits
“restrictions on freedom to provide services” and refers to the concept of non-
discrimination when specifying that such prohibition applies “in respect of nationals of
Member States who are established in a Member State other than that of the person for
whom the services are intended”.
Exclusive use of the term “restrictions” is made, conversely, by Articles 34 and 35 TFUE,
which prohibit restrictions on imports and exports and “all measures having equivalent
effect” and Article 63 which prohibits “all restrictions on the movement of capital (…)”.
The language of the TFUE seems to indicate a preference for the term “discrimination”
where personal freedoms are involved, so that a subjective difference in treatment (on
the basis of nationality) is at stake, while the term “restriction” is more often used where
an objective difference in treatment (referred to the origin or destination of goods,
services or capital) may be involved.
However, the distinction is not always sharp (as the contents of Articles 63 and 65
indicate) and, in the current state of the interpretation of the CJEU, the different language
does not really imply any relevant difference in the scope of application of the individual
freedoms, so that it can be argued that “all encompass both a non-discrimination
component and a non-restriction component”935.
The evolution of the freedom of establishment is particularly meaningful in this respect.
Article 49 TFEU provides, according to the formula of "national treatment", that freedom
of establishment shall include, inter alia, the right "to set up and manage undertakings,
and in particular companies (... ) under the conditions laid down for its own nationals by
the law of the country where such establishment is effected (...)".
And, in fact, such provision had been at first considered to be a mere explanation of the
principle of non-discrimination and, therefore, deemed to apply only to discrimination on
grounds of nationality936. However its scope has been, over time, extended to include
first, "covert discriminations" and, later, non-discriminatory restrictions.
935
N. BAMMENS, The Principle of Non-Discrimination in International and European Tax Law,
Amsterdam, 2012, Chapter 12.
936
See, e.g. Reyners, v. Belgian State, 21 June 1974, Case C-2/74, concerning a Belgian rule
which prevented, on the basis of his nationality, a qualified Dutch lawyer from practicing in
239
The notion of "covert discrimination" goes back to a renowned decision of 1974937,
relating to workers, which prohibited "not only overt discrimination based on nationality
but also all covert forms of discrimination that the application of other criteria , lead to the
same result", The approach was subsequently extended to the freedom of
establishment938.
Later, the Court has begun to identify in Article 49 TFEU a broader and more general
prohibition of restrictions to the freedom of establishment, leading to affirm the
effectiveness of the provisions in question, even in the presence of non-discriminatory
national rules, with a development that has found its consolidated expression in the
Kraus decision of 1993 and according to which the TFEU provisions “preclude any
national measure (…) where that measure, even though it is applicable without
discrimination on grounds of nationality, is liable to hamper or to render less attractive
the exercise by Community nationals, including those of the Member State which
enacted the measure, of fundamental freedoms guaranteed by the Treaty.939. Shortly
later, in Gebhard, the Court has not only confirmed that interpretation, but has also
declared that it should apply to all fundamental freedoms940.
This trend has also involved tax cases, e.g., with reference to national rules which, as in
ICI v Colmer (HMIT) were liable to hindering the establishment of national in another
Member State941. This stream of case law also includes the decisions related to national
“exit taxes”942 and others (often concerning outbound establishment943) where there was
no difference of treatment based, directly or indirectly, on nationality (so that there was
not, in the strict terms of the TFEU a “discrimination”) but nonetheless a difference in
Belgium. Traces of this initial approach can be found also in early tax cases. See, e.g.,
Commission v. France (Avoir Fiscal), 28 January 1986, Case 270/83, Para 14, where the Court
remarks that the provision corresponding to the present Article 49 "prohibits, as a restriction on
freedom of establishment, any discrimination on grounds of nationality resulting from the
legislation of the Member State".
937
Sotgiu, 12 February 1974, Case C-152/73.
938
See, e.g., Jean Thieffry v Conseil de l'Ordre des Avocats de la Cour de Paris, 28 April 1977,
Case C-71/76. With more specific reference to tax matters, the notion of "hidden discrimination"
has made its appearance in Commerzbank, 13 July 1993, Case 330/91, which reads (quoting the
"Sotgiu" doctrine) that (Para. 14) "the rules regarding equality of treatment forbid not only overt
discrimination by reason of nationality or, in the case of a company, its seat, but all covert forms
of discrimination which, by the application of other criteria of differentiation, lead in fact to the
same result".
939
Kraus v Land Baden-Württemberg, 31 March 31, Case 19/92, Para. 32. See more generally
on the described evolution, C. BARNARD, The substantive law of the EU: the four freedoms,
Oxford, 4th ed., 2013, p. 308 et seq.; P. CRAIG, G. DE BÚRCA, EU law, Oxford, 6th ed., 2015, p.
273 et seq..
940
Gebhard v Consiglio dell'Ordine degli Avvocati e Procuratori di Milano, 30 November 1995,
Case C-55/94, especially Para. 37.
941
ICI v Colmer (HMIT), 16 July 1998, Case C-264-96, Para. 21
942
See, Lasteyerie de Saillant, 11 March 2004, Case C-9/02, the leading case on exit taxation,
where clearly no discrimination based on nationality was (directly or indirectly) involved.
943
See, among the earlier decisions, Baars, 13 April 2000, Case C-251/98 and Bosal, 18
September 2003, Case C-168/01 concerning the denial of a tax allowance for foreign investments;
X and Y v Riksskatteverket, 18 November 1999, Case C-200/98 related to the ownership of
shares through a foreign holding company; Cadbury Schweppes and Cadbury Schweppes
Overseas, 12 September 2006, Case C-196/04 on the taxation of undistributed profits of
controlled foreign companies.
240
treatment between domestic and cross-border situations (which may be defined a
“discriminatory restriction”).
VII.2.d Disparities and the “parallel exercise of taxing powers”
VII.2.d.1 The case law of the Court on tax disparities

Notwithstanding the described developments in the interpretation of the TDEU provisions
on fundamental freedoms, The Court has never adopted a pure “restriction” (or “market
access”) approach in income tax cases. One exception may be represented by the
decision in Futura944, to the extent that the national rule at stake (the obligation on the
head of non-resident enterprises to keep separate accounts, relating to their Luxembourg
taxable presence) was indeed applicable, allegedly without distinctions, also to
Luxembourg companies945.
In the early years 2000, the first cases have been submitted to the Court where tax
obstacles were not attributable to the rules of one single Member State, but rather to the
combined effects of the non – discriminatory rules of two (or more) Member States.
The first of those cases concerned a German resident and the tax treatment of the
payment of alimonies to his divorced spouse, resident in Austria946. Alimonies were
deductible in Germany only where taxable in the hands of the recipient and such
condition was not met in that case, since the payments were excluded from taxation
under Austrian law. The same alimonies would have been deductible if the divorced
spouse had been resident in Germany and the Court was asked to decide whether an
unfavorable treatment of that nature constituted a breach of Articles 12 or 18 EC
(corresponding to the present Articles 18 and 21, TFUE).
The Court, once remarked that the unfavorable treatment derived from a difference in
the tax regime of alimonies in the two Countries involved (Para. 32) makes reference to
earlier (non-tax) case law under which “Article 12 EC is not concerned with any
disparities in treatment, for persons and undertakings subject to the jurisdiction of the
Community, which may result from divergences existing between the various Member
States, so long as they affect all persons subject to them in accordance with objective
criteria and without regard to their nationality” (Para 34)947.
On this basis, the decision reaches the conclusion that the different treatment of
payments of alimonies to German residents and foreign resident, being attributable to
different tax systems, corresponds to situations which are not comparable and does not
944
Futura Participations and Singer v Administration des contributions, 15 May 1997, Case C-
250/95. On the nature of the restriction at stake, see F. A. GARCÍA PRATS, Revisiting
“Schumacker”: Source, Residence and Citizenship in the ECJ Case Law on Direct Taxation, in (I.
Richelle et al. eds.), Allocating Taxing Powers within the European Union, Berlin, 2012, p. 21 and
A. ZALASINNSKI, The Limits of the EC Concept of “Direct Tax Restriction on Free Movement
Rights”, the Principles of Equality and Ability to Pay, and the Interstate Fiscal Equity, in Intertax,
n. 5, 2009, p. 282 et seq..
945
The restriction consisted in the double administrative burden, considering that the obligation
to keep accounts was also in force in the Country of origin of the company.
946
Egon Schempp, 12 July 2005, Case C-403/03
947
The Court has followed, on the point, the Conclusions of Advocate General Geelhoed and the
reference there made to Milk Marque and National Farmers' Union, 9 September 2003, Case C-
137/00 and Wilhelm, 13 February 1969, Case 14-68.
241
constitute discrimination under Article 12 EC (now 18 TFEU). The same conclusion was
reached with reference to Article 18 EC (now 21 TFEU) and the alleged restriction on
the freedom of the recipient to leave Germany, on the grounds that “the Treaty offers no
guarantee to a citizen of the Union that transferring his activities to a Member State other
than that in which he previously resided will be neutral as regards taxation” (Para. 45).
The kind of disadvantage was examined again with reference to internal market
freedoms, the occasion was provided by two preliminary ruling requests both filed in
2004.
One was the case of a couple of Belgian residents which had received French source
dividends948. The dividends were subject to withholding tax in France, but (since Belgium
did not have rule on withholding taxes or on their deduction from tax due on dividends)
the French levy could not be credited against Belgian taxes. The resulting (juridical)
double taxation of dividends was a disadvantage in the overall treatment of French
source dividends in comparison with Belgian source dividends.
The other case concerned the tax credit granted upon the distribution of dividends by UK
companies (only) to recipients resident in the UK or in some EU States, on the basis of
the respectively applicable bilateral tax treaty with the UK949.
The Conclusions of Advocate General Geelhoed in this latter case are an attempt to
define the border between two categories of restrictions: those (defined as “true”
restrictions) consisting in disadvantageous tax treatment resulting from the rules of one
jurisdiction and those attributable to the “disparities or differences between the tax
systems of two or more Member States” These latter are referred to in the mentioned
Conclusions with different terms (disparities, variations, “quasi-restrictions”) and, in the
opinion of Advocate General Geelhoed, do not fall within the scope of the free movement
provisions.
While the ACT case has been decided on different grounds, the above distinction has
been again envisaged in the Conclusions of Advocate General Geelhoed in Kerckhaert
and Morres950. In the decision, the Court has ascertained that the Belgian tax legislation
did not make any distinction between dividends depending on their source and has
reached the conclusion that the adverse consequences resulting from the interaction of
the French and the Belgian systems do not constitute a breach of treaty freedoms. Those
adverse consequences derive, according to the Court, from what has been for the first
time defined in that decision the “exercise in parallel by two Member States of their fiscal
sovereignty” (Para 20).
The notion of “parallel exercise” of tax sovereignty has been maintained in later
decisions, to constantly exclude from the scope of application of internal market
freedoms those disadvantages not caused by the rules of one single jurisdiction but from
disparities between national (non-discriminatory) rules. The Court has so specified that
948
Kerckhaert and Morres, 14 November 2006, Case C-513/04
949
Test Claimants in Class IV of the ACT Group Litigation, 12 December 2006, C-374/04
950
See Para 24. It should be noted that the Conclusions in Kerckhaert and Morres have been
presented after those in ACT, even if the Decision of the Court has been delivered earlier.
242
a Member State is not required to eliminate double taxation951 or draw up its tax rules on
the basis of those of another Member State952.
It has been remarked that case law on “two-country problems”, i.e., the tolerance towards
international double taxation in the mentioned cases, indicates that the Court does not
apply an obstacle-based approach but rather, in direct tax matters, an approach based
on discrimination, i.e. the distinction from the perspective of one member State between
a cross-border situation and a comparable domestic situation953.
The removal of obstacles deriving from the difference of national rules requires, as the
Court has often indicated, criteria for the allocation of the tax jurisdiction. EU law, and
specifically EU primary law, does not lay down any general criteria for the elimination of
double taxation within the Union. Nor – with the exception of the existing harmonisation
directives and of (Article 4 of) the Arbitration Convention - any harmonized measure has
been adopted to that effect954.
In Damseaux, which concerned the same situation examined in Kerckhaert and Morres,
but in the light of the treaty between France (state of source of the dividends) and
Belgium (State of residence of the recipient), the Court has indicated that the allocation
to the Member State of residence of the obligation to “prevent double taxation, would
amount to granting a priority with respect to the taxation of that type of income to the
Member State in which the dividends are paid” (Para. 32) and, as just mentioned, no
such priority is attributed by EU law.
Also, the Court does not attribute any relevance to allocation principles that may be
drawn from the international treaty practice955.
VII.2.d.2 The difference with the “market access” approach in other matters
The case law of the Court indicates that the discrimination-based approach is a rather
limited instrument in respect of double taxation deriving from disparities956.
951
Columbus Container Services, 6 December 2007, Case C-298/05), Para. 51, Block, 12
February 2009, Case C-67/08, Para. 31, Orange European Smallcap Fund, 20 May 2008, Case
C-194/06, Para. 42, Damseaux, 16 July 2009, Case C-128/08, Para. 27 and CIBA, 15 April 2010,
Case C-96/08, Paras. 27-29.
952
Deutsche Shell, 28 February 2008, Case C-293/06, Para. 43; Krankenheim Ruhesitz am
Wannsee-Seniorenheimstatt, 23 October 2008, Case C-157/07, Para. 50.
953
954
See Kerckhaert and Morres, Para 22
955
See Damseaux, Damseaux, 16 July 2009, Case C-128/08, Para. 33: “Even though such an
attribution of powers complied, in particular, with the rules of international legal practice as
reflected in the model tax convention on income and on capital drawn up by the Organisation for
Economic Cooperation and Development (OECD), in particular Article 23B thereof, it is not in
dispute that Community law, in its current state and in a situation such as that at issue in the main
proceedings, does not lay down any general criteria for the attribution of areas of competence
between the Member States in relation to the elimination of double taxation within the Community
(…)”
956
J. MONSENEGO, Taxation of Foreign Business Income within the European Internal Market,
Amsterdam, 2012, Para. 6.2.1; F. VANISTENDAEL, The compatibility of the basic economic
freedoms with the sovereign national tax systems of the Member States, in EC Tax Review, 2003,
p. 143.
243
The point has been the subject of extensive scholarly analysis, aimed at exploring in
particular the difference between the approach taken by the Court in respect of tax
matters and in other cases related to the application of fundamental freedoms (including
the freedoms of circulation of goods) where the concept of non-discriminatory restrictions
has been applied to a much larger extent957. The Court case law on double income
taxation indeed stands in a strained relationship with the extensive internal market case
law, especially when dealing with other regulatory “double burdens”, including those in
the social security area958.
The difference arises especially from the comparison with those cases which have
addressed the “indistinctively applicable measures” in the context of the prohibition by
Article 34 TFEU of measures having an equivalent effect to quantitative restrictions.
957
J. M. COUGNON, Plea for a Multilateral Approach in the Judgements of the European Court
of Justice, in EC Tax Review, No 4, 2011, p. 179; D. GUTMANN, How to avoid Double Taxation
in the European Union?, in (I. Richelle et Al. eds.), Allocating Taxing Powers within the European
Union, Berlin Heidelberg, 2013, p. 63 s.; E. REIMER, Taxation – an Area without Mutual
Recognition?, in (I. Richelle et Al. eds.), Allocating Taxing Powers within the European Union,
Berlin Heidelberg, 2013, p. 197 s.; M. HELMINEN, The principle of Elimination of Double Taxation
under EU Law – Does it exist?, in (C. Brokenlind ed.) Principles of law: Function, Status and
impact in EU Tax Law, Amsterdam, 2014, Chapter 17; G. KOFLER, Double Taxation and
European Law: Analysis of the Jurisprudence, in (A. Rust ed.), Double Taxation within the
European Union, Alphen aan den Rijn, 2011, p. 97 s.; A. RUST, How European Law Could Solve
Double Taxation, in (A. Rust ed.), Double Taxation within the European Union, Alphen aan den
Rijn, 2011, p. 137 s.; P.J. WATTEL, Passing the Buck Around: Who is Responsible for Double
Taxation?, in (A. Rust ed.), Double Taxation within the European Union, Alphen aan den Rijn,
2011, p. 157 s.; F. VANISTENDAEL, Does the ECJ have the power of interpretation to build a tax
system compatible with the fundamental freedoms?, in EC Tax Review, No. 2, 2008, p. 52; F.
VANISTENDAEL, The ECJ at the crossroads: Balancing Tax Sovereignty against the Imperatives
of the Single Market, in European Taxation, Sept., 2006, p. 413; M. CRUZ BARREIRO CARRIL,
National Tax Sovereignty and EC Fundamental Freedoms: The Impact of Tax Obstacles on the
Internal Market, in Intertax, No. 2, 2010, p. 105; M. LEHNER, Avoidance of Double Taxation within
the European Union: Is There an Obligation under EC law? In (M. Lang and al. eds.) Tax Treaties
and EC Law, Alphen aan den Rijn, 2007, p. 11 s.; G. FIBBE, A. DE GRAAF, Is double taxation
arising from autonomous tax classification of foreign entities incompatible with EC law?, in
(H.P.A.M. Van Arendonk and al. eds.), A Tax Globalist. Essays in honour of Maarten Ellis,
Amsterdam, 2005; M. LEHNER, Tax consequences resulting from the application of the of the
non-restriction principle in areas other than taxation: distinction between discriminatory and non-
discriminatory restrictions, in (F. Vanistendael ed.) EU Freedoms and Taxations, EATLP
Congress, Paris 3-5 June 2004, Amsterdam, 2006, p. 47 s.; L. CERIONI, Double taxation and
Internal Market: Reflections on the ECJ’s Decisions in Block and Damseaux and the Potential
Implications, in Bulletin, Nov. 2009, p. 543; G. BIZIOLI, Balancing the Fundamental Freedoms
and Tax Sovereignty: Some Thoughts on Recent ECJ Case Law on Direct Taxation, in European
Taxation, Mar. 2008, p. 133; M. ISENBAERT, EC Law and the Sovereignty of the Member States
in Direct Taxation, Amsterdam, 2016, Chapter 6.3; J. MONSENEGO, Taxation of Foreign
Business Income within the European Internal Market Amsterdam, 2012, Chapter 6; M.G.H.
SCHAPER, The Structure and Organization of EU Law in the Field of Direct Taxes, Amsterdam,
2017, Chapter 5; N. BAMMENS, The principles of Non-Discrimination in International and
European Tax Law, Amsterdam, 2016, Chapter 12; G.K. FIBBE, EC Law Aspects of Hybrid
Entities, Amsterdam, 2009, Chapter IV.
958
G. KOFLER, Double Taxation and European Law: Analysis of the Jurisprudence, in (A. Rust
ed.), Double Taxation within the European Union, Alphen aan den Rijn, 2011, p. 134 et seq.
244
In a wide stream of case law initiated with the landmark decision in Cassis de Dijon959
the Court has confirmed the interpretation according to which “in the absence of common
rules relating to the marketing of the products in question, obstacles to free movement
within the Community resulting from disparities between the national laws must be
accepted in so far as such rules, applicable to domestic and imported products without
distinction, may be recognized as being necessary in order to satisfy mandatory
requirements recognized by Community law”960:
The foundation of the Cassis de Dijon doctrine is in the notion of measure of equivalent
effect, which has been defined in the well renown Dassonville961 statement as “all trading
rules enacted by Member States which are capable of hindering, directly or indirectly,
actually or potentially, intra-Community trade”962.
The Cassis de Dijon judgment has had a seminal role in the introduction of the principle
of mutual recognition.963 The underlying rationale, as perfectly summarised by Advocate
General Capotorti in his Conclusions, is that “until (…) approximation has taken place,
Article 30 is and remains applicable to each of the laws which await harmonization”.
The mentioned divergence with tax case law can be well highlighted through the
comparison between the above Conclsions with those of Advocate General Geelhoed in
ACT GLO (at Para. 47): “although restrictions resulting from disparities do not fall within
the scope of the Treaty free movement rules, that is not to say that they fall in principle
out with the scope of the Treaty. Rather, Member States’ competence in the direct tax
field is subject (…) to harmonisation measures (…)”.
The two statements reflect an opposite view, according to which obstacles of a general
nature resulting from disparities justify the application of the fundamental freedoms, while
obstacles resulting from disparities in income tax matters must await for harmonisation
and no contribution can meanwhile come from the fundamental freedoms.
This visible difference requires some few additional remarks.
VII.2.d.3 Remarks on the “market access” doctrine and tax disparities

The points in common between the disparities which led to the Cassis de Dijon doctrine
and the disparities deriving from the lack of coordination of (non – harmonised) tax rules
have led some to arguing that also these latter disparities should – differently from what
the Court case law indicates – be considered to be in breach of the fundamental
freedoms.
This conclusion is strongly supported by Vanistendael, who argues that there is no

reason why the market access doctrine should not be applied to obstacles resulting from
959
Rewe-Zentral AG (Cassis de Dijon), … 1979, Case C-120/78
960
C-302/86, Commission v. Denmark, 20 Sept. 1988, ECR (1988), 4607, para. 6.
961
Procureur du Roi v Dassonville, 11 July 1974, Case 8/74, Para. 5
962
This development is similar to that which characterized case law on free movement of goods,
with reference to the measures applied without distinction, in the wake of the famous Dassonville
decision (11 July 1974, Case 8/74). In that decision, the Court has enunciated (at Para. 5) the
concept of measures having equivalent effect to quantitative restrictions, which still forms the
point of reference and according to which “All trading rules enacted by Member States which are
capable of hindering, directly or indirectly, actually or potentially, intra-Community trade are to be
considered as measures having an effect equivalent to quantitative restrictions”.
963
C. JANSSENS, The Principle of Mutual Recognition in EU Law, Oxford, 2013, p. 12
245
double taxation caused by disparities and that the question as to which rule should be
considered to cause the obstacle – lacking any specific basis in the Treaty – should be
searched in clear legislative choices or the EU legislator or of the “overwhelming majority
of the national legislators”. 964 This opinion was shared by Advocate General Sharpston
in his opinion in the CIBA case, which reads that “where cumulative burdens caused by
double taxation amount to restrictions that hinder cross-border activity, the Court should
apply by analogy its case-law on the fundamental freedoms to eliminate such
obstacles”965.
A similar argument is that the counteraction of double taxation on the basis of the
fundamental freedoms could only be achieved by adopting a global approach as
opposed to the one-country reasoning.966
Others admit that it may be tempting to apply the market access remedies to tax
disparities, but also mention that some peculiarities of taxation, including the sovereignty
of States, the entitlement to tax revenue and the legislative power in tax matters do not
allow the plain adoption of such approach967.
But the main difficulty is the lack in the TFEU of guidance as to which State should, in
case of double taxation, have priority over the other. This point – which was also made
by the CJEU in Damseaux968 - is a recurring argument in scholar literature969. As
effectively pointed out, the lack of criteria seems to prevent any solution, but this cannot
lead to the denial of the problem970.
964
F. VANISTENDAEL, Does the ECJ have the power of interpretation to build a tax system
compatible with the fundamental freedoms?, in EC Tax Review, 2008, pp. 52 et seq., where also
examples of allocation criteria referred to some situations of double taxation are proposed.
965
Opinion of Advocate General Sharpston delivered on 17 December 2009, Case C-96/98, Para.
966
J. M. COUGNON, Plea for a Multilateral Approach in the Judgements of the European Court
of Justice, in EC Tax Review, No 4, 2011, p. 179
967
M. LEHNER, Avoidance of Double Taxation within the European Union: Is There an Obligation
under EC law? In (M. Lang and al. eds.) Tax Treaties and EC Law, Alphen aan den Rijn, 2007, p.
11 s.
968
Damseaux, 16 July 2009, Case C-128/08, Para. 32 "In a situation where both the Member
State in which the dividends are paid and the Member State in which the shareholder resides are
liable to tax those dividends, to consider that it is necessarily for the Member State of residence
to prevent that double taxation would amount to granting a priority with respect to the taxation of
that type of income to the Member State in which the dividends are paid” and Para. 33 "(…) it is
not in dispute that Community law, in its current state and in a situation such as that at issue in
the main proceedings, does not lay down any general criteria for the attribution of areas of
competence between the Member States in relation to the elimination of double taxation within
the Community."
969
See, in particular, M. HELMINEN, The principle of Elimination of Double Taxation under EU
Law – Does it exist?, in (C. Brokenlind ed.) Principles of law: Function, Status and impact in EU
Tax Law, Amsterdam, 2014, Para. 17.2; G. KOFLER, Double Taxation and European Law:
Analysis of the Jurisprudence, in (A. Rust ed.), Double Taxation within the European Union,
Alphen aan den Rijn, 2011, p. 124; B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen
aan den Rijn, 2012, p. 56.
970
In the words of G. KOFLER, Double Taxation and European Law: Analysis of the
Jurisprudence, in (A. Rust ed.), Double Taxation within the European Union, Alphen aan den Rijn,
2011, p. 132, this conclusion derives from what seems a reverse logic: “since there is no solution
to the problem, the problem cannot be one under the fundamental freedoms”.
246
Gutmann, while proposing a procedural solution (mandatory agreement of the States
and arbitration as a last resort) submits that the importance of the prior identification of
rules and principles should not be overestimated, since the OECD Model could serve as
a default solution and equity could guide the decisions on remaining cases971. Fibbe
highlights that under the OECD Model, source taxation generally prevails, so that double
taxation should in principle, be eliminated by the residence state972.
The present dissertation aims at searching possible criteria within the case law which
has specifically addressed situation of economic double taxation and within the corporate
tax directive. At the same time, it builds on the ascertainment that the application of the
“market access” approach finds at least two relevant hindrances.
The first is that national tax rules address a relationship where the State (or any other
territorial entity having tax jurisdiction) has not only legislative functions but also is a party
of the tax relationship. Italian scholarship, for example, refer – with respect to such
relationship - to the concept of “active subjectivity” of the State as opposed to the
“passive subjectivity” of the taxpayer973 and points out the mentioned dual role of the
State.974
This circumstance is suitable to prevent the application to taxes of the principle of
equivalence which underlies the mutual recognition975. Two national rules may be
equivalent in terms of effects for a taxpayer, but will likely not be equivalent for the active
subject of the tax relationship.
So, it has been argued that, albeit the mutual recognition is not unknown in the tax
domain (e.g., in the definition of dividend to be found at Article 10 of the OECD Model
Tax Convention) there is one essential reason that inhibits its application to taxes under
“the legal power of the fundamental freedoms” (as opposed to a spontaneous decision
of the States involved) and this reason is that “taxes function as sources of revenue of
exactly one State” 976. Similarly, it has been argued that in the area of taxation “the
971
D. GUTMANN, How to avoid Double Taxation in the European Union?, in (I. Richelle et Al.
eds.), Allocating Taxing Powers within the European Union, Berlin Heidelberg, 2013, p. 63 s.;
972
G. FIBBE, A. DE GRAAF, Is double taxation arising from autonomous tax classification of
foreign entities incompatible with EC law?, in (H.P.A.M. Van Arendonk and al. eds.), A Tax
Globalist: the Search for the Border of International Taxation: Essays in honour of Maarten Ellis,
Amsterdam, 2005, Para 3.3.
973
E. DE MITA, Principi di diritto tributario, Milano, 6th ed., 2011, p. 25 et seq.; P. PURI, I soggetti,
in (a cura di A. Fantozzi), Diritto tributario, Torino, 4th ed., 2012, p. 417 et seq.; L. FERNAZZO
NATOLI, Corso di diritto tributario. Parte generale, Milano, 1997, p. 55; P. RUSSO, Manuale di
diritto tributario, Milano, 3° ed, 1999, p. 147.
974
On this point, see in particular, F. TESAURO, Istituzioni di diritto tributario. Parte generale,
Torino, 13th ed., 2017, p. 100 who highlights the dual role of the State, as owner of the tax
jurisdiction and creditor in the tax relationship.
975
G. TESAURO, Diritto dell’Unione Europea, 6th ed., Padova, 2010, p. 438 remarks that the
logical foundation of the mutual recognition is that national legislation may be different, but they
can be equally respectful of the health or needs of consumers. On the equivalence criterion see
also C. BARNARD, The substantive law of the EU: the four freedoms, Oxford, 4th ed., 2013, p.
93; C. JANSSENS, The Principle of Mutual Recognition in EU Law, Oxford, 2013, p. 14
976
E. REIMER, Taxation – an Area without Mutual Recognition?, in (I. Richelle et Al. eds.),
Allocating Taxing Powers within the European Union, Berlin Heidelberg, 2013, p. 204.
247
interest of one Member State mainly is the collection of revenue, and that interest is in
no way protected by the collection of revenue by another Member State”977.
A second explanation derives from a logical consequence of all prohibition rules, Indeed,
the counteraction of a phenomenon which is it itself considered as negative can’t always
be achieved by way of a mere prohibition.
This is especially true where the adverse effect may be the (often unwanted) result of a
combination of facts or individual behaviour of persons or institutions.
This issue is not limited to EU law. As highlighted at Para IV.2.a above, the same intrinsic
limit of prohibitions may well arise within one national system, as the uncertain results of
the judicial application of the Italian general prohibition of double taxation demonstrate.
VII.2.e Justifications
The Court, once identified the presence of a discrimination or a restriction, then assesses
whether this could be considered objectively justified by reasons of general interest.
The TFEU provides for exceptions to fundamental freedoms only in some specific listed
cases (e.g., Article 46 TFUE, mentions "public order, public security or public health"). It
is, according to the generally accepted interpretation, a mandatory listing.
However, the Court, in the course of the same evolution that has led to the expansion of
the scope of the freedom of establishment to include non-discriminatory restrictions, has
also correspondingly expanded the range of possible causes of justification. If a
discriminatory rule can be justified only in cases explicitly provided for by Article 46,
restrictions (including, in the tax case law of the Court, also discriminatory restrictions)
are eligible if they are related to the pursuit of public interest and meet certain other
conditions.
More precisely, the "justificatory test" provides that the right of establishment may be
limited (only) by provisions that are:
(i) justified by overriding reasons of public interest,
(ii) applicable without distinction,
(iii) objectively necessary in order to ensure the protection of the interests
pursued, and if the same result can’t be obtained by less drastic measures978.
On this basis, the Court has often accepted as overriding reasons of public interest in
tax cases the need for fiscal control and supervision, the counteraction of tax fraud, the
preservation of the cohesion of the tax system or the balanced allocation of tax revenue,
the principle of territoriality and others.
977
G. KOFLER, Double Taxation and European Law: Analysis of the Jurisprudence, in (A. Rust
ed.), Double Taxation within the European Union, Alphen aan den Rijn, 2011, p. 124.
978
Commission v. Germany, 4 December, 1986, Case 205/84 (Paras. 27 and 29). The
"justificatory test" derives from the "rule of reason" enunciated in Rewe, February 20, 1979, Case
120/78. In argument, more widely, L. DANIEL, Non-Discriminatory Restrictions on the Free
Movement of Persons in European Law Review, 1997, p. 191; G. MARENCO, The Notion of a
Restriction on the Freedom of Establishment and the Provision of Services in the Case Law of
the Court, in Yearbook of European Law, 1991, p. 111, and, more specifically with reference to
the matter of income tax, J. WOUTERS, The Case-law of the European Court of Justice on Direct
Taxes: Variations upon a Theme, in Maastricht Journal of European and Comparative Law, 1994
153 s.
248
VII.3 EU Law and the selected paradigms of double taxation
VII.3.a Transfer pricing, thin capitalisation and interest limitation
VII.3.a.1 Transfer pricing, thin capitalisation, interest limitation rules and the TFEU.
It has been mentioned in the previous chapters that transfer pricing and thin capitalisation
rules are suitable to generating economic double taxation where the States concerned
adopt different criteria. However, a dispute may arise also in application of the same
criterion to a given set of facts.
The structural feature of both the OECD Model Tax Convention and the EU Arbitration
Convention, in this respect, is that they provide both a common criterion and a procedure
for the settlement of disputes.
Case law of the Court of Justice has been confronted with transfer pricing and thin
capitalisation rules of Member States979 in a quite different perspective, i.e., the
perspective of assessing whether the application of such rules only to cross-border
situations is in breach of fundamental freedoms.
The analysis conducted by the Court has been traditionally structured in two separate
parts, one aimed at assessing whether the selective application of the rules at stake
constitutes a restriction, and the other aimed at determining whether the restriction, if
any, can be justified.
Due to the many points in common, the decisions related to both transfer pricing and thin
capitalisation rules should be examined together.
Interest limitation rules have not been (and for the reasons illustrated below will unlikely
be) subject to the judgment of the CJEU. Nonetheless, due to the functional similarity
(see Chapter III above) with thin capitalisation rules, they can be examined together.
VII.3.a.1.1 Freedom of establishment and ownership discrimination

As the comparative analysis made at Chapter 3 above indicates, national transfer pricing
rules and thin capitalisation rules are based on the existence of a foreign control (or
foreign common control) relationship.
In such case, those rules depict a difference of treatment between domestic and cross-
border situations which depends on the residence of the shareholders of a given local
entity. However, those national rules are not addressed directly to the foreign resident
shareholders, but to the locally resident subsidiary.
By contrast, the beneficiaries of the freedom of establishment are the foreign
shareholders. The present Art 49 TFEU concerns indistinctively their right to set up either
979
Lankhorst-Hohorst, 12 December 2002, Case C-324/00; Test Claimants in the Thin Cap Group
Litigation, 13 March 2007 Case C-524/04; Lammers & Van Cleeff 17 January 2008, Case C-
105/07; SGI, 21 January 2010, Case C-311/08; Itelcar, 3 October 2013, Case C-282/12;
Hornback-Baumarkt AG, 31 May 2018, Case C-382/16.
249
“agencies, branches” or “subsidiaries”, without any specification referred to the
circumstance that these are latter are separate entities from their shareholder980.
As a result, the TFEU provisions concerning the freedom of establishment981 do not seem
to be immediately capable of contrasting situations of “ownership discrimination”982.
The CJEU had initially adopted on this point a rather restrictive interpretation983 and only
later these hypotheses of subjective dualism (national companies vs. foreign
shareholders) have found a safeguard within the wide concept of restriction. This
evolution may be traced in some decisions delivered between 1989 and 1991 and related
to (non-tax) national rules which set limitations to the access to certain activities in the
host state on the basis of the nationality of shareholders.984 Also relevant in this
development is the more general statement that the less favourable treatment of a
person other than the one who exercises the freedom of establishment may nonetheless
indirectly constitute a restriction for this latter985.
The reconciliation between the wording of Article 49, TFEU and the concept of
“ownership discrimination” (as outlined., e.g., at Article 24, Para. 5 of the OECD Model
Tax Convention) lies in a peculiar enlargement of the notion of restriction which can be
attributed to the CJEU decision in Lankhorst.
The conclusion reached by the Court as to whether the difference in treatment based on
the nationality of shareholders is relevant for EU law is based on the ascertainment that
the selective application of German thin capitalisation regime “makes it less attractive for
companies established in other Member States to exercise freedom of establishment
980
On the history of the adoption of a unitary concept of secondary establishment regardless of
the legal form, see A. PIETROBON, L’interpretazione della nozione comunitaria di filiale, Padova,
1990, p. 101 s..
981
The same issue seems to rise with respect to Article 55 TFEU (formerly Article 294 TEU), which
grants the national treatment of shareholders, stating that “Member States shall accord nationals
of the other Member States the same treatment as their own nationals as regards participation in
the capital of companies or firms (...)”
982
Ownership discrimination is conversely addressed by the specific provisions of Article 24,
Para. 5 of the OECD Model Tax Convention, which refer to “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”. The language of Articles 49 and 55 TFEU does not
conversely refer to the “enterprises” but to their shareholders.
983
Fearon, 6 November 1984, Case 182/83, referred to Irish rural land expropriation law, which
entrusted certain advantages to rural land owners which, if companies, were owned by
shareholders resident at less than 3 miles from the item of land. The Court had taken the view
that, since the company in the particular case (incorporated in Ireland by UK shareholders) “is an
Irish company for the purposes of Article 58 of the EEC Treaty, it cannot claim in Ireland the right
of establishment granted to companies formed under the laws of the other Member States.”
984
The Queen c. Secretary of State for Transport, ex parte Factortame, 25 July 2001, Case C-
221/1989; Commission vs. United Kingdom, 4 October 1991, Case C-246/89. Both cases
originated from the UK Merchant Shipping Act 1988, under which registration of fishing vessels
was subordinated to the condition that at least 75% of the ship owner company was owned by
UK residents. A similar situation, in the television broadcasting industry, was behind the case
Commission vs. Belgium, 16 December 1992, Case C-211/1991.
985
Segers, 10 July 1986, Case 79/85, concerning the denial of application of national social
security regime to the directors of a foreign company.
250
and they may, in consequence, refrain from acquiring, creating or maintaining a
subsidiary in the State which adopts that measure”. 986
The conclusions reached in Lankhost have been, on this particular point, confirmed by
later case law. In the Test Claimants in the Thin Cap Group Litigation (“Thin Cap GLO”)
case, referred to the similar thin capitalisation provisions adopted in the United Kingdom,
the Court has reaffirmed (at Para. 61) that “a difference in treatment between resident
subsidiaries which is based on the place where their parent company has its seat
constitutes a restriction on freedom of establishment”. In Lammers & Van Cleeff (Para.
23), the Court held that also “a difference in treatment between resident companies
according to the place of establishment of the company which, as director, has granted
them a loan” may constitute an obstacle to the freedom of establishment987.
Recourse to the notion of restriction, as made by the CJEU, may thus bring most national
transfer pricing and thin capitalisation rules within the scope of application of the freedom
of establishment, notwithstanding the absence of an explicit ownership discrimination
provision in the TFEU.
In the more recent Itelcar decision, which concerned Portuguese thin capitalisation rules
triggered by a holding (by the lender or a common shareholder) of at least 10% of the
shares or voting rights in the borrowing company, the Court, after having remarked that
“a holding of such a size does not necessarily imply that the holder exerts a definite
influence (…)” has recognised the application of the Treaty provisions on the free
movement of capital988. In such event, the restriction was more easily assessed with
reference to the loan itself rather than with respect to the shareholding relationship.
VII.3.a.1.2 Consequence on the territorial scope of application of the

freedom of establishment in transfer pricing and thin
capitalisation cases
The Thin Cap GLO case, due to the fact that it originated from a group litigation order,
concerned a variety of cases, which offered the opportunity for a more detailed analysis
of the conditions of the national rules at stake and of the scope of application of the
freedom of establishment.
Indeed, the UK thin capitalisation rules under scrutiny at that time were based on two
usual conditions: the counterpart of a given transaction should be resident in another
jurisdiction and parties should be related. This means that the counterpart of the
transaction may not necessarily coincide with the parent company and may even be
resident in a different States.
The position taken by the Court in Thin Cap GLO is that, in the context of the freedom of
establishment, what matters is the residence of the parent company. So, the provisions
of Article 43 EC (now Article 49 TFEU) would not apply where the EU companies involved
were “directly or indirectly controlled by a common parent company which is resident, for
its part, in a non-member country” (Para. 98 and, in identical terms, Para. 102).
On the contrary, the Treaty provisions would apply “where a borrowing company is
granted a loan by another non-resident company which, irrespective of where it is
986
Lankhorst-Hohorst, 12 December 2002, Case C-324/00, Para. 32.
987
Lammers & Van Cleeff, 17 January 2008, Case C-105/07
988
Itelcar, 3 October 2013, Case C-282/12, Paras. 20 et seq.
251
resident, is itself controlled by a company which is resident in another Member State and
which has, directly or indirectly, such a holding in the capital of the borrowing company”
(Para. 95).
The issue of the territorial scope of application of Article 49, TFEU, has not been
addressed in Itelcar, since the provisions on the free movement of capital do apply also
to relationships with Third Countries989.
VII.3.a.1.3 Is double taxation deriving from transfer pricing and thin

capitalisation adjustments a restriction?
It has been highlighted at Para VII.2.d. above that double taxation deriving from
disparities between national tax rules is, at the present state of EU law, considered to fall
outside the scope of application of fundamental freedoms.
In principle, this may also be the case of economic double taxation deriving from
disparities in the formulation or the application of transfer pricing or thin capitalisation
rules.
However, such domestic rules (mostly based on the arm’s length principle) are typically
applicable only to situations where the need of international income apportionment and
prevention of abuse arise, i.e.: to cross-border transactions990. This is the case of the
present transfer pricing rules of Italy and France (see Chapther 3 above).
Such selective application portrays a difference of treatment between domestic and
cross – border transactions, which has, in the analysis of the CJEU, taken priority over
the analysis of the obstacle potentially consisting in the economic double taxation of
income991 or the consistency of national rules with the arm’s length principle992.
Lankhorst, the first case related to such selective, arm’s length based, national rules, has
been indeed centred on the comparison between the situation of resident and non-
resident business entities. The Court, well before examining the potential effects of the
rule itself has thus reached the conclusion (Para. 32) that a “difference in treatment
between resident subsidiary companies according to the seat of their parent company”
constitutes “an obstacle to the freedom of establishment”993.
989
Itelcar, 3 October 2013, Case C-282/12, Para. 24.
990
This point has been raised also very recently in the Opinion of Advocate General Bobek in
Hornbach. The argument made by the German Government and shared by the Advocate General
is that the specific purpose of transfer pricing rules explains sufficiently why they are applicable
only to cross-border transactions. In this perspective, those transactions would not comparable
with domestic transactions (see Paras. 40 et seq. of the Opinion) and this would prevent the
insurgence of a discrimination. The Decision of the Court has instead confirmed the consolidated
interpretation and noted that “those arguments do not relate to the comparability of the situation
but rather to the justification” (Para. 40 of the Decision).
991
It can’t be denied that if transfer pricing rules are applied only to cross-border transactions,
these bear additional financial and administrative burdens. See M. GLAHE, Transfer Pricing and
EU Fundamental Freedoms, in EC Tax Review, No. 5, 2013, p. 222
992
On the treaty based arm’s length principle in the context of the Lankhorst case, see A.
CORDEWENER, Company Taxation, Cross-Border Financing and Thin Capitalization in the EU
Internal Market: Some Comments on Lankhorst-Hohorst GmbH, in European Taxation, No. 4,
2003, p. 110.
993
On the limits and possible implications of the approach taken by the Court on this point see D.
GUTMANN, L. HINNEKENS, The Lankhorst-Hohorst case: the ECJ finds German thin
252
National Governments have raised, in subsequent cases, the point that the mere
difference in treatment provided by national rules do not imply necessarily a banned
restriction. The German and UK Government have specifically claimed (Thin Cap GLO,
Paras 46 and 47) that the UK legislation at stake was consistent with the arm’s length
principle, as internationally recognised for the purpose of allocating the “fiscal
competence” of States.
Also, the UK Government has stated (Thin Cap GLO, Para. 48) that most of the tax
conventions with Member States provide for a corresponding adjustment clause, under
which “any increase in the taxable profits” in one State is “matched by a corresponding
reduction in taxable profits” in the other State.
This latter argument is echoed by the Belgian Government in SGI (Para. 47) according
to whom the “disadvantage” does not result from the adjustment made in one State, “but
from the risk of double taxation” if the other Member State “does not make a
corresponding tax adjustment”. Such risk, according to the Belgian Government, is
greatly diminished by the possibility to apply Convention 90/436/CEE994.
The Court has eventually discarded both these arguments.
As to the conformity to arm’s length principle, the Court has concluded (in Thin Cap GLO,
Para. 48) that the national provisions at issue do not reflect a “mere allocation of powers”
and are not aimed at “seeking to avoid double taxation”. Rather, the national provisions
examined have been considered to have “unilateral nature” due to their purpose of
preventing profits from being untaxed in a given State.
As to the point concerning double taxation and corresponding adjustments, the Court
has observed that it has no evidence that any upward adjustment in one of the States
concerned is actually offset by a corresponding advantage in the other State (Thin Cap
GLO, Para. 56). Also, the Court has stated that “the unilateral nature of the provisions”
is not negated by the attempt of States to “couple the application of its national legislation
with DTCs containing clauses designed to prevent or to mitigate the double taxation that
might arise”. In that same Decision, the Court has also remarked (Para. 54) that the
application of the Arbitration Convention would anyway imply “an additional
administrative and financial burden” and that during the procedure, “the company in
question must bear the burden of double taxation”.
In summary, the Court does not identify the restriction in the potential economic double
taxation, but rather in the plain difference in treatment between domestic and cross-
border transaction. This is confirmed by the facts that neither the conformity to an
internationally accepted principle nor the set-up of a procedural remedy against double
taxation can avoid that the difference in treatment generated by the selective application
of national arm’s length based rules be construed as a restriction for the purposes of EU
law.
Compliance of national rules with the arm’s length principle, has however a significant
role in the different and subsequent context of the justificatory test.
capitalization rules incompatible with freedom of establishment, in EC Tax Review, 2003, No. 2,
p. 94.
994
On whether a corresponding adjustment can offset the apparent disadvantage of a
discriminatory transfer pricing rule, see W. SCHÖN, Transfer Pricing, the Arm’s Length Standard
and European Union Law, in (I. Richelle et Al. eds.), Allocating Taxing Powers within the European
Union, Berlin - Heidelberg, 2013, p. 84 s.
253
VII.3.a.1.4Is double taxation deriving from interest limitation rules a
restriction?
The comparative analysis of Para III.3 above indicates that the interest limitation rules
examined (those in force in Italy and the United Kingdom) apply without distinction to
both domestic and cross border situations and to both related and unrelated party
financial relationships. From the perspective of country of the borrower, there is
consequently no difference in treatment, and no discrimination995.
There is also no difference in treatment from the perspective of the country of the lender.
In all the Countries examined (see Para IV.4 above) interest is taxable in the hands of
the lender, regardless of whether the same interest has been deducted or not by the
borrower.
And finally, no disparity arises where the overall tax treatment of a domestic financial
relationship is compared to that of a cross-border relationship from a “market access”
perspective, since both relationships are subject to the same overall treatment, i.e.:
excess interest is subject to economic double taxation in both domestic and cross-border
relationships. The difference is that such economic double taxation, in the first case,
occurs within one tax system and, in the second case, within two systems.
The same considerations can be made with reference to the interest limitation rule
introduced by the ATAD. Under its Article 4, Para. 1, “exceeding borrowing costs shall
be deductible (…) only up to 30 percent of the taxpayer's earnings before interest, tax,
depreciation and amortisation (EBITDA)”. The rule does not draw any distinction based
on the nationality or residence of the borrower, nor on the origin of the facility996 and does
not address the taxation of interest in the hands of the lender. It can then be argued that
– just as the existing national equivalent provisions of Italy and the UK – the interest
limitation rule of the ATAD does not entail any difference in treatment between domestic
and cross-border financing relationships.
This remains true if the analysis is extended to the multiple derogations, exclusions and
options provided by the subsequent paragraphs of that same Article 4 of the ATAD.
At a closer look, there seem to be one exception, i.e.: a rule of the ATAD which may
result in a difference in treatment between domestic and cross-border situations.
Reference is made here to the second and third sentences of Article 4, Para. 1, under
which “exceeding borrowing costs and the EBITDA may be calculated at the level of the
group and comprise the results of all its members”.
995
A.P. DOURADO, The Interest Limitation Rule in the Anti-Tax Avoidance Directive (ATAD) and
the Net Taxation Principle, in EC Tax Review, N. 3, 2017, p. 118. On the non-discriminatory nature
of interest limitation rules see also G. GINEVRA, The EU Anti-Tax Avoidance Directive and the
Base Erosion and Profit Shifting (BEPS) Action Plan: Necessity and Adequacy of the Measures
at EU level, in Intertax, 2017, p. 123; G.BIZIOLI, Taking EU Fundamental Freedoms Seriously:
Does the Anti-Tax Avoidance Directive Take Precedence over the Single Market? In EC Tax
Review, 2017, p. 173. Contra, S. DOUMA, Limitations on Interest Deduction: An EU Law
Perspective, in British Tax Review, 2015, p. 364 et seq.; C. PANAYI, The Compatibility of the
OECD/G20 Base Erosion and Profit Shifting Proposals with EU Law, in Bulletin, 2016, p. 101.
996
This is explicitly highlighted at Recital No. 7: ”The interest limitation rule should apply in relation
to a taxpayer's exceeding borrowing costs without distinction of whether the costs originate in
debt taken out nationally, cross-border within the Union or with a third country, or whether they
originate from third parties, associated enterprises or intra-group”
254
Under the second sentence of Article 4, Para. 1, the concept of “group” is defined through
reference to “national tax law”997. As a result, where the national law definition of group
does not include affiliate companies of other Member States, there would be a difference
in treatment between domestic and cross-border situations: domestic infra-group loans
may be disregarded and thus exempted from the interest limitation rule, while cross-
border infra-group loans would remain subject to said rule. The concern that the
mentioned provisions may entail a difference in treatment between domestic and cross-
border situations, suitable to constitute a disadvantage998, is further increased by the
language of Recital No. 7, which openly refers only to “group entities in the same State”.
Outside such exception, there seem to be no difference in treatment between domestic
and cross-border situations, which can be attributed to the existing interest limitation
rules of Italy and the UK or to that provided by Article 4 of the ATAD.
This circumstance contributes to explain the preference attributed to interest limitation
rules in the OECD/G20 Project on Base Erosion and Project Shifting (and, consequently,
in the drafting of the ATAD), where it is mentioned that “there are a number of
approaches that the countries involved in this work have discussed in order to avoid any
restriction of EU treaty freedoms”999.
Indeed, the main obstacle to the application of EU treaty freedoms to interest limitation
rules derives from the mentioned identity of effect of those rules. In other words, the non-
deduction of interest in the State of the borrower may be in general terms a restriction,
but it applies equally to domestic and cross border facilities. The taxation of interest in
the State of the lender, without regards to whether that interest has been deducted or
not by the borrower, is also in general terms a restriction, but it applies equally to
domestic and cross border facilities. And, even in a two Country perspective, the
economic double taxation of (excess) interest is a restriction, but it also concerns
domestic (excess) interest of either Countries. So, there is no disadvantage, a
circumstance which – in the light of the existing case law on fundamental freedoms in
income tax matters – impedes the assessment of both a discrimination and of a
restriction for the purposes of EU law1000.
Notwithstanding this, the interest limitation rule adopted by some Member States and by
Article 4 of the ATAD, is a major source of economic double taxation in the European
Union and raises questions as to whether the absence of a difference in treatment is
sufficient to avoid any possible conflict with EU law.
997
The provision reads as follows: “For the purpose of this Article, Member States may also treat
as a taxpayer: (a) an entity which is permitted or required to apply the rules on behalf of a group,
as defined according to national tax law; (b) an entity in a group, as defined according to national
tax law, which does not consolidate the results of its members for tax purposes”.
998
See O. ÁSTRÁÐSSON, The Interest Limitation Rule of the Anti-Tax Avoidance Directive
(Master’s Thesis), Uppsala, 2017, p. 26 et seq.. For the same argument, with respect to the
German interest limitation rule, see A. SCHNITGER, I. ZAFIROV, The Interest Limitation Rule in
(P. Pistone and D. Weber eds) The Implementation of Anti-BEPS Rules in the EU: A
Comprehensive Study, Amsterdam, 2015, Para. 12.4.2.
999
OECD, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.
Action 4 – 2016 Update, Paris, 2016, p. 89 et seq. (Annex I.A) At the same time, the Report
addresses the issue of justifications (thus implicitly admitting that a possible restriction may not
be entirely excluded) and indicates that “consideration should also be given to the circumstances
in which EU Member States could justify a restriction of EU treaty freedoms, for example: the
need to preserve the balanced allocation between EU Member States of the power to impose
taxes the need to prevent tax avoidance and to combat artificial arrangements”.
1000
See Para. VII above.
255
In my view, some remarks can be made with reference to at least one case, Bosman1001,
where the Court has assessed a restriction in absence of a disadvantage.
The case concerned certain Belgian rules applicable to professional football players,
including a rule on their transfer between teams and the obligation placed on the head
of the acquiring team to pay an indemnity to the previous team. Those rules applied
equally to any kind of transfer (either domestic or cross-border) and the Court has
examined, in particular, whether the rules constitute an obstacle to freedom of movement
for workers.
The decision has stated that “those rules are likely to restrict the freedom of movement
of players who wish to pursue their activity in another Member State” (Para 99)1002
although the rules in issue apply also to transfers of players within the same Member
State (a circumstance recognised at Para. 98). The decision trails, on the point, the
Opinion of Advocate General Lenz, whom had taken the view, on the basis of a detailed
analysis of the case law (Paras 165 to 208), that “Even if one were to assume that the
transfer rules were applied (…) without distinction to transfers within a Member State
and to transfers to another Member State, it would still be a fact that they restrict the
freedom of movement”.
In this perspective, the circumstance that “those rules also restrict the possibility of
changing clubs freely within one and the same Member State can make no difference
(…)” (see Para 209 of his Opinion).
Bosman indicates that within a “market access” approach the comparison with domestic
situations is not essential in the assessment of a restriction1003. This opens interesting
scenarios in respect of interest limitation rules to the extent that they may constitute (in
particular by generating economic double taxation of interest) an obstacle to the
movement of capital between Member States (as well as those between Member States
and third countries).
It should be borne in mind, however, that (as mentioned at Para. VII.d.2. above) the
Court has never adopted a pure “restriction” (or “market access”) approach in income
tax cases.
Even in Futura, which is considered to constitute an exception in this respect, the
conclusions of the Court were referred to a situation where the national rule examined
(the obligation on a foreign company to keep separate accounts for the activities of a
1001
Union Royale Belge des Sociétés de Football Association and Others v Bosman and Others,
15 December 1995, Case C-415/93.
1002
See Para. 103: “It is sufficient to note that, although the rules in issue in the main proceedings
apply also to transfers between clubs belonging to different national associations within the same
Member State and are similar to those governing transfers between clubs belonging to the same
national association, they still directly affect players' access to the employment market in other
Member States and are thus capable of impeding freedom of movement for workers”.
1003
On this feature of the restriction approach, see M. HELMINEN, EU Tax Law Direct Taxation,
Amsterdam, 2017, Para. 2.2.5.1.: “Tax treatment that does not make a difference between an
internal and a cross-border situation but which creates a restriction on cross-border activities may
be in conflict with the TFEU”. F. VANISTENDAEL, The compatibility of the basic economic
freedoms with the sovereign national tax systems of the Member States, in EC Tax Review, No.
3, 2003, p. 136, mentions that the restriction approach in income tax matters implies a comparison
between domestic and cross-border situations, but at the same points out (at p. 137) that “The
type of reasoning involved in the restriction concept is totally different from the reasoning in the
application of the principle of equality. In order to determine the scope of the provision, there is
no question of similarity or the same situation, the only question is whether the provision affects
a cross-border operation”.
256
local branch) purported a disadvantage, since those accounts were to be kept “in addition
to its own accounts” in the State where the company had its seat (see Para. 25)1004.
Interest limitation rules do not generate any such disadvantage. This circumstance does
not appear to be relevant within the Bosman doctrine but constitutes one more reason
for considering unlikely that a pure “restriction” approach may be applied.
It is nonetheless worth considering that some features of the interest limitation rules
seem to raise an issue of proportionality. This is especially the case of Article 4 of the
ATAD1005, when examined in the light of its declared purposes.
In general, the ATAD is aimed at counteracting tax avoidance practices (Recital No. 2
and No. 16) and aggressive tax planning (Recital No. 3); with more specific reference to
Article 4, the declared purpose is to avoid “excessive interest payments” (Recitals No. 6
and No. 8).
It may be questioned whether the fixed ratio approach of Article 4 is consistent with those
aims, since it applies equally to all companies, without taking into account the specific
financial structure of the related business1006 and applies also to third party relationships
of stand-alone entities, where declaredly (at Recital No. 8) the risk of base erosion and
profit shifting is very low, since it “in principle takes place through excessive interest
payments among entities which are associated enterprises”.
One further issue of lack of proportionality derives from the absence of any possibility to
provide evidence to the contrary1007.
It has also been argued that the departure of the fixed ratio rule from the arm’s length
principle depicts a lack of proportionality1008.
1004
The Opinion of Advocate General Lenz, delivered on 5 November 1996, further highlights that
the conflict with fundamental freedoms derived, in that case, from disadvantage placed on foreign
companies by the (non-discriminatory) national rules examined: “there appears to be no
difference in treatment of foreign branches. However, the Law itself imposes additional conditions
on non-resident companies, namely the requirements (…) for separate accounts to be kept and
held in Luxembourg. There are no such obligations imposed on Luxembourg companies. (….)
The requirement to produce a second set of accounts for the branch will result in additional costs
for that company. (….)”.
1005
The same applies to national rules, and the intensity of review is different in respect of
harmonised rules. See P. VAN OS, Interest Limitation under the Adopted Anti-Tax Avoidance
Directive and Proportionality, in EC Tax Review, 2016, p. 195.
1006
In this respect, the interest limitation rule is in striking contrast with the principles established
by the EU case law in respect of anti-avoidance rules since Leur-Bloem, 17 July 1997, Case C-
28/95, which contains (at Para 41) the renowned statement according to which, in order to detect
abusive operations, “the competent national authorities cannot confine themselves to applying
predetermined general criteria but must subject each particular case to a general examination”.
On the doctrine of the CJEU concerning the abuse of law in the area of direct taxation since Leur-
Bloem, see A. CORDEWENER, Anti-Abuse Measures in the Area of Direct Taxation:Towards
Converging Standards under Treaty Freedoms and EU Directives? in EC Tax Review, No. 2,
2017, p. 60 et seq.
1007
The requirement that an anti-avoidance rule must provide the taxpayer with the opportunity
to provide evidence to the contrary has been affirmed in Cadbury Schweppes and Cadbury
Schweppes Overseas, 12 September 2006, Case C-196/04, Para. 70 and further developed in
subsequent case law.
1008
See, on the relationship between the arm’s length principle and proportionality, Para
VII.3.a.1.6 below. With more specific respect to the interest limitation rules, see S. DOUMA,
Limitations on Interest Deduction: An EU Law Perspective, in British Tax Review, 2015, p. 364 et
257
An additional issue of proportionality derives from the absence of any remedy against
economic double taxation of excessive interest1009. This remark finds support non only
in the case law (examined below, at Para VII.3.a.1.8) on tax matters but also in case law
which has addressed the proportionality of measures1010, especially of those providing
penalties or charges, under the criterion of the “disproportionate burden”1011.
The ATAD itself recognises (Recital No. 5) that double taxation creates “obstacles to the
market” which should be avoided. It may be thus argued that the double taxation of
excess interest lacks proportionality.
It is true that proportionality becomes relevant only in two specific contexts.
The first is the evaluation – in the practice of the CJEU - of possible justifications of
Member State measures which have been considered to create a discrimination or a
restriction1012 and is thus subject to the difficulties above described as to the assessment
of a restriction in the case of interest limitation rules.
The second is the process of review of legality of EU measures which is made also on
the grounds of general principles of law, including the principle of proportionality.
However, the access to such review is subject to the conditions of Article 263 TFEU,
including the time limitation of Para. 61013 which, in the case of the ATAD, has now
expired. A possible review may nonetheless still take place under Article 277 TFEU,
should the proportionality of the ATAD be called into question in the course of a
proceeding in front of the CJEU for a different reason1014, such as the consistency with
internal market freedoms of the interest limitation rules of a Member State.
In conclusion, it may be argued that economic double taxation generated by interest
limitation rules may result in breach of the fundamental freedoms due to the lack of
proportionality where they purport a difference in treatment between domestic and cross-
border financing arrangements (as it seems to be the case of Article 4 Para. 1, second
and third sentences of the ATAD) or in the event that the Court adopted in its respect a
market access approach in the wide terms of Bosman.
In such case, the identification of the Member State which should remove the double
taxation may find some grounds in the ATAD itself, whose Recital No. 5 reads that
“Where the application of those rules gives rise to double taxation, taxpayers should
seq. who submits that the consistency with the TFEU rules entails the respect of the arm’s length
principle and the right to provide a commercial justification; P. VAN OS, Interest Limitation under
the Adopted Anti-Tax Avoidance Directive and Proportionality, in EC Tax Review, 2016, p. 184 et
seq..
1009
See, with specific reference to the issue of double taxation, E. CENCERRADO MILLÁN, M.
SOLER ROCH, Limit Base Erosion via Interest Deduction and Others, in Intertax, 2015, p. 67 s.
1010
The principle of proportionality is presently enshrined in Article 5, Para. 4 of the TEU,
according to which “Under the principle of proportionality, the content and form of Union action
shall not exceed what is necessary to achieve the objectives of the Treaties. The institutions of
the Union shall apply the principle of proportionality as laid down in the Protocol on the application
of the principles of subsidiarity and proportionality”.
1011
See P. CRAIG, G. DE BÚRCA, EU law, Oxford, 6th ed., 2015, p. 555 et seq..
1012
On the point, with specific reference to the case of interest limitation rules, see P. VAN OS,
Interest Limitation under the Adopted Anti-Tax Avoidance Directive and Proportionality, in EC Tax
Review, 2016. p. 195
1013
According to Article 263, Para. 6, TFEU, “The proceedings provided for in this Article shall be
instituted within two months of the publication of the measure (….)”.
1014
See P. CRAIG, G. DE BÚRCA, EU law, Oxford, 6th ed., 2015, p. 539 et seq..
258
receive relief through a deduction for the tax paid in another Member State or third
country, as the case may be. (…)”.This indicates that, in general, the duty to provide
relief is with the State of residence of the recipient. The statement does not explicitly
provide for relief in case the tax be not paid by the same taxpayer (i.e., to cases of
economic double taxation) but at the same time there seem to be no limitation in this
respect.
It is finally worth mentioning that interest limitation rules rise issues of consistency with
Constitutional rules of Member States.
A case is pending in front of the German Federal Constitutional Court following a decision
by the Bundesfinanzhof in 20151015. According to such decision, the interest barrier rule
in force in Germany is in breach of the principle of equality enshrined at Article 3, Para.
1 of the German federal constitution and which requires that the tax legislation takes into
account the ability to pay. According to the “objective net” principle, which has been
recognised by the Federal Tax Court and the Federal Constitutional Court, expenses
should be deductible from positive revenue for the purpose of determining the taxable
base of income taxes; exceptions are admitted, but material departures from such
principle require special justifications1016. Interestingly, the Bundesfinanzhof has, in
particular, rejected the justification related to the anti-abuse purposes of the German
legislation and has remarked that the interest limitation has only loose connection with
the notion of abuse (to the extent that it does not apply to, e.g., abusive structures where
the interest cost is below the statutory limitation) and that, when it applies, it does offer
any option for providing evidence to the contrary.
Similar arguments have been made in respect of consistency of the Italian interest
deduction rule with the principle of ability to pay which is expressly provided by the Italian
Constitution at Article 53. The question has not been raised yet in front of the Italian
Constitutional Court, but it has been pointed out that a fixed ratio applicable to all
enterprises cannot constitute a reasonable presumption of avoidance and that, in the
Italian legislation, the taxpayer is not allowed to provide evidence to the contrary1017.
VII.3.a.1.5 Justification - Legitimate objective

Once determined the existence of a restriction to the freedom of establishment, the Court
has evaluated whether such restriction could be justified on the grounds that the national
(transfer pricing or thin capitalisation) rule under scrutiny pursues (to use the language
of SGI, Para. 35) “a legitimate objective compatible with the Treaty and is justified by
overriding reasons in the public interest” and also that “its application be appropriate to
ensuring the attainment of the objective thus pursued and not go beyond what is
necessary to attain it”.
The Court has examined a rather wide range of possible justifications set forth by the
different States who have submitted their observations, as summarised in the table here
below.
1015
BFH, 14 October 2015, I R 20/15. See on the case S. LAMPERT, T. MEICKMANN, M.
REINERT, Article 4 of the EU Anti Tax Avoidance Directive in Light of the Questionable
Constitutionality of the German “Interest Barrier” Rule, in European Taxation, No. 8, 2016, p. 323.
1016
S. LAMPERT, T. MEICKMANN, M. REINERT, Article 4 of the EU Anti Tax Avoidance Directive
in Light of the Questionable Constitutionality of the German “Interest Barrier” Rule, in European
Taxation, No. 8, 2016, p. 325.
1017
G. VANZ, The Italian Interest Limitation Rule: Constitutional Issues, in European Taxation,
2018, p. 173.
259
Justification \ Case Lankhorst Thin Cap Lammers SGI Itelcar Hornbach
GLO
Balanced allocation ≠ ≠ ≠ ≠ 
of taxing powers

Prevention of tax x  x  ≠
evasion or avoidance
Cohesion of the x x ≠ ≠ ≠ ≠
national tax systems
Effectiveness of x ≠ ≠ ≠ ≠ ≠
fiscal supervision
(Key: recognised, x rejected, ≠ not proposed).
In all cases after Lankhorst, the national rules at issue, although considered to engender
a restriction to the freedom of establishment (as illustrated above), have been considered
to be justified.
The conclusion is based, in Thin Cap GLO, on the recognition that the national rule at
issue “specifically targets wholly artificial arrangements designed to circumvent the
legislation of the Member State concerned” (Para. 72). In this perspective, the UK rule
has been considered specific enough to target “the practice of thin capitalisation” (Para.
76) and not “the mere fact that a resident company is granted a loan by a related
company” (Para. 73).
In the SGI decision, justification has been found in the “need to maintain the balanced
allocation of the power to tax between the Member States and to prevent tax avoidance,
taken together” (Para. 69).
It may be argued that in this latter decisions, the justification, by looking at both the
distributive1018 and the anti-avoidance functions of transfer pricing rules, comes closer
than ever to the purposes of such rules, as developed in tax treaty law along the decades.
The common core of the two decision is the relevance attributed to the purpose of
preventing tax avoidance1019.
This justification was also addressed in Lankhorst, but eventually discarded on the
grounds that prevalence was attributed at the time to the fact that (Para. 37) the German
rules applied “generally to any situation in which the parent company has its seat, for
whatever reason, outside the Federal Republic of Germany”. A situation which was not
considered to entail, in itself, a risk of tax evasion, since the parent company “will in any
event be subject to the tax legislation of the State in which it is established”1020.
1018
The admission of the allocation function of transfer pricing rules has been the main
achievement of SGI in respect of Thin Cap GLO. See A. JIMENEZ, Transfer Pricing and EU Law
Following the ECJ Judgment in SGI: Some Thoughts on Controversial Issues, in Bulletin, 2010,
p. 273.
1019
On the link between the arm’s length principle and the tax avoidance case law of the Court,
see V. RUIZ ALMENDRAL, Tax Avoidance, the “Balanced Allocation of Taxing Powers” and the
Arm’s Length Standard: an odd Threesome in Need of Clarification, in (I. Richelle et Al. eds.),
Allocating Taxing Powers within the European Union, Berlin Heidelberg, 2013, p. 158 et. seq.. On
the relationship between the two justifications in SGI, see also P. BAKER, Transfer Pricing and
Community Law: The SGI Case, in Intertax, 2010, p. 194.
1020
D. GUTMANN, L. HINNEKENS, The Lankhorst-Hohorst case: the ECJ finds German thin
capitalization rules incompatible with freedom of establishment, above, p. 95 were cautious about
260
As to the concept of “balanced allocation”, it should be reminded that it has also been
taken into account, in similar terms, within the ratio decidendi of the Thin Cap GLO case
(Para. 75) but, in that occasion, was rather mentioned in order to further emphasize the
need to prevent abusive practices than acknowledged as a separate justification.
Also, in both Thin Cap GLO and SGI decisions, the Court defines in identical terms that
a balanced allocation purports “the right of a Member State to exercise its tax jurisdiction
in relation to activities carried out in its territory” (Thin Cap GLO, Para. 75; SGI, Para.
64).
In the recent Hornbach decision, the preservation of the balanced allocation of taxing
powers and the principle of territoriality is for the first time admitted as an autonomous
justification (Para 47). The Court argues, more specifically, that the arm’s length principle
allows Member States “to exercise its power to tax in relation to activities carried out in
its territory” (Para. 43) and avoids the “transfer of profits in the forms of advantages” to
related parties (Para. 45, corresponding to Para 62 of SGI).
VII.3.a.1.6 Proportionality and the arm’s length principle

The justificatory test requires that the national measure should be proportional in respect
of its legitimate objective. The assessment of the proportionality requirement is, in the
case of transfer pricing and thin capitalisation rules, of special interest, since it is in the
context of such assessment that some peculiar profiles of those rules, elsewhere
disregarded1021, eventually come into play.
Indeed, the Court supports the idea that compliance of a national anti-abuse rule with
the arm’s length principle represents a relevant evidence of proportionality.
As well illustrated by Advocate General Geelhoed (Para. 66 of the Opinion in Thin Cap
GLO) “the arm’s length principle, accepted by international tax law as the appropriate
means of avoiding artificial manipulations of cross-border transactions, is in principle a
valid starting point for assessing whether a transaction is abusive or not” and represents
“an objective factor by which it can be assessed whether the essential aim of the
transaction concerned is to obtain a tax advantage”. The point has been acknowledged
by the Court in the Thin Cap GLO (Paras. 80 to 82), SGI (Para. 71)1022 Itelcar (Para. 37)
decisions which attribute to the arm’s length principle the value of an “objective and
verifiable element”.
Also examined in for the purposes of the proportionality test is the requirement that “the
corrective tax measure must be confined to the part which exceeds” the arm’s length
standard (CGI, Para. 72; Hornbach, Para 50) In the CGI Opinion, at Para. 74 it is further
the more general effects of such conclusions in Lankhorst, considering that the decision was
somehow foreshadowing the justifiability of rules aimed at preventing artificial arrangements
designed to circumvent domestic tax rules. More in general, on the justificatory test in Lankhorst-
Hohorst, see N.VINTHER, E. WERLAUFF, The need for fresh thinking about tax rules on thin
capitalization : the consequences of the judgment of the ECJ in Lankhorst-Hohorst, in EC Tax
Review, 2003, No.2, p. 97 ff.
1021
As mentioned above, in the case law under examination, the fact that a national rule be based
on the arm’s length principle is not sufficient to exclude the portrayal of a restriction, nor
compliance with that principle alone can represent a justification.
1022
Specifically on SGI, see P. BOONE et Al., SGI Case: The Impact of the Decision of the
European Court of Justice from a European Perspective, in International Transfer Pricing Journal,
No. 5, 2010, p. 183
261
clarified that the divergence, if any, “may not, for example, result in a refusal to recognise
the entire transaction”)1023.
VII.3.a.1.7Proportionality and commercial justification

One further requirement identified by the Court under the proportionality test, as specified
in SGI, Para. 71 or in identical terms in Thin Cap GLO, Para. 87 and further developed
in Hornbach, Paras 51 et seq., is that the taxpayer must be given “an opportunity, without
being subject to undue administrative constraints, to provide evidence of any commercial
justification”.
The effect of such interpretation by the Court is the inclusion into an objective test (such
as the arm’s length standard) some elements of subjective evaluation of the business
reasons1024. A particularly effective illustration of the possible consequences can be
found in the Opinion of Advocate General Geelhoed in Thin Cap GLO (Para. 67, broadly
reflected in Para. 86 and 87 of the Decision), where it is stated that “it must be possible
for a taxpayer to show that, although the terms of its transaction were not arm’s length,
there were nonetheless genuine commercial reasons for the transaction other than
obtaining a tax advantage”1025.
The point is addressed in SGI in more general terms, and the opportunity is mentioned
(at Para. 71) “(...) to provide evidence of any commercial justification that there may have
been for that transaction”.
It could be questioned whether the commercial justification can be found only inside of
the arm’s length criterion, as e.g., illustrated in the OECD Transfer Pricing Guidelines, or
also outside. Some commentators1026, and the recent Hornbach case clearly indicates
that the Court has in mind this latter solution.
1023
In similar terms, with reference to thin capitalisation rules, see Thin Cap GLO, Para. 83
(confirming the statement in the Opinion, Para. 67) which reads that “the re-characterisation of
interest paid as a distribution is limited to the proportion of that interest which exceeds what would
have been agreed had the relationship between the parties or between those parties and a third
party been one at arm’s length”.
1024
On this consequence of the Court decision and the nature of the commercial justification, see
L. DE BROE, International tax planning and prevention of abuse, Amsterdam, 2008, p. 945, A.
M. JIMÉNEZ, Transfer Pricing and EU Law Following the ECJ Judgement in SGI: Some Thougths
on Controversial Issues, in Bulletin, May 2010, p. 276; M. GLAHE, Transfer Pricing and EU
Fundamental Freedoms, in EC Tax Review, No. 5, 2013, p. 226
1025
In similar terms, the COMMISSION has summarised the position of the Court in its
Communication COM(2007) 785 final, The application of anti-abuse measures in the area of direct
taxation – within the EU and in relation to third countries, where it is stated that thin capitalisation
rules (but the principle is thereby considered to be applicable also to transfer pricing rules) should
be “confined to purely artificial arrangements” by ensuring that the terms of the debt financing
arrangements are at arm’s length “or that they are based on otherwise valid commercial reasons”.
1026
As effectively summarised by W. SCHÖN, Transfer Pricing, the Arm’s Length Standard and
European Union Law, in (I. Richelle et Al. ads.), Allocating Taxing Powers within the European
Union, Berlin - Heidelberg, 2013, p. 73, “There is no indication in the ECJ’s judgments that the
only commercial justification for the taxpayers arrangements consists in the comparison with
arrangements between independent parties”; L. DE BROE, International tax planning and
prevention of abuse, Amsterdam, 2008, p. 94o remarks that, in essence, the arm’s length principle
“is not sacrosanct” and that the taxpayer should always “have the right to prove that the
transaction complies with the arm’s length principle or where it does not that there are commercial
justifications for the non-compliance”.
262
The case originates from the provision, at no charge, by the German company assessed,
of comfort letters to banks and creditors guaranteeing that the liabilities of some of its
foreign subsidiaries. According to the German tax authorities and under German transfer
pricing legislation, an arm’s length consideration should have been charged to the
subsidiaries, in the same way as it would have been charged between unrelated parties.
The Court, after a brief evaluation of such commercial justifications (in particular, at Para.
53, the circumstance is mentioned that the foreign group companies had negative equity
capital and the financing bank would have not granted vital financing without the
provision of the comfort letters) concludes that (Para. 58) that the proportionality
requirement is met where the taxpayer has the “opportunity to prove that the terms were
agreed on for commercial reasons which could result from its status as a shareholder in
the non-resident company, which is a matter for the referring court to assess”
Some remarks can be made in respect of the above point of the conclusions.
The issue is not whether a loan or other financial facility granted by a parent company to
its subsidiaries can, in some cases, be construed as an equity contribution1027. Nor the
issue is whether the arm’s length remuneration for a financial service may happen to be
zero in some circumstances1028.
What is meant in Hornbach is that the commercial reasons provided by a taxpayer could
result from “its status as a shareholder in the non-resident company” (Para. 57). or even
refer to “the financial success of the foreign group companies” (Para. 56).
The conclusion may appear excessive if not read in connection with the function
attributed, in the same decision (at Para. 44) to the arm’s length principle, and namely
avoiding “the transfer of profits (…) in the form of unusual or gratuitous advantages” to
related parties”. Otherwise, if the “financial success” of a subsidiary was a valid
commercial justification for applying non arm’s length conditions (i.e., unusual or
gratuitous advantages), then the derogation from the arm’s length principle would
become possible in almost all cases, with the result of severely hampering national
transfer pricing rules of Member States1029.
The Court is aware that in such case “the notion of arm’s-length transaction would be
emptied of any meaning”1030, its interpretation simply intends to reflects the dualism
between the nature of transfer pricing rules as income allocation rule on the one side
and their effect of preventing abuse on the other side1031.
1027
This is, e.g. the construction made by the Italian Supreme Court in the case of an interest-
free long term subordinated loan to a foreign subsidiary (Cassazione, Fifth Section, 19 December
2014, No. 27087) or the construction underlying the UK administrative practice on loans having
an “equity function” (see Para. IV.4.c.2 above).
1028
See, OECD, Transfer pricing and multinational enterprises, 1979, Para. 196: “For tax
purposes, interest should always be regarded as charged (…) unless an unrelated lender would
have waived the payment of the interest in the same circumstances”.
1029
S. BURIAK, R. PETRUZZI, Transfer pricing rules under the ECJ's scrutiny: green light for non-
arm's length transactions? in International transfer pricing journal, 2018, p. 349 et seq.
1030
See the Opinion of Advocate General Bobek delivered on 14 December 2017, at Para. 113.
The issue is rather to ensure that “the principle is being applied correctly in a specific case”.
1031
M. GLAHE, Transfer Pricing and EU Fundamental Freedoms, in EC Tax Review, 2013, p. 228
refers to “the right balance between the tax avoidance and balanced allocation justifications”.
263
VII.3.a.1.8 Proportionality, double taxation and corresponding
adjustments
As the Commission pointed out since Lankhorst (Decision, Para. 35) thin capitalisation
rules imply a “risk of double taxation” where non-deductible interest was still subject to
taxation in the hands of the lender in the respective State of residence. The Commission
then argued that the Member State making the adjustment “must also ensure that there
is liaison on the matter” with the other State involved “so that a corresponding adjustment
can be made” (Lankhorst Opinion, Para. 68). In more effective terms, the Commission
pointed out that “the principle of proportionality requires that the two Member States in
question reach an agreement in order to avoid double taxation”1032 suggesting (Para. 69
of the Opinion) that “Article 9(2) of the OECD model convention may afford the outline of
a solution”.
It is noteworthy that the Commission in Lankhorst identifies a possible solution in Article
9, Par, 2 of the OECD Model and does not mention the provisions of the Arbitration
Convention, which was already at that time considered to be applicable to thin
capitalisation situations1033. These arguments have been re-proposed by some Member
States and by the Commission in the Thin Cap GLO and in the SGI cases.
The Court, however, does not seem to attribute relevance to double taxation and has
reached the conclusion (Thin Cap GLO, Para. 88) that the Member State which enforces
its own rules “cannot be obliged to ensure” that the other State “does everything
necessary to avoid the payment (...) being taxed, as such, at group level” in both
States1034. No mention of the topic can be found in the CGI decision. It may be then
argued that in the existing case law, the issue of double taxation is not taken into account
in assessing the proportionality of the national measures.
1032
As remarked by O. THÖMMES, Group financing and EC Law, in Intertax, n. 1, 2003, p. 2,
such double taxation would represent in itself a form of restrictions, which can’t be avoided by
extending thin capitalisation rules to domestic transactions.
1033
D. PILTZ, International aspects of thin capitalization. General Report, in Cahier de droit fiscal
international, Deventer, 1996, p. 137; B. TERRA, P. WATTEL, European Tax Law, London, 2° ed.,
1997, p. 292; COMMISSION, Company Taxation in the Internal Market. Commission Staff
Working Paper, SEC (2001) 1681, at p. 363 reads that “(...) it should be made clear that thin
capitalizations rules are covered. This, again, would in principle not require an amendment to the
Convention”. Application of the Arbitration Convention to thin capitalisation cases was eventually
recognised – alhough with may reservations - at Para. 1.2 of the Revised Code of Conduct for
the effective implementation of the Convention on the elimination of double taxation in connection
with the adjustment of profits of associated enterprises, in Official Journal C 322 of December
30th 2009.
1034
The Court has thus rejected the approach taken by Advocate General Geelhoed, which reads
(Para. 69) “I would add that I agree with the Commission that, in order for the application of thin
cap rules to be proportionate to their aim, the Member State applying these rules must ensure via
DTC that the requalification of the transaction within its tax jurisdiction is mirrored by a counterpart
requalification (i.e., from receipt of interest payments to receipt of dividend distributions) in the
parent company’s Member State. Failure to do so would in my view go beyond what is necessary
to achieve the aim of the thin cap rules, and would impose a disproportionate burden (double
taxation) on the group as a whole”.
264
VII.3.a.1.9The discriminatory remedies and the Masco Denmark case:
internal consistency vs. arm’s length standard
Case law on transfer pricing and thin capitalisation examined above has concerned the
Member State where the adjustment was made.
However, as mentioned in prior paragraphs of this dissertation economic double taxation
does not derive from the rule of one member State, but rather from its interaction with
the rules of the other(s) State(s) concerned.
Economic double taxation may thus be equally attributed to the lack of coordination of
remedial measures in such latter State(s). The comparative analysis performed at
Chapter 4 above has shown, in particular, that discriminatory remedial measures of this
kind are in force in the UK.
The comparison between Italy and the UK is of particular significance. On the one side,
Italian transfer pricing rules apply to cross-border transactions only; accordingly, the
Italian system does not provide for corresponding adjustments at a domestic level, while
at a cross-border level they are provided by domestic rules, by tax treaties and by the
The UK legislation, conversely, provides for the application of transfer pricing rules
without distinction to both domestic and cross-border controlled transactions, and at the
same time provides for “automatic” corresponding adjustments for the former, while
relies (as Italy does) on treaty remedies, or on those provided by the Arbitration
Convention, for corresponding adjustments at a cross-border level.
The assessment of the consistency of Italian rules with the fundamental freedoms would
presumably follow the same course of analysis which has been taken place in the
examined CJEU cases: i.e., the detection of a restriction and its likely justification.
As to the UK transfer pricing legislation, and based on the current state of the CJEU case
law, a restriction should not arise since there is no difference in treatment between
domestic and cross-border transactions1035. As mentioned in Para. III.2.d above, the
removal of any such difference was indeed the rationale beyond the adoption of the new
rules in 2004, on the wake of the Lankhorst decision.
However, this would not be the case for the UK domestic remedial measures, which
apply to domestic transactions only. This would depict – at a remedial measure level – a
difference in treatment subject to scrutiny vis-à-vis the fundamental freedoms1036.
The case law of the CJEU on the taxation of cross-border dividends in the state of
residence of the recipient indicates that the adoption of remedial measures aimed at
counteracting economic double taxation can be in breach of fundamental freedoms
where those measures apply to domestic situations only1037.
Can the same conclusions be extended to those remedial measures which address
economic double taxation in transfer pricing (or thin capitalisation) cases?
1035
Accordingly, F. DICKINSON, Are the UK Thin Capitalization Rules Compliant with EU Law?
– An Update in the Light of Recent ECJ Decisions, in European Taxation, No. 11, 2011, p. 487 et
seq.
1036
On the possible restriction attributable to equally applicable transfer pricing rules where
associated with relief rules or different documentation requirements, see M. GLAHE, Transfer
Pricing and EU Fundamental Freedoms, in EC Tax Review, No. 5, 2013, p. 225
1037
See, e.g., Verkooijen, 6 June 2000, Case C-35/98, Para. 36. See amplius Para VII.3.b below.
265
The Court has recently had the opportunity to examine a national remedial rule of this
kind. The case concerned the tax treatment in Denmark of interest received from a
subsidiary established in Germany, where such interest was not deductible from the
taxable profits of that subsidiary under German thin capitalisation rules1038.
Thin capitalisation rules were provided also in Denmark and applied evenly where both
the borrower and the lender were resident for tax purposes in Denmark. However,
interest was exempt in the hands of the lender to the extent that, under the same Danish
thin capitalisation rules, it was not deductible for the borrower. No similar exemption was
provided in respect of foreign source interest, not even where interest was equally non-
deductible for the non-resident borrower.
The Court has examined whether (i) such difference in treatment constituted a restriction
under the TFEU and (ii) whether such difference could be justified.
As to the first point, the Court has reached the conclusion (see Para. 27 of the decision)
that “the exclusion of such an advantage for a resident parent company in relation to
interest paid to that company by a subsidiary resident in another Member State, in so far
as that interest cannot be deducted from the taxable profits of that subsidiary by reason
of the legislation of that Member State on thin capitalisation” constitutes a restriction to
the freedom of establishment, since (according to the well-established definition), it “is
liable to render less attractive the exercise by that parent company of its freedom of
establishment by deterring it from setting up subsidiaries in other Member States”1039.
The decision is not different, in this conclusion, from those which have concerned thin
capitalisation and transfer pricing rules from the perspective of the “primary adjustment”
State. The disadvantage identified by the Court does not relate to the potential (economic
double taxation) effect of relief rule, but more simply to the circumstance that the relief
rule is applicable only to domestic situations.
As to the possible justifications, the decision is especially focused on the balanced
allocation of taxing powers. The Court, after having referred to its most recent definition
of such justification, has drawn the conclusion that the limitation of the tax exemption to
domestic situations “appropriately ensures a balanced allocation of the power to impose
taxes between the Member States concerned”. Otherwise, the plain granting of the
allowance to foreign source interest would imply that the Member State of the interest
recipient “would be foregoing (…) its right to tax the interest income received by the
parent company depending on the rules on thin capitalisation adopted by the Member
State of residence of the subsidiary”.
The admission of a justification requires the analysis as to whether the justified measure
meets the proportionality requirement, i.e., whether it does not go beyond what is
necessary in order to attain such objective. And the Court, in this respect, reaches the
conclusion that proportionality of the remedial rule must be searched in the comparison
1038
Masco Denmark and Damixa, 21 December 2016, Case C-593/14. See generally on the case,
G. MEUSSEN, Thin Capitalization Rules and Corresponding Tax Exemptions: All or Nothing, in
European Taxation, No. 11, 2017, p. 508.
1039
The decision diverges on the point from the opinion, delivered on 12 May 2016, of Advocate
General Kokott, who has argued that the disadvantage suffered by the Danish company could
not be ascribed solely to the Denmark rules but was rather the result of the parallel exercise of
taxing powers by Germany and Denmark. Indeed, according to the Opinion (Paras. 19 to 33), the
favourable treatment of domestic situations depends on whether the “subsidiaries are subject to
a prohibition on the deduction of interest expenses”, a condition which, in the case of non-resident,
“depends on the tax law of another Member State”.
266
with the thin capitalisation rules of the Member State of the recipient of interest (i.e., the
thin capitalisation rules of that same State where the remedial measure is in force).
In other words, the requirement arising from the Court case law on dividends (i.e., the
extension to foreign dividends of any system for preventing or mitigating charges to tax
or economic double taxation for domestic dividends) is applicable also to excess interest,
but only for the amount that would have been considered excess interest under the own
rules of the State of the recipient.
The solution of the Court is a very relevant innovation and consists in comparing the
treatment of local source interest in the domestic situation with the treatment of foreign
source interest in the theoretical case where the source state had in force the same rules
as the state of the recipient (or, in other words, if the home state rules were applicable in
the source state). This approach neutralises the effect of the different national rules and,
at the same time, avoids making reference to foreign State rules (a reference which,
according to the AG would have breached the principle of autonomy)1040.
The approach adopted by the Court evokes the so-called “internal consistency test”, a
criterion developed by the US Supreme Court in order to evaluate the impact of State
tax rules on interstate commerce under the Dormant Commerce Clause1041. Through
the internal consistency tests, the U.S. Supreme Court asks whether, if the other states
involved enacted the challenged tax rule, interstate commerce would bear a burden that
purely domestic commerce would not also bear. In the practice of the U.S. Supreme
Court, the test is used to neutralise the effects of disparities, so that any remaining
difference in treatment is to be investigated as possibly arising from discriminatory
rules1042.
The CJEU, in the Masco Denmark decision, is making use of such criterion for the
purposes of the proportionality test. Differently, in the US Court approach, the criterion
is used at an earlier assessment stage, so that failure of internal consistency does not
lead unavoidably to the conclusion that the scrutinised rule is discriminatory, it only
indicates that the disadvantage does not derive from disparities1043.
VII.3.a.1.10 Remarks on Masco Denmark

In the legal and factual context of Masco Denmark, the adoption of the internal
consistency test at the later stage of assessing the proportionality of the national
measure, leads – in my view - to dividing the double taxation effect of the scrutinised
provision into two parts.
1040
Masco Denmark and Damixa, Case C-593/14, Opinion of Advocate General Kokott delivered
on 12 May 2016, Para. 27
1041
The Dormant (or Negative) Commerce Clause is a legal doctrine derived by US Courts from
the Commerce Clause in Article I of the US Constitution, which grants Congress with the power
to “regulate Commerce with foreign Nations, and among the several States (…)”. Lacking
Congressional statutes, States retain the power to enact legislation, provided that such legislation
is not discriminatory and does not hampers interstate commerce.
1042
R. MASON, Made in America for European Tax: The Internal Consistency Test, in Boston
College Law Review, Vol. 49, 2008, p. 1277 et seq., esp. p. 1309 et seq. See also A. VAN DE
VIJVER, International Double Taxation in the European Union: Comparative Guidelines from
Switzerland and the United States, EC Tax Review, No 1, 2017, p. 10
1043
See R. MASON, Made in America for European Tax: The Internal Consistency Test, in Boston
College Law Review, Vol. 49, 2008, p. 1277 et seq., esp. p. 1309 et seq., also for an analysis of
the limitations of the test.
267
The first part is the double taxation effect that arises from the comparison of the actual
Danish rule (i.e.: the full denial of any relief) with the virtual application of the Danish
rules in the other Country (i.e., the portion of interest that would be exempt if Danish thin
capitalisation rules had been applicable in Germany, or if the lender and the borrower
had both been resident in Denmark). This part of the double taxation effect is a difference
in treatment attributable entirely to the discriminatory character of the Danish remedial
measure and – according to the Court – it is in breach of the fundamental freedom.
The second part is the one that derives from the difference between the Danish thin
capitalisation rules and the German thin capitalisation rules. If, in particular, the German
rules were more restrictive than the Danish ones, the denial of the Danish exemption to
the differential non-deductible interest (which would have been deductible under Danish
rules but has not been deducted under German rules) would not constitute a
discrimination or a restriction under EU law, since it merely derives from the difference
between the concerned tax systems. Such part can be attributed to the parallel exercise
of taxing powers by the two Member States involved and Denmark can thus legitimately
exercise its jurisdiction to tax.
The solution envisaged by the Court avoids to place entirely on Denmark the burden of
remedying to the economic double taxation deriving from the interaction between the two
tax systems and in this ways takes into consideration the opinion of the Advocate
General and the primary objective of a balanced allocation of taxing powers. However,
such solution is only partially effective (and in other circumstances could be at all
ineffective) in avoiding economic double taxation.
Indeed, by its own nature, the internal consistency approach, as used by the CJEU in
Masco Denmark is capable of eliminating only that part of economic double taxation
which is attributable to the discriminatory effect of the remedial rule. But it is not capable
of providing any solution for the portion of double taxation which is attributable to the lack
of coordination between the two systems.
In many cases the entire double taxation could be attributed to the lack of coordination:
e.g., where the recipient State has no thin capitalisation rules at all or has thin
capitalisation rules which are applicable only to cross-border situations, so that there
would be no difference in treatment with domestic situations that might depict a restriction
and which would then lead to the application of the internal consistency test.
In this perspective, it appears clearly that with the Masco Denmark decision the Court
has further confirmed its orientation towards a discrimination based approach in tax
matters.
What is visibly missing from the proceedings of the case is any reference to a common
notion of excessive interest, which may well be different from the domestic definition of
either State.
The comparison with the OECD Model Tax Convention and the EU Arbitration
Convention indicates the different approach consisting in the provision of a common
criterion (specifically, the arm’s length test) and of a procedure for the settlement of
disputes.
But, more specifically, the reference to “an objective element which can be independently
verified” has been relevant in the assessment of the proportionality of the national thin
capitalisation rules in Thin Cap GLO (Para. 81)1044 as well as the Court concluded in SGI
1044
More explicitly, the Conclusions of the Advocate General at Para. 66 read that “the arm’s
length test represents in this context an objective factor by which it can be assessed whether the
essential aim of the transaction concerned is to obtain a tax advantage”.
268
that “the corrective tax measure must be confined to the part which exceeds what would
have been agreed if the companies did not have a relationship of interdependence”
(Para. 72).
So, the reference to an objective criterion (and specifically, to the arm’s length principle)
is part of the case law of the Court and, specifically, has been adopted for the purposes
of the proportionality test when examining thin capitalisation (and transfer pricing) rules
from the perspective of the State which makes the adjustment.
What is being submitted in the present dissertation is that there appears to be no reason
for adopting different criteria for assessing proportionality when examining the remedial
measures from the perspective of the other Member State involved.
This would achieve a symmetrical pattern of evaluation of the national measures, where
the difference in treatment constitutes a restriction, but the arm’s length principle is
symmetrically adopted for testing the proportionality. Such an approach would reconcile
the case law of the Court with the avoidance of double taxation, at least with reference
to national rules which concern the evaluation of transactions.
VII.3.a.2 Transfer pricing, thin capitalisation and excess interest in the interest and
royalty directive
VII.3.a.2.1The measure of interest in the interest and royalty directive

The issue of excessive interest payments is also addressed by the Interest and royalty
directive1045. Article 4, Para 2 of the Directive provides that “2. Where, by reason of a
special relationship between the payer and the beneficial owner of interest (…), or
between one of them and some other person, the amount of the interest (…) exceeds
the amount which would have been agreed by the payer and the beneficial owner in the
absence of such a relationship, the provisions of this Directive shall apply only to the
latter amount, if any”.
The provision, in the 1996 proposal, went further and specified that “where by reason of
such a relationship the amount of the debt claim in respect of which the interest is paid
exceeds the amount which would have been agreed by the payer and the beneficial
owner in the absence of such a relationship, the provisions of this Directive shall apply
only to interest of the latter amount, if any”. The aim of the specification – which was not
included in the finally approved version - seemingly was to prevent doubts about the
application of the rule to cases of thin capitalization.
A possible indirect reference to transfer pricing or thin capitalization rules is also made
at Article 4, Para. 1, otherwise in most part devoted to providing qualification criteria for
hybrid financial instruments (letters b to d) but which also refers, at letter a) to “income
which is treated as a distribution of profits or as a repayment of capital”.
It may be argued that the language is liable to include also items of income which are
(re) characterised as profit distributions under some domestic transfer pricing or thin
capitalisation rules.
1045
COUNCIL DIRECTIVE 2003/49/EC of 3 June 2003 on a common system of taxation
applicable to interest and royalty payments made between associated companies of different
Member States
269
The importance of such provisions (which otherwise simply entail the non-application of
the withholding tax exemption to the items of income concerned) is in the possible
implications in the State of the recipient.
It has always been the view of the Commission that payments excluded under Article 4,
Para. 1 from Directive 2003/49/CE should have constituted distributed profits for the
purposes of the Parent –Subsidiary Directive1046.
And the Economic and Social Committee had recommended, in its opinion of 1 July 1998
on the Proposed directive, that the same treatment was granted also to excess interest
under Article 5 of the proposal (corresponding to Article 4, Para. 2 of the Directive)1047.
Both proposals have not been included in the final text of the directive. Whether excess
interest may fall within the scope of application of the Parent - Subsidiary directive is thus
a matter which exclusively depends on this latter.
Scholars generally agree on the fact that the State of source should apply the benefits
of the Parent – Subsidiary Directive to interest characterised as constructive dividend,
so that the source withholding tax would not apply anyway whenever excess interest is
paid to a recipient which qualifies as a parent company under the Parent Subsidiary
Directive1048
And, indeed, The 2005 IBFD Survey points out that “For payments reclassified as
distributions of profit, all Member States, except for France, would nevertheless apply
the exemption available under the EC Parent-Subsidiary Directive, provided that all
relevant conditions are met (see Table 3)”1049.
The topic of the notion of dividend in the Parent – Subsidiary Directive, from the
perspective of the Member State of the recipient will be addressed at Para. VII.3.b.3
below.
VII.3.a.2.2 Can the interest and royalty directive prevent economic double
taxation through the inhibition of source state interest deduction
limitation rules?
One issue that concerns the Interest and Royalty Directive is whether its rules be capable
of preventing the economic double taxation that may derive from the interaction of
national rules which, in the source State, deny the deduction of interest for the borrower
and, in the State of residence of the recipient, nonetheless provide for the taxation of the
interest received by the lender.
1046
See COMMISSION, Proposal for a Council Directive on a common system of taxation
applicable to interest and royalty payments made between associated companies of different
Member States, COM(1998) 67 final. The proposed text of Article 4 provided at Para 2, the rule
under which “Interest that has been re-characterised as a distribution of profits shall accordingly
be subject instead to the provisions of Council Directive 90/435/EEC, where it is paid between
companies to which the present Directive applies”. The point was re-proposed, as an
interpretative argument, at Para 3.3.8 of the Report to the Council on the operation of Directive
2003/49/CE, COM(2009) 179 final.
1047
Opinion of the Economic and Social Committee on the ‘Proposal for a Council Directive on a
common system of taxation applicable to interest and royalty payments made between associated
companies of different Member States’ (98/C 284/09)
1048
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 765
1049
IBFD, Survey on the Implementation of the EC Interest and Royalty Directive, 2005, p. 6.
270
The doubt may arise from the reading of the Recitals to the directive, which mention the
aim to ensure that double taxation be eliminated (Recital No. 2) and more specifically,
that interest be “subject to tax once in a Member State” (Recital No. 3).
It is, at the same time, undisputable that the provisions of the Directive are exclusively
addressed to the Member State of source (Recital No. 4 and Article 1)1050, so that the
question becomes whether the provisions of the directive are capable not only to inhibit
the levy of withholding taxes, but also the limitation of interest deduction that, as a matter
of fact, can be seen as corresponding to the taxation of interest in the hands of the
borrower1051.
The question has been submitted to the CJEU in a case referred to the German interest
deduction rules1052.
The Court, on the basis of a literal interpretation of the directive and of its conditions,
which in most part concern the creditor, has argued (Para. 28 et seq.) that the provision
of Article 1 concerns only the position of the beneficial owner of interest and that it aims
at avoiding “legal double taxation of cross-border payments of interest”. By contrast, the
Court goes on, the source State rules which limit the deduction for the borrower non-
deduction do not “subject the interest paid to any taxation in the hands of the beneficial
owner of the interest”. Furthermore, according to the Court, the non-deduction of interest
pertains to the determination of the taxable income of the borrower and is not comparable
to the situation underlying the Athinaïki Zythopoiïa case, since the taxable event is not
the distribution of profits1053.
As a conclusion, the interest an royalties directive only concerns source withholding
taxes and has not the effect of inhibiting the effects of national interest deduction
limitation rules. As the Advocate General pointed out in its conclusions, the directive only
concerns juridical double taxation and not economic double taxation1054.
1050
Recital No. 4 refers to “The abolition of taxation on interest and royalty payments in the
Member State where they arise, whether collected by deduction at source or by assessment”,
Article 1 accordingly provides that “1. Interest or royalty payments arising in a Member State shall
be exempt from any taxes imposed on those payments in that State, whether by deduction at
source or by assessment”.
1051
This doubt may be fuelled by the interpretation of the parent subsidiary directive in Athinaiki
Zythopoia, 4 October 2001, Case C-294/99. Reference is here made, in in particular the Opinion
of Advocate General Alber, who at Para. 32, remarks that “economic effect of taxation of the
subsidiary is tantamount to taxation of the parent company”. This interpretation was later
abandoned by the Court, in Burda, 26 June 2008, Case C-284/06, on the grounds well illustrated
in the Opinion of Advocate General Mengozzi delivered on 31 January 2008, at Para. 49 et seq.
1052
Scheuten Solar Technology GmbH v Finanzamt Gelsenkirchen-Süd, 21 July 2011, Case C-
397/09
1053
M. GREGGI, Vecchi e nuovi limiti all'armonizzazione della tassazione degli interessi
transfrontalieri, in Rassegna tributaria, 2012, p.257 et seq.; J. ENGLISCH, Germany II: The
Mattner Case and the Scheuten Solar Technology GmbH Cases, in ECJ - Recent Developments
in Direct Taxation, Wien, 2009, p. 79 et seq.
1054
See Para. 65, where the Advocate General – building on the distinction between juridical and
economic double taxation - remarks that differently from the Parent - Subsidiary directive, “(…)
Directive 2003/49 recognises that the same person – the beneficial owner – is potentially subject
to a charge to tax twice in respect of the same income, in the source State (the State of the
company paying interest) by withholding tax or by assessment and again in the beneficial owner’s
home State. Directive 2003/49 is thus concerned with the imposition of a charge to tax not upon
two different persons, but on one. The beneficial owner is the only person that might suffer double
taxation; and Directive 2003/49 is thus concerned solely with juridical double taxation”.
271
VII.3.b Hybrid financial instruments
VII.3.b.1 Introduction
A hybrid financial instrument can give rise to economic double taxation where the related
remuneration is qualified as equity return and is not deductible in the State of the issuer,
while it is qualified as debt return and is included in ordinary income in the State of the
investor.
At the root of economic double taxation there is a qualification conflict between the two
states involved and thus ultimately a conflict of allocation of the tax base. This derives
from the attempt of national tax legislatures to capture the diversity of financial
instruments created by the market practice and which have blurred the
compartmentalisation of corporate finance into equity and debt in a context where there
are no international standards and no “principled ways” to draw a distinction
The comparative analysis performed at Chapters 3 and 4 above indicates some
examples of such qualification conflicts.
In the UK, while interest relating to loan relationships is generally deductible according
to how interest cost is reflected in the account, statutory provisions re-characterise as a
distribution those interest or other value in respect of “special securities”, a category
which includes notes with a maturity in excess of 50 years.
The remuneration of such a note would be fully taxable as debt return in the hands of an
Italian resident investor, since the maturity of a financial instrument does not imply, under
Italian law, that the related remuneration be qualified as a profit distribution for the
purposes of the domestic participation exemption regime.
Italian corporate tax rules provide for equity treatment of profit participating loans, so that
interest would not be deductible for the portion which is related to the results of the issuer,
of a specific business or of a related party business.
The French tax characterisation of debt and equity is closely linked to the principles and
categories of corporate law and GAAPs, so that instruments other than shares (including
profit participating instruments) are generally treated as debt for tax purposes. The
French corporate lender in an Italian profit participating loan would thus be fully taxable
in France on the return of such instrument.
Qualification rules may be discriminatory, where they apply differently to domestic and
cross-border situations. This is the case of the UK “special security” qualification rules,
which – as illustrated at Chapter 3 above – do not apply where the payee is “another
company which is within the charge to corporation tax”. In the example mentioned above,
thus, remuneration on notes with a maturity in excess of 50 years would not be deductible
if the payee was an Italian resident company (without a permanent establishment in the
UK) but would be deductible where the payee was a UK resident company (or the UK
permanent establishment of a non- resident company).
A difference in treatment of this kind would plainly constitute – unless justified – a breach
of the TFEU rules on fundamental freedoms.
However, national hybrid financial instruments qualification rules may also apply to
domestic and cross-border taxation without any distinction based on the residence of the
issuer (from the perspective of the State of the investor) or on the residence of the
investor (from the perspective of the State of the issuer).
In such case, the conflict of qualification may entail an obstacle to the fundamental
freedoms which is not attributable the rules of any of the two States, but to the combined
272
effects of their respective (non-discriminatory) rules. It would be, in other words, a case
of disparity deriving from the “parallel exercise of taxing powers” in the meaning
described at Para. VII.2.d.1. above.
And in such case the main difficulty pertains to the identification of which State should,
in case of double taxation, take priority over the other, as discussed at Para VII.2.d.3
above. In what follows, the search of a possible priority criterion will be carried out, in the
light of the primary or secondary EU law rules and the case law of the Court of justice in
situations similar to that under examination.
VII.3.b.2 The possible comparison with case law on dividends

The CJEU has not been so far requested to address cases specifically related to the
qualification of the return of hybrid financial instruments in the light of the provisions of
the TFEU1055.
By contrast, and very recently, the Court has been requested – pursuant to Article 273
TFEU1056 - to provide its interpretation of a specific provisions (Article 11, Para. 2) of the
bilateral tax convention between Germany and Austria which excludes from the notion
of interest “income from rights or debt-claims with participation in profits”1057. The case
concerned the qualification of certain certificates issued by a German bank, which
conferred entitlement to a fixed annual remuneration upon condition that the borrower
did not incur into an accounting loss. In other words, the payment of the annual
remuneration to the holders of the certificate was conditioned to the reporting, by the
issuer, of an accounting profit. Germany claimed that this condition implied that the
instrument was to be qualified as having a “participation in profits” for the purposes of
mentioned Article 11, Para. 2, so that the remuneration was subject to withholding tax at
source in Germany, with the corresponding obligation of Austria to recognise a credit.
The Court, after having recognised its jurisdiction on the dispute (see Paras. 19 to 20 of
the decision) has reached the conclusion that the certificates at stake do not fall within
the exemption of Article 11, Para. 2 of the Austro-German Convention since the
circumstance that “the annual payment of interest is affected by the presence of sufficient
net profit for that financial year” does not imply that “the certificates at issue confer
entitlement, in addition to annual interest, to a share in those profits” (Para. 53)
The decision, albeit referred to a bilateral treaty and based on its specific rules of
interpretation, is nonetheless of more general interest, not only for being the first in the
case law of the Court to address a conflict of qualification of a financial instrument, but
also for two points of the decision.
The first point is the departure of the Court from the main rule of interpretation set forth
by Article 3, Para. 2 of the Austro-German Convention (and by the same provision of the
OECD Model Tax Convention) which gives priority to the meaning that a disputed term
1055
J. BUNDGAARD, Hybrid Financial Instruments and Primary EU Law – Part 1, in European
Taxation, 2013, p. 540.
1056
According to Article 273, TFEU, the Court may rule on “any dispute between Member States
which relates to the subject matter of the Treaties if the dispute is submitted to it under a special
agreement between the parties”.
1057
Austria v Germany, 12 September 2017, Case C-648/15. On the decision, see J. LUTS, C.
KEMPENEERS, Case C-648/15 Austria v. Germany: Jurisdiction and Powers of the CJ to Settle
Tax Treaty Disputes Under Article 273 TFEU, in EC Tax Review, No. 1, 2018, p. 5
273
has under the domestic law of the State applying it. According to the Court, such rule “is
not to be regarded as a rule intended to arbitrate between divergences of interpretation
(…)”; these divergences would rather require an interpretation based on the “methods
proper to international law” as embedded in the Vienna Convention1058.
The second point, which is of a more substantial relevance to the questions here
examined, is that the Court has outlined a definition of the term “participation in profits”
in the following terms: “both everyday language and the most commonly accepted
accounting conventions refer to an acceptance which implies, in principle, the object of
receiving a share in the positive income of the annual operations of an undertaking”1059.
The decision provides a quite relevant contribution to the building of a EU definition of
profit distribution but does not contain any hints as to which national rule should take
priority for the purposes of avoiding economic double taxation of dividend.
Further indications for the definition of dividends and interest and the allocation of the
jurisdiction to tax the remuneration of hybrid financial instruments may come from the
CJEU case law concerning the taxation of dividends in the light of the fundamental
freedoms granted by the TFEU. In fact, both dividends and the remuneration of hybrid
financial instruments are similarly subject to economic double taxation. In both situations,
payment is not or may not be deductible for the payer (and is included into the taxable
base in the State of residence of this latter) and is or may be taxable for the payee.
Before entering into the outlined examination of the CJEU case law on dividends, it is
worth considering that the taxation of cross-border dividends may entail three different
kinds of double taxation, as illustrated in the following diagram.
The first kind of double taxation (which can be defined as “domestic economic double
taxation” – see line 1) arises when profits are taxed in the Host Country in the hands of
the distributing company (D) and dividends are taxed in that same country in the hands
of the recipient (A) at the time of the subsequent distribution and generally in the form of
a withholding tax.
The second kind (which can be termed “international economic double taxation” – see
arrow 2) is due to the taxation of profits in the Host Country in the hands of the distributing
1058
Austria v Germany, 12 September 2017, Case C-648/15, Para. 38
1059
Ibidem, Para. 40
274
company (D) and the taxation of dividends in the hands of the recipient (A) in its own
Home Country.
The third kind (“international juridical double taxation” – see arrow 3) is due to the taxation
of dividends in the hands of the recipient (A), both in the Host Country and in its own
Home Country.
These multiple layers of taxation, and the distinction between juridical and economic
double taxation are not only taken into consideration in the OECD Model Tax Convention
and its Commentary but also can be traced in the proceedings of the CJEU in cases
concerning the taxation of dividends)1060.
The EU Parent - Subsidiary Directive provides remedial measures to all the three
depicted kinds of double taxation, through the inhibition (at Article 5) of the source
taxation of dividends in the Home State and the granting of exemption or relief (at Article
4) in the Host Country.
Outside the scope of application of the directive, cross-border dividends may be still be
subject to all the three kinds of double taxation, unless exemption or relief in the States
concerned is provided under domestic law or bilateral treaties. The cases submitted to
the Court of justice have in most part concerned those domestic or treaty remedies and
their possible inconsistency with the fundamental freedoms granted by the TFEU.
International economic double taxation of dividends has been scrutinised, in the case
law of the Court, from the perspective of the State of residence of the shareholder
(inbound dividend) and from the perspective of the State of residence of the distributing
company (outbound dividend).
VII.3.b.2.1 Inbound dividend relief

In the perspective of the State of residence of the recipient, the cases brought in front of
the Court were centred on the difference in treatment, by that Member State, between
domestic dividends and those distributed by a company resident in a different member
State. More precisely, such difference concerned the remedies provided against
economic double taxation1061 (as a matter of fact, exemption or imputation credit relief).
1060
See, e.g, the description in the Opinion of Advocate General Geelhoed in the ACT GLO case
(Test Claimants in Class IV of the ACT Group Litigation v. Commissioners of Inland Revenue, 12
December 2006, Case C-374/04). Para 5 illustrates that the distribution of profits entails two levels
of taxation (in the hands the distributing company and in the hands of the shareholder) and “The
existence of these two possible levels of taxation may lead, on the one hand, to economic double
taxation (taxation of the same income twice, in the hands of two different taxpayers) and, on the
other hand, juridical double taxation (taxation of the same income twice in the hands of the same
taxpayer). Economic double taxation, when, for example, the same profits are taxed first in the
hands of the company as corporation tax, and second in the hands of the shareholder as income
tax. Juridical double taxation, when, for example, a shareholder suffers first withholding tax and
then income tax, levied by different States, on the same profits”.
1061
A perfect example of this approach can be found in the Conclusions of Advocate General
Kokott in Manninen, Case C-319/02, at Points 3 and 4: “The idea underlying the Finnish legislation
is to avoid the double taxation of corporate profits by the Finnish tax authorities (economic double
taxation), which would occur if tax were charged on profits first in the form of corporation tax levied
on the undertaking and then again in the form of income tax on the dividends. 4. Many Member
States have or had comparable set-off or exemption schemes to prevent or attenuate such double
taxation. As in the present case, however, these schemes often apply only to purely domestic
situations (...)”.
275
In Verkooijen, the Court has reached the conclusion that the granting of an exemption to
portfolio investors only in respect of domestic dividends has the effect of dissuading
resident investors from “investing their capital in companies which have their seat in
another Member State” and at the same time “also has a restrictive effect as regards
companies established in other Member States” as to the raising of capital1062.
The Court had recognised (at Para. 11 of the decision) that “the exemption was intended
to compensate in some measure for the double taxation which would otherwise result,
under the Netherlands tax system, from the levying both of corporation tax on profits
accruing to companies and of tax on the income of private shareholders imposed on the
dividends distributed by those companies”.
A few years later, in Manninen1063 this principle was confirmed also with respect to the
imputation credit. The Court has confirmed the Manninen doctrine in the subsequent
case Meilicke1064.
In summary, the Court has, in this way, constantly held that where the residence State
grants relief against economic double taxation at a domestic level, is obliged, under the
TFEU, to grant comparable relief also to dividends from other Member States1065.
VII.3.b.2.2 Outbound dividend relief

Since the mentioned cases concerned the State of residence of the recipient of
dividends, the question remains unanswered as to which of the two States involved has
the obligation to provide a relief.
If both States concerned provided relief against economic double taxation of domestic
income (in particular, by way of an imputation credit system) but both States excluded
from such relief all cross-border dividend (i.e., both outbound dividends and inbound
dividends) it would still remain undetermined if the obligation to provide relief in cross-
border situation would primarily lay on:
• the State of the investor (due to the fact that it provides discriminatory relief in
comparison with dividends distributed by its own resident companies); or
• the State of distributing company (due to the fact that it provides discriminatory relief
to its own resident investors).
Interestingly, the difference in treatment between domestic and cross border situations
was examined by the CJEU also with reference to the state of the distributing company.
1062
Verkooijen, 6 June 2000, Case C-35/98. The Court had recognised (at Para. 11 of the
decision) that “the exemption was intended to compensate in some measure for the double
taxation which would otherwise result, under the Netherlands tax system, from the levying both
of corporation tax on profits accruing to companies and of tax on the income of private
shareholders imposed on the dividends distributed by those companies”.
1063
Manninen, 7 September 2004, Case C-319/02.
1064
Meilicke, 20 June 2011, Case C-262/09.
1065
See, also for a comparison with case law on juridical double taxation, J.
MONSENEGO, Double Taxation in the EU: The Future After Block, in Tax Notes
International, April 20, 2009, p. 216. For a critical analysis of the decisions of the Court
in this matter, especially pointing out the lack of an adequate analysis of comparability
between domestic dividends and foreign dividends, see J. ENGLISCH, Taxation of Cross-
Border Dividends and EC Fundamental Freedoms, in Intertax, 2010, p. 201 et seq.
276
The decision1066 originates from the (now repealed) UK Advance Corporation Tax (“ACT”)
system and the granting of relief by the state of the subsidiary company. The Court
conclusion read that “insofar as a source State chooses to relieve domestic economic
double taxation for its residents (for example, in taxation of dividends), it must extend
this relief to non-residents to the extent that similar domestic double economic taxation
results from the exercise of its tax jurisdiction over these non-residents (for example,
where the source State subjects company profits first to corporation tax and then to
income tax upon distribution)”. This follows from the principle that tax benefits granted
by the source State to non-residents should equal those granted to residents insofar as
the source State otherwise exercises equal tax jurisdiction over both groups”.
The decision indicates that, unless a Member State imposes a source tax on dividends,
the positions of resident and non-resident shareholders are not comparable and the
Member State of the distributing company is not due to extends the relief to non-resident
shareholders.
The comparison of inbound dividend cases and outbound dividend cases above seems
to indicate that the State of the shareholder has a wider obligation to provide relief.
In the ACT GLO decision, such submission arises from three different arguments1067.
The first is that (Para 58) “the Member State in which the company making the
distribution is resident, that is to say the Member State in which the profits are derived,
is not in the same position, as regards the prevention or mitigation of a series of charges
to tax and of economic double taxation, as the Member State in which the shareholder
receiving the distribution is resident” Indeed, (Para 59) “to require the Member State in
which the company making the distribution is resident to ensure that profits distributed
to a non-resident shareholder are not liable to a series of charges to tax or to economic
double taxation, (…) would mean in point of fact that that State would be obliged to
abandon its right to tax a profit generated through an economic activity undertaken on
its territory”.
The second is that (Para 60) “it is usually the Member State in which the latter is resident
that is best placed to determine the shareholder's ability to pay tax”
The third is that (Para. 60) the obligation to provide relief is placed by the Parent
Subsidiary Directive on the head of the state of the shareholder.
Such approach was later confirmed in Burda, a case concerning the German
equalisation tax on dividends distributed to non-resident shareholders, where the Court
has stated (Para. 89) that “it is, in principle, not for the Member State in which the
subsidiary is resident to prevent that economic double taxation but for the Member State
in whose territory the parent company is resident”1068.
The preference for residence state relief that arises from the CJEU case law is rather
clear, although not exempt from criticisms in terms of consistency or foundations1069.
1066
Test Claimants in Class IV of the ACT Group Litigation v. Commissioners of Inland Revenue,
12 December 2006, Case C-374/04
1067
Some objections can be raised in respect of the illustrated arguments, see J. ENGLISCH,
Taxation of Cross-Border Dividends and EC Fundamental Freedoms, in Intertax, 2010, p. 214 et
seq.
1068
Burda, 26 June 2008, Case C-284/06
1069
See, M. GRAETZ; A. WARREN, Dividend taxation in Europe: when the ECJ Makes Tax Policy,
in Common Market Law Review, 2007, p. 1584 and 1608 who remark that the Court has been
required to “resolve the dilemma” but that the decisions “do not offer any coherent rationale for
choosing between the two” possible solutions; in this respect the priority attributed to the “source-
277
VII.3.b.2.3 Critical Remarks on the possible application of the dividend
case law to the remuneration of hybrid financial instruments
If a priority obligation of the State of the investor was to be derived from the CJEU case
law on dividends, the State of the investor would be bound to always provide relief
against the double taxation of the remuneration of hybrid financial instruments,
depending upon the tax treatment applied in the State of the issuer.
It may be questioned whether the arguments set forth by the Court in ACT GLO and
Burda can be held valid in respect of hybrid financial instruments, considering that those
imply not a plain double taxation of an item of income, but a double taxation which derives
from a conflict of qualifications,
The first argument, i.e., the right to tax deriving from the exercise of an economic activity
on the territory is valid to the extent that the item of income is qualified as a profit and is
thus the result of such economic activity. Interest is by contrast a cost of such an activity
and has a much looser connection with the territory than the profit of an enterprise
resident in that State.
The second argument is applicable to any cross-border income.
The third argument (just as the first one) presupposes that the item of income fits within
the scheme of the EU Parent-Subsidiary. Interest is not subject to that Directive but to
the Interest and Royalty Directive, which allocates an unlimited jurisdiction to tax to the
State of residence of the recipient.
In conclusion, it does not seem appropriate to apply the allocation criteria resulting from
the CJEU case law on dividends to the remuneration of hybrid financial instruments, to
the extent that the qualification of such remuneration as dividends (as opposed to
interest) is prejudicial to the identification of the related tax treatment.
Nonetheless it is worth examining the Parent-Subsidiary Directive in more detail.
VII.3.b.3 Economic double taxation and the notion of “distributed profit” in the Parent –
Subsidiary Directive
The purpose of Directive 2011/96/EU to eliminate double taxation is openly stated in the
Recitals1070, as it was in the preparatory work to Directive 1990/435/EEC (now recast in
Directive 2011/96/EU) ever since the first proposal presented by the Commission in
19691071. By contrast, Directive 1990/435/EEC itself did not explicitly mention double
country entitlement” merely reflects principles drawn from international law.; on this latter point
see also W. HELLERSTEIN, G. KOFLER, R. MASON, Constitutional Restraints on Corporate Tax
Integration, in Tax Law Review, 2008, p. 29.
1070
See, in particular, Recital No. 3, which reads that “The objective of this Directive is to exempt
dividends and other profit distributions paid by subsidiary companies to their parent companies
from withholding taxes and to eliminate double taxation of such income at the level of the parent
company”.
1071
COMMISSION, Proposition de directive du Conseil concernant le régime fiscal commun
applicable aux sociétés mères et filiales d'États membres différents, presented on 16 January
1969 (OJ C 39 of 22 March 1969). The fourth Recital stated that the proposed regime “must first
of all, avoid that a profit from a subsidiary company, already taxed on the head of such company,
be again subject to corporation tax at the parent company level”. See also COMMISSION,
Guidelines on Company Taxation, SEC(90) 601 fin., where the proposal was indicated (in the
Conclusions) as one of those that were to be adopted without delay in view of their “special
importance for the establishment of the internal market” and where it is underlined (at Para. 20)
that the proposal is “intended to eliminate the double taxation of the dividends distributed by a
278
taxation but merely contained, in the respective Recitals, a general reference to the
necessity of introducing “tax rules which are neutral from the point of view of competition”
so as to ensure that the grouping together of companies of different Member States was
not “hampered by restrictions, disadvantages or distortions arising in particular from the
tax provisions of the Member States”.
VII.3.b.3.1The present text of Directive 2011/96/EU

In the present EU legal framework, the avoidance of cross-border economic double
taxation on dividends and other profit distributions is entrusted to Article 4 of Directive
2011/96/EU, according to which (and subject to conditions), the Member State of the
parent company is due to either exempt the distribution of profits or, in case of taxation
of such distribution, recognise the underlying tax credit1072.
In either case (exemption or imputation credit), the obligation to provide a remedy against
cross-border economic double taxation is placed on the head of the Member State of the
parent company (i.e.: the recipient of the dividend or other profit distribution).
Under Directive 2011/96/EU, where all the other conditions were met, the avoidance of
cross-border economic double taxation would ultimately depend on whether a cross-
border item of income falls within the notion of “distributed profits” for the purposes of
Article 4.
However, the term is not defined, as it was also not defined in Directive 90/435/EEC.
There is, on this point, a relevant difference with tax treaties, where a definition is
provided, which ultimately makes reference (in the terms illustrated at Para V.8.b above)
to the “laws of the State of which the company making the distribution is a resident”.
Also, differently from what happens (under Article 3, Para 2, of the OECD Model
Convention) for undefined terms in tax treaties, interpretation of directives can’t be made
through the plain reference to domestic law definitions. Indeed, the lack of a definition
requires recourse to an autonomous interpretation, an approach which derives from the
principle of autonomy of EU law 1073 and the necessity of ensuring its uniform application
within the EU, rejecting, where necessary, interpretations based on the meaning which
the controversial expression assumes within the sphere of individual national
systems1074. After having been embraced in other subject matters, the principle of
subsidiary established In one Member State to Its parent company established In another Member
State”.
1072
It should be remarked that the other key provision of Directive 2011/96/EU, i.e., Article 5, by
providing that “Profits which a subsidiary distributes to its parent company shall be exempt from
withholding tax” not only avoids juridical double taxation of dividends but also their domestic
economic double taxation (as outlined in the chart at Para. VII.3.b.2 above), at the source State
level.
1073
As pointed out by J. M. DE WILMAARS, Réflexions sur les méthodes d’interprétation de la
Cour de justice des Communautés européennes, in Cahiers de Droit Européen, 1986, p. 8, « Le
point de départ du raisonnement interprétatif auquel elle a recours est basé sur la constatation
que, si le Communautés trouvent leur origine dans des traités, elles constituent cependant un
ordre juridique spécifique et autonome ». Likewise, more recently, K. LENAERTS, Le droit
comparé dans les travail du juge communautaire, in Cahiers de Droit Européen, 2001, p. 491 s.
1074
However, as J. M. DE WILMAARS, Réflexions sur les méthodes d’interprétation de la Cour
de justice des Communautés europeénnes, cit., p. 17 remarks, also in the light of judgment 17
December 1970, Internationale Handelsgesellschaft (case 11/70, in ECR, 1970, p. 1125) the
mentioned approach does not prevent, in general, from the recourse to common general
principles of the Member States (following the « comparative» method).
279
autonomous interpretation has found application in the area of excise duties 1075, of
indirect taxes1076 and, finally, with respect to the interpretation of undefined terms of the
Parent – Subsidiary Directive.
In Athinaiki Zythopohiia, the Court has expressly adopted an autonomous interpretation
of Article 5, Paragraph 1, of the Directive, based on the remark (para. 27) that “it is settled
case-law that the nature of a tax, duty or charge must be determined by the Court, under
Community law, according to the objective characteristics by which it is levied,
irrespective of its classification under national law”1077.
The actual delineation of such an autonomous definition of “distributed profits” is made
difficult by the absence of a structured reference.
It has been submitted that orientation can be given by the respective definition under
corporate law, accounting directives and accounting principles, which are largely
harmonised in Member States1078.
In case law concerning the scope of application of the Directive, and more precisely, the
notion of withholding tax, the Court has recurrently stated that one of the elements of
such a tax, is the fact that “its chargeable event must be the payment of dividends or of
any other income from shares”1079. In such a way, the Court seems to have indirectly
limited the notion of “distribution” to the notion of “income from shares” (i.e., to the first
limb of the definition of Article 10, Para. 3 of the OECD Model Convention), with the result
that the remuneration of financial instruments which do not qualify as “shares” under
corporate law would fall outside the scope of the Directive.
An equivalent limitation of the notion of distributed profit may originate from the difference
between the wording of Article 5 of the Directive (which concerns “Profits which a
subsidiary distributes to its parent company”) and that of Article 4 (which refers to profits
received “by virtue of the association of the parent company with its subsidiary”). Article
4 so seems to set forth an additional requirement: not only should the parent company
hold shares in the subsidiary, but the payment should derive precisely from (“by virtue
of”) such shares.
A further interpretation – which at the opposite greatly enlarges the notion of distributed
profit - starts from the adjacent definition of interest provided by Directive 2003/49/CE.
In particular, Article 4 excludes from its scope of application some categories of
1075
In such sense, see, for all, the ruling of 2 April 1998, The Queen v. Commissioners of Customs
and Excise, ex parte EMU Tabac e.a., case 296/95.
1076
Bautiaa e Société française maritime, 13 February 1996, joint cases C-197/94 e C-252/94,
especially Para. 39.
1077
Athinaiki Zythopoiia, 4 October 2001, Case C-294/99, Para. 27. See on the decision, G.
ROLLE, Is corporate income tax a withholding tax?, in EC Tax Review, 2003, p. 36.
1078
G. MAISTO, Current Issues on the Interpretation of the Parent-Subsidiary Directive, in (D.
Weber and G. Maisto, eds.) EU Income Tax Law - Issues for the Years Ahead, Amsterdam, 2013,
p. 15. According to the author, reference to domestic tax laws would conversely jeopardise the
uniform application of the Directive throughout the European Union.
1079
X v Ministerraad, 17 May 2017, Case C-68/15, Para. 63. The same approach was earlier
adopted in P. Ferrero e C. SpA and General Beverage Europe BV v Agenzia delle Entrate, 24
June 2010, Joined Cases C-338/08 and C-339/08, Para. 27; Finanzamt Hamburg-Am Tierpark v
Burda GmbH, 26 June 2008, 26 June 2008, Para 52;Test Claimants in the FII Group Litigation,
12 December 2006, Case C-446/04; Paras. 108 and 109; Océ van der Grinten, 25 September
2003, Case C-58/01, Paras. 47 and 56; Athinaiki Zythopoiia, 4 October 2001, Case C-294/99,
Para 29 (which refers only to the “payment of dividends”); Epson Europe BV, 8 June 2000, Case
C-375/98, Para. 23.
280
remunerations (either described in an objective and autonomous way1080 or through
reference to the domestic legislation of the source State1081) which are typically
associated with hybrid financial instruments.
And it is remarkable that the Proposal for that directive1082 provided, at Article 4, Para. 2,
that “Interest that has been re-characterized as a distribution of profits shall accordingly
be subject instead to the provisions of Council Directive 90/435/EEC, where it is paid
between companies to which the present Directive applies”.
Such proposed provision indicates that, in the view of the Commission, payments
excluded from the scope of Directive 2003/49/CE should have been characterised as
distributed profits for the purposes of the Parent–Subsidiary Directive. Albeit not adopted
by the Council, the proposed provision has been attributed a relevant interpretative
value1083.
The same argument was also made – albeit in the different perspective of inhibiting the
source State interest deduction limitation rule - by Advocate General Mischo in the
Conclusions to the Lankhorst-Hohorst case1084, but the Court has not further examined
it, otherwise stating, in the Scheuten Solar Technology decision, that the effects of
Directive 2003/49/CE only concern the source withholding tax1085.
VII.3.b.3.2The preparatory works

It has already been mentioned (in the preceding paragraph) that the avoidance of
economic double taxation was one of the main aims of the 1969 Proposal1086. The point
to be further examined is whether the 1969 Proposal, or the preparatory works of the
Parent Subsidiary Directive more in general, contain indications as to the preference for
one or the other Member States involved in a profit distribution, or elements for the
interpretation of such latter concept.
One of the first hints comes from the fourth Recital of the 1969 Proposal, where it reads
that “the common tax regime must first avoid that a profit from a subsidiary company,
1080
This is the cases of the categories at Paras. 1 b) to 1d), i.e.: “(b) payments from debt-claims
which carry a right to participate in the debtor's profits; (c) payments from debt-claims which entitle
the creditor to exchange his right to interest for a right to participate in the debtor's profits; (d)
payments from debt-claims which contain no provision for repayment of the principal amount or
where the repayment is due more than 50 years after the date of issue”.
1081
See Article 4, Para. 1 a), which refers to “payments which are treated as a distribution of
profits or as a repayment of capital under the law of the source State”.
1082
COMMISSION, Proposal for a Council directive on a common system of taxation applicable
to interest and royalty payments made between associated companies of different Member
States, Brussels 4 March 1998, COM(1998)67 final.
1083
See, especially, M. HELMINEN, The International Tax Law Concept of Dividend, Alphen aan
den Rijn, 2nd ed., 2010, p. 172 et seq.
1084
Lankhorst-Hohorst, Case C-324/00, Opinion of Advocate General Mischo delivered on 26
September 2002, Paras. 100 et seq.
1085
Scheuten Solar Technology GmbH v Finanzamt Gelsenkirchen-Süd, 21 July 2011, Case C-
397/09
1086
COMMISSION, Proposition de directive du Conseil concernant le régime fiscal commun
applicable aux sociétés mères et filiales d'États membres différents, presented on 16 January
1969 (OJ C 39 of 22 March 1969).
281
already taxed on the head of such company, be again subject to corporation tax at the
parent company level”).
The statement does not only provide a sort of definition of the kind of double taxation
which the proposed provisions are aimed at avoiding, but also shows, though mentioning
income “already taxed” and “again subject (…) to tax”, the favour for a solution based on
the elimination of such latter level of taxation, i.e., the taxation “at the parent company
level”.
It is interesting to compare the quoted language of Recital No. 4 of the 1969 Proposal
with the definition provided at Paragraph 40 of the OECD Commentary on Article 10,
where it is reminded that certain national laws seek to avoid or mitigate economic double
taxation of dividends. This is defined as “the simultaneous taxation of the company’s
profits at the level of the company and of the dividends at the level of the shareholder”.
The use of the term “simultaneous” indicates that the OECD Commentary, differently
from the 1969 Commission Proposal, has a neutral approach as to which taxation is
considered to be the “double” and which State then has the burden of its removal.
Consistently with the hierarchy depicted in the premises, Article 4 of the 1969 Proposal
provided for the exemption of distributed profits on the head of the parent company.
The solution was endorsed by the ESC Opinion of 19 February 19691087, which describes
(Para. 2) the exemption at the parent company level as a principle according to which
the profit of the subsidiary, already subject to tax, is no longer taxable when “transferred
to another taxable company”.
The approach underlying the 1969 Proposal was shortly later contradicted by the
proposal, submitted on 1 August 1975, of a directive concerning the harmonisation of
company taxation and of dividend withholding taxes1088.
The proposal also addressed the economic double taxation of dividends and was based
on the imputation system, described as “the most suitable solution for ensuring neutrality
(…), reducing the opportunities for tax avoidance and (…) developing the share market”
(Recital No. 5). Article 4 of the 1975 Proposal provided that “a dividend distributed by a
corporation of a Member State shall confer on its recipient a right to a tax credit (…)”.
The 1975 Proposal, differently from the 1969 Proposal, contained a very narrow
definition of the term “dividend”. According to Article 2, Para. 1, dividend means “that part
of the profits of any corporation of a Member State, other than a corporation in liquidation,
distributed by it by virtue of a proper decision of its competent authorities and divided
among its members in proportion to their rights as members of the corporation;
distributions of bonus shares are not regarded as dividends within the meaning of the
present directive”.
The imputation system is not in contradiction with the tax basis allocation provided by
the 1969 Proposal, since the burden of removing the economic double taxation is anyway
placed on the State of the parent company. And indeed, the imputation system was
eventually included in the final version of the Parent Subsidiary Directive adopted by the
Council in 1990.
1087
OJEC, C 100 of 1 August 1969, p. 7. The Opinion of the EP (OJEC, C 51 of 29 April 1970)
does not address the point.
1088
COMMISSION, Proposal for a Council Directive concerning the harmonization of systems of
company taxation and of withholding taxes on dividends (OJEC, C 253 of 5 November 1975).
282
The contradiction is in a different provision (Article 13), which did not concern the
companies but the Member States and according to which “(…) the budgetary cost of
the tax credit shall be borne by the Member State of the corporation which distributes
the dividends”.
The provision turns over the natural allocation of the burden of the imputation credit and
is succinctly justified at Recital No. 10, which reads that “in principle there are grounds
for requiring the budgetary cost of the tax credit to be borne by the State where the profits
from which the dividends are derived have been subjected to corporation tax (…)”.
No further explanation is to be found in the preparatory acts, with the exception of the
critical position taken by the ESC in its Opinion of 29 September 1976.
The ESC (Para 2.11.2.) is “extremely concerned about the possible dramatic budgetary
impact in Member States with companies whose shareholders are mostly resident in
other Member States” and explains that “once a country acts as host to a company, it
has to undertake a certain amount of expenditure on structures, safety, communications,
etc. The Committee feels that this warrants such companies remaining subject to tax in
the country in which they are set up”.
The opinion is at all consistent with that adopted in respect of the 1969 Proposal and,
indirectly, provides a convincing explanation for the preference attributed by the ESC on
that occasion to the State of the subsidiary, which is the State where the economic
activity is carried out and whose resources are deployed to that end.
The 1975 Proposal was eventually abandoned. The imputation credit was later included
in the final text of the Parent – Subsidiary Directive, but without any rule concerning
budgetary reallocation.
Still, the idea that the burden of removing economic double taxation might be allocated
to the State of the subsidiary has survived in Article 7, Para 2, of Directive 90/435/CEE
(recast, without changes, into the same article of Directive 2011/96/EU), according to
which “This Directive shall not affect the application of domestic or agreement-based
provisions designed to eliminate or lessen economic double taxation of dividends, in
particular provisions relating to the payment of tax credits to the recipients of dividends”.
The opportunity of such kind of bilateral agreements is envisaged by the Commentary
on Article 23 of the OECD Model Convention where, after having clarified that “economic”
double taxation does not fall within the scope of application of Article 23, since it concerns
only “juridical” double taxation, it is specified that “if two States wish to solve problems of
economic double taxation, they must do so in bilateral negotiations”.
It is remarkable that – in the same years when the Parent-Subsidiary directive was being
adopted and implemented – some Member States bilaterally agreed on treaty remedies
against economic double taxation of dividends that were based on the refund of either
the adjustment surtax or the tax credit by the State of the subsidiary and thus allocated
on this latter the burden of the remedial measures1089.
The interactions of such alternative solutions with the Parent Subsidiary Directive have
been explored by the Court of Justice, but limitedly to the issue of whether the application
of a source withholding tax on the refund of the adjustment surtax was consistent with
1089
See, in particular, Art 10 of the France – Italy tax convention and Article 10 of the UK – Italy
tax convention.
283
the Directive 1090 so that there was not the opportunity for the Court to provide its
interpretation as to the placement of the burden of the remedial measures1091.
Those bilateral treaties entered into by some Member States and the 1975 Proposal
indicate that the issue of the allocation of the tax jurisdiction in respect of the aim to avoid
economic double taxation is not undisputed. At the same time, the (necessarily)
unanimous adoption of Directive 90/435/CEE indicates that a choice has been made on
the point at a EU level. The final discussion was rather between exemption or imputation
credit (both solutions have eventually been included in the text eventually adopted by
the Council on 23 July 1990)1092 but there was no longer any discussion on the fact that
the burden of removing economic double taxation on profit distributions should lay with
the State of the parent company.
The preparatory works are conversely of limited use with reference to the interpretation
of the notion of profit distribution. The very definition provided in the 1975 Proposal was
entirely dropped and made reference to the different and undoubtedly more strict concept
of dividend.
VII.3.b.3.3Conclusive remarks regarding the framing of hybrid financial

instruments within the Parent-Subsidiary Directive
The Parent-Subsidiary Directive indicates without uncertainties that the removal of cross-
border economic taxation is an obligation of the State of residence of the parent
company.
This obligation applies, under Article 4, in respect to “distributed profits” and there is no
hint in the Directive nor in the preparatory works that the allocation of tax jurisdiction
pursued by Article 4 can be extended to any other item of income which does not fit
within the mentioned notion of distributed profit.
The notion of distributed profit should then serve as a guide (and a limit) in the framing
of the remuneration of hybrid financial instruments within the allocation criteria of the
Directive.
On the one side, the strictest interpretations of that notion (as pointed out at Para.
VII.3.b.4.1 above) should be discarded. Is true that the CJEU has, in some decisions
concerning the Parent-Subsidiary Directive, made reference to “dividends and other
income from shares”, but in those decisions the Court was not specifically addressing
the definition of “distributed profits”, so that, in this perspective, the language of the
decisions should not be taken in absolute terms. It is also true that Article 4 makes
reference to profits received “by virtue of the association of the parent company with its
subsidiary”, but there is no indication from other provisions of the Directive or from the
1090
See P. Ferrero e C. and General Beverage Europe, 24 June 2010, Joined Cases C-338/08
and C-339/08, Paras.20 and 21.
1091
The Court has simply acknowledged (at Para. 36 of the decision) that the refund of the
adjustment surcharge is “the transfer of a portion of tax revenue resulting from the waiver, by the
Italian State, of definitive collection of that revenue in order to limit the economic double taxation
of dividends distributed (...) as agreed by the two States party to the convention”.
1092
See, e.g. K. VOGEL, Taxation of Cross-Border Income, Harmonization, and Tax Neutrality
Under European Community Law, Rotterdam, 1994, p. 21 et seq.
284
preparatory work that such expression is meant to restrain the notion of “distributed
profits”1093.
On the other side, the interpretation based on the comparison with the categories of
remunerations excluded from the scope of application of Directive 2003/49/CE does not
seem to have sufficiently solid grounds, being almost exclusively based on the initial draft
of such latter directive or, in other words, on the position of the Commission, which was
eventually not agreed upon by the Council.
Furthermore, some of the potential effects of such interpretation (i.e, the inclusion within
the notion of distributed profits of the categories listed at Article 4 of Directive
2003/49/CE) do not seem consistent with the approach recently taken by the CJEU in
the case Austria v. Germany with respect to the interpretation of the term “participation
in profits”1094.
This is the case of those categories (e.g. “payments from debt-claims which contain no
provision for repayment of the principal amount”) for which there is no relationship with
the company profits, in the terms outlined in Austria v. Germany.
This is also the case of payments which “are treated as distribution of profits (…) under
the law of the source State” (Article 4, Para. 1a of Directive 2003/49/CE). Indeed, if the
CJEU has rejected the reference to national law in a context where it could have been
supported by the (treaty) law, it is unlikely that such a reference be admitted in the
interpretation of the Parent Subsidiary-Directive, where national law definitions are not
even mentioned.
The above does not imply, in my view, that the treatment of the remuneration of a hybrid
financial instrument in the State of the subsidiary is to be entirely disregarded.
To some extent this would even be impossible. The Commentary on Article 10 of the
OECD Model Tax Convention (Para. 23) explains that “in view of the still remaining
dissimilarities between member countries in the field of company law and taxation law, it
did not appear to be possible to work out a definition of the concept of dividends that
would be independent of domestic laws”.
Furthermore, the interpretation of the term “distributed profits” should take into account
the aims of the Directive and, in particular, as far as Article 4 is concerned, that of
avoiding the economic double taxation of said distributed profits. The attainment of this
objective (which, as well expressed in the first Proposal of 1969, is to “avoid that a profit
from a subsidiary company, already taxed on the head of such company, be again
subject to corporation tax at the parent company level”) in the absence of uniform rules,
presupposes that account is taken to some extent of the rules of the State of the
subsidiary1095, i.e., of whether the distribution is made out of items of income that have
been taxed as profits in the hands of the distributing company.
Finally, it should be considered that the conditions for the application of Article 4 of
Directive 2011/96/EU have been modified by Directive 2014/86/EU, which has the
purpose (see Recital No. 3) of “avoiding situations of double non-taxation deriving from
mismatches in the tax treatment of profit distributions between Member States”.
1093
See accordingly W. F. G. WIJNEN, Survey of the implementation of the EC corporate tax
directive, Amsterdam, 1995, p. 363 takes the view that there is no evidence of any intended
difference in meaning.
1094
Austria v. Germany, 12 September 2017, Case C-648/15, examined at Para VII.3.b.2 above.
1095
M. HELMINEN, The Dividend Concept in International Tax Law, The Hague, 1999, p. 72.
285
Following such amendment, the exemption is to be granted by the State of the parent
company and by the State of its permanent establishment only to “the extent that such
profits are not deductible by the subsidiary”1096.
Two further arguments may thus be put forward, in favour of the extension of the scope
of application of the directive to the remuneration of hybrid financial instruments.
The first argument is that Article 4 of the Parent-Subsidiary Directive now makes open
reference to the treatment of the distribution on the head of the distributing company and
thus, indirectly, to the qualification of the distribution and the underlying instrument in the
State of source. The amendment opens the way for a wider consideration of the source
State rules; it would otherwise be contradictory to make reference to the source
qualification only in order to avoid double non taxation and not also to avoid double
taxation1097.
The second argument is that the reference to “not deductible” profits introduces the two
categories of “deductible” and “not deductible” profits. This indicates that the notion of
profits underlying the directive is very wide (and wider than before) so as that it is suitable
to include – with effect for the Member State of the recipient - not only the core notion of
remuneration of shares but also the remuneration of other financial instruments that
generate profit related (deductible or non-deductible, as the case may be) remuneration.
The conclusion that can be drawn is that the notion of distributed profits may well be
interpreted very widely, and also taking into account the treatment of the distribution in
the State of the subsidiary. At the same time there seem to be no room for going beyond
the boundaries represented by the fact that what is distributed must be profit. This entails
that the remuneration of an hybrid financial instrument may qualify for the relief provided
by Article 4 of the Parent Subsidiary Directive to the extent that it is made of profits, i.e.,
in the language of Austria v. Germany, represents “a share in the positive income of the
annual operations of an undertaking”.
By contrast, the Parent Subsidiary Directive does not seem capable, at the present state
of EU law, to provide relief in respect of those remunerations which have not been
deducted in the State of the payer, due to qualitative features unrelated to profits, such
as the absence of provisions for repayment of the financial instrument.
VII.3.b.4 Hybrid financial instruments in the ATAD

The search, in a EU law context, of criteria suitable to indicating a possible solution for
economic double taxation caused by conflicts of qualification of hybrid financial
instruments calls, finally, for the examination of the recent EU legislation on tax
avoidance practices.
Hybrid financial instruments have indeed been addressed by Directive (EU) 2016/1164
(“ATAD”), as shortly later amended by Directive (EU) 2017/952. The purpose of this
legislation is, in particular, the hindrance of double non-taxation attributable to “hybrid
mismatches”. Albeit such purpose is actually opposite to that of the prevention of double
1096
The taxation of distributed profits “to the extent that such profits are deductible by the
subsidiary” is not left to the discretionary power of member States (as it happens with respect to
distributed profits which do not meet the other conditions of the directive) but is an obligation of
Member States. In this perspective, this obligation anticipates the “minimum requirement”
approach which characterises the ATAD.
1097
Accordingly, C. KAHLENBERG, A. KOPEC, Hybrid Mismatch Arrangements – A Myth or a
Problem That Still Exists?, in World Tax Journal, February 2016, p. 74.
286
taxation, the origin of the issues is the same and so the solutions and criteria adopted by
the ATAD in this matter may possibly offer a model solution for all qualifications conflicts.
VII.3.b.4.1 The too narrow definition of hybrid mismatch
A short clarification of the terminology is necessary at this point. Recital No. 13 of the
ATAD elucidates that “hybrid mismatches are the consequence of differences in the legal
characterisation of payments (financial instruments) or entities and those differences
surface in the interaction between the legal systems of two jurisdictions”.
The above mentioned “differences in legal characterisation” are suitable to generating
both double taxation (as illustrated at Chapters 3 and 4 of the present dissertation) and
double non-taxation. In general terms, the expression “hybrid mismatches” may well
encompass both kind of differences.
However, the definition of “hybrid mismatch” provided by Article 2, Para. 9, of the ATAD
(as amended in 2017) refers only to the situation where the outcome of the “differences
in the legal characterisation” is double non-taxation.
For what more closely concern the object of the present analysis, in particular, the
expression “hybrid mismatch” includes those differences whose outcome is a “deduction
without inclusion”, or more in detail, “(…) a deduction of a payment in the Member State
in which the payment has its source without a corresponding inclusion for tax purposes
of the same payment in the other Member State (‘deduction without inclusion’)”1098.
Differences with the opposite outcome (i.e., those giving rise to double taxation) are not
even recognised at the level of terminology.
For the sake of clarity, the term “hybrid mismatch” is anyway used in this dissertation in
the strict meaning provided by the Article 2, Para. 9 of the ATAD. Other expressions
(e.g., “conflicts of qualification”) are instead used to designate those situations where
double taxation is the outcome of a different categorisation of hybrid financial instruments
VII.3.b.4.2 The provisions on “deduction without inclusion”

The rules concerning hybrid mismatches with a deduction without inclusion outcome are
provided by Article 9, Para. 2 Directive (EU) 2016/1164. After the amendments made by
Directive (EU) 2017/9521099 the provision reads as follows:
“To the extent that a hybrid mismatch results in a deduction without inclusion:
(a) the deduction shall be denied in the Member State that is the payer jurisdiction; and
(b) where the deduction is not denied in the payer jurisdiction, the amount of the payment
that would otherwise give rise to a mismatch outcome shall be included in income in the
Member State that is the payee jurisdiction”.
1098
The present paragraph only examines the rules applicable to a situation of “deduction without
inclusion” and does not extend to those concerning a “double deduction”, since this latter is
generally not the outcome which derives from the difference in qualification of a hybrid financial
instrument, taken alone.
1099
Directive (EU) 2017/952 has added letter (b), so as to also counteract mismatches arising
from payments to (and not only from) Member States and and slightly reworded the remaining
part of the provision. The initial text of Directive (EU) 2016/1164 was the following: “To the extent
that a hybrid mismatch results in a deduction without inclusion, the Member State of the payer
shall deny the deduction of such payment”.
287
The rule has been designed in order to ensure compliance with the Recommendations
formulated in the Final Report of the BEPS Action 2 project1100 and, in particular with
Recommendation No. 1.1.(a) and (b).
It is, accordingly (and as specified by Article 9, Para 3, of Directive (EU) 2016/1164),
applicable only to transactions between related parties or to those which are part of a
“structured arrangement”, as there defined.
Directive (EU) 2016/1164 does not contain any provision equivalent to Recommendation
No. 2.1 of the mentioned Final Report of the BEPS Action 2 project, according to which
“In order to prevent D/NI outcomes from arising under a financial instrument, a dividend
exemption that is provided for relief against economic double taxation should not be
granted under domestic law to the extent the dividend payment is deductible by the
payer”. This is explained by the circumstance that a provision equivalent to
Recommendation No. 2.1 was already included in Article 4 of Directive 2011/96/EU (as
modified by Directive 2014/86/EU).
Taken together, the present set of measures adopted by the EU in order to neutralise
hybrid mismatches resulting in a deduction/non-inclusion outcome are thus derived from
or anyway consistent with those recommended by the Final Report of the BEPS Action
2 project1101.
Overall, those measures can be summarised as follows:
1. No dividend exemption should be granted to deductible payments. This is, in the BEPS
framework, a general rule with unlimited scope. In a EU context, it applies within the
scope of application of Directive 2011/96/EU and, as matter of fact, takes precedence,
in relationships between Member States, over the specific rules on hybrid instruments.
This rule entails that the tax treatment in the payee jurisdiction depends on the tax
treatment in the payer jurisdiction
2. No deduction should be granted to payments not included as ordinary income for the
payee. This is, in both the BEPS and EU framework, a rule (referred to in the
Recommendations as the “primary rule”) applicable only to related party and structured
arrangements. This rule entails that the tax treatment in the payer jurisdiction depends
on the tax treatment in the payee jurisdiction (i.e., the opposite of the general rule).
3. Deductible payments should be included in the ordinary income of the payee. This is,
in both the BEPS and EU framework a rule (referred to in the Recommendations as the
“defensive rule”) applicable only to related party and structured arrangements. This rule
entails that the tax treatment in the payee jurisdiction depends on the tax treatment in
the payer jurisdiction (i.e., the same as the general rule, but the opposite of the primary
rule).
Some remarks can be made in respect of the above measures.
First, the measures have not been designed to prevent qualification conflicts through the
harmonisation of the qualification criteria, but consist in (sequential) linking rules which
only counteract the consequences of the mismatches. As it has been effectively
summarised, the OECD linking rules concern the effects and not the causes of hybrid
1100
OECD, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2 - 2015 Final
Report, OECD/G20 Base Erosion and Profit Shifting Project, Paris, 2015
1101
This circumstance is stated in the most recent directives. See, e.g., Recitals Nos. 1 to 3 of
Directive (EU) 2016/1164 and Recitals Nos. 1 to 10 of Directive (EU) 2017/952. See accordingly
O. POPA, Recent Measures to Counter Hybrid Mismatch Arrangements at the EU Level, in
European Taxation, 2017, p. 402.
288
mismatches1102 and the Recommendations do not attempt to harmonising national laws
around common principles1103.
Through closely following the BEPS Action 2 Recommendations, the ATAD shares the
same limit and has so fulfilled only one of the tasks recommended by the European
Parliament in the Recommendation of December 2015 (“prevent double non-taxation, in
the event of a mismatch”) but not the other, which was to “harmonise national definitions
of debt, equity (…)”1104.
Second, the combination of the outlined rules (the general rule, the primary rule and the
defensive rule) is designed in such a way as to achieve the result that income from hybrid
financial instrument be taxed in at least one State. But the sequence of the rules and the
differences between them indicates that this goal is pursued regardless of where such
income should be taxable.
This approach was openly stated during the proceedings of the BEPS Action 2 Project,
where reference was made to the need for rules that “operate automatically without
requiring to establish which jurisdiction has lost tax revenue under the arrangement”1105
VII.3.b.4.3 Conclusions on the possible relevance of the linking rules in

respect of double taxation of the remuneration of hybrid
financial instruments
The provisions examined in the above Paragraph do not appear to be the expression of
any overarching principle and “which state ultimately collects revenue from implementing
the recommended rule could be arbitrary or driven by strategic behaviour”1106.
In this context, the examined rules do not seem sufficiently principled to serve as a basis
for identifying a possible solution for conflicts of qualifications of hybrid financial
instruments that lead to economic double taxation.
Two remarks can nonetheless be made with respect to the combined set of rules
recommended by the OECD and implemented through Directive 2014/86/EU and the
ATAD (as amended).
The first is that where rules have been adopted at a EU level for the neutralisation of
hybrid mismatches (i.e., of double non taxation) the absence of rules aimed at avoiding
1102
Still Exists?, in World Tax Journal, February 2016, p. 72 et seq. The submission of the authors is
that the harmonization of national tax systems “through legal definitions of dividend and interest
payments would obviously be the most effective way of curbing the exploitation of hybrid
mismatches and would enable qualifications conflicts to be eliminated at source”.
1103
G. COOPER, Some Thoughts on the OECD’s Recommendations on Hybrid Mismatches, in
Bulletin, 2015, p. 345.
1104
Resolution of the European Parliament with recommendations to the Commission on bringing
transparency, coordination and convergence to corporate tax policies in the Union, 16 December
2015, Recommendation C6 “Hybrid mismatches”. See G. FIBBE, T. STEVENS, Hybrid
Mismatches Under the ATAD I and II, in EC Tax Review, No. 3, 2017, p. 155.
1105
OECD, Neutralising the Effects of Hybrid Mismatch Arrangements. ACTION 2: 2014
Deliverable, Paris, 2014, Para. 11, p. 12 et seq.. See R. DE BOER, O. MARRES; BEPS Action
2: Neutralizing the Effects on Hybrid Mismatch Arrangements, in Intertax, 2015. p. 19 et seq.
1106
G. COOPER, Some Thoughts on the OECD’s Recommendations on Hybrid Mismatches, in
Bulletin, 2015, p. 344 et seq.
289
the opposite outcome of double taxation deriving from the same issue of conflicting
qualification of hybrid financial instruments appears to have little justification 1107.
The second is that even if the counteraction of hybrid mismatches is based on a
sequence of different criteria, the first of these criteria, i.e., the denial of the dividend
exemption where the payment is deductible takes a certain priority, because it is a
general criterion and because within Member States will, as a matter of fact, the other
criteria will play a residual role.
This entails that, not only the general rule can indicate a possible solution for cases of
double taxation but that (as already mentioned at Para VII.3.b.3.3 above) reference to
the treatment of the payment in the state of the subsidiary should be taken into account
even in the interpretation of the present text of Directive 2011/96/EU, to the maximum
possible extent made possible by the notion of “distributed profits”.
Finally, it may be worth pointing out that the difference between the linking rules
(especially, between the general rule of Directive 2011/96/EU and the primary rule of the
ATAD) does not seem likely to give rise to double taxation1108. This effect should be
prevented by the sequential application of the linking rules, in accordance with the Final
Report of the BEPS Action 2 which clarifies that “a jurisdiction does not need to apply
the hybrid mismatch rule where there is another rule operating in the counterparty
jurisdiction that is sufficient to neutralise the mismatch”.
Indeed, Article 9, Para. 2, of the ATAD applies only to the extent that “hybrid mismatch
results in a deduction without inclusion”, an outcome that between Member States should
generally be prevented by Article 4 of Directive 2011/96/EU and Article 9, Para. 3
specified that the deduction denial obligation of the source State does not apply “to the
extent that one of the jurisdictions involved in the transaction or series of transactions
has made an equivalent adjustment in respect of such hybrid mismatch”.
VII.3.c Cross border mergers
A cross-border merger can give rise to economic double taxation where unrealised
capital gains on the transferred assets and liabilities are taxed (generally on the basis of
their market value) in the absorbed (or transferring) company country but the new
(market value) tax basis of the assets is not recognised in the absorbing (or receiving)
company country.
As illustrated at Paras. III.5 and IV.6 above this may also derive from the different
accounting treatment. This is especially true where the State of the absorbed company
1107
Still Exists?, in World Tax Journal, February 2016, p. 74 et seq. The Authors indicate that
notwithstanding the OECD policy aim of building a “coherent international tax system”, double
taxation is totally ignored. By contrast, “the addressed hybrid mismatches should not only be
limited to double non-taxation events, but also apply to situations that result in double inclusion
outcomes”.
1108
The related issue of the consistency with the TFEU and the fundamental freedoms of the
application of linking rules to cross-border transactions only is outside the scope of the present
analysis. See, on the matter, R. DE BOER, O. MARRES; BEPS Action 2: Neutralizing the Effects
on Hybrid Mismatch Arrangements, in Intertax, 2015. p. 33 et seq.; G.K. FIBBE, Hybrid Mismatch
Rules under ATAD I & II in (P. Pistone & D. Weber eds.), The Implementation of Anti-BEPS Rules
in the EU: A Comprehensive Study, Amsterdam, 2018, Para. 18.5.
290
adopts a fair market value basis of taxation (irrespective of the accounting results), while
in the State of the absorbing company the acquisition value for tax purposes is
determined on the basis of the accounting entries (as it happens in France, see Para.
IV.6.b above) and a merger is subject to book value accounting (as provided by IFRS 3
in respect of combinations of entities or businesses under common control).
This paragraph is aimed at examining whether the provisions of the TFEU, as interpreted
by the CJEU (negative integration), or of EU secondary law (positive integration) can
eliminate such double taxation by either limiting taxation in the absorbed company State
or having the absorbing company State recognise the new tax basis of the transferred
assets and liabilities.
VII.3.c.1 The Merger Directive, the roll-over relief and the lack of rules for “taxable” cross-
border mergers
The tax profiles of cross-border mergers have been addressed by Directive 90/434/EEC,
later amended and codified into Directive 2009/133/EC (the “Merger Directive”)1109.
One of the most relevant features of the Merger Directive is the provision (at Article 4,
Para. 1) of the “roll-over relief”, i.e., the rule under which a merger “shall not give rise to
any taxation of capital gains calculated by reference to the difference between the real
values of the assets and liabilities transferred and their values for tax purposes”. The
receiving company, on its turn should (Article 4, Para. 2) compute depreciation and gains
and losses on the assets and liabilities received “according to the rules that would have
applied to the transferring company or companies if the merger or division had not taken
place”, i.e. on the same tax basis. The effect of the quoted provisions is that, in essence,
capital gains are not taxable in the hands of the absorbed company at the time of effect
of the merger (Article 4, Para. 1) but remain taxable – on the same basis (Article 4, Para.
2) – in the hands of the absorbing company and at the time of the actual realisation.
The roll-over relief applies (within the scope of application of Directive 2009/133/EC) only
in respect to those assets and liabilities which, under Article 4, Para. 2, letter b, “in
consequence of the merger (…) are effectively connected with a permanent
establishment of the receiving company in the Member State of the transferring company
and play a part in generating the profits or losses taken into account for tax purposes”.
The requirement1110 does not refer only to the immediate effect of the merger, but also,
indefinitely, to the resulting asset ownership situation and intends to secure the later
taxation of the gains and thus achieve the aim, stated in Recital No. 4 of the Directive, of
“safeguarding the financial interests of the State of the transferring (…) company”
What, in essence, the Directive provides is a tax deferral1111.
1109
Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation
applicable 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
an SE or SCE between Member States, OJ L 310, 25.11.2009, p. 34–46.
1110
The requirement may be considered excessive where the State of the transferring company
retains the taxing power anyway, such as in the case of transfer of ownership of immovable
property. See M. HOFSTÄTTER, D. HOHENWARTER-MAYR, The Merger Directive, in (M. Lang
et Al. eds.), Introduction to European Tax Law on Direct Taxation, Wien, 2015, p. 165.
1111
The CJEU openly refers to Article 4 of the Merger Directive as establishing “only a system of
deferral of the taxation of the capital gains” in 3D I Srl, 19 December 2012, Case C-207/11, Para.
28. The provisions is described in terms of deferral also by the most part of literature. See, inter
alia, M. HOFSTÄTTER, D. HOHENWARTER-MAYR, The Merger Directive, in (M. Lang et Al.
291
Conversely, there is no provision which addresses the taxation of capital gains (or the
deduction of losses).
This is not a negligible shortage. The realisation of capital gains (or losses) on transferred
assets and liabilities is an occurrence which (at the time of effect or later) concerns all
mergers:
 those which are outside the scope of application of the Directive;
 those to which the Directive is applicable, but at no point meet the effective
connection requirement; and
 those in respect of which the effective connection requirement is initially met,
but later comes down (e.g., due to the transfer of the assets to the headquarter
in another Member State or to another permanent establishment of the same
company in another Member State) 1112.
The tax regime of cross-border mergers, save for the described deferral, which is
however limited in terms of scope (and time), thus remains entrusted to the domestic
law provisions of the States concerned.
More specifically, there is no rule in the Merger Directive as to the basis of taxation in
the absorbed company Country or to the acceptance of the taxed values in the absorbing
company Country1113. It should be highlighted, in respect of this latter point, that the
Directive addresses (at Article 4, Para. 2) the issue of the recognition of values only in
the internal context of the State of the absorbed company and for the purposes of the
roll-over relief, but not in a cross-border context and for the purposes of the taxation of
the transferred assets and liabilities.
Consistently, the CJEU case law on the directive has examined different aspects of its
application to mergers and the interaction with national anti-abuse rules1114 but, hasn’t
addressed (and can’t be expected to address) matters which are not disciplined by the
eds.), Introduction to European Tax Law on Direct Taxation, Wien, 2015, p. 163 et seq.; C.
PANAYI, European Union Corporate Tax Law, Cambridge, 2013, p. 287; B. TERRA, P. WATTEL,
European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 669; M. HELMINEN, EU Tax Law –
Direct Taxation, Amsterdam, 2017, Para. 3.3.1.2.
1112
See Commission, Company taxation in the single market, 2001, Part III, par 3.3.2. where is it
highlighted that economic double taxation, might arise in in the case of a transfer of assets when
“the beneficiary company is taxed on the capital gains which had been neutralised at the time the
assets were transferred when the assets transferred are disposed of”.
1113
J. WHEELER, What the Merger Directive doesn’t say, in European Taxation, 1995, p. 142,
points out that the absence of those rules is suitable to allow double taxation and to jeopardize
the aims of the directive. Based on similar arguments, H. VAN DEN BROEK, Cross-border
mergers within the EU, Alphen aan den Rijn, 2012, p. 217 et seq. submits that the Merger Directive
entails the all assets and liabilities should be recorded by the receiving company at their real
value. The purpose of the Merger Directive is, according to this latter Author, “the deferral of tax
claims, not the doubling of tax claims”. Contra, F. BOULOGNE, Shortcomings in the EU Merger
Directive, Alphen aan den Rijn, 2016, p. 248 et seq. who proposes to amend the Directive on the
point, but – agreeably – does not attribute such effect to the existing provisions.
1114
See, in particular, the decisions in Leur-Bloem, 17 July 1997, Case C- 28/95 (anti-abuse
provisions), Zwijnenburg, 20 May 2010, Case C-352/08 (relevance of the Dutch tax on the transfer
of real property), Foggia-Sociedade Gestora de Participates Socials, 10. November 2011, Case
C-126/10 (anti-abuse provisions), and Euro Park Service, 8 March 2017, Case C-14/16 (French
prior authorisation regime).
292
directive such as, specifically, the taxation of capital gains and the related cross-border
recognition of tax basis.
VII.3.c.2 The Merger Directive and cross-border mergers involving a Permanent

Establishment
Particular cases of economic double taxation may occur where the merger involves a
permanent establishment of the absorbed company. In such case, to the possible
difference between the treatment in the State of the absorbed company and in the State
of the absorbing company (described in the previous Paragraph), the treatment in the
State of the permanent establishment is added, giving rise to a wider array of possible
combinations.
The Merger Directive deals with the transfer of a permanent establishment at Article 10,
which is addressed, on the one side, to the State in which the permanent establishment
is situated and to the Member State of the receiving company and, on the other side, to
the State of the transferring company.
As far as the first two States are concerned, Article 10, Para. 1, third sentence, provides
that they “shall apply the provisions of this Directive to such a transfer as if the Member
State where the permanent establishment is situated were the Member State of the
transferring company”.
Both States are thus obliged to apply the roll-over relief resulting from the combinations
of Paras. 1 and 4 of Article 4, so that there is no taxation of capital gains, while the
transferred assets and liabilities of the permanent establishment retain their prior tax
basis, as if “the merger (…) had not taken place”1115.
The above treatment is subject to all the conditions provided by the Merger Directive,
and, in particular, to the requirement (Article 4, Para. 2, letter b) that the transferred
assets and liabilities be “effectively connected with a permanent establishment of the
receiving company (…)”.
In the light of mentioned Article 10, Para. 1, third sentence, the requirement is naturally
met if the permanent establishment is situated in a State other than that of the receiving
company so that, upon the merger, the permanent establishment of the transferring
company becomes the permanent establishment, in that same State, of the receiving
company.
The language of the provision has generated some doubts in respect of the case where
the transferred permanent establishment is located in the same State of the receiving
company, so that there could be no permanent establishment after the transfer. The
specification of Article 10, Para. 1, fourth sentence, now makes it clear that the roll-over
relief (along with the other provisions of the Merger Directive) applies also in the
mentioned case1116.
As far as the State of the transferring company is concerned, the Merger Directive draws
a distinction.
1115
F. BOULOGNE, Shortcomings in the EU Merger Directive, Alphen aan den Rijn, 2016, p. 174;
1116
N. SARTORI, Le riorganizzazioni transnazionali nelle imposte sul reddito, Torino, 2012, p.
120, also for further reference to the interpretation of many commentators prior to the amendment
of Article 10 made by Directive 2005/19/EC of 17th February 2005.
293
States which adopt a territorial basis of taxation “shall renounce any right to tax” the
unrealised capital gains of the transferred permanent establishment (Article 10, Para. 1,
second sentence).
States which apply a “system of taxing worldwide profits” (Article 10, Para 2) conversely
maintain their taxing rights on the transfer of the permanent establishment but are
required to give relief for the “tax that, but for the provisions of this Directive, would have
been charged (…)” in the Member state in which the permanent establishment is situated
(“notional tax credit”).
In the light of the outlined provisions, it can be argued that economic double taxation of
the transfer of a permanent establishment can occur not only in respect of mergers which
fall outside the scope of application of the Merger Directive but also in some cases which
are within its scope.
This will usually happen when the State of the receiving company does not recognise
the new (market value) of the assets, and in this respect there is no difference with the
general case of mergers (not involving a permanent establishment) described in the
previous Paragraph.
One more particular case is that of the merger between a company resident in a world-
wide system State with a permanent establishment in a State, different from that of the
receiving company, which does not consider the transfer of the permanent establishment
upon a merger as a taxable transaction for the purposes of its domestic legislation. In
such case, the merger would be taxable in the State of the transferring company without
any notional tax credit. The tax basis in the State of the permanent establishment would
remain the same. In the event of a later disposal of the assets, the taxation in the State
of the permanent establishment can no longer be credited against the taxation in the
State of the transferring company levied at the time of the merger1117.
Interestingly, this latter situation of economic double taxation would occur even where
the State of the receiving company recognised the new (market value) tax basis of the
assets transferred upon the merger (indeed, the economic double taxation would not
concern the State of the transferring company and the State of the receiving company,
but the State of the transferring company and the State of the permanent establishment).
Also to be remarked is that no economic double taxation would occur if - in the same set
of circumstances - the State of the permanent establishment considered the merger as
a taxable transaction, since in such case the notional tax credit provided by Article 10,
Para. 2 would apply. So, the effectiveness of the notional tax credit ultimately depends
on the national tax rules of the State of the permanent establishment.
VII.3.c.3 The taxation of cross-border mergers and the taxation of cross-border transfers
of residence: early case law and policy initiatives
The CJEU has also not had, so far, the opportunity to scrutinizing the consistency of the
national tax regimes of cross-border mergers with fundamental freedoms.
National rules on cross-border mergers have been examined by the Court in the different
realm of corporate law. The conclusion reached in that domain is that cross-border
mergers constitute a form of exercise of the freedom of establishment and consequently,
“Member States are required to comply with the freedom of establishment laid down by
1117
D. J. JIMÉNEZ-VALLADOLID, F. A. VEGA BORREGO, Elimination of Double Taxation and
Tax Deferral: The Example of the Merger Directive, in (M. Lang ed.) Tax treaties: building bridges
between law and economics, Amsterdam, 2010, p. 382 s.
294
Article 43 EC”1118. There is no reason to doubt that the same conclusion would apply with
respect to (national) tax rules.
As to the merits of the taxation of capital gains on transferred assets and liabilities, a
reference may be represented by the stream of CJEU case law concerning the transfer
of residence out of a Member State (“exit taxation”).
The CJEU case law on exit taxation is relevant with respect to the taxation of unrealised
capital gains on assets and liabilities transferred on the occasion of a cross-border
merger, due to the analogy between the two situations1119.
The analogy derives from the circumstance that the national rules applicable in the
described situations are inspired by the same rationale of ensuring the taxation of
unrealised capital gains that would otherwise, after the merger or the transfer of
residence, fall outside the national jurisdiction to tax of the State of origin. Furthermore,
both situations of cross-border mergers and cross-border transfer of residence pose an
issue of recognition of values in the destination State. And the issue of the recognition of
taxed values in the hands of the absorbing company has many similarities with the issue
of the step up in basis in the State of destination upon a transfer of residence1120.
The Court has delivered its first decision on the matter in a case concerning the French
exit tax regime for individuals1121, and has stated on that occasion that such regime was
liable to hindering the freedom of establishment, notwithstanding the fact that French
rules at stake provided for the possibility to defer the payment (subject to conditions and
against the issuance of a guarantee).
The Court has also excluded that the measure could be justified by imperative reasons
in the public interest, in particular rejecting the justification based on the aim of preventing
tax avoidance. Also rejected was the justification related to the allocation of tax powers
between the State of departure and the host State, based on the argument that the
dispute did not concern “the allocation of the power to tax between Member States (…)
but the question whether measures adopted to that end comply with the requirements of
the freedom of establishment”1122.
This latter justification was reconsidered by the Court a few years later in the N v
Inspecteur case, related to the guarantees requested, in similar circumstances, by the
Dutch legislation1123. The Court decision, while confirming that the Dutch measure
constituted a restriction, has acknowledged that the taxation by the State of origin, upon
the transfer of residence, of unrealised capital gains (the Dutch system provided for the
immediate determination of the amount of tax but a deferral of the payment at the time
1118
See the decision in SEVIC Systems Aktiengesellschaft, 13 December, 20015, Case C-411/03,
Point 19.
1119
See, accordingly, H. VAN DEN BROEK, Cross-border mergers within the EU, Alphen aan den
Rijn, 2012, p. 217 et seq.; F. BOULOGNE, Shortcomings in the EU Merger Directive, Alphen aan
den Rijn, 2016, p. 161 et seq.
1120
See L. DE BROE, The tax treatment of transfer of residence by individuals. General report,
in Cahier de droit fiscal international, Vol. 87b, 2002, p. 57 et seq. who remarks that “it seems that
countries are very much concerned with the protection of their own tax base but not with the
avoidance of the double taxation (…)”.
1121
De Lasteyrie du Saillant, 11 March 2004, Case C-9/02
1122
See point 68 of the Decision in De Lasteyrie du Saillant, 11 March 2004, Case C-9/02. In
similar terms, see also points 82 of the Conclusions of Advocate General J. Mischo.
1123
N v Inspecteur van de Belastingdienst Oost/kantoor Almelo, 7 September 2006, Case C-
470/04.
295
of the actual disposal of the assets) is designed “to allocate between Member States, on
the basis of the territoriality principle, the power to tax” (Para. 41). Such allocation of
taxing power is, according to the decision, a legitimate justification for the difference in
treatment between domestic and cross-border transfers of residence, lacking unifying or
harmonising measure at the EU level and considering that under the OECD Model Tax
Convention, capital gains are generally taxable only in the (new) State of residence of
the alienator.
Proportionality, according to the Court, requires that the Dutch system “would have to
take full account of reductions in value capable of arising after the transfer of residence
by the taxpayer concerned, unless such reductions have already been taken into account
in the host Member State” (Para. 54).
Following the two mentioned decisions related to individuals and in accordance with the
policy objective of developing guidance on important CJEU rulings1124, the Commission
has issued, in December 2006, 1125 a Communication which has examined the possible
implications for companies.
The Commission admits that the Member State of origin may “establish the amount of
income on which it wishes to preserve its tax jurisdiction” but takes the view that the
treaty freedoms imply an unconditional deferral of taxation until the actual realisation. At
the same time, the Commission is aware that “such an unconditional deferral will not
necessarily provide a solution for the existing mismatches” which are suitable to generate
situations of double taxation (and double non-taxation) and that may arise from either
the use of different criteria (e.g., market value in the State of origin and book value in the
State of destination) or, even where the criteria were the same, from “different
conclusions on the value of the specific assets involved”.
In the light of this analysis, the Communication recommends that the Member States
should take measures to “avoid such double taxation” and proposes an array of solutions
which include the mutual recognition (the Member State of destination accepts the
market value established by the other Member State at the moment of transfer “as the
starting value of the asset for tax purposes”) or a binding dispute resolution mechanism
(reference is made, in the Communication, to the Arbitration Convention).
The initiative of the Commission was soon followed by a Council resolution adopted in
December 20081126, which does not envisage any limit to collection of taxes by the State
of origin, but has in common with the Communication the focus on the avoidance of “the
double taxation which could result from the transfer of economic activities which are
subject to two or more jurisdictions”.
In the scheme envisaged by the Resolution (at Para. C), the State of origin may tax the
unrealised gains “calculated as the difference between the market value of these assets
on the transfer date and their book value” and the host State “takes the market value on
the transfer date” as a basis for taxation.
1124
The policy was one of the targeted measure recommended in COMMISSION, Towards an
Internal Market without tax obstacles, COM(2001)582 final, Brussels, 23 October 2001.
1125
COMMISSION, Exit taxation and the need for co-ordination of Member States' tax policies,
COM (2006) 825, Brussels, 19 December 2006.
1126
COUNCIL, Council Resolution of 2 December 2008 on coordinating exit taxation (2008/C
323/01). The principles stated in resolution, as specified in the premises, “are a political
commitment, whose implementation is left to the decision of the Member States, and therefore
affect neither the rights and obligations of the Member States nor the respective competencies of
the Member States and of the Community under the Treaty”.
296
In case of disagreement regarding the market value of the assets “the two States settle
their dispute using the appropriate procedure” (Para. D). The Resolution does not further
specify which is the appropriate procedure and, in particular, makes no reference to the
EU Arbitration Convention.
VII.3.c.4 The National Grid Indus decision and the territoriality principle
The initiatives of the Commission and the Council share, as mentioned, the concern
about the double taxation effects of exit taxes and the proposition of possible remedies.
By contrast, in the subsequent case law of the CJEU, starting from the decision in the
National Grid Indus case1127 priority has rather been given to the restrictive effects of the
“immediate taxation of unrealised capital gains”.
The National Grid Indus and the N v Inspecteur decisions have in common that the
taxation of unrealised capital gains upon the transfer of tax residence has been ruled to
be a restriction, in breach of the provisions of the TFUE on the freedom of
establishments. Also common to both decisions (referred to different categories of
taxpayers, i.e., individuals in the N v Inspecteur case and companies in the National Grid
Indus case) is the admission of the justification consisting in the “preservation of the
allocation of powers of taxation between the Member States concerned”. Such allocation
constitutes a legitimate objective and is based on what the most recent decision and the
related conclusions of the Advocate General (respectively at Paras. 38 and 41) define
the “principle of fiscal territoriality linked to a temporal component”.
Divergences arise with respect to the features of deferred payments and the related
issues of interest and guarantees1128 but the most important difference, in the perspective
of the avoidance of double taxation, is the approach taken in National Grid Indus with
reference to the effects for the State of origin, of the tax rules of the host State.
The point is whether the Member State of origin is required to take into account the
decrease in value that may occur after the transfer of residence but before the realisation.
The National Grid Indus decision (at Point 58) states that the deduction of said decreases
lies with the Member State of destination and, more importantly, that (Point 61) “a
possible omission” by such latter Member State “does not impose any obligation on the
Member State of origin”1129.
In the N v Inspecteur case, the Court had reached the opposite conclusion and ruled that
proportionality of the rules aimed at ensuring the balanced allocation of the tax
jurisdiction between the State of origin and the host State required that the former “would
have to take full account of reductions in value capable of arising after the transfer of
residence of the taxpayer concerned, unless such reductions have already been taken
into account in the host Member State” (Point 54).
Such different interpretation has generated a temporary difference in treatment between
companies and individuals which has not been thoroughly explained by the Court and
1127
National Grid Indus BV, 29 November 2011, Case C-371/10.
1128
On these profiles see O. THÖMMES, A. LINN, Deferment of Exit Taxes after National Grid
Indus: Is the Requirement to Provide a Bank Guarantee and the Charge of Interest Proportionate?
in Intertax, 2012, p. 485.
1129
The Court more widely concludes (at Point 62) that “freedom of establishment cannot
therefore be understood as meaning that a Member State is required to draw up its tax rules on
the basis of those in another Member State in order to ensure, in all circumstances, taxation which
removes any disparities arising from national tax rules”.
297
which has been overcome only in later case law, where the National Grid Indus doctrine
was extended also to individuals1130.
VII.3.c.5 Some critical remarks on the exit taxes case law
The issue of subsequent losses addressed in N. v Ispecteur is, in my view, in close
relationship with the issue of double taxation of subsequent gains.
The central factor to both issues is value of transferred assets and liabilities at the time
of the transfer.
In the N. v Inspecteur approach, the value at the time of transfer had a dual function: it
is one of the elements for the computation of the unrealised capital gain at the time of
the transfer and at the same time it is one of the elements of the computation of the
“reductions in value” possibly arising after the transfer. This dual function was relevant
in respect only of the State of origin; while no obligation can be derived from N. v
Inspecteur in respect of the Host State.
Case law has developed, since National Grid Indus, in a different direction, which indeed
seems more correct and more consistent with the territoriality principle1131. However,
National Grid Indus has removed the obligation of the State of origin to take into account
the value at the time of the transfer and the subsequent reductions, but has not replaced
it with any obligation of the host State to take into account the value at the time of the
transfer so as to tax only its subsequent increases and thus avoid double taxation of
capital gains.
According to the Court, such double taxation does not arise, since (as affirmed in
National Grid Indus, at Para 48): “capital gains realised after the transfer of the
company’s place of management are taxed exclusively in the host Member State in
which they have arisen (…)”.
However, this is only an assumption and, depending upon the circumstances, it may not
be true1132.
The construction of the Court is based on the theoretical distinction between unrealised
and realised capital gains: the “principle of fiscal territoriality linked to a temporal
component“ implies that the first would be taxable in the State of origin and the second
in the host State of destination.
1130
On the subject of subsequent losses, the same treatment of individuals and companies has
been achieved in Comm. v. Portugal, 21 December 2016, Case C-503/14. The prior divergence
(on this and other points) was considered to be in conflict with the provisions of the TFEU, which
do not differentiate the extent of the freedom of establishment. See C. PANAYI, European Union
Corporate Tax Law, Cambridge, 2013, p. 321; B. TERRA, P. WATTEL, European Tax Law, 6th ed.,
Alphen aan den Rijn, 2012, p. 965.
1131
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 970..
According to B. ZUIJDENDORP, The N case: the European Court of Justice sheds further light
on the admissibility of exit taxes, but still leaves some questions unanswered, in EC Tax Review,
No. 1, 2007, p. 12, the decision is not consistent with the principle of territoriality, but the Court
appears to say that while the States retain the power to define the criteria for taxation, “taxpayers
exercising their rights under the EC Treaty should not suffer double taxation as a result”.
1132
The conclusion reflects the reasoning made in the Opinion of Advocate General to the Council
decision of 8 December 2008 (where “the combination of exit tax imposed by the exit State and
‘step up’ imposed by the host State constitutes a typical way of ensuring that undisclosed reserves
are taxed (only) once”) are also made. Overall, the Court seems convinced that the avoidance of
double taxation was already achieved by existing rules, an assumption that – at that time – was
not true in the case of e.g. Italy (see VII.3.c.6 below).
298
However, the achievement of such allocation, without overlaps of the tax jurisdictions
suitable to generate double taxation, is not simply a matter of territoriality and time, but
necessarily needs to take into account one further element, which is the value of the
assets at the time of the transfer.
Such value is (just as time and territoriality) the border line between the two tax
jurisdictions, and the balanced allocation (as well as the avoidance of double taxation) is
achieved only if it is univocally determined by both the States concerned, so that the final
value for the computation of the unrealised gain in the State of origin is the initial value
for the computation of the realised gain (or loss) in the State of destination.
The National Grid Indus decision omits, in other words, to take into account the issue of
the evaluation of the transferred assets.
Unfortunately, this gap has not been remedied in the subsequent case law, including the
decisions on the infraction procedures that had been initiated by the Commission
immediately after the N. case1133. All cases have concerned the State of origin, and the
Court has not had the opportunity to examine the issue of the recognition of tax value
from the perspective of the host State.
The issue is thus open whether the non-recognition of market value by the host State
may constitute a restriction of the freedom of establishment.
The National Grid Indus decision reads (at Para 58) that it is for the host State “to take
account in its tax system of fluctuations in the value of the assets of that company which
occur after the date on which the Member State of origin loses all fiscal connection with
the company”. The language may support different interpretations, but the context and
the sentence in Para. 61, according to which “as appears from paragraph 58 above, the
tax system of the host Member State will in principle take account, at the time when the
assets of the undertaking in question are realized, of capital gains and losses realized in
relation to those assets after the transfer of the place of management” seem to exclude
that the Court has intended to attribute to the host State any specific obligation in this
respect1134.
It has been argued that the non-recognition of taxed values (“step-up”) is tantamount to
“levying an entrance tax, with deferral of recovery” 1135. Other consider that the step-up
of value at the time of immigration is the necessary complement to the principle of
territoriality, since “not granting a step-up in value means that the immigration Member
State taxes more profits than have been generated there”1136.
1133
Reference is made, in particular, to cases concerning companies, i.e.: Commission v Portugal,
06 September 2012, Case C-38/10; Commission v Netherlands, 31.01.2013, Case C-301/11
(referred to both companies and individuals at the same time); Commission v Spain, 25 April
2013, Case C-64/11; Commission v Denmark, 18 July 2013, Case C-261/11; Verder LabTec
GmbH & Co. KG, 21 May 2015, Case C-657/13 and, lately, Trustees of the P Panayi Accumulation
& Maintenance Settlements, 14 September 2017, Case C-646/15.
1134
Accordingly, R. KOK, Exit Taxes for Companies in the European Union after National Grid
Indus, in EC Tax Review, 2012, p. 206; C. PANAYI, European Union Corporate Tax Law,
Cambridge, 2013, p. 319.
1135
R. KOK, Exit Taxes for Companies in the European Union after National Grid Indus, in EC
Tax Review, 2012, p. 206
1136
H. VAN DEN HURK, H. VAN DEN BROEK, J. KORVING, Final Settlement Taxes for
Companies: Transfer of Seats, Interest Charges, Guarantees and Step-Ups in Value, in Bulletin,
2013, p. 265; D. DE SANTIS, Exit Tax: An Analysis of Relevant Unresolved Issues in Light of the
Circular Issued by the Italian Association of Joint Stock Companies, in European Taxation, 2014,
p. 357.
299
The main obstacle to the recognition of taxed values derives however from the fact that
States which adopt a book value criterion might apply it consistently for both domestic
and cross-border migrations, so that no difference in treatment arises1137. In this
circumstances, the statement made in National Grid Indus that freedom of establishment
(at Para 62) “cannot (…) be understood as meaning that a Member State is required to
draw up its tax rules on the basis of those in another Member State in order to ensure,
in all circumstances, taxation which removes any disparities arising from national tax
rules” seems to fit not only in the situation of the State of origin, but also in that of the
host State. From the perspective of the TFEU, the lack of recognition of the transfer value
may can thus be considered as one more case of lack of coordination attributable to the
parallel exercise of taxing power by the Member States1138.
VII.3.c.6 Exit taxes and double taxation in the ATAD

Exit taxes have more recently been included in the scope of the directive against tax
avoidance (“ATAD”)1139.
This circumstance indicates the change in perspective that has occurred since the times
of the infraction procedures of 2007/2008 (when the question was whether Member
States were allowed to levy exit taxes), to the present scenario, where Member States
are obliged (under Article 5 of the ATAD) to introduce or maintain exit taxes1140 .
Also, the introduction of an EU exit tax within the framework of an instrument focused
on tax avoidance is somehow unexpected in the light of the case law of the CJEU which
has excluded that national exit tax provisions be justified on the basis of the prevention
of tax avoidance1141.
In the merits, the rules designed by the directive are largely inspired by the settled case
law of the CJEU, which also constitutes the limit to any higher level of protection possibly
adopted by Member States in accordance with Article 3 of the ATAD1142.
In particular the directive recognises the function of “ensuring that where a taxpayer
moves assets or its tax residence out of the tax jurisdiction of a State, that State taxes
the economic value of any capital gain created in its territory even though that gain has
1137
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 967 argue
that the host State should grant a step up if it does so in domestic situations (or even if it taxes
unrealised capital gains upon migration). In this way, they implicitly recognise that the step up of
received asset is not a general obligation..
1138
On the concept of parallel exercise of taxing powers, see Para VII.2.d above.
1139
Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices
that directly affect the functioning of the internal market, in OJ L 193/1 of 19 July 2016.
1140
S. PEETERS, Exit Taxation: From an Internal Market Barrier to a Tax Avoidance Prevention
Tool, in EC Tax Review, No. 3, 2017, p. 122 and 128. The Author also remarks that the inclusion
of exit taxation in the ATAD is not a necessary consequence of the BEPS Action Plan where exit
taxes are mentioned are only marginally in the Report on Action 6.
1141
See National Grid Indus, at Para. 103 (“it must be made clear that the cross-border transfer
of the place of management of a legal person is not to be regarded in itself as tax avoidance”).
1142
Tool, in EC Tax Review, No. 3, 2017, p. 124, with examples taken from the preparatory works of
the ATAD.
300
not yet been realised at the time of the exit”, thus echoing the Court elaborations on the
“allocation of taxing powers”1143.
The directive also provides that taxpayers should be given the right to defer the payment,
and that in such case interest may be charged and a guarantee may be requested (but
only “if there is a demonstrable and actual risk of non-recovery”).
Differently from the case law of the CJEU examined in the previous Paragraph, the
Directive explicitly addresses the issue of double taxation and the connected requirement
of recognition of values.
This is done firstly through the adoption of a common criterion, which at one time
constitutes a limit for the taxation by the State of origin and the tax basis for the State of
destination. Such criterion is the market value: under Article 5, Paragraph 1 tax shall be
applied by the State of origin on the basis of “the market value of the transferred assets,
at the time of exit of the assets,” and, symmetrically, under Article 5, Paragraph 5, such
basis shall be accepted by the host State “unless this does not reflect the market
value”1144.
The solution envisaged by the directive is consistent with the declared aim of “avoid
creating other obstacles to the market, such as double taxation” (Recital No. 5).
The same rules apply to the transactions described at Article 5, Para. 1, letter b), i.e., to
the case where “a taxpayer transfers assets from its permanent establishment in a
Member State to its head office or another permanent establishment in another Member
State (…)”. The scope of application of the rule does not seem to include the transfer of
a permanent establishment upon a merger, which has been examined above and which
remains then subject only to the present provisions of Article 10 of the Merger Directive.
VII.3.c.7 Remarks on exit taxation in the ATAD

Two remarks can be made in respect of the exit tax regime contained in the ATAD.
The first concerns the adoption of a definition of market value, specifically provided by
Article 5, Paragraph 6 and according to which market value is “the amount for which an
asset can be exchanged or mutual obligations can be settled between willing unrelated
buyers and sellers in a direct transaction”. The definition is at variance with the more
common definition of “at arm’s length” value, to be found in Article 9 of the OECD Model
Convention and at Article 4 of the Arbitration Convention. No explanation is given for this
choice in the ATAD or in the explanatory notes to the Commission proposal.
It is difficult to predict whether, in the array of cases where Article 5 of the ATAD will
apply, the “market value” determined on the basis of the Directive definition may really
be different from the “arm’s length value” otherwise determinable on the basis of treaty
provisions and the TP Guidelines. The Recital No. 10 specifies that market value should
be “based on the arm's length principle”, but it may be questioned whether such
specification is sufficient to avoid the risk that the application of the two formally different
criteria leads to divergent valuations in individual cases, thus generating possible
conflicts between the Directive and the applicable treaties.
1143
In particular, National Grid Indus, 29 November 2011, Case C-371/10, Para. 46.
1144
Recital No. 10 reads that “In order to compute the amounts, it is critical to fix a market value
for the transferred assets at the time of exit of the assets based on the arm's length principle. In
order to ensure the compatibility of the rule with the use of the credit method”.
301
The second remark is that the Directive neither provides nor refers to any specific dispute
resolution mechanism in respect of the situation where the Host state considers that the
taxed value does not reflect the market value1145. Only the Recital No. 10 mentions that
“Member States could resort to this effect to existing dispute resolution mechanisms”.
The language likely intended to make reference to the double taxation dispute resolution
mechanism, proposed by the Commission on 25 October 20161146. However, and as
illustrated above at Para VI.9.b.2, the proposal of the Commission has been later
significantly amended by the Council and (based on the final text of Council Directive
(EU) 2017/1852 of 10 October 2017) the mechanism will apply only where the disputes
concern “the interpretation and application of (…) bilateral tax treaties and the Union
Arbitration Convention”. In some of the situations where exit taxes are applicable under
the Directive, the mentioned treaties and Convention may not be applicable.
Indeed, while situations concerning the transfer of assets to and from permanent
establishments (Article 5, Para. 1, Letters a, b and d) undoubtedly entail the application
of treaty provisions equivalent to those of Article 7 of the OECD Model (and of Article 4,
Para 3 of the Arbitration Convention) some States may argue that the taxation of capital
gains at the time of the transfer of residence is a matter which only concerns the State
of residence, and that the recognition of values in the host State is a matter of non-
concurrent residence-residence conflict, which is not specifically addressed by either the
OECD Model Convention or by the Commentary1147.
VII.3.c.8 Can the exit tax case law be extended to cross-border mergers?
Both the CJEU case law and the provisions of Article 5 of the ATAD refer to exit taxation
and it may be asked to what extent the related principles and rules are suitable to be
extended to cross-border mergers outside or past the deferral regime provided by the
Merger Directive.
As to the CJEU case law, there are several elements that suggest that it would find
application also to the taxation of capital gains arising in the State of the absorbed
company upon a cross-border merger.
Indeed, cross-border mergers create, just as transfers of residence, the need of ensuring
the possibility of the State of the absorbed company to exercise its tax jurisdiction on the
transferred assets and liabilities. This also finds evidence in the Recitals to the Merger
Directive, whose rules are justified, among other things, by the need to “safeguarding the
financial interests of the State of the transferring or acquired company” and which have
ultimately been made applicable to both mergers and transfers of registered office (albeit
limitedly to those companies incorporated in the form of SE or SCE). At all similar is also
the restriction to internal market freedoms which would be caused by the immediate
taxation of the capital gains on transferred assets and liabilities.
1145
The Member State of destination can challenge the tax basis if not compliant with the market
value, but cannot avoid the recognition of the market value on the basis of the minimum protection
rule of Article 3 of the ATAD. See C. DOCCLO, The European Union’s Ambition to Harmonize
Rules to Counter the Abuse of Member States’ Disparate Tax Legislations, in Bulletin, 2017, p.
373.
1146
Tool, in EC Tax Review, No. 3, 2017, p. 132.
1147
V. CHAND, Exit Charges for Migrating Individuals and Companies: Comparative and
TaxTreaty Analysis, in Bulletin, No. 4/5, 2013, Para. 4.3 et ff.
302
It has also to be taken into consideration that the CJEU case law has initially referred to
the sole hypothesis of transfer of the residence for tax purposes, but that in more recent
cases1148, the same rationale and conclusion of the cases of transfer of residence has
been applied to the different situation of the transfer of assets involving foreign
permanent establishments. This indicates that the category of transaction subject to the
“exit tax” rules of primary EU law is not defined by strict legal categories but in view of
the effect of the transactions (and, precisely, the effect consisting in the loss of the taxing
jurisdiction by the State of origin).
The conclusion that the principles of the CJEU case law on exit taxes also apply to
mergers is widely shared in the tax literature1149. It has been remarked that where the tax
deferral regime of the Merger Directive does not apply, taxation in the State of the
absorbed company should comply with the EU primary law1150 and that the conclusions
of National Grid Indus be equally applicable to a cross-border merger1151.
Notwithstanding this, in the case of cross-border mergers (just as in the case of transfer
of residence) the fundamental freedoms do not contribute to the avoidance of double
taxation from the perspective of the recognition of the taxed values in the host State.
For sake of completeness, it is worth mentioning an EFTA Court decision of 2013, which
is specifically referred to the taxation of undisclosed capital gains in cross-border
mergers1152.
The EFTA Court was requested to examine – upon initiative of the EFTA Surveillance
Authority – the consistency with Articles 31, 34 and 40 of the EEA Agreement of the
Icelandic regime of mergers. Under the inspected Icelandic rules, cross border mergers
implied the immediate taxation of either the difference between the market value of the
exchanged shares and the respective purchase price in the hands of the shareholders
(in mergers with exchange of shares) or the difference between the market value of the
transferred assets and liabilities and the respective tax basis, in the hands of the
absorbed company (in mergers without exchange of shares). By contrast, specific
provisions exempted domestic mergers from either taxation.
The EFTA Court has reached the conclusion that the described difference in treatment
between domestic and cross-border mergers “represents a restriction on the right to
1148
Verder LabTec GmbH & Co. KG, 21St May 2015, Case C-657/13. The case concerned a
German limited partnership that transferred some patent, trademark and model rights to its
permanent establishment located in the Netherlands. The same rationale has been adopted in
A., 23rd November 2017, Case C-292/16, concerning the contribution of assets by a Finnish
company from its permanent establishment in Austria to a local company.
1149
See, in particular, H. VAN DEN BROEK, Cross-border mergers within the EU, Alphen aan den
Rijn, 2012, p. 354 et seq.; F. BOULOGNE, Shortcomings in the EU Merger Directive, Alphen aan
den Rijn, 2016, p. 161 et seq.
1150
N. SARTORI, Le riorganizzazioni transnazionali nelle imposte sul reddito, Torino, 2012, p.156.
1151
H. VAN DEN BROEK, G. MEUSSEN, National Grid Indus Case: Re-Thinking Exit Taxation,
in European Taxation, 2012, p. 196 remark that while the transferring company, in the case of a
merger, ceases to exist (and does not exercise its right of establishment), exit taxation indirectly
hampers the freedom of establishment of the receiving company. C. PANAYI, European Union
Corporate Tax Law, Cambridge, 2013, p. 287 points out that Member States that impose exit
taxes on merging companies may have to reassess their rules. See also M. HOFSTÄTTER, D.
HOHENWARTER-MAYR, The Merger Directive, in (m. Lang at Al. eds.), Introduction to European
Tax Law on Direct Taxation, Wien, 4th ed., 2016, p.165.
1152
EFTA Surveillance Authority vs Iceland, 2 December 2013, Case E-14/13.
303
establishment and the free movement of capital pursuant to Articles 31 and 40 EEA”1153
and also remarked that such difference in treatment could be justified.
The absence of a detailed analysis of possible justifications makes the comparison with
CJEU case law on exit taxes difficult. It seems anyway unlikely, in the light of the most
recent CJEU decisions on exit taxation and of the provisions of the ATAD (analysed
above), that the conclusions of the ETFA Court with respect to justifications be endorsed
in a EU law context.
By contrast, the similarity between Articles 31 and 40, EEA and, respectively, Articles 49
and 63, TFEU attributes a certain importance to the point made by the EFTA Court with
reference to the existence of a restriction1154.
VII.3.c.9 Can the ATAD exit tax provisions be extended to cross-border mergers?
It has to be examined finally to what extent the ATAD exit tax provisions may apply to
cross-border mergers.
Mergers are not explicitly mentioned at Article 5 of the ATAD and would thus, in
themselves, fall outside its scope of application. This implies that, under the ATAD and
also considering the minimum protection criterion of Article 3, the States involved retain
in full their taxing powers (of course, within the limits of primary EU law). As a matter of
fact, the State of the transferring company is not bound by Article 5 in adopting the market
value criterion for the purposes of the taxation of unrealised capital gains, and the State
of the receiving company does not, on its turn, have any obligation as to the recognition
of the market value of received assets and obligations.
The above conclusion does not concern those mergers which benefit from the tax
deferral regime of the Merger Directive. Indeed, where the assets are (initially) connected
to a permanent establishment of the receiving company in the Member State of the
transferring company, it may be argued that the later cross-border transfer (of individual
assets or the entire business) to the headquarter or to a different permanent
establishment of the receiving company, will certainly fall within the scope of Article 5,
Para. 1, letters b) and d) of the ATAD.
In other words, where the assets meet (at least, initially) the PE connection requirement,
the combination of the Merger Directive and the ATAD would make it possible to avoid
the effect of lack of coordination of the tax systems of the Member States involved.
Taxation of unrealised capital gains would first be deferred under the Merger Directive
and then - in the event of a subsequent transfer of assets (or business) within the same
entity - take place within the harmonised framework of Article 5 of the ATAD.
1153
See the decision in EFTA Surveillance Authority vs Iceland, 2 December 2013, Case E-14/13,
Point 29. The decision makes reference to both Article 40 EEA (corresponding to Article 63 TFEU)
and Article 31 EEA (Corresponding to Article 49 TFEU) because the Icelandic tax regime
concerned, respectively, situations where shareholders hold shares below the threshold of definite
influence, and above the same threshold.
1154
Article 6 of the EEA Agreement provides unilateral confomity obligations with respect to those
EEA Agreement that are identical in substance to those of EU treaties. However, a system of
exchange of information with the CJEU is provided by Article 106 of the EEA Agreement and, as
a matter of fact, also the CJEU has at times made reference, in the interpretation of EU treaties
to EFTA Court decisions not only in the interpretation of the EEA Agreement but also of EU law.
See, generally on the matter, H. FREDRIKSEN, The EFTA Court 15 Years On, in International
and Comparative Law Quarterly, 2010, p. 731.
304
In such scenario, secondary EU law would overall generate a disparity of treatment of
cross-border mergers depending on whether or not the tax deferral regime of the Merger
Directive is initially applicable (i.e., where the PE connection condition is initially met or
not). Mergers falling outside the path designed by the mentioned combination of the
Merger Directive and the ATAD could only rely on the principles of EU primary law, which
– at the present state of judicial interpretation – may purport the deferral of tax collection
in the State of origin, but not the recognition of values in the Host State.
Finally, it can be observed that the recognition of the market value of received assets in
the State of the receiving company would solve most but not all possible cases of
economic double taxation concerning mergers which involve the transfer of a permanent
establishment. In particular, it would not solve the economic double taxation – described
at Para VII.3.c.2 above – arising from the possible overlap of the tax levied by the State
of the transferring company at the time of the merger and that levied by the State of the
permanent establishment in the event of a subsequent disposal of the assets. This case
also highlights the contradiction between the roll-over relief provided by the Merger
Directive and the market value recognition rule envisaged by Article 5 of the ATAD.
VII.3.c.10 Some final remarks about the treatment of cross-border mergers in Italy,
France and the UK
The comparative analysis at Para. III.6 shows that the States considered provide - in
respect of cross border mergers which not meet the permanent establishment
connection requirement or otherwise fall outside the scope of application of the Merger
Directive - for the taxation of unrealised capital gains. The rules are almost coincident
and provide that the taxable base is the difference between the market value of
transferred assets at the time of the merger and the respective tax basis.
To the extent that no deferral of tax collection is provided, these domestic rules rise an
issue of consistency with the freedom of establishment, in the terms described in the
previous paragraph.
In 2012, the aim of ensuring compliance of domestic rules with the “recent decisions of
the Court of Justice” has suggested to the Italian legislature the introduction of a deferral
regime for outbound transfers of residence, which has been extended in 2015 also to
cross-border mergers1155.
As to the recognition of tax values in the State of the absorbing company, France and
the UK, provide for a market value taxation regime for domestic mergers which provides
for the step-up of values and which eases the recognition of market value as a basis of
taxation in the hands of the receiving company. An exception may occur in France, where
the acquisition value for tax purposes is determined on the basis of the accounting
entries, so that – as mentioned - double taxation may arise where the merger is
accounted for at book value1156.
In Italy, domestic mergers are subject to neutrality rules which provide for the transfer to
the absorbing company of the same tax basis that the assets have for the absorbed
company. Since the domestic regime also applies – unless otherwise provided – to
cross-border mergers, the issue arises of the recognition of tax values in those latter
transactions.
1155
See Para III.5.b above
1156
Respectively, paras IV.6.b1 and IV.6.c.1
305
A 2015 Legislative Decree had provided the step-up to market value of the tax basis of
assets and liabilities in cross-border transfer of residence1157 but no reference to cross-
border mergers was made1158. The gap was filled by a ruling published in the following
year with reference to an individual cross-border merger case. 1159
The evolution of Italian legislation on the matter indicates that – even before the adoption
of harmonisation directives, such as the ATAD in this case - the removal of barriers to
the freedom of establishment can derive from a combination of case law and soft law
(the Council Recommendation of 2 December 2008) suitable to be extended also beyond
the respective scope of application.
1157
Article 11 of Legislative Decree No. 147 of September 14 2015
1158
On the disparity in treatment between transfers of residence and mergers in Legislative
Decree No. 147/2015, see G. ROLLE, Exit taxation, riorganizzazioni transfrontaliere e doppia
imposizione, in Fiscalità e commercio internazionale, No. 11, 2015 p. 32 et seq.
1159
Resolution No.69/E of August 5th 2016
306
VII.4 Conclusions and answers to the first research question
The case law of the Court indicates, in general, that the discrimination-based approach
is a rather limited instrument in respect of double taxation deriving from disparities. At
the same time, “market access” or “restriction” approach finds relevant hindrances.
The study of the relationship between economic double taxation of corporate income and
the fundamental freedoms can however rely on some more specific decisions of the
CJEU.
National rules suitable to give rise to economic double taxation have been in some cases
been considered to be in breach of the fundamental freedoms and in other cases to
generate a justified difference in treatment.
But, what matters most, in no case economic double taxation has been considered in
itself as a restriction. The restriction has rigorously been assessed in respect of one of
the national rules which concurred to generate the double taxation. In other words, the
Court has approached those cases where economic double taxation was involved
without taking into consideration (as it would have otherwise been under a “global
perspective”) the cumulative effects in the two countries but exclusively focusing (in a
“one country perspective”) on the difference of treatment between domestic and cross-
border situations attributable to one of the countries involved.
This is a constant feature of the decisions related to transfer pricing or thin capitalisation
rules, where the Court has exclusively examined the possible difference in treatment
between domestic and cross border transactions by the State who had adopted the rules
under scrutiny.
This circumstance, which derives from the adoption of a “discrimination” approach, is
evident especially where the Court has denied any relevance to the circumstance that
the adjustments made on the basis of the discriminatory rule could have been neutralised
by corresponding adjustments in the other Country involved. In such events, there would
be no “obstacle” in the policy meaning of the term as outlined above, but still a restriction
(unless justified) to the fundamental freedoms.
Economic double taxation (or the related remedial measures) has also not been taken
into consideration in the assessment of a possible justification. These have been found
in the prevention of tax evasion or avoidance or in the need to ensure the balanced
allocation of taxing powers (separately or, in one case, combined between them).
The prevalence of anti-abuse purposes in the analysis of whether an arm’s length based
rule is justified implies that arm’s length based rules should leave room to the taxpayer
for a subjective justification of non-arm’s length transactions1160.
A similar denial of relevance of economic double taxation arises from the analysis of
cross-border mergers. The Merger Directive provides for a tax deferral, but does not
address the taxation of capital gains in the transferring company Country nor the
recognition of tax basis in the absorbed company Country and thus the potential
1160
Richelle et Al. eds.), Allocating Taxing Powers within the European Union, Berlin - Heidelberg,
2013, p. 94 et seq. considers that the Court is right in admitting the “commercial rationality” as a
taxpayer justification and points out that the arm’s length standard is in fact not consistent with
the economics of a group.
307
In the case law of the CJEU related to national exit taxes (which are applicable in the
different situation of a transfer of residence or assets but which raise problems similar to
those of the taxation of capital gains in cross-border mergers) the consistency of such
rules with the freedom of establishment have been examined exclusively from the
perspective of the transferring State and on the basis of a comparison between a cross-
border transfer and a domestic transfer. The disadvantage liable to hinder the freedom
of establishment is the “one country” difference of treatment between domestic and
cross-border transfers1161 and not the possible double taxation deriving from the
inconsistent evaluation of the transferred assets and liabilities in the Country of
destination. The opening towards a “global” evaluation of the effects in such other
Country has been made in only one case concerning individuals1162 and later abandoned,
for both companies1163 and individuals1164.
The coordinated valuation by the two States concerned is taken into consideration, but
is seen by the Court as an assumption and not as an obligation of either State. Such
valuation is (just as time and territoriality) the border line between the two tax
jurisdictions, and the avoidance of double taxation is achieved only if it is univocally
determined by both the States concerned.
In respect of exit taxation this has been set as a policy objective1165 and has been
pursued through harmonisation1166.
In case law concerning the taxation of dividends, the Court has also held that the
avoidance of double taxation is clearly not a general obligation of Member States.
In some decisions, this concept is expressed very openly: “it is for the Member States to
determine whether, and to what extent, a series of charges to tax and economic double
taxation are to be avoided”1167.
At the same time, the principle arising from case law is that “where a Member State has
a system for preventing or mitigating a series of charges to tax or economic double
taxation for dividends paid to residents by resident companies” (the use of the term
“where” confirms that according to the Court there is no obligation in such respect) then
“it must treat dividends paid to residents by non-resident companies in the same way”1168.
1161
De Lasteyrie du Saillant, Paras. 46 to 48; N v Inspecteur, Paras. 37 to 41.
1162
N v Inspecteur, Para. 54.
1163
National Grid Indus BV, 29 November 2011, Case C-371/10.
1164
Comm. v. Portugal, 21 December 2016, Case C-503/14.
1165
COUNCIL, Council Resolution of 2 December 2008 on coordinating exit taxation (2008/C
323/01).
1166
Article 5 of Directive (EU) 2016/1164.
1167
ACT GLO (Test Claimants in Class IV of the ACT Group Litigation v. Commissioners of Inland
Revenue), 12 December 2006, Case C-374/04, Para. 54; Amurta, 8 November 2007, Case C-
379/05, Para 24; Gaz de France, 1 October 2009, Case C-247/08, Para 60; Commission v Italy,
19 November 2009, Case C-540/07, Para 31; Commission v Spain, 3 June 2010, Case C-487/08,
Para. 40; Commission v Germany, 20 October 2011, Case C-284/09, Para 48; Kronos
International, 11 September 2014, Case C-47/12, Para. 68.
1168
ACT GLO (Test Claimants in Class IV of the ACT Group Litigation v. Commissioners of Inland
Revenue), 12 December 2006, Case C-374/04, Para 31; Lenz, 15 July 2004, Case C-315/02,
Paras. 31 and 32; Manninen, 7 September 2004, Case C-319/02, Paras 35 and 36; FII Group
Litigation, 12 December 2006, Case C-446/04, Para 45 and 46; Amurta, 8 November 2007, Case
C-379/05, Para 39; Orange European Smallcap, 20 May 2008, Case C-194/06, Para. 39; Haribo
Lakritzen Hans Riegel and Österreichische Salinen, Joined Cases C-436/08 and C-437/08, Para
308
The above conclusions apply, a fortiori, to hybrid financial instruments. It is true that the
case law of the CJEU and (notwithstanding some historical contradictions) the Parent –
Subsidiary directive place the burden of removal of economic double taxation on the
state of residence of the shareholder, but this criterion (which applies to dividends) does
not appear suitable to be applied where the dividend qualification is in itself disputed.
Nonetheless, the placement of the burden to remove economic double taxation of the
remuneration of hybrid financial instruments on the State of resident of the recipient finds
some grounds in the recent amendments to the Parent-Subsidiary Directive and in the
ATAD, where – for the opposite purposes of preventing double non-taxation – the
treatment of dividends in the State of the recipient is made dependent on the treatment
in the State of source. This interpretation should take into account the limitation
represented by the notion of “distributed profits” with the consequence that only those
remunerations which have not been deducted in the State of the payer, due to
qualification criteria such as the participation into profits, could possibly qualify under the
Parent-Subsidiary Directive.
114; Meilicke, 20 June 2011, Case C-262/09, Para. 29; Accor, 15 September 2011, Case C-
310/09, Paras. 43 and 44; Kronos International, 11 September 2014, Case C-47/12, Para. 69 and
(with reference to dividends from non-member States) SECIL, 24 November 2016, Case C-
464/14, Para 51; Masco Denmark and Damixa, 21 December 2016, Case C-593/14, Para.42.
309
VIII THE POSSIBLE SOLUTION OF A PAN EUROPEAN TAX BASE (CCCBT)
VIII.1 Introduction
Based on the current interpretation of the CJEU, as examined in the preceding Chapter,
the TFUE rules on fundamental freedoms are ineffective in respect of double taxation,
including economic double taxation, which derives from the lack of coordination between
national non-discriminatory rules.
The Masco Denmark decision1169 indicates that, even in front of a discriminatory rule, the
protection of the fundamental freedoms – at the present state of EU law - may be limited
to the removal of the discriminatory effect, but not also of the effect which, in the
circumstances, derives from the mere disparity of national rules. The internal consistency
test, as introduced in the mentioned decision, draws the dividing line between the two
effects and, as a matter of fact, represents the present limit of cogency of the
fundamental freedoms in tax matters. Recourse to positive integration is unavoidable if
the disadvantages deriving from disparities are to be removed.
In this framework, the present chapter intents to examine the proposals of the European
Commission for a Common Corporate Tax Base (CCTB) and for a Common
Consolidated Corporate Tax Base (CCCTB), presently contained in the two directive
proposals presented by the Commission on 25 October 20161170. The two proposals will
be referred to in what follows as, respectively, the Common Base proposal and the
Consolidated Base proposal.
The two proposals constitute the updated version of the proposal presented on 16 March
2011 (the “2011 Proposal”) for a directive on Common Consolidated Corporate Tax
Base1171.
The separation, which is mainly motivated by the aim of reaching a wider consensus of
Member States1172, is also functional for the purposes of present dissertation. Indeed, an
earlier draft of the present Chapter did already draw a distinction between two categories
of provisions included in the 2011 Proposal: those which designed a common tax base
(“Common Base provisions”) and those which regulated the consolidated tax base and
its formulary apportionment (“Consolidated Base provisions”).
The two proposals of 2016 in most part reflect this distinction, which will be maintained
in the present analysis, for two main reasons.
1169
See Para VII.3.a.1.7 above
1170
Respectively, EUROPEAN COMMISSION, Proposal for a Council Directive on a Common
Corporate Tax Base, COM (2016) 685 final; EUROPEAN COMMISSION, Proposal for a Council
Directive on a Common Consolidated Corporate Tax Base (CCCTB), COM (2016) 683 final.
1171
EUROPEAN COMMISSION, Proposal for a Council Directive on a Common Consolidated
Corporate Tax Base, COM (2011) 121 final. The proposal has its origin in EUROPEAN
COMMISSION, An Internal Market without company tax obstacles, COM(2003) 726 final. On the
preparatory work, see extensively M. LANG et Al., Common Consolidated Corporate Tax Base,
Wien, 2008
1172
See COUNCIL, Proposal for a Council Directive on a Common Consolidated Corporate Tax
Base (CCCTB), Presidency Synthesis Report on the bilateral discussions, Brussels, 27 March
2013, (doc. 7830/13 FISC 60), Para 9.2. and, more recently, COMMISSION, A Fair and Efficient
Corporate Tax System in the European Union: 5 Key Areas for Action, COM/2015/0302 final,
Para. 1.2..
310
The first reason is that the Common base rules have been conceived for being applied
independently from the consolidation, due to the different scope of application and –
according to the most recent orientation of the Commission – also to the different
proposed time frame for adoption1173.
The second, and more important reason, is that the two sets of provisions have different
aims and expected effects. The Common Base proposal aims at replacing the different
national corporate income tax rules with a single set of rules and has in itself the potential
(expressed at Recital No. 2 of the Common Base proposal) of preventing double taxation
“through eradicating disparities in the interaction of the national corporate tax systems”
1174. The Consolidated Base proposal aims further, through the consolidation, at
achieving the cross-border compensation of losses and, through the formulary

apportionment, of overcoming the present transaction by transaction allocation (based
on qualification and evaluation rules both suitable to generating conflicts and situations
of economic double taxation).
In the outlined framework, two research (sub) questions will be addressed:
 To which extent do the Common Base proposal and the Consolidated Base
proposal respectively avoid economic double taxation deriving from the lack of
coordination of the present Member States corporate tax systems?
 Does the Common Base proposal provide criteria for tax jurisdictions that may
constitute a reference outside its scope of application?
The provisions of the two proposed directives are examined in comparison with the prior
proposal of 2011, along with the related scholarly interpretation.
The analysis, consistently, with the general methodology settings of the present
dissertation, will be done with reference to the four paradigms of double taxation, as
identified and described at Chapters 1 and 3 above.
VIII.2 Common Base provisions

VIII.2.a Transfer pricing
Article 57 of the Common Base proposal provides for an arm’s length rule, which applies
to relationships between associated enterprises (Para. 1) and for the purposes of income
allocation in respect of permanent establishments (Para. 2)1175. The language of the two
1173
As explained at Recital No. 4 of the Common Base proposal, “at a first stage, rules on a
common corporate tax base should be enacted, before addressing, at a second stage, the issue
of consolidation”.
1174
In similar terms, the explanatory memorandum to the 2011 Proposal stated that “in the
absence of common corporate tax rules, the interaction of national tax systems often leads to
over-taxation and double taxation (…)”.
1175
Article 57 (Adjustment of pricing in relations between associated enterprises): “1.Where
conditions are made or imposed in relations between associated enterprises that differ from those
that would have been made between independent enterprises, any income that would have
accrued to the taxpayer but because of those conditions has not so accrued, shall be included in
the income of that taxpayer and taxed accordingly. 2. Income attributable to a permanent
establishment is what the permanent establishment would be expected to earn, in particular in its
dealings with other parts of the same taxpayer, if it were a separate and independent enterprise
engaged in the same or similar activities under the same or similar conditions, taking into account
the functions performed, assets used and risks assumed by the taxpayer through the permanent
establishment and through other parts of the same taxpayer”.
311
provisions is unchanged in comparison with that included in the 2011 Proposal and is
almost identical to that of, respectively, Article 9 and Article 7 of the OECD Model Tax
Convention.
Article 56 provides a very detailed definition of associated enterprises. As pointed out in
the first scholarly comments to the 2016 proposals1176, such definition contains a visible
error since it includes only taxpayers that are “not in the same group”. The specification
derives from Article 78 of the 2011 Proposal, where it was justified by the fact that
companies of the same group were also part of the consolidation.
The introduction of a common arm’s length rule is, in general, a contribution to the
avoidance of double taxation in the realm of transfer pricing since it prevents possible
divergences deriving from national rules that may be at variance in respect of the OECD
Model Tax Convention definition. At the same time, it should be considered that – as
illustrated in more detail at Chapter 5 above – provisions equivalent to Article 9, Para. 1
of the OECD Model are embedded in the network of bilateral treaties between Member
States with similar effects.
By contrast, there is no reference - in the Common Base proposal definition of arm’s
length conditions - to the OECD Guidelines, so that the risk of diverging interpretation, a
possible source of economic double taxation even in presence of the same (common)
rule, can be higher than in the case of application of bilateral treaties.
The Common Base proposal does not contain any provision concerning corresponding
adjustments. The system designed by the Commission for the future corporate taxation
in the Union thus entirely relies, as to the elimination of economic double taxation
deriving from transfer pricing adjustments, on existing bilateral treaties and the EU
In summary, it can be affirmed that, within the Common Base provisions, the present
transfer pricing regulatory framework remains in place. And this will apply in several
circumstances, where the Common Base provisions are applicable but not along with
the Consolidation provisions1177 or, of course, in transactions with related parties resident
in third countries1178.
Finally, it should be highlighted that the application of transfer pricing rules in Countries
where such rules are not applicable to same-Country transaction under local rules (so
that no same-Country correlative adjustment rule is provided), may expose companies
opting for the CCTB rules to economic double taxation in domestic situations.
VIII.2.b Thin capitalisation and interest limitation

According to Article 7 of the Common Base proposal, the tax base is determined as
“revenues less exempt revenues, deductible expenses and other deductible items”.
1176
D. GUTMANN, E. RAINGEARD DE LA BLÉTIÈRE, CC(C)TB and International Taxation, in
EC Tax Review, No. 5, 2017, p. 243
1177
See, with reference to the 2011 Proposal, C.PANAYI, The Common Consolidated Corporate
Tax Base and the UK Tax System, in Institute for Fiscal Studies, TLRC Discussion Paper No. 9,
London, 2011, m.no. 2.5.3.
1178
See . RÖDER E., Proposal for an Enhanced CCTB as Alternative to a CCCTB with Formulary
Apportionment, in World Tax Journal, 2012, p. 135.
312
Interest may fall within the category of deductible expenses, provided that the general
condition of Article 9, Para. 1 be met (“incurred in the direct business interest of the
taxpayer”) and within the boundaries set forth by the interest limitation rule of Article 13.
Such rule, which was not present in the 2011 proposal1179, is almost identical to the one
provided by Article 4 of the ATAD. And just as in the case of the ATAD, there is no
provision avoiding economic double taxation of the portion of interest that has not been
deducted under Article 13.
A further question is whether, on the top of the interest limitation rule, a thin capitalisation
rule can be derived from the arm’s length rule of Article 57.
The same issue could have been raised under Article 79 of the 2011 Proposal. In the
related Working Paper No. 57 it had been affirmed that both the amount of the interest
and of the loan were to be consistent with the arm’s length principle1180 but no provision
to that effect was eventually included.
The Common Base proposal has not made any progress on the point and thus risks to
pose interpretative divergence as to the application of Article 57 to the amount of intra-
group financial transactions. Since the Common Base proposal does not include a
corresponding adjustment provision or a dispute settlement procedure, such divergence
would combine with the analogous divergence that exists in respect of the scope of
application of bilateral treaties and the Arbitration convention1181. Where a Member State
takes the view that the arm’s length principle of Article 57 applies to the amount of the
loan while another considers that it applies to the interest rate only, the conflict of
interpretation would lead to a risk of double taxation which is at all similar to the risk that
already exists as a combination of national arm’s length rules and the same rules
included in bilateral treaties and the arbitration convention.
VIII.2.c Hybrid financial instruments

As mentioned, the Common Base proposal contains at Article 7, a framework provision
under which “the tax base shall be calculated as revenues less exempt revenues,
deductible expenses and other deductible items”.
Article 8, Para. 1(d) then exempts, upon conditions1182, “received profit distributions”,
while Article 12 lists, among non-deductible items “profit distributions and repayments of
equity or debt”.
1179
By contrast, the Common Base proposal has abandoned the interest deduction rule (Article
81 of the directive proposal), which provided that, under some circumstances, interest payments
to “associated enterprises” resident in a “third country” shall not be deductible. On the old interest
deduction limitation rule, please see, amongst others: P. PISTONE, The limits to interest
deducibility: An ad hoc anti-abuse rule in the proposal for a CCTB Directive, in (M. Lang et Al.
ed.) Corporate Income Taxation in Europe, Institute for Austrian and International Tax Law, Wien,
2013, p. 272 s.; I. M. DE GROOT, Interest Deduction and the CCCTB: A Walk in the Park for Tax
Advisors?, in Intertax, No. 41, II, 2013, p. 574 s.; C. HJI PANAYI, The Anti-Abuse Rules of the
CCTB, in Bulletin, 2012, p. 264 s.
1180
See CCCTB Working Group, Possible elements of a technical outline - annotated, Working
Paper, n. 57, of 20 November, 2007, m.no. 44.
1181
Please see respectively, Paras. V.7.a.2 and VI.7 above.
1182
The exemption is granted “provided that the taxpayer has maintained a minimum holding of
10 % in the capital or 10 % of the voting rights of the distributing company for 12 consecutive
months, with the exception of profit distributions from shares held for trading as referred to in
313
There is no definition of “profit distribution” in the Common Base proposal1183. The term
is however used in the provision of Article 4, devoted to definitions1184. Indeed,
 Para. 5 states that the term “revenues” includes “interest, dividends and other
profits distributions, proceeds of liquidations, (…)”;
 Para. 6 defined “expenses” as “decreases in net equity of the company during
the accounting period in the form of outflows or a reduction in the value of assets
or in the form of a recognition or increase in the value of liabilities, other than
those relating to monetary or non-monetary distributions to shareholders or equity
owners in their capacity as such”.
There is also no definition of interest, even though the term is used in the definition of
“borrowing cost”, under Article 4, Para. 12, which includes “interest expenses on all forms
of debt, other costs economically equivalent to interest and expenses incurred in
connection with the raising of finance, as defined in national law, including payments
under profit participating loans, imputed interest on convertible bonds and zero coupon
bonds, payments under alternative financing arrangements, (…) guarantee fees for
financing arrangements, arrangement fees and similar costs related to the borrowing of
funds”. The definition is the same that can be found at Article 2, Para 1. of the ATAD
(save for the missing reference to Islamic finance arrangements) and is extremely wide,
likely due to the fact that it is ancillary to the interest limitation rule of Article 13 and is
thus aimed at capturing the widest possible range of interest cost.
A similar approach is adopted at Article 4, Para. 13 in the definition of “exceeding
borrowing cost”, a definition which – in the rationale of the interest limitation rule – is
required for offsetting borrowing cost with interest revenue. To that end, the definition
refers to interest revenue, but also includes “other taxable revenues that the taxpayer
receives and which are economically equivalent to interest revenues”.
The above definitions may indeed represent a set of criteria suitable to distinguish
between equity return and debt return.
Article 61 of the Common Base proposal provides hybrid mismatch rules which, as far
as the case of deduction without inclusion is concerned, are substantially identical to
those of Article 9. Para 2 f Directive (EU) 2016/1164 as amended by Directive (EU)
2017/952. It should be considered that, within the scope of application of the Common
Base provisions, the insurgence of hybrid mismatch is virtually excluded1185.
Article 21(4) and profit distributions received by life insurance undertakings in accordance with
point (c) of Article 28”;
1183
In Working Paper n. 42 (dated 28 July 2006) of the proceedings that led to the 2011 Proposal
it was stated, at Para. 3 that “for the purposes of this document dividends should be understood
as those distributions of taxed profit made by a company to its shareholders”
1184
See I. M. DE GROOT, Group Provisions in the Common (Consolidated) Corporate Tax Base,
in Intertax, No. 45, II, 2017, p. 745.
1185
D. GUTMANN, E. RAINGEARD DE LA BLÉTIÈRE, CC(C)TB and International Taxation, in
EC Tax Review, No. 5, 2017, p. 242 submits that anti-hybrid rules may not be justified in all cases
e.g. with respect to hybrid entities, since there could be no hybrid mismatch when all companies
involved are subject to the draft directives, save the case of an associated enterprise that may
fall outside its scope of application.
314
VIII.2.d Cross-border mergers
The Common Base proposal does not contain any provision in respect of cross border
mergers, which should then remain subject to Directive 2009/133/EC. As illustrated at
Chapter VII above, this latter does not address the taxation of capital gains (or the
deduction of losses) of any transfer of assets which occurs as an effect of a merger which
is not eligible for the roll-over relief, e.g., because it does not meet the PE connection
requirement.
This may be a case where, in accordance with Article 1 of the Common Base proposal,
“national corporate tax law” would apply1186. In other words, the Common Base proposal
does not purport, on this point, any progress in respect of the present state of EU law,
as illustrated at Chapter VII above.
VIII.3 Consolidated base taxation

The Consolidated base directive1187 is aimed at establishing, as Article 1 describes, “a
system for the consolidation of the tax bases” and the “rules on how a common
consolidated corporate tax base shall be allocated to Member States (…)”.
Such consolidation and (formulary) allocation of the tax bases is a radical alternative to
the system consisting in the determination of the tax bases on the head of each individual
company (“separate accounting”), associated with an arm’s length rule, which is at the
foundation of the present corporate taxation within the EU.
The proposal is thus very ambitious and the expected difficulties of reaching the
necessary consensus of Member States have suggested the Commission to separate it
from the Common base proposal in which it was embedded in the initial Proposal of
2011.
The Consolidated base proposal builds on the Common base proposal, since the
consolidation would concern the tax bases determined under the rules of this latter.
This scheme, as mentioned in the above Paras., is also helpful in the perspective of the
present analysis, which is aimed at picking how much of the disadvantages bearing on
cross-border activities in the EU can be eliminated by harmonisation of the tax base and
how much by the replacement of the present system with one based on consolidation
and different allocation criteria allocation.
VIII.3.a Consolidation
The basic rule for consolidation is provided by Article 7, para 1, according to which “The
tax bases of all members of a group shall be added together into a consolidated tax
base”.
1186
This submission is supported by Working Paper n. 39 (“Issues related to business re-
organisations”) of 28 July, 2006, according to which “the Merger directive will continue to apply in
a non-CCCTB context”.
1187
EUROPEAN COMMISSION, Proposal for a Council Directive on a Common Consolidated
Corporate Tax Base (CCCTB), COM(2016) 683 final
315
This addition (which can of course also lead to a negative result) would imply the offset
of profits and losses (as determined under the Common Base rules) of the individual
members of the group, and would lead to an aggregate taxable base1188.
The consolidation process is completed by the elimination of intra-group transactions, as
provided by Article 9, according to which “profits and losses arising from intra-group
transactions shall be ignored when calculating the consolidated tax base”1189.
The procedure resembles to some extent to that provided by the (accounting) directive
2013/34/EU, whose Article 24, Para. 7 provides that “Consolidated financial statements
shall show the assets, liabilities, financial positions, profits or losses of the undertakings
included in a consolidation as if they were a single undertaking. In particular, the following
shall be eliminated from the consolidated financial statements: (…); (b) income and
expenditure relating to transactions between the undertakings; and (c) profits and losses
resulting from transactions between the undertakings, where they are included in the
book values of assets”.
The provisions correspond to, respectively, Article 57 (“the tax bases of the members of
a group shall be consolidated”) and 591190 (“shall be ignored”) of the 2011 Proposal1191.
VIII.3.b Apportionment
The general rule for apportionment is provided by Article 28 of the Consolidated Base
proposal, according to which “The consolidated tax base shall be shared between the
group members in each tax year on the basis of a formula for apportionment”. The same
Article 28 then provides the formula, based on equal weighting of the factors of sales,
1188
With respect to the aggregation of profit and losses, please see: J. LAMOTTE, New EU Tax
Challenges and Opportunities in a (C)CCTB World: Overview of the EU Commission Proposal for
a Draft Directive for a Common Consolidated Corporate Tax Base, in European Taxation, 2012,
p. 271 s.; E. RÖDER, Proposal for an Enhanced CCTB as Alternative to a CCCTB with Formulary
Apportionment, in World Tax Journal, 2012, p. 129; T. SANDERS, Consolidation in the CCTB
Proposal, in (D. Weber ed.) CCCTB: selected issues, Wien, 2012, p. 9; G. FORTE, La tassazione
dei gruppi Europei: un’analisi critica della CCCTB, in Diritto e pratica tributaria internazionale,
2010, n. 2, p. 664 s.; S. MAYER, Formulary apportionment for the Internal Market, Amsterdam,
2009, Ch. IV, p. 15; L. CERIONI, The Commission’s Proposal for a CCCTB Directive: Analysis
and Comment, in Bulletin, 2011, p. 520 s.; C. HJI PANAYI, The Common Consolidated Corporate
Tax Base - Issues for Member States Opting Out and Third Countries, in European Taxation,
2008, p. 115 s. J. BARENFELD, A Common Consolidated Corporate Tax Base in the European
Union – A Beauty or a Beast in the Quest for Tax Simplicity?, in Bulletin, 2007, p. 261
1189
With reference to the elimination of intra-group transactions, please see: T. SANDERS,
Consolidation in the CCTB Proposal, in (D. Weber ed.) CCCTB: selected issues, Wien, 2012, p.
9; C. HJI PANAYI, The Common Consolidated Corporate Tax Base and the UK Tax System, in
Institute for Fiscal Studies, TLRC Discussion Paper No. 9, London, 2011, p. 22 s.; J.
BARENFELD, A Common Consolidated Corporate Tax Base in the European Union – A Beauty
or a Beast in the Quest for Tax Simplicity?, in Bulletin, 2007, p. 261 s.; B. TERRA, P. WATTEL,
European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 806.
1190
CCCTB\WP\041\doc\en, dated December 5th 2006 (Related parties in CCCTB) reads that
“Intra-group profits and losses will be eliminated so that the arm's length pricing will no longer be
required for transactions among companies within the same consolidated group”.
1191
J. LAMOTTE, New EU Tax Challenges and Opportunities in a (C)CCTB World: Overview of
the EU Commission Proposal for a Draft Directive for a Common Consolidated Corporate Tax
Base, in European Taxation, 2012, p. 273;
316
labour and assets and is followed by rules (especially contained in Articles 32 to 44) on
the measurement of the individual factors1192.
The degree of detail of the regulations of the factors indicates the complexity of the
formulary apportionment. Furthermore, rules such as Article 35 on the allocation of
assets, which draws the distinction between the legal owner, the economic owner and
the effective user of an asset suggests that the adoption of allocation factors does not
entirely eliminate the risk of disputes1193.
In the separate accounting systems, those allocation conflicts constitutes the object of
mutual agreement or arbitration procedures.
A quite different dispute resolution procedure is envisaged in respect of the formulary
apportionment factors. The Consolidated Base proposal designs an assessment
procedure where the principal taxpayer files a consolidated tax return which comprises
(Article 52, Para. 1, letter g) “the calculation of the apportioned share of each group
member”. Such consolidated tax return is then verified by the principal tax authority,
which is attributed, under Article 56, the power to issue an amended tax assessment,
after consultation with the competent authorities of the other Member States.
The amended tax assessment can be appealed by either the principal tax payer (under
Article 66) or the competent authority of another Member State in front of the courts of
the Member State of the principal tax authority.
VIII.3.c Transfer pricing

The Consolidated Base proposal provides for the apportionment of the taxable income
in accordance with a formula; in this context transfer pricing rules become unnecessary
within group members and, according to the mentioned provision of Article 9, Para. 1,
“profit and losses arising from intra-group transactions shall be ignored”.
The provision, then, eliminates from its roots the risk of double taxation deriving from
diverging formulation or application of transfer pricing rules.
Article 9 nonetheless provides (at Para. 2) for the maintenance of a “consistent and
adequately documented method for recording intra-group transactions”, a requirement
which seems to be instrumental to the elimination of the profit or losses deriving from
such transactions from the taxable base.
Similar obligations were provided by the 2011 Proposal, especially by Article 59, Para 3,
which corresponds to Article 9, Para. 2 of the Consolidated Base proposal. Furthermore,
Article 59, Para 4, of the 2011 Proposal provided that “the method for recording intra-
group transactions shall enable all intra-group transfers and sales to be identified at the
lower of cost and value for tax purposes”. Working Paper n. 35, explained that - in the
1192
On the formula and the related factors especially with reference to the 2011 proposal see: M.
PETUTSCHNIG, Sharing the Benefits of the EU’s Common Consolidated Corporate Tax Base
within Corporate Groups, in World Tax Journal, 2015, p. 246 s.; W. HELLERSTEIN, Tax Planning
under the CCCTB’s Formulary Apportionment Provision: The Good, the Bad and the Ugly, in in
(D. Weber ed.) CCCTB: selected issues, EUCOTAX series on European Taxation, No. 35, Wien,
2012, p. 223 s.; J. M. WEINER, CCCTB and Formulary Apportionment: The European
Commission Finds the Right Formula, in in (D. Weber ed.) CCCTB: selected issues, Wien, 2012,
p. 257 s.; M. ERASMUS-KOEN, Common Consolidated Corporate Tax Base: A “Fair Share” of
the Tax Base?, in International Transfer Pricing Journal, 2011, p. 239 s.
1193
See other examples in B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den
Rijn, 2012, p. 811 who remark that those issues overlap with the functional analysis performed
under traditional transfer pricing rules.
317
case of goods purchased by company A, sold to B, then sold to C and eventually sold to
a third party – the consolidated base would have included “A’s costs, A’s income from
sale to B at cost, B’s cost and income from sale to C at cost, C’s cost and income from
sale to third party”, in such a way as to “remove intra-group profits on such transactions
but preserve an ‘audit trail’ in the tax base”1194.
Those rules seem to imply non-negligible administrative burdens1195; however Member
states authorities are not attributed any prerogative to rewrite transactions.
VIII.3.d Thin capitalization and interest limitation

The Consolidated Base proposal would entail for thin capitalisation effects similar to
those illustrated with respect to transfer pricing. The circumstance that profit and losses
be ignored when calculating the consolidated tax base would mean that the interest cost
and the interest revenue deriving from infra-group loans would be evenly eliminated for
their entire amount, regardless of whether the amount of the loan can be considered at
arm’s length. This prevents any possible economic double taxation on the remuneration
of intra-group loans within the scope of consolidation.
Consolidation would, interestingly, remove also a form of economic double taxation of
interest which would otherwise not be removable, i.e., the double taxation deriving from
interest limitation rules and – specifically – the interest limitation rule of Article 13 of the
Common Base proposal. This is a unique effect of ignoring all intra-group transactions,
and it concerns loans between companies which form part of the consolidated group1196.
Only interest deriving from loans with external parties would be still subject to the interest
limitation rule and, according to the provisions of Article 69 of the Consolidated Base
proposal, which specify that, for such purposes “a group shall be treated as one single
taxpayer”
VIII.3.e Hybrid financial instruments

As examined in Para VIII.2.c above, the Common Base proposal – notwithstanding the
significant degree of harmonisation that it would achieve - does not entirely remove the
risk of qualification inconsistencies with respect to hybrid financial instruments.
Such possible residual cases of inconsistent qualification, along with the possible
resulting double taxation (or double non taxation) would however be neutralised by effect
of the rules of the Consolidated Base proposal1197.
Indeed, even where the remuneration of a hybrid financial instrument was still qualified
as “profit distribution” in one Member State and as interest in the other State, the
elimination of intra-group transactions under Article 9 would neutralise the (deductible or
1194
CCCTB Working Group, Issues related to group taxation, Working document n. 35 of 5 May,
2006, m.no. 39. For a more exhaustive example see also CCCTB Working Group, Annex to
CCCTB Working paper n. 57.
1195
See J LAMOTTE, New EU Tax Challenges and Opportunities in a (C)CCTB World: Overview
of the EU Comission Proposal for a Draft Directive for a Common Consolidated Corporate Tax
Base”, European Taxation, 2012, p. 275.
1196
See HJI PANAJYI C., The Anti-Abuse Rule of the CCCTB, in Bulletin, 2012, p. 264 .
1197
E. RÖDER, Proposal for an Enhanced CCTB as Alternative to a CCCTB with Formulary
Apportionment, in World Tax Journal, 2012, p. 141
318
taxable) interest component, thus achieving a symmetry of treatment with the (non-
deductible, nor taxable) profit distribution component1198.
The neutralisation effect of consolidation is further confirmed by the provision of Article
74 of the Consolidated Base proposal, under which the scope of application of the hybrid
mismatch rule of Article 61 of the Common Base proposal “shall be limited to relations
between group members and non-group members”.
VIII.3.f Cross-border mergers

Cross-border mergers within the consolidated group should in principle fall within the
scope of the elimination of intra-group transactions of Article 9. This general principle
finds a specific confirmation at Article 22, dedicated to business reorganisation within a
group, and under which (Para. 1) “A business reorganisation within a group or the
transfer of the legal seat of a taxpayer shall not give rise to profits or losses for the
purposes of determining the consolidated tax base”.
Business reorganisations where assets are transferred to another Member State entail
(under Article 22, Para 2) the maintenance of the initial asset factor for a maximum period
of five years following the transfer.
VIII.4 Conclusions and answers to the second research question

The aim of the present chapter is to contribute to the current discussions on the
Common Base and Consolidated Base proposals in terms of effects that each of the
proposal may have in respect of the selected paradigm cases of economic double
taxation and in the light of existing remedies as illustrated at Chapters 4 to 7 above.
The main findings are summarised in the table below
Common Base Proposal Consolidated Base Proposal
Transfer The adoption of a common arm’s Intra-group transactions are

pricing length rule is suitable to ignored.
overcome possible diverging
national rules. However, this
effect is already available where
bilateral tax treaties follow the
OECD Model.
By contrast, the rule does not
make any explicit reference to the
TP Guidelines (differently from
e.g. the UK legislation) so that
the risk of inconsistent
interpretation may increase.
1198
CCCTB Working Group, “Dividends”, Working Paper n. 42 m.no 14. confirmed that intragroup
payments within members of a CCCTB group “must be eliminated through the consolidation
process” and also “all intra-group payments of dividends will be completely eliminated”.
319
Common Base Proposal Consolidated Base Proposal
Thin Albeit the topic was addressed in Intra-group transactions are

capitalisation the preparatory works, there is no ignored.
mention as to whether the
common arm’s length rule also
applies to the amount of related
party financing. This
circumstance does not remove
the present risk of inconsistent
interpretation under bilateral tax
treaties and the EU Arbitration
Convention.
Interest The interest limitation rule is not The Consolidation neutralizes the
limitation significantly different from those interest limitation rule with respect
in force in Italy and the UK and to loans between consolidated
subject to be introduced companies only.
throughout the EU under the
ATAD. There is no provision
against the economic double
taxation of excess interest.
Hybrid The Proposal contains relevant Intra-group transactions are

financial elements of a uniform distinction ignored.
instruments between debt return and equity
return
Cross-border There is no provision on the Intra-group reorganisations are

Mergers matter, so that national rules ignored.
remain applicable.
On the basis of the above, the answer to the first research (sub) question is that the
adoption of the Common Base proposal would not bring any significant effect with
reference to the paradigms of economic double taxation examined in the present
dissertation.
A remarkable exception - which concerns the second research (sub) question - is
represented by the rules concerning the treatment of interest and profit distributions. The
combined effect of the definitions of the taxable base (Article 7) and of the notion of
borrowing cost (Article 4, Para 12) along with the interest limitation rule (Article 13,
especially Paras. 1 and 2) imply a rather precise distinction between equity return and
debt return which – where common to multiple States - would reduce significantly the
conflicts of qualification of hybrid financial instruments.
This set of rules is suitable to also constitute the criteria for the qualification of debt and
equity outside the scope of application of the Common Base provisions.
It is true that Article 13 is almost identical to Article 4 of the ATAD, which already
constitutes part of EU law. However, the efficacy of Article 4 of the ATAD for qualification
purposes is negatively influenced by the circumstance that it provides, as all provisions
of the ATAD, only a minimum requirement, so that Member States are under no
obligation to allow the deduction of any of the items that the ATAD considers “borrowing
cost”. Article 13 of the Common Base proposal would thus constitute a more uniform
reference.
320
For sake of completeness, it should be considered that, more in general, possible
conflicts of qualifications may derive from the residual role attributed, in the Common
Base proposal, to national tax rules.
Article 1, Para. 2 of the Common Base proposal provides, that “A company that applies
the rules of this Directive shall cease to be subject to the national corporate tax law in
respect of all matters regulated by this Directive, unless otherwise stated”1199. The effects
of the provision depends on the meaning to be attributed to the expression “national
corporate tax law”, which should anyway be interpreted to also include treaties1200.
The Common Base proposal leaves room for the application of “national” law in other
two points. The first relates to the reference to “all matters regulated by this Directive”
to the effect that non-regulated matters remain subject to national law1201. The second
derives from cases where it is “otherwise stated”, and indeed – even if in few cases1202 -
the Common Base proposal makes use of such referrals.
The Consolidated base proposal, through the elimination of intra-group transactions

provided by Article 9, removes all situations of economic double taxation between the
members of the group. It also avoids the double taxation of excess interest cost between
members of the group.
In my view, the evaluation of the Consolidated Base proposal is then to be done on the
basis of additional criteria, essentially on the basis of the comparison between the
transaction-based apportionment presently adopted by national legislations and tax
treaties, and the formulary apportionment provided by Article 28 et seq. of the
Consolidated Base proposal.
The evaluation can be done on the basis of empirical factors, such as the shortcomings
of the arm’s length principle which have become evident in its application1203. For
example, the arm’s length principle does not take into consideration the economic
synergies deriving from the coordinated operations of an economically integrated group.
1199
The same provision is at Article 1, Para. 2, of the Consolidated Base proposal. The major
difference with the 2011 Proposal concerns the elimination of article 8, labelled “Directive
overrides agreements between Member States”, and which stated that that “The provisions of this
Directive shall apply notwithstanding any provision to the contrary in any agreement concluded
between Member States”.
1200
On the relationship between the proposals and tax treaties see: D. GUTMANN, E.
RAINGEARD DE LA BLÉTIÈRE, CC(C)TB and International Taxation, in EC Tax Review, No. 5,
2017, p. 233 s.; M. VAN GRAAFEILAND, I. KAM, CCTB: Selected Issues – A Summary, in in (D.
Weber ed.) CCCTB: selected issues, Wien, 2012, p. 329 s..
1201
B. TERRA, P. WATTEL, European Tax Law, 6th ed., Alphen aan den Rijn, 2012, p. 800 remark
– with reference to the 2011 Proposal - that common base rules create an autonomous profit
determination system and that there is no general principle which can be referred to for
unregulated issues, unless Article 7 must be interpreted as making reference to national law for
such matter
1202
E.g. Article 4, Para. 12 in providing the definition of borrowing costs (…)other costs
economically equivalent to interest and expenses incurred in connection with the raising of
finance, as defined in national law(…); Article 4 Para. 20 in providing the definition of financial
assets (…)and own shares to the extent that national law permits their being shown in the balance
sheet; Article 13, Para. 2 (…)where a taxpayer is permitted or required to act on behalf of a group,
as defined in the rules of a national group taxation system(…).
1203
L. SCHOUERI, Arm’ s Length: Beyond the Guidelines of the OECD, in Bulletin, 2015, p. 690
321
Similar shortcomings can be foreseen with reference to the formulary apportionment1204,
which for example implies that each unit of a factor earns the same rate of return1205.
The Commission sees the choice as a trade-off between economic efficiency and other
national policy goals1206. From an internal market perspective, the opportunity
represented by the adoption of the apportionment method has been evaluated
considering its economic equity and efficiency (in terms of neutrality, tax planning
opportunity, tax competition, simplicity and costs effectiveness)1207.
From the perspective of this dissertation, which is focused on the causes of and on the
remedies to economic double taxation, the key factor relates to the fact that the
Consolidated Base proposal aims at entirely replacing the existing allocation rules (which
include valuation rules and qualification rules both subject to generating conflicts) with
radically different allocation rules, based on the formulary apportionment of income1208.
The beneficial effects in the perspective of economic double taxation are based on the
realistic assumption that the apportionment factors be selected in such a way that their
application be less controversial – and thus beneficial in terms of absolute transaction
cost - than the application of the traditional criteria.
The adoption of apportionment factors indeed may reduce both the recurrence of
conflicts (because the apportionment is, in principle, made once a year and on a per-
entity basis, while traditional allocation rule are, in principle, applied incessantly on a
transaction-by-transaction basis) and their very likelihood1209.
1204
For a comparative evaluation of the positive and negative consequences deriving from the
application of the formulary apportionment as provided by the proposal, please see: J. LAMOTTE,
New EU Tax Challenges and Opportunities in a (C)CCTB World: Overview of the EU Commission
Proposal for a Draft Directive for a Common Consolidated Corporate Tax Base, in European
Taxation, 2012, p. 276 s.; E. RÖDER, Proposal for an Enhanced CCTB as Alternative to a CCCTB
with Formulary Apportionment, in World Tax Journal, 2012, p. 131 s.; R. OKTEN, Why Reinvent
the Wheel in the European Union? The Common Consolidated Corporate Tax Base Proposal, in
International Transfer Pricing Journal, 2011, p. 325 s.
1205
M. ERASMUS-KOEN, Common Consolidated Corporate Tax Base: A “Fair Share” of the Tax
Base?, in International Transfer Pricing Journal, 2011, p. 246.
1206
EU COMMISSION, Towards an internal market without tax obstacles, COM(2001) 582 final,
at 30.
1207
A. AGÚNDEZ-GARCÍA, The Delineation and Apportionment of an EU Consolidated Tax Base
for Multi-jurisdictional Corporate Income Taxation: A review of issues and options, in European
Commission Working paper n° 9/2006, Doc TAXUD/2006/3202, p. 41 s. Similar considerations
can be found in S. MAYER, Formulary apportionment for the Internal Market, Amsterdam, 2009,
Ch. V, p. 9 s.
1208
EU COMMISSION, Sec. 6 CCTB Proposal considers that: (…) consolidation is an essential
element of such a system, since the major tax obstacles faced by companies in the Union can be
tackled only in that way(…). L. CERIONI, The Commission’s Proposal for a CCCTB Directive:
Analysis and Comment, in Bulletin, 2011, p. 522: (…)a common tax base without consolidation
would lose the benefits of the offsetting of profits and losses by group members in different
Member States, the elimination of costs for compliance with national transfer pricing rules for
intragroup transactions and the elimination of intra-group double taxation.
1209
The determination of e.g., the annual cost of employment in each of two countries once a year
in expected to be simpler than e.g., the assessment of the arm’s length value of each sale of
goods between associated companies.
322
IX SUMMARY CONCLUSIONS
The present research has examined four paradigms of economic double taxation across
different layers of legal rules of national, treaty and EU origin, on the assumption that the
need of further EU measures in these matters depends on the effect (or lack of effect) of
the combination of those rules.
The following summary conclusions are intended to focus on the findings, rather than on
the strict sequence of the results of the individual Chapters.
IX.1 The tax treaty paradox

The most widely accepted definition of international economic double taxation of income
(the taxation of the same income by two different States in the hands of different
taxpayers) and the distinction from juridical double taxation (which concerns one and the
same taxpayer) has its origins in the proceedings that led to the first adoption of the
OECD Model Tax Convention in 1963 and, more precisely, in a 1959 draft OEEC working
document.
The OECD definition appears to have acted as a watershed: later scholarship definitions
are indeed, with large prevalence, based on the OECD definition, while earlier studies
had shaped definitions which were quite different from each other, wider in scope and
did not contain the distinction between juridical double taxation and economic double
taxation.
The present day Commentary on the OECD Model Tax Convention (sub Article 23) and
the preparatory works provide one significant additional element, i.e., that the definition
and the categorization have been devised for the purpose of clarifying that such
“economic” double taxation does not fall within the scope of application of the article of
the OECD Model Tax Convention which concerns the elimination of double taxation.
By contrast (and as a paradox), that same OECD Model Tax Convention, which in the
mentioned terms evicted economic double taxation from its scope, contained, at Article
9, Para. 1, the basic ingredient of a prototypical remedy against economic double
taxation, i.e., a common rule on the allocation of tax jurisdiction. Some years later, upon
initiative by the United States, the remedy was completed with the provision of a
corresponding adjustment mechanism, all combined within a dispute resolution
procedure (to be found at Article 25 of the OECD Model Tax Convention).
That combination of an allocation rule (the arm’s length principle) and a dispute
resolution procedure both included into the structure of an international treaty represents
- even today and within the European union - the sole effective pattern of remedy against
economic double taxation (at least in respect of the subject matters of the present
dissertation).
A first conclusion of the present research is that - just as it happens with Articles 9 and
25 of the OECD Model Tax Convention - solutions against economic double taxation
necessarily require a detailed analysis of the causes and the consequent adoption of
remedial measures based on the combination of an allocation rule and a dispute
resolution mechanism.
323
IX.2 The case against general prohibitions or isolated settlement
procedures
The research indicates that, with the exception of the domestic law of Italy, no explicit
general prohibition of economic double taxation can be found in any of the legal systems
examined.
As the history of Article 25 of the OECD Model Tax Convention indicates, the drafters
have avoided to make reference to double taxation or to the “principles of the convention”
(as earlier drafts did) and have limited the mutual agreement procedure to cases of
“taxation which is not in accordance with the provisions” of the Convention.
Nor the EU Treaties presently contain a prohibition of such kind. The repealed Article
293 of the EC Treaty (formerly Article 220 of the Treaty of Rome), which provided 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 Community (…)” did not have, as the Court of Justice had clarified, any direct
effect, and the abolition of double taxation was just “an objective of any such
negotiations”1210.
The decisions delivered by Italian Courts on the basis of the prohibition of double taxation
under Article 163 of the Italian Tax Code indicate that a rule of that nature, without criteria
for determining which of the two levies should prevail, leads to diverging results even
within one same national tax system.
The same conclusion may be reached in respect of procedural remedies which cannot
rely on allocation criteria, as it was the case of the initial proposal of a dispute resolution
directive1211.
IX.3 The limits of EU fundamental freedoms

The case law of the CJEU indicates that although international economic double taxation
is an obstacle in the perspective on the internal market, it constitutes a breach of
fundamental freedoms only where it goes along with a rule of one single Member State
which provides for a difference in treatment between domestic and cross-border
situations (i.e., a discrimination or a discriminatory restriction).
This is confirmed - in cases specifically concerning transfer pricing and thin capitalization
rules1212 - by the fact that neither the conformity to an internationally accepted principle
(as the arm’s length principle) nor the availability of procedural remedy against double
taxation can avoid that the difference in treatment generated by the selective application
of national arm’s length based rules be construed as a discrimination or a restriction for
the purposes of EU law. The Court is rather oriented to then admit that the difference in
treatment be justified by the need to prevent tax evasion or avoidance and to ensure the
balanced allocation of taxing powers, and the consistency with the arm’s length principle
1210
Gilly v Directeur des Services Fiscaux du Bas-Rhin, 12 May 1998, Case C-336/96. Para 16.
1211
COMMISSION, Proposal for a Council Directive on Double Taxation Dispute Resolution
Mechanisms in the European Union, COM(2016) 686 final. In favour of a wider reaching dispute
resolution mechanism see D. GUTMANN, How to avoid Double Taxation in the European Union?,
in (I. Richelle et Al. eds.), Allocating Taxing Powers within the European Union, Berlin Heidelberg,
2013, p. 63 s.
1212
Lankhorst-Hohorst, 12 December 2002, Case C-324/00; Test Claimants in the Thin Cap
Group Litigation, 13 March 2007 Case C-524/04; Lammers & Van Cleeff 17 January 2008, Case
C-105/07; SGI, 21 January 2010, Case C-311/08; Itelcar, 3 October 2013, Case C-282/12.
324
is then taken into consideration for the purposes of assessing the proportionality of the
measure.
More recent case law1213 has specified that a difference in treatment between domestic
and cross-border situations does not imply the obligation of a Member State to remedy
in full to any consequent economic double taxation, but only within the limits that would
have been applicable under the own rules of that same State. The CJEU has in this way
introduced an “internal consistency test” which corresponds to that developed by the US
Supreme Court in order to evaluate the impact of State tax rules on interstate commerce
and which further confirms the trend of the EU case law towards a “discrimination”
approach in tax matters, as opposed to the “restriction approach” adopted in respect of
other subject matters, such as technical barriers to the free circulation of goods.
The CJEU has not been requested so far to address cases specifically related to the
qualification of the return of hybrid financial instruments in the light of the provisions of
the TFEU. The CJEU case law concerning the taxation of dividends (in cases involving
discrimination) as well as the Parent Subsidiary Directive and its preparatory works seem
to indicate that the State of residence of the shareholder should rather provide relief.
However, such a criterion does not seem to be applicable to classification conflicts,
especially where the possible alternative classifications bring along different allocation
criteria. Furthermore, classification conflicts generally do not entail any difference in
treatment between domestic and cross-border transactions, so that the disadvantage
deriving from such conflict would be considered as a mere disparity deriving from the
parallel exercise of taxing powers.
Economic double taxation has also not been taken into consideration in the case law
concerning exit taxes, where again the breach of EU law was examined only from the
perspective of the State of origin and was entirely ascribed to the difference in treatment
between domestic and cross-border situations.
Recourse to positive integration is thus necessary at the present state of EU law and not
only the Parent-Subsidiary Directive but also the ATAD rules concerning exit taxes (to
the extent that it may be considered as a reference also for mergers which are outside
tits scope of application) are a remarkable example of a EU law based solution to
IX.4 Consolidation vs. new rules for tax jurisdictions

The Consolidated Base proposal, through the elimination of intra-group transactions
provided by Article 9, removes all situations of economic double taxation between the
members of the group. By contrast, it implies the switch from the transaction-based
apportionment presently adopted by national legislations and tax treaties to the formulary
apportionment provided by Article 28 et seq. of the Consolidated Base proposal. The
transition would have economic and public finance effects which are outside the scope
of the present dissertation and which have been briefly mentioned in the course of the
work.
From the perspective of double taxation, the key factor resides in the potential relative
uncertainties and conflicts that are associated with, on the one side, the existing
1213
Masco Denmark and Damixa, 21 December 2016, Case C-593/14
325
allocation criteria (i.e., the separate accounting and the arm’s length principle) and, on
the other side, the formulary apportionment of income1214.
The possible beneficial effects of this latter in the perspective of economic double
taxation may derive from the circumstance that the apportionment factors be selected in
such a way that their application be less controversial - and thus beneficial in terms of
transaction cost - than the application of the traditional criteria.
By contrast, almost no beneficial effect - for what concerns economic double taxation in
the paradigm cases examined - could be attributed to the Common Base proposal, with
the exception represented by the mutually exclusive definitions of equity return and debt
return, which could potentially eliminate economic double taxation of hybrid financial
instruments within the EU.
The avoidance of double taxation may however be achieved, from a substantial point of
view (i.e., disregarding the procedural implications) also through the adoption of missing
rules for tax jurisdiction or the refinement of the existing ones.
In respect of the paradigm cases of double taxation examined, the following conclusive
remarks can be made as to the features of those possible new rules for tax jurisdiction.
IX.4.a Transfer pricing

As illustrated at Chapter V above, it can be considered that (with the exception of
procedural gaps, which have not been examined and which are addressed in significant
part by the recent Dispute Resolution Directive) the Arbitration Convention provides a
remedy against double taxation caused by lack of coordination of transfer pricing
adjustments.
IX.4.b Thin capitalisation and interest limitation

Thin capitalisation rules are impeded from the full access to the remedies provided by
the EU Arbitration Convention due to divergences existing between Member States as
to its objective scope of application.
A contribution in this respect may come from the entry into force of the Dispute
Resolution Directive, which targets, under its Article 1, disputes arising from the
“interpretation and application of agreements and conventions that provide for the
elimination of double taxation of income (…)”. To the extent that the mentioned
divergences concerning the application of the EU Arbitration convention to thin
capitalisation cases constitute a question in dispute under the Directive (see Para.
VI.10.b.2 above), it may be expected that thin capitalisation be subject to the procedural
remedies provided by the Directive and also (considering that the Directive is an
instrument of EU law) to the jurisdiction of the Court of Justice of the European Union.
This may lead to clarifications of the scope of application of the Directive and, indirectly,
1214
EU COMMISSION, Sec. 6 CCTB Proposal considers that: “(…) consolidation is an essential
element of such a system, since the major tax obstacles faced by companies in the Union can be
tackled only in that way (…)”. See also L. CERIONI, The Commission’s Proposal for a CCCTB
Directive: Analysis and Comment, in Bulletin, 2011, p. 522: (…) a common tax base without
consolidation would lose the benefits of the offsetting of profits and losses by group members in
different Member States, the elimination of costs for compliance with national transfer pricing rules
for intragroup transactions and the elimination of intra-group double taxation”.
326
of the scope of application of the treaties to which it applies, including the EU Arbitration
Convention.
IX.4.c Hybrid financial instruments

The removal of economic double taxation deriving from conflicts of qualification of hybrid
financial instruments would require the adoption of a harmonised definition of debt return
and equity return.
The Common Base proposal might constitute a starting point for the above purpose. As
illustrated at Chapter VIII above, it includes a definition of borrowing cost which coincides
with the one provided by the interest limitation rule of the ATAD and which may be
adopted as a general definition of debt return.
A possible outline of a harmonized definition of debt return and equity return and of the
related tax treatment is illustrated here below.
IX.4.c.1 Debt return, interest and borrowing cost
As mentioned at Para. VII. 3.b.3 above, at the present stage of EU law, there is no
comprehensive definition of equity return. The case law of the CJEU has addressed the
topic only at a rather high level, and no definition at all is to be found in the Parent –
Subsidiary Directive.
By contrast, there are two definitions of debt return, in two Directives, and an additional
definition in the Common Base Proposal. These definitions may then constitute the
foundations of a harmonization project.
A first definition can be found at Article 2.1(a) of Directive 2003/49/CE and reads as
follows:
“the term ‘interest’ means income from debt-claims of every kind, whether or not secured
by mortgage and whether or not carrying a right to participate in the debtor's profits, and
in particular, income from securities and income from bonds or debentures, including
premiums and prizes attaching to such securities, bonds or debentures”.
A second definition relates to the concept of “borrowing cost” which has been introduced
at Article 2 of the ATAD, for the purposes of the interest limitation rule of Article 4, with
the following text:
“‘borrowing costs’ means interest expenses on all forms of debt, other costs economically
equivalent to interest and expenses incurred in connection with the raising of finance as
defined in national law, including, without being limited to, payments under profit
participating loans, imputed interest on instruments such as convertible bonds and zero
coupon bonds, amounts under alternative financing arrangements, such as Islamic
finance, the finance cost element of finance lease payments, capitalised interest included
in the balance sheet value of a related asset, or the amortisation of capitalised interest,
amounts measured by reference to a funding return under transfer pricing rules where
applicable, notional interest amounts under derivative instruments or hedging
arrangements related to anentity's borrowings, certain foreign exchange gains and
losses on borrowings and instruments connected with the raising of finance, guarantee
fees for financing arrangements, arrangement fees and similar costs related to the
borrowing of funds”.
The above definition is almost identical to the one of Article 4, No. 12 of the Common
Base proposal, except that this latter does not contain the explicit reference to Islamic
finance and by contrast includes in borrowing cost the notional yield on net equity
increases (an incentive provided by Article 11 of the Common Base proposal).
327
The comparison between the two more recent definitions and the one which was
included in Directive 2003/49/CE indicates that both are based on the notion of debt, that
both include the remuneration of profit participating loans and that both provide a list of
examples. The ATAD and Common Base proposal definitions extend to “other cost
economically equivalent to interest” and also to the “expenses incurred in connection
with the raising of finance”.
The more recent definitions thus are wider in scope and appear more suitable to be
adopted as a reference for further harmonization. Furthermore, the more recent
definitions are associated with a provision which concerns the deduction of interest, while
the older definition is instrumental to the different purpose of the withholding tax
exemption provided by Directive 2003/49/CE.
Another reason for preferring the more recent definitions is that the older definition goes
along with a number of exceptions (although not explicitly referred to the definition itself)
which – if adopted by Member States – still leave room for qualification conflicts and – if
not adopted – would anyway cause a divergence between the scope of application of
the Directive 2003/49/CE and the possible future further harmonization.
IX.4.c.2 Equity return

As mentioned already, the Parent–Subsidiary Directive does not provide for any
definition of the item of income it regulates, namely the “dividends and other profit
distributions” (Recital No. 3) or more simply the “distributions of profits” (Article 1). Nor
the case law of the CJEU related to the directive has directly addressed the matter1215.
In the recent decision in Austria v. Germany, examined at Para VII.3.b.2 above, the Court
has outlined a definition, in view of the interpretation of a bilateral tax treaty. In that
context, according to the Court, the term “participation in profits” refers to “the object of
receiving a share in the positive income of the annual operations of an undertaking”.
Lacking other EU law references, the definition of dividend provided by the OECD Model
Tax Convention may also be taken in to account. According to Article 10, Paragraph 2
of said Model Convention, the term “dividend” means “income from shares, “jouissance”
shares or “jouissance” rights, mining shares, founders’ shares or other rights, not being
debt-claims, participating in profits, as well as income from other corporate rights which
is subjected to the same taxation treatment as income from shares by the laws of the
State of which the company making the distribution is a resident”. Such definition has
been examined in more detail at Para. V.8.b.2 above.
In this framework, the definition of equity return for the purposes of the harmonization of
the treatment of hybrid financial instrument should be based on the reference to the
concept of equity as opposed to the term “debt” (or “debt-claim”) which connotates the
definition of interest (and borrowing cost). At the same time, reference to the legislation
of the State of residence of the distribution company does not seem consistent with the
purpose of harmonizing the definition.
In the light of the above, a possible definition, aimed at providing a clear distinction
between equity return and debt return could be based on definition of borrowing cost, as
provided by the ATAD and the Common Base proposal. Such a definition, to be included
in the Parent–Subsidiary Directive, could read as follows.
1215
Please see Para. VII.3.b.4 above on the reference made by the CJEU in some decisions to
the concept of “dividends or any other income from shares”.
328
“The term distributed profit means income from shares or other rights participating in
profits, not being debt-claims, as well as any remuneration of financial instruments other
than “borrowing cost” as defined by Article 4 of the ATAD”.
The reference to Article 4 of the ATAD may be replaced or integrated with the reference
to the corresponding provision of the Common Base proposal, if and when it should be
adopted.
Under such approach, the definition of profit distribution would have a residual nature.
This is the opposite of what happens under Articles 10 and 11 of the OECD Model, where
– according to Para. 19 of the OECD Commentary to Article 11 – priority is given to the
dividend definition. It should be considered, however, that such priority is referred only
to situations where the OECD Model definitions overlap due to the reference made by
the dividend definition to the national law of the countries concerned, a situation which
is not expected to occur here.
Furthermore, it should be considered that a residual definition of equity instrument is
adopted for accounting principles. Indeed, International Accounting Standard 32
(Financial Instruments: Presentation) provides that “An equity instrument is any contract
that evidences a residual interest in the assets of an entity after deducting all of its
liabilities”.
IX.4.c.3 The income tax treatment of debt return

The basic assumption is that the remuneration of financial instruments which qualify as
debt return, i.e., falls within the definition of borrowing cost outlined by the ATAD and the
Common Base proposal should be deductible in the payee jurisdiction, save the
application of anti-hybrid rules and, of course, the interest limitation rules.
A provision of this kind could be included in Article 4 of the ATAD and would read as
follows.
“Taxpayers shall be given the right to deduct borrowing cost which does not exceed the
limitations set forth in accordance with the present article.
Such deduction right is subject to the Hybrid Mismatches rules of Article 9, to the Reverse
hybrid mismatches rules of Article 9a and the Tax residency mismatches rules of Article
9b of this Directive”.
An equivalent provision should be included in the Common Base proposal, if and when
it should be adopted.
Interest limitation rules would be safeguarded by the reference to the limitations of that
same Article 4.
The explicit derogation in favour of the anti-hybrid rules would conversely be necessary
since those rules are embedded in provisions (Articles 9, 9a and 9b) other than Article
4. A similar derogation should be envisaged with respect to transfer pricing rules, so as
to safeguard their application.
Equivalent provisions should be included in the Common Base proposal. There would
be no need to regulate the taxation of the remuneration in the payee jurisdiction. The
deduction right provided by the new legislation would ensure that double taxation
deriving from conflicts of characterisation be avoided; the ATAD rules on hybrids would
ensure that double non-taxation be also prevented.
329
IX.4.c.4 The income tax treatment of equity return
The definition of “profit distribution” outlined above would entail that the remedies
provided by Parent-Subsidiary Directive, and more specifically the exemption or
imputation of Article 4 would apply to the remuneration of financial instruments that fell
within said definition.
With respect to cases where the (other) conditions of the Parent-Subsidiary Directive are
met, there appears to be no need to introduce further rules in either the State of the
payee or the State of the payer.
Indeed, the existing set of rules, along with the above definition of “profit distribution” (on
its turn built on the basis of the definition of borrowing cost) seems to be sufficient in
order to avoid both double taxation and double non-taxation.
Should the State of the payee deny the deduction of the remuneration (other than
borrowing cost) of a given hybrid financial instrument, that remuneration (being other
than borrowing cost) would qualify as a profit distribution and benefit from the remedial
measures provided by Article 4 of the Parent – Subsidiary Directive.
Where by contrast the rules of the State of the payee admitted the deduction of such
cost, the existing anti-hybrid rules of the ATAD would counteract the D/NI situation that
might otherwise occur.
IX.4.d Cross-border mergers

The avoidance of economic double taxation of cross-border mergers (more precisely, of
those which do not meet the permanent establishment connection requirement for the
deferral under the Merger Directive at the time of the merger) would require the
introduction of the obligation, for the State of the receiving company, of the recognition
of taxed values of the State of the transferring company.
In that case, the prevention of economic double taxation could be achieved by the
insertion in the Merger Directive itself of a provision equivalent to Article 5, Paragraph 5
of the ATAD, purporting the obligation of the State of the receiving company of
recognising the market value of the assets and liabilities transferred.
Here below is the possible language of such a provision, which could be inserted as new
last Paragraph of Article 4 of the Merger Directive.
“6. Those assets and liabilities which do not meet the requirement of paragraph 2 (b)
shall give rise to a taxation of capital gains calculated by reference to the difference
between the real values of the assets and liabilities transferred and their values for tax
purposes.
In such event, the Member State of the receiving company shall accept the value
established by the Member State of the transferring company as the starting value of the
transferred assets and liabilities for tax purposes, unless this does not reflect their real
values”.
The above provision makes reference to the notion of “real value” for reasons of
consistency with the present text of the Merger Directive. Reference to the notion of
“arm’s length value” would be more appropriate for the reasons illustrated above at Para.
VII.3.c.6 with respect to the similar expression adopted in the ATAD.
* * *
Measures of the above nature, based on a detailed analysis of the specific cases and
national rules, could contribute to the avoidance of economic double taxation in the
internal market even in absence of a larger harmonisation efforts.
330
It is interesting to read back, from the preparatory work to the OECD Model Tax
Convention, that: “from a technical point of view, (…) obstacles could of course be
abolished more easily by harmonizing the taxation laws of the Member countries. But
such a harmonization is not necessary condition for a radical improvement. To remove
a great many of the taxation obstacles to the expansion of intra-European trade,
payments and investments, it is enough to apply a less ambitious programme which
would be confined to solving taxation problems having an international aspect and, in
particular, to delimiting taxation powers uniformly between the Member countries”1216.
* * *
1216
OECD FC(58)2 of 13 February 1958
331
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KU Leuven

ECONOMIC DOUBLE TAXATION OF

ECONOMIC DOUBLE TAXATION OF CROSS-BORDER INCOME IN THE INTERNAL MARKET

(A STUDY ON CONFLICTS OF QUALIFICATION AND EVALUATION

LEUVEN, 22 OCTOBER 2019

Torino - Leuven, 22 October 2019

I.2 Research questions

I.3.b The selection of paradigm cases of economic double taxation

I.3.b.2 Cases included

Qualification of the entity (ACo.) in its own State of residence (A)

I.3.c The choice of Countries and the date of reference

I.3.d The instrumental distinction between causes and remedies

I.3.f The functional method, its relationship with the identification of

The second part of the dissertation (Chapters 4 to 8) is devoted to the examination of

II.2 The notion of economic double taxation in Model Tax

II.2.a.1 Two different definitional patterns

II.2.a.3 Objective profiles: comparable taxes

Article 9, Para. 2 Article 7, Para. 3

II.2.c.1 The early drafts of the League of Nations (1923 – 1935)

II.2.c.2 The Mexico and London Drafts (1943 – 1946)

II.3 The legal doctrine definitions of economic double taxation

II.3.a After the OECD Model Tax Convention

connection was addressed by A. SPITALER, Das Doppelbesteuerungsproblem bei den direkten

The contemporary study of Salvioli achieves a much narrower definition, according to

II.4 The definition of economic double taxation and the economic

The OECD Commentary definitions, as most of the contemporary definitions of economic

II.5 Conclusions on the origin and the purpose of the distinction

III.2.b.1 Background and sources

III.2.b.2 Scope of application and the statutory limitation to cross-border transactions

III.2.c.1 Background and sources

III.2.c.1.1 The statutory provisions of Article 57 of the CGI

III.2.c.1.2 Special statutory rules on interest rates

III.2.c.1.3 The judicial doctrine of the acte anormal de gestion

III.2.c.2 Scope of application

III.2.c.2.1 The statutory provisions of Article 57 of the CGI

III.2.c.2.2 Special statutory rules on interest rates

III.2.c.2.3 The judicial doctrine of the acte anormal de gestion

III.2.c.3 The rule

III.2.c.3.2 Special statutory rules on interest rates

III.2.c.3.3 The judicial doctrine of the acte anormal de gestion: is it

III.2.c.4 The effects

III.2.c.4.2 Special statutory rules on interest rates and the reconstruction

III.2.c.4.3 The judicial doctrine of the acte anormal de gestion: profit

III.2.d United Kingdom

III.2.d.1 Background and sources

III.2.d.2.1 Transfer pricing legislation

III.2.d.2.2 Securities and the reasonable commercial return

III.2.d.4 The effects

III.2.d.4.1 Transfer pricing legislation

III.2.e Comparative considerations on transfer pricing rules

III.3.a Categorisation and definition of thin capitalisation and interest limitation

III.3.b.2 Scope of application

III.3.b.3 The rule

III.3.b.4 The effects

III.3.c.1 Background and sources

III.3.c.3 The rule

III.3.c.4 The effects

III.3.d United Kingdom