Direct Taxation in Relation to Freedom of Establishment and the Free Movement of Capital

Direct taxation is considered as an area within the almost exclusive competence of the individual Member States of the European Union. Some politicians believe that if the European Union intervenes in the tax systems of the Member States, the financing of the public sector of the Member States could be at risk. Even against this background, however, the European Union has exercised considerable influence in the area of direct taxation of Member States. Despite the fact that unanimity among the Member States is required to reach a Community decision in the area of direct taxation, it is now clear that the European Union has gained legal competence in the field. The adoption of pertinent directives is clear evidence of that. Of greater significance, however, is the increasing number of cases in which the European Court of Justice decides that specific elements of national tax legislation are in breach of fundamental freedoms provided for in the EC Treaty.

This major new study analyses the case-law of the European Court of Justice on the freedom of establishment and the free movement of capital in matters of direct taxation. The author identifies two areas where cases from the European Court of Justice are especially important: what constitutes discrimination, and which circumstances may justify such discrimination. Among his specific approaches to the complex issues involved may be noted the following:

• the Court's interpretation of discrimination and restriction, both in general and in particular regarding the freedom of establishment and the free movement of capital;
• the grounds of justification, according to the rule-of-reason doctrine, accepted by the Court, such as the prevention of tax abuse, the preservation of fiscal coherence, the effectiveness of fiscal supervision, and the fiscal principle of territoriality;
• grounds rejected by the Court, such as lack of harmonisation, counterbalancing advantages, a new form of establishment being seen as subject to equal treatment, lack of Community competence in the field of tax treaty law, and the protection of tax revenue;
• the characteristics of national legislation on direct taxation that the Court has found to be in breach of the freedom of establishment and the free movement of capital;
• the neutrality between different forms of establishment, in the form of either a branch or a subsidiary (the pending Marks & Spencer case is subject to a thorough analysis in this respect);
• the degree of convergence between the freedom of establishment and the free movement of capital,
• the territorial extension of the free movement of capital.

Direct Taxation in Relation to the Freedom of Establishment and the Free Movement of Capital uncovers the present principal standpoints of the Court, how those standpoints have evolved, and how they are likely to develop in the coming years. As all proposals on unified corporate taxation of the European Union must consider the findings of the European Court of Justice on the compatibility of national tax legislation with Community law, and as individual Member States must consider and follow the case-law of the European Court of Justice when revising old tax legislation and adopting new legislation in this area, the significance of this penetrating analysis cannot be underestimated. It will be of immeasurable value not only to European policymakers and tax lawyers, but to tax and business lawyers worldwide engaged in European commerce.