European Commission Competence in Reviewing Direct Business Tax Measures

Abstract: Direct taxation is the quintessential national prerogative in the EU, although it must be exercised in conformity with Community law obligations, the European Court of Justice (ECJ) says. The ECJ has upheld the Commission action in reviewing direct business tax rules, directly infringeing against the exercise of fundamental economic freedoms protected by the Treaty and with respect to State aid rules. Distinct infringements proceedings relating to business tax measures for breach of fundamental freedoms, harmful tax competition, or State aid may proceed in parallel as each one is autonomous on its own right.

The role of State aid and discrimination reviews has become critical for direct business taxation, as with the expansion and consolidation of the common market the effects of host and residence taxation are found to distort the location of new undertakings and investments. On the one hand, the prohibition to fiscally discriminate against host undertakings or to limit foreign investments leads towards equalization between more favourable residence taxation and source imposition. On the other hand, fiscal aid review demands that preferential taxation for host undertakings is brought in line with standard residence taxation. This unresolved tension between residence and source taxation is the source of unsettled jurisprudence of the ECJ.

Against this background, the article offers a critical analysis of the ways by which the Commission exercises its competences to review direct tax measures, through its prerogatives under Article 226 EC, the Code of Conduct and State aid rules, by outlining the notions of tax discrimination, restriction and selectivity in the different contexts in which they have developed under the Commission review practice and the interpretation provided by the European judicature, with a view to establishing possible parallels and distinctions between such notions.