What Is Substantial Economic Activity for Tax Purposes in the Context of the European Union and the OECD Initiatives against Harmful Tax Competition?

Abstract:

This article deals with the substantial economic activity criterion as defined in the Code of Conduct for Business Taxation, in the Organisation for Economic Co-operation and Development (OECD) Report Harmful Tax Competition - An Emerging Global Issue and, more recently, in the item 5 of Base Erosion and Profit Shifting (BEPS) Action Plan, namely regarding, at this phase, its application to patent box tax regimes.

The author analyses the juridical and political controversy on the various approaches to determine what substantial economic activity actually means, specifically the value added approach, the transfer pricing approach and the nexus approach, this last criterion being the one preferred by the majority of the Member States of OECD and European Union (EU).

Finally the author raises some questions about the application of the recent agreement between UK and Germany concerning the British patent box regime. Is it compatible with the EU law, especially with the EU State Aid rules?