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«dr. Balázs Békés DIRECT TAXATION IN THE EUROPEAN UNION Possibilities and limitations in the national legislation thesis of the doctoral ...»

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dr. Balázs Békés


Possibilities and limitations in the national legislation

thesis of the doctoral dissertation

Supervisor: Dr. Anna Halustyik, Head of Department and Associate Professor

Pázmány Péter Catholic University

Faculty of Law and Political Sciences

Doctoral School

Budapest, 2013


The European Union is determined to create a single economy without customs borders, to allow free movement of goods, capital, services and persons. The same concepts characterized the Ancient Roman Empire, where the Roman Citizen had the right to relocate from Hispania or Gallia without first obtaining a permit therefor. The Empire not only evolved to become the centre of the world proper as illustrated by the proverb “all roads lead to Rome”, but – although claimed with a bit of exaggeration – it may well be deemed as the “point of departure” for European jurisprudence.

One thousand and five hundred years after the fall of the Roman Empire, with the roots of history still constituting an uniting factor, the prevailing circumstances, however, have undergone substantial changes on the emergence of sovereign nations and legal systems, which European business entities are to tackle on a continuous basis. It is particularly true in the field of Tax Law, as European enterprises must encounter as many as 27 different tax systems with the same number of administrative practices followed, which impose significant limitations particularly in case of cross-border transactions (in view of transfer-pricing regulations as well). Accordingly, European enterprises are at a significant disadvantage in contrast to the companies in the United States and Japan, which pursue their activities in a single market of considerable size, by using a single currency and in a single tax system on the state level.

Right from its creation, the European Union has sought to create – besides the single Community integration policies Member State were to implement – a harmonised system also in direct taxation; however, despite the efforts of its Institutions for unification and harmonisation, Member States still strive to retain sovereignty in the field of corporate and personal income taxation. The Member States exert this resistance as tax law is one of the last resorts in economic policy-making whereby national governments may exercise their influence with a view to improving the competitive edge of their economies. In addition to noble economic objectives, tax measures constitute the means whereby politicians may influence the level of their electors’ income, thereby indirectly influencing their choice in casting their votes.

It follows from the foregoing that taxation – and in particular direct taxation – is not to be regarded to have been duly harmonised, as the corporate tax systems of the Member States are to be deemed harmonised on the level of Directives – and in Community competition policy on the level of Decrees – applicable to certain special regulatory areas only. In personal income taxation, the level of harmonisation has not exceeded a Directive for the implementation of a data provision system as yet.

However, it would be wrong to come to the conclusion that the low number of mandatory acts leaves Member State with full freedom in this field. With objectives and means changed, harmonisation was replaced by coordination, positive harmonisation by negative harmonisation, and hard-core legal Acts by the range of “soft law” measures. In this Dissertation, the highly complex non-harmonised system of direct taxation as outline above is to be described. For methodological perspective, European Tax law as a scientific discipline covers three time levels: the past, the present and the future. The past is covered by the History of Tax Law, the present by Tax Law dogmatics, and the future by Tax Law policies.

In fact these time aspects overlap considerably. Tax Law and the history of Tax Law are incomplete without dogmatic analysis and tax law dogmatics is also to be regarded complete with awareness of the past only. Time aspects are duly covered in separate chapters, in the description of the history of tax regulations, in the narration on the current set of regulations and in the presentment of the plans of the European Commission regarding the future.

The aim of my thesis is to define the minimum system of direct taxes, the rules which have to be observed by legislators of the EU member states when creating their tax rules. In the European Union, next to the narrow effect of directives, court decisions are the real engines of coordination, therefore the main objective of this thesis is the presentation of this adjudication regarding the crystallizing principles from it. I am seeking the answer for the following provided that the narrow areas regulated by positive harmonization are transplanted into a national legal system of a country then will the practice of the European Court of Justice evolved in the last 27 years under the topic of about 200 cases requires further measurements regarding the national tax system.


Regulations on direct taxation are defined in the Treaty on the Functioning of the European Union (hereinafter: TFEU) on the one part and the Directives on the other. The rules setting out regulations as to “how the Member State should amend its tax system” as elaborated in the framework of positive harmonisation have been outweighed in volume and significance by negative harmonisation as defined by the European Court of Justice, the principles elaborated in rendering its judgements put forth prohibitions for the national legislator as to “how not to amend its tax system”. As Dániel Deák says: “Thereby the negative harmonization is the “minimum programme” of harmonization, during which the objective is to create the equivalence of national laws.”1 The Member State are to observe these guidelines as otherwise their rules would be rendered inapplicable and would be deprived of their tax revenues.

In between positive and negative harmonisation there stand “soft law” amending the same, which is to be regarded as a separate form of harmonisation.2 In this context (Ms.) Éva ERDŐS explains that “Harmonisation despite efforts to this end proceeds at a low pace only;

however in resolving conflicts new regulatory measures with no binding effect including Codes of Conduct, reports, EC communications have emerged and are applied by the Member State in their voluntary law-abiding conduct without applying sanctions”3. The importance of “soft law” is to be given its due emphasis, with the European Committee attempting to regulate an increasing number of areas with this range of measures.

The methodology of my research is in line with the above categories. In this Dissertation, a detailed analysis is given to primary and secondary sources of law generally applied in the context of sources of law for positive harmonisation. For the purposes of direct taxation in the Dr. Deák Dániel: Adóverseny a kibővített Európai Unióban, Gazdaság és Jog, 1/2005, pp. 17-22.

Cf. Éva Erdős: A nemzetközi adójog egyes alapelveinek érvényesülése az európai adójogban In: Tanulmányok Nagy Tibor tiszteletére (szerkesztette: Simon István) ELTE Állam –és Jogtudományi Kar tudományos kiadványai, Libri Amicorum 14. Szent István Társulat az Apostoli Szentszék Könyvkiadója, Budapest, 2009. p.


Éva Erdős: Új tendenciák az egyenes adók harmonizációjában; Miskolci Jogtudományi Műhely 3., Magyarország az Európai Uniós csatlakozás küszöbén (text of the scientific session held on 28 May 2003), szerk.: ed. Erika Róth, Bíbor Kiadó, Miskolc, 2003. p. 82.

context of primary sources of law, TFEU has a pronounced significance, as this is the instrument laying down the objectives for the creation of the internal market, which are to be attained by the abolishment of hindrances among the several Member States, including those relating to taxation. At the same time, the TFEU sets forth regulations on direct taxation in an indirect way only. It is for this reason that the most significant sources of law for positive harmonisation are the Directives. By the end of 2012, three Directives were adopted in the field of corporate direct taxation and one in the field of private individuals on the basis of Article 94 of the Treaty Establishing the European Union (or, Article 115 of TFEU)4. These Directives are described in detail in conjunction with the related legal practice.

I agree with Éva Erdős’ above quotation regarding “soft law” without however covering the issue in a separate chapter, with non-mandatory recommendations and other acts being described in the context of tax policy and the Code of Conduct under the part on the history of the issue.

For the purposes of this Dissertation, one of the most revolutionary initiatives on behalf of the European Commission is the regulation relating to the establishment of the common consolidated corporate tax base. The European Commission and the Member State has made extraordinary efforts and work for the development of the norms. A draft directive has already been created however it has not attained any legal status.

At the same time, the issue of transfer pricing posing the most problems for international companies is of particular importance, for the regulation of which the European Union has taken serious measures even in view of the fact that – as regards their form - non-mandatory acts have been created: the requirements as to the range of documentation and the manner preliminary pricing agreements are concluded have been incorporated in communiqués and Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (parent-subsidiary directive), Council Directive 90/435/EEC on a common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Merger Directive), 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, Council Directive 2003/48/EC of 3 June 2003 on taxation of savings income in the form of interest payments (Savings Directive) the issue of dispute resolution has been regulated by the European Union under a multilateral convention, with the relevant provisions described herein in a separate Chapter.

In view of the fact that the Member State – in their efforts to protect their sovereignty has hardly resorted to positive harmonisation, with their roles taken over the European Court of Justice. The Court – although not in a position to legislate – made an attempt to ensure concordance between internal tax regulations with EU Law. The relevant case law is highly complex and diverse, wherefore I have selected certain underlying principles for their interpretation and presentation. The cases are described with two approaches in mind: first grouped in the context of fundamental freedoms and then secondly private individuals and companies are treated separately, providing an analysis on one of their typical activities.

In case of private individuals, cross-border transactions are analysed in relation to these issues: (a) relocation of residence, (b) personal circumstances, (c) objective circumstances, (d) pension and other social benefits, (e) revenues from properties located in another Member State, and (f) taxation of other cross-border economic activities.

Transactions effected by companies are by far more complex and diverse. In the Dissertation, first I have described the ways the freedom of establishment is ensured in the host country and the country of residence, and then the ways the freedom of cross-border provision of services is ensured in the host country and the country of residence. Then, I have covered the issue how consolidation and loss carry forward is regulated and exercised and the issue of taxation of dividends.

In addition to my examination of these issues, I also relied on international and Hungarian literature in this field. Foreign authors include B.J.M. Terra, P.J. Wattel, Michel Lang, Pasquale Pistone, Josef Schuch, Claus Staringer, Richard Lechner, Marjaana Helminen and Michael Devereux, to name only a few, while Hungarian sources include those written by Tamás Őry, Dániel Deák, Éva Erdős, Gábor Földes and György Herich. The volume of this Dissertation allows no room for making reference to each of the concepts mentioned in relevant literature however I emphasized some of the key notions, without attempting to be all-inclusive.

–  –  –

On the one hand European tax as a separate category does not exist because the lack of the necessary political, legal and economic background and in the lack of that the necessary Community system of institution is not available. On the other hand, as Dániel Deák also points out that “in the absence of federation it is not realistic to expect the Community regulation replacing national legislation.”5 European tax does not exist but there is European tax law. European tax law has not a clear definition accepted by everyone but academics are trying to define this concept. The most evident is to draw a parallel with international tax law.6 As some states retain the right of taxation in international tax law, Member States retain it in the European Union as well. The national tax law of Member States shows significantly different features and as a result of this the conflict of tax discrimination, tax avoidance or double taxation may arise which becomes to be perceived beyond the boundaries of the European Union in international law. As in international law the legislators try to solve these conflicts by creating principles, similar taxation principles and methods also appear in European tax law, in particular the principle of equal treatment, the prohibition of discrimination and the prohibition of harmful tax competition.

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