Limits to Tax Planning

S. 453 1. Introduction

While indirect taxes are extensively harmonized within the European Union direct tax matters fall within the competence of the Member States, which are free to decide on the taxable base or the tax rate. Only a few areas of direct taxation are harmonized by EU Directives (e.g. the Parent-Subsidiary Directive, Interest-Royalty Directive, Merger Directive). With direct taxation being in the hands of the Member States it is also up to them to provide for domestic anti-abuse rules in order to prevent taxpayers from trying to improperly or fraudulently circumvent national legislation to take advantage of provisions of EU law.

However, it is settled case law of the ECJ that Member States have to exercise their competencies in the field of direct taxation in accordance with EU law, i.e. avoiding discrimination by virtue of nationality and complying with the freedoms provided for in the Treaty on the Functioning of the European Union.

Due to the lack of other sources in the non-harmonized area of direct taxes the meaning and the legal consequences of abuse have to be derived from the case law of the ECJ.

2. The Fundamental Freedoms

2.1. General

The TFEU contains a general non-d...