Limits to Tax Planning

S. 499 1. What does it mean?

A “directive” is a legislative act of the European Union which is regulated in Article 288 of the Treaty on the Functioning of the European Union (“TFEU”). Directives are binding upon each Member State addressed as to the result to be achieved thereby but the choice of form and methods of the implementation is left to the Member States. Directives accordingly provide Member States generally with a certain amount of flexibility regarding the national rules to be adopted in the course of their implementation.

“Directive shopping” generally refers to international tax planning techniques taking advantage of tax benefits provided by directives. The meaning and use of this term derive from, by analogy, “treaty shopping” which is described by the Commentaries on the OECD Model Tax Convention on Income and on Capital (“OECD Model” and, respectively, “OECD Commentaries”) as “persons who are not resident of either Contracting State […] accessing the benefits of a Convention through the use of an entity that would otherwise qualify as a resident of one of these States”.

In tax planning practice treaty shopping mostly targets cross-border dividend, interest and royalty i...