Non-Discrimination in European and Tax Treaty Law

I. S. 88Introduction

One of the main EU goals is the establishment of an internal market without frontiers where persons can freely move and companies can be freely established (free movement and freedom of establishment) in the Member State of their preference without restrictions. Admittedly and not only in the area of direct taxation, Member States tend to protect the taxing powers granted by their national legislation or by bilateral treaties over entities established in their territory. Member States often adopt provisions which are determined as restricting the fundamental freedoms. Such provisions may still be compatible with the Treaty freedoms if they are justified and proportionate. In direct tax matters the ECJ (Court) has developed various justifications which in their specific substance are not always clear and which may overlap each other. However, behind these justifications there still remains symmetry (or tax base integrity) as the main objective of the Court. This means that if Member States do not tax foreign profits, they do not need to consider foreign losses either (except final losses). The essence of that symmetry principle and justifications accepted by the Court are more precisely analysed below.

II. TFEU fundamental freedoms and its restrictions in connection with direct taxation

The functioning of the EU and its internal market is based on the five fundamental freedoms which are included in the Treaty: (i) free movement of goods, (ii) free movement of persons, (iii) freedom of establishment, (iv) free movement of services and (v) free movement of capital. The idea of establishing an internal market intended to allow persons, capital and others to move to the area where they wish to and where they can provide their economic or non-economic activities in the best manner possible and thus improve the efficiency of the allocation of resources within the EU. In order to ensure that the internal market will fulfil the purpose for which it was established the Member States are obliged to remove all barriers, restrictions and other measures that will restrict the fundamental freedoms enshrined in EU law. Such an obligation applies also in the areas of exclusive competence of Member States, e.g. direct taxation, where Member States are obliged to exercise their competences consistently with EU law and avoid any discrimination.

The fundamental freedoms are based on a common principle of non-discrimination and as the ECJ have held in its case law not only discrimination as such is S. 89prohibited: also any measures which could hinder the fundamental freedoms without justification are prohibited, “the non-discriminatory obstacles”.

The ECJ has developed two parallel meanings of the fundamental freedoms:

• the Treaty ensures that foreign goods and persons are treated in the same way as domestic goods and nationals (the fundamental freedoms are specifications of the principle of non-discrimination set out in the Treaty and are intended to eliminate economic protectionism within the internal market),

• fundamental freedoms require the elimination of all obstacles that affect the ability to enter the internal market.

The assessment of the consistency of national tax regulations with the fundamental freedoms has always used a comparative test – cross-border situation vs. internal situation. When the ECJ wishes to determine whether a measure constitutes discrimination or not, it proceeds so that it first determines whether two situations are comparable. Then it examines whether they are treated equally. The comparability test is decisive in many ECJ cases on the fundamental freedoms. If two situations are comparable, they should be treated equally. If the subject of comparison is treated less favourably, the equal treatment requirement has been violated. In many cases the ECJ held that the situation where one taxpayer is subject to worldwide taxation (as a resident of a Member State) and another taxpayer is subject to source taxation (as a non-resident taxpayer of the same Member State) is not a different situation which can constitute a different treatment by that Member State.

Under the Treaty provisions, fundamental freedoms restrictions may be justified on the grounds of public policy, public security, public health. However, it is very unlikely that these grounds could serve as justification in the area of direct taxation. Restrictions on free movement can be justified only when based on imperative motives of public interest, such restrictions must be suitable to achieve the aim at issue and that may not go beyond what is necessary to achieve the objective (proportionality test). In its case law on direct taxation the Court has evaluated S. 90the existence of justifications and has developed a “rule of reason” doctrine concerning whether the circumstances under which a national measure that is found to restrict exercise of the fundamental freedoms guaranteed by the Treaty or that is discriminatory may be justified as representing an imperative requirement in the public interest. One of the conditions is that there should be a sufficient causal nexus between the measure and the objective it is intended to achieve.

Justifications have been primarily developed by the ECJ in its case law on direct taxation where it accepted three most important justifications for restrictive tax measures constituting a restriction on one of the fundamental Treaty freedoms:

III. Fiscal principle of territoriality

Generally, taxes may be levied by Member States based on the (i) principle of worldwide taxation where the State taxes domestic income and also foreign-source income, or based on the (ii) principle of source taxation where State taxes only the income which is connected to its territory (territoriality principle). The principle of territoriality is relevant in tax law mostly for non-resident taxpayers who are most often taxed on the basis of a territorial connection between a State and tax object. In other words, according to the territoriality principle the Member State taxes a person only on income which has connection to its territory.

A. The Futura case

The fiscal principle of territoriality as a justification was introduces for the first time in the Futura case. This case concerned a French company which had a permanent establishment (branch) in Luxembourg and which applied for crediting the French losses against the Luxembourg profits. Luxembourg residents were taxed in their worldwide income and the non-residents were taxed on their S. 91Luxembourg source income. As is stated in the Futura judgment, under the Double Tax Agreement concluded between France and Luxembourg, where an undertaking has permanent establishments in both Contracting States, each State may tax only the income arising from the activity of the permanent establishment located on its territory. (For the purposes of the aforementioned Double Taxation Agreement a branch constitutes a permanent establishment.)

The Luxembourg entity requested the tax authorities in its tax declaration to set off against its income losses incurred by the French company in the previous years. But the Luxembourg tax authorities refused to allow a set-off of the losses of the French company against the Luxembourg branch income on the ground that in Luxembourg law a non-resident taxpayer may carry forward a loss only if (i) there is an economic link to its territory and (ii) proper administrative account records are kept in Luxembourg as evidence admissible when making calculation. According to Luxembourg law, for the purpose of calculating the basis of assessment for non-resident taxpayers, only profits and losses arising from their Luxembourg activities are taken into account in calculating the tax payable by them in the Luxembourg.

The Court held that a system which is in conformity with the fiscal principle of territoriality cannot be regarded as entailing any discrimination, overt or covert, prohibited by the Treaty. Unfortunately, the Court did not provide a more in-depth analysis of when such system is in conformity with the fiscal principle of territoriality but it held significantly that the “Treaty does not preclude aMember State from making the carrying forward of previous losses, requested by anon-resident taxpayer, subject to the condition that the losses must be economically related to the income earned by the taxpayer in that State, provided that resident taxpayers do not receive more favourable treatment”, which is an important expression of the justification based on the fiscal principle of territoriality. Following the conclusion of the Court, the Member State is not obliged to set-off (deduct) the losses of the non-resident taxpayer which are taxed as domestic income if such losses are not economically connected to the income which the taxpayer achieved in that Member State.

B. Bosal Holding

In contrast to the Futura case the Court took a different opinion in the Bosal Holding case. Bosal Holding B.V. was a parent company established in the S. 92Netherlands and wished to deduct costs incurred in relation to financing Bosal Holding subsidiaries established in other Member States from the computation of Bosal’s taxable profit in Netherlands. Bosal claimed that those costs should be deducted from its own profits but the Netherlands refused to allow such deduction. To clarify, under the Netherlands tax law the deductibility of those costs was subject to the condition that they must be instrumental in making taxable profits in the State of establishment of the parent company. This means that irrespective of whether it is a subsidiary seated in Netherlands or in another Member State, the costs for financing that subsidiary may be deducted on the parent level (in the Netherlands) only if there is a link between such costs and the making of taxable profits by the parent company in Netherlands. Hardly ever will there be a situation when a subsidiary does not have economic activities connected to the territory where it is established. So without any obstacles deducting the costs of the subsidiary established in the Netherlands from the taxable profit of the Netherlands parent company is allowed. Only costs connected to a foreign subsidiary are excluded from the deduction if the subsidiary does not have economic activities in the Netherlands. As stated by the Court, this different treatment constitutes a discrimination of comparable situations where parent companies and subsidiaries of different Member States are less advantageously treated than parent companies and subsidiaries of the same Member State. Deduction of costs by the parent company depends on where the subsidiary makes its profit. According to the Opinion of Advocate General Albert, Member States may freely decide the costs are non-deductible, but if they do so, they cannot make any exceptions.

The Futura case and Bosal Holding case at first sight may seem to be very similar and it can be asked why the Court decided these cases in different ways. In comparison to the Futura case where the justification of fiscal principle of territoriality was used, the situation in Bosal Holding was much different: (i) Futura concerns allocation of profits and losses within one company, in the Bosal Holding it concerns the allocation of costs between the parent company and its subsidiaries, which were not seen by the Netherlands as one group; (ii) in the Futura the losses were intended to be allocated to the headquarters established in one Member State against profits made in other Member State, contrary to Bosal Holding where it was intended to take into account costs by the non-resident subsidiary that should be allocated to the headquarters in the Netherlands. Following the Netherlands tax law and transfer pricing rules, “finance and management costs of S. 93parent company are part of the holding activities of the parent enterprise” and should not be charged to the subsidiary but should be borne by the parent company. The justification made by the Netherlands based on the fiscal principle of territoriality was rejected by the Court as well as by the Advocate General and it was concluded that such treatment of Netherlands was discriminatory as investment in a foreign subsidiary is treated less favourably than investment in domestic subsidiary. The effect is that “the costs which should normally be deductible are not taken into consideration when calculation the amount of the tax liability.” Finally, in the Bosal Holding case the Court held that such different treatment of two comparable situations cannot be justified by the need to preserve the coherence of fiscal territoriality.

If one analyses the ECJ cases, the territorial matching of income and corresponding losses was recognized by the Court as an overriding reason for different tax treatment of cross-border and internal situations. Therefore, it is possible to conclude that different tax treatment may be justified based on the principle of fiscal territoriality if the following conditions are met:

• The same situations are treated equally irrespective of whether it concerns the resident taxpayer or non-resident taxpayer (resident taxpayers do not receive more favourable treatment; if different cases are considered in the same way and same cases in a different way it constitutes discrimination);

• territoriality is preserved in such a way that non-resident taxpayer is taxed only on the locally sourced income (only the income derived from the territory of the Member State where taxpayer is non-resident is taken into consideration by that Member State) and the resident taxpayer is taxed on the worldwide income,

• income of the non-resident taxpayer is connected to the territory of that Member State where the taxpayer is non-resident,

• taxation of income or set-off of losses of the non-resident taxpayer is allowed only if the losses are economically connected to the activities of the taxpayer arising from the territory in that State (one taxpayer = one income).

According to the principle of territoriality, the different treatment of Member States may be justified by the need to match within the same taxing jurisdiction the tax base reductions and corresponding tax base increases such as: losses and S. 94corresponding profits, income and the expenses incurred in earning it. The Member States must apply their tax jurisdiction symmetrically to income and losses.

IV. Fiscal coherence of the national tax system

A. Bachmann case

The fiscal coherence justification was accepted for the first time by the ECJ in the Bachmann case, which concerned Mr Bachmann, a German national employed in Belgium, and the Belgium State which did not allow the deduction from Mr Bachmann’s total occupational income for previous years contributions paid in Germany pursuant to sickness and invalidity insurance contracts and a life assurance contract concluded prior to his arrival in Belgium. The refusal was based on the Belgian legislation which provides that the deductibility of voluntary paid insurance contributions or assurance contribution is conditional upon being paid in Belgium. Under Belgian tax law pensions, annuities, capital sums or surrender values under life assurance contracts were exempt from tax where there had been no deduction of such contributions. On the other hand, contributions paid by Belgian nationals based on such contracts with the Belgian insurers were allowed to be deducted from their occupational income as the amounts payable by the insurers and which would be taxed in Belgium. This means that under the Belgian tax system the deduction of life assurance and insurance contributions from the total taxable income is offset by the taxation of sums payable by the insurers and when such contributions have not been deducted such sums paid by the insurers was exempt from tax. As a consequence of the Belgian legislation Mr Bachmann’s payments received under the insurance contract concluded with the German insurer would be taxed in Germany; however, the deduction of such insurance contributions was not possible in Germany or in Belgium.

In one of his articles Louan Verdoner stated that the coherence principle assumes that positive and negative components of taxable income are inseparable parts of the domestic tax system and for that reason cannot be dissociated from each other. The same philosophy was followed by the Court in the Bachmann case in the finding that under the Belgian rules a connection between the deductibility of contributions and the liability to tax of sums payable by the insurers under penS. 95sion and life assurance contracts must exist. The Court held that (i) on the one hand such Belgian provisions constitute a restriction on the freedom to provide services (from the insurer’s perspective, as there is a requirement that the insurer must be established in Belgium as a condition for deductibility of the contribution from the taxable income in Belgium) but (ii) on the other hand, such a condition may be justified by the need to preserve the cohesion of the applicable tax system and therefore is not contrary to the Treaty. Cohesion of a tax system supposes that if the Member State is obliged to allow the deduction of life assurance contributions paid in another Member State, it should be able to tax sums payable by insurers. Hence, it can be stated that there should be a connection between deductibility of the contributions and the liability to tax the revenue payable by the insurers under the assurance contract. The Court held the right of Belgium to be based on the statistical chance that the payments made to foreign insurance company would not be taxed in Belgium; Belgium was entitled to refuse a deduction of such insurance payments. According to Louan Verdoner, the Bachmann judgment represents the model situation when the Court observed the coherence as a defence of the national tax system.

The outcome of the Bachmann case as decided by the Court is that cohesion of tax system presupposes that, in the event a Member State is obliged to allow the deduction of contributions (expenses) paid in another Member State, it should be able to tax sums payable from these contributions (revenue) while if the Member State does not tax such sums (revenue) it is not obliged to allow deduction of paid contributions (expenses). Therefore, it can be concluded that the coherence of national tax system justification may appear in the situations where:

• A direct link between advantage and disadvantage (profit and loss/tax and deduction) exists,

• the same taxpayer is involved,

• the same income is involved (insurance contributions and revenue paid from these contributions).

After the Court (first) accepted fiscal coherence as justification in the Bachman case, it did not continue that line of thinking for many years. The Krankenheim case was the first time fiscal cohesion came up again.

B. S. 96Krankenheim case

The ECJ confirmed its acceptance of the fiscal coherence justification in the Krankenheim case concerning the treatment of losses incurred by a permanent establishment situated in Austria which belonged to a German limited liability company KR Wannsee. In 1990 the permanent establishment in Austria made losses and at the request of KR Wannsee (the principal company), Germany had taken into account those losses in calculating the taxable amount for KR Wannsee in Germany as in Austria losses incurred by the permanent establishment were not taken into account. Later the permanent establishment in Austria made profits and in accordance with German tax law Germany added that profits to the total income obtained by KR Wannsee in Germany. This means that Germany taxed the sums which were previously deducted from KR Wannsee’s taxable base in respect to the losses incurred by the permanent establishment in Austria. KR Wannsee brought an action against the tax notice of Germany to take account of profits made by its permanent establishment in Austria, arguing that reintegration of those sums on the basis of the provisions of German tax law was unlawful; also the Austrian-Germany tax treaty provides that profits made by a permanent establishment in Austria may be taxed only in Austria.

Germany first granted a tax advantage to KR Wannsee in Germany with the permanent establishment in Austria and it subsequently withdrew such a tax advantage when the permanent establishment in Austria made a profit. Despite the fact that reintegration of losses was only up to the amount of the profits made by the permanent establishment in Austria, Germany subjected resident companies with permanent establishments in Austria to a less favourable treatment than resident companies with permanent establishments situated in Germany which constitutes a restriction on the freedom of establishment granted by the Treaty. As mentioned above, in accordance with the Austria-Germany tax treaty only Austria had the taxing right for income derived by the permanent establishment in Austria, and not Germany where the principal company KR Wannsee is situated.

In the judgment the Court noted that the reintegration of losses by Germany cannot be dissociated from the fact that earlier they have been taken into account. There was thus a direct, personal and material link between the reintegration of the losses and their deduction previously granted. The reintegration of the S. 97amount of the Austrian permanent establishment’s losses in the result of KR Wannsee is the logical complement of their having previously been taken into account. The Court concluded that the restriction which follows from the reintegration is (i) justified by the need to guarantee the coherence of the German tax system (ii) appropriate to achieve such an objective – reintegration of losses previously deducted, and (iii) proportionate since the reintegrated losses are reintegrated only up to the amount of the profits made. The coherence of the tax system is thus represented by a balance between the deduction of losses and the subsequent recapture of losses up to the amount of the profits of the permanent establishment.

It appears that coherence has moved from the income of natural persons in Bachmann to business income in Krankenheim. Based on the Court’s decisions in the Bachmann case and the Krankenheim case it can be concluded that fiscal coherence of the national tax system means the need for conformity between tax base reductions and corresponding tax base increases within the same taxing jurisdiction and is accepted as a justification when following conditions are met:

• direct link between the sums which are deducted from taxable income and the sums which are subject to tax,

• the same taxpayer is concerned – who makes the deduction for insurance contributions and who receives the sums payable,

• the same tax relating the deduction and the taxation,

• the purpose of the measure is to safeguard the fiscal coherence of the national tax system.

Some authors are of the opinion that coherence of the national tax system prevents market participants engaged in cross-border economic activities from taking only tax advantages from a tax system of a Member State without sharing the related tax burdens. The question remains what the difference between the fiscal principle of territoriality and fiscal coherence of the national tax system is if there are similar conditions for both.

V. S. 98Balanced allocation of taxing powers

A. Marks & Spencer case

The need to safeguard the balanced allocation of taxing powers was for the first time accepted by the Court as a justification in the Marks & Spencer case. This case concerned a parent company Marks & Spencer incorporated and registered in the UK which had a number of companies established in the UK and also in other Member States. Later Marks & Spencer sold a French subsidiary to third parties. At the same time other subsidiaries in Belgium and Germany had ceased trading. Marks & Spencer claimed under the UK Income and Corporation Taxes Act a group tax relief in the UK for losses incurred by its subsidiaries in France, Belgium and Germany. The UK tax authorities argued that such group tax relief could be granted only for losses which were recorded in the UK and since the subsidiaries had operated in the Member State where they have been incorporated and had never traded in UK, it rejected the claims for such group tax relief. The UK legislation provides that a company established in the UK which operates in another Member State through a branch is taxed on the profits of that branch and may deduct from the tax payable the tax paid in the other Member State, or may deduct that tax when calculating branch profits or losses in the United Kingdom. If a branch incurred losses those losses could be set against the profits of the UK company. The UK argued that resident subsidiaries and non-resident subsidiaries are not in comparable tax situations and in accordance with the principle of territoriality the Member State in which the parent company is established has no tax jurisdiction over non-resident subsidiaries since foreign subsidiaries with foreign profits are not subject to UK tax jurisdiction. The UK submitted the following factors as a justification of its restriction:

• S. 99in tax matters profits and losses are two sides of the same coin and must be treated symmetrically in the same tax system in order to protect a balanced allocation of the power to impose taxes between the different Member States concerned,

• if the losses were taken into consideration in the parent company’s Member State they might well be taken into account twice,

• if the losses were not taken into account in the Member State in which the subsidiary is established there would be a risk of tax avoidance.

The Court held that such tax treatment when the UK treated differently the losses incurred by a resident subsidiary and losses incurred by a non-resident subsidiary constitutes a restriction to the freedom of establishment. Under the freedom of establishment, (i) it should be ensured that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State and (ii) the Treaty freedoms prohibit the Member State of origin from hindering the establishment in another Member State of its nationals or of a company incorporated under its legislation. Generally such tax treatment which constitutes a restriction on the freedom of establishment may be permissible only if it is justified by imperative reasons in the public interest. In this case when resident companies are taxed on their worldwide income and non-resident companies are taxed only on the income derived from their activities in that State, the parent company’s Member State is acting in accordance with the principle of territoriality recognized by the Court in the Futura case analysed above. The Court recognized that the UK had rightly observed that the preservation of the allocation of the power to impose taxes between Member States might make it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that State in respect of both profits and losses. If the companies have an option to have their losses taken into account in the Member State in which they are established or in another Member State this would significantly jeopardize a balanced allocation of the power to impose taxes between Member States, as the taxable base would be increased in the first State and reduced in the second to the extent of the losses transferred. The express statement of the Court was that such treatment is considered to be a restriction to the freedom of establishment considering the territoriality principle if Member States do not allow the resident parent company to deduct from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although S. 100they allow it to deduct losses incurred by a resident subsidiary. Such a restriction is justified in order to protect a balanced allocation of the powers to impose taxes between the different Member States. Subsequently, the Court held that it is contrary the Treaty not to allow the parent company to deduct from its taxable profits in that Member State the losses incurred by its non-resident subsidiary when the foreign subsidiary is unable to ever use the loss relief in its State of establishment (final losses as an exception). In the Opinion of Advocate General Kokott to the recent case European Commission v UK she stated that the last few years have shown that the Marks & Spencer exception does not satisfy the requirement of legal certainty, but makes investment conditions unforeseeable and liable to give rise to disputes.

B. Lidl Belgium case

The Court confirmed the Marks & Spencer decision in the Lidl Belgium case where it accepted preservation of the allocation of the power to impose taxes between the two Member States. In 1999 Lidl Belgium, a limited partnership with its registered office in Germany, created a permanent establishment in Luxembourg. During the 1999 accounting period Lidl Belgium’s permanent establishment in Luxembourg incurred a loss. Lidl Belgium sought deduction that loss from the amount of its tax base; however, the German tax authorities disallowed the deduction of that loss arguing that income relating to that Luxembourg PE is exempt by virtue of the provisions of the treaty. The Court repeated that the freedom of establishment entails for companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the European Community, the right to exercise their activity in other Member States through a subsidiary, branch or agency. Provisions of Treaty concerning freedom of establishment are directed to ensuring that foreign nationals and companies are treated in the host Member State in the same way as nationals of that State (non-discrimination based on nationality).

A provision of the national law which allows losses incurred by a permanent establishment in Luxembourg to be taken into account in calculating the profits and taxable income of Lidl Belgium as principal company constitutes a tax advanS. 101tage since under the OECD Model a permanent establishment is treated as an autonomous fiscal entity for tax purposes. However, that provision does not grant such a tax advantage for the losses incurred by a permanent establishment situated in a one Member State different than the Member State of the principal company. This situation constitutes a different tax treatment for (i) the German company with a permanent establishment in Germany and (ii) the German company with a permanent establishment in another Member State, which involves a restriction to the freedom of establishment.

Germany had taken the view that the justification may be based on the need to preserve the allocation of the power to impose taxes between Member States and the danger that losses might be taken into account twice. In this respect the Court accepted these justifications, holding that

• the objective of preserving the allocation of the power to impose taxes between the two Member States is able to justify the German tax regime since it safeguards symmetry between the right to tax profits and the right to deduct losses there,

• there is clearly a danger that the same losses will be used twice as there is a possibility that Lidl Belgium might deduct in Germany losses incurred by its permanent establishment in Luxembourg and that, despite such offsetting, the same losses might be taken into account subsequently in Luxembourg, when that permanent establishment generated profits, thereby preventing Germany from taxing that profit.

The Court also referred to its previous judgments holding that if Germany were to accept the deduction of losses of a non-resident permanent establishment from the taxable income of the German principal company there would be a threat of freely choosing the Member State in which those losses could be deducted.

Unlike in the Marks &Spencer case where there was no possibility for the subsidiary’s losses to be taken into account in the State of its residence, the Luxembourg tax legislation in this case provides for the possibility of deducting a taxpayer’s losses for the purposes of calculating the tax base. Accordingly, the Court stated that Lidl Belgium had not shown that the conditions for establishing the situation in which a measure constituting a restriction on the freedom of establishment goes beyond what is necessary to attain legitimate objectives were satisfied.

VI. S. 102What is the difference between the justifications?

It is difficult to see the conceptual difference between the principles (as justifications) of territoriality, fiscal coherence and the balanced allocation of taxing powers. All of them seem to have a common concept – tax base integrity (or tax base protection). The Court in its case law, however, does not take into consideration the connections between these justifications and therefore its judgments sometimes seem to be messy and inconsistent. Often in one case the Court recognizes the balanced allocation and territorial consistency and in another ignores it. This has sometimes led to legal uncertainty and misleads the taxpayers about their position.

Based on an analysis of the Court’s judgments on direct taxation the following common features (overlap) of the justifications may be indicated:

S. 103As indicated by the UK in the Marks &Spencer case, taxation of profits and deduction of losses are two sides of the same coin and should be treated symmetrically within the same tax system. The very strong link is required between the income to be taxed and the losses to be deducted to preserve:

• the principle of territoriality; each State has a right to decide which income should be taxed in its territory, which item it will consider to be taxable income and how it will exercise its taxing jurisdiction,

• the fiscal coherence of the national tax system; if the State does not tax the income and is forced to deduct losses this will lead to fiscal incoherence of its tax system as the losses will be deducted from income which has no link to such losses,

• the balanced allocation of taxing powers between Member States; if the State does not tax the income of the non-resident taxpayer it should not be forced to allow the deduction of the losses incurred by this taxpayer as this is not exercising tax jurisdiction over such taxpayer; otherwise this will lead to asymmetrical taxation (except for final losses).

Therefore, it is confusing and asymmetrical when the profits are taxed in one State and losses are deducted in the other and it is contrary to the principles of territoriality, coherence, balanced allocation. If the State has not chosen to exercise its right to tax profits, the Court should not unilaterally allocate the losses there. Sometimes it seems that the Court takes arguments into consideration in the wrong step of its decision and the result is that there are different decisions for identical situations.

S. 104Many authors, including Terra and Wattel, are of the opinion that the balanced allocation of taxing power, the fiscal principle of territoriality and cohesion of the tax system all revolve around the same concept which is tax base integrity of the Member States to exercise their taxing power in parallel. The close connections (overlaps) of the justifications are also noted by Dennis Weber who says that the principle of the balanced allocation of taxing power evolved on the basis of the territoriality principle and that this justifies the exclusive territorial matching of profits and losses within the same tax jurisdiction. Considering that the spirit of the justifications is more or less the same, the only difference which can be found is their proper application in different situations as a justification of the restrictive measures of the Member States.

VII. Conclusion

Over the course of time the Court has examined and decided a number of cases in direct tax matters relating to different tax treatment of the Member States. Due to the lack of harmonization in the area of direct taxation, the Court has accepted various justifications for discriminatory restrictions. In its judgments the Court had to choose between the restriction (or discrimination) of the Treaty freedoms, on the one hand, and protection of the tax sovereignty of the Member States involved, on the other hand. The first justification accepted by the Court reviewed in the second section above is the fiscal principle of territoriality. It is relevant in tax law cases where territorial matching of income and corresponding losses is present. The third section above dealt with the fiscal coherence of the national tax system justification and analysed the Bachmann case, in which such justification was accepted by the Court for the first time, and the Krankenheim case. The last justification accepted by the Court – the balanced allocation of taxing powers – was reviewed above in the fourth section based on the Marks &Spencer case and the Lidl Belgium case, both of which concerned foreign losses. As these justifications may not be always clear at the first glance, the fifth section shows that there are not so many differences among them and they are more or less the same principles for tax base protection. Ultimately, it can be concluded that each of the justifications pursues a common objective – the tax base integrity and symmetry between profits and losses.