Negative harmonization – fundamental freedoms
Approach taken by the ECJ to test the compatibility of a (tax) provision with the EU freedoms:
STEP 1: Access to EU law (Scope)
In order for the EU freedoms to apply, there must be:
i. An EU national/company (or a third-country national/company in instances of capital
movement)
ii. Cross-border element
o It cannot be a purely internal situation.
o Any link is sufficient for a cross-border element to be triggered (ie economic activity,
moving for personal reasons, indirect link)
o This will (obviously) be the case where a person relies on the:
a) Free movement of goods (Art. 34) -> not really covered by direct taxation
b) Free movement of persons
i. Free movement of workers (Art. 45 TFEU)
ii. Freedom of establishment (Art. 49 TFEU)
iii. Freedom to move and reside in another MS without pursuing economic activity
therein (Art. 21 TFEU)
c) Free movement of services (Art. 56 TFEU)
d) Free movement of capital [and payments] (Art. 63 TFEU)
o Important: when assessing the freedom of capital, make reference to Art. 65(1)(a) 1
TFEU as well in the comparability assessment
STEP 2: Restriction/discrimination
In order for a restriction to exist, there must be:
i. Comparability (between the domestic and cross-border situation)
o A measure is discriminatory (or a restriction) only if the domestic and cross-border
situation are comparable (See other notes for case law on comparability!!!)
1
Article 65: ‘The provisions of Article 63 shall be without prejudice to the right of Member States:
(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation
with regard to their place of residence or with regard to the place where their capital is invested;
, o Important: in case of free movement of capital make reference to Art. 65(1)(a)
TFEU -> in order to assess whether comparability exists
o Comparability test: the factual cross-border situation is compared, therefore, with a
hypothetical similar domestic situation. This involves 2 steps:
i. Superficial comparison between domestic and cross-border situations
ii. ‘Objective’ comparison in light of the aim of the national measure
This aspect has the role of a quasi-justification (however, without the
proportionality test)
o Only if there is comparability the next elements of the analysis can be assessed. If no
comparability then there is no restriction/discrimination
ii. Restriction/discrimination (disadvantageous treatment for the cross-border situation)
o Principle of non-discrimination -> comparable situations should not be treated differently,
and different situations should not be treated in the same way, unless doing so is
objectively justified
o Different types of cross-border impediments exist:
i. Direct discrimination -> Different treatment on the basis of nationality/corporate
seat
ii. Indirect discrimination -> when a measure, on its face, it does not differentiate on
grounds of nationality but de facto operates at the disadvantage of foreign
nationals
iii. Restrictions -> To impede, hinder or make less attractive free movement
If there is (i) comparability and (ii) a restriction/discrimination -> the relevant EU freedom will
be prima facie breached.
STEP 3: Justification
In order for a restriction/discrimination to be compatible with the EU freedoms it must be justified (also
proportional). In this regard, a distinction in justifications exists between:
i. Direct discrimination
o Can be justified only under the explicit justification under the TFEU
ii. Indirect discrimination
o Can be justified on the basis of the ‘rule of reason’ -> in Cassis de Dijon, the ECJ accepted
that restrictive measures that are not directly discriminatory might be justified on general
grounds of public interest as long as they comply with the principle of proportionality.
Justifications accepted by the ECJ Justification rejected by the ECJ
1) Cohesion of the tax system justification 1) Loss of revenue
It requires a nexus between a tax advantage and a The Court has never accepted the potential
future tax levy that offsets it (e.g. what is deducted loss of tax revenue in cross-border situations
now must be taxed later for the cohesion as an overriding reason of public interest that
justification to work) can justify restrictive measures, in itself.
It is generally invoked with the balanced allocation
of taxing rights justification -> difficult to be
successful on its own
2) Balanced allocation of taxing rights justification 2) Difficulties in obtaining information
Ensures that the taxing rights are fairly shared According to the Court there are no such
between MSs difficulties
3) Anti-abuse justification 3) Compensation of unfavourable tax treatment
According to the ECJ, 2 conditions exists for the by other tax advantage
justification to apply: In some cases, governments have argued that
a) There is a wholly artificial arrangement, the discrimination may be compensated for
Approach taken by the ECJ to test the compatibility of a (tax) provision with the EU freedoms:
STEP 1: Access to EU law (Scope)
In order for the EU freedoms to apply, there must be:
i. An EU national/company (or a third-country national/company in instances of capital
movement)
ii. Cross-border element
o It cannot be a purely internal situation.
o Any link is sufficient for a cross-border element to be triggered (ie economic activity,
moving for personal reasons, indirect link)
o This will (obviously) be the case where a person relies on the:
a) Free movement of goods (Art. 34) -> not really covered by direct taxation
b) Free movement of persons
i. Free movement of workers (Art. 45 TFEU)
ii. Freedom of establishment (Art. 49 TFEU)
iii. Freedom to move and reside in another MS without pursuing economic activity
therein (Art. 21 TFEU)
c) Free movement of services (Art. 56 TFEU)
d) Free movement of capital [and payments] (Art. 63 TFEU)
o Important: when assessing the freedom of capital, make reference to Art. 65(1)(a) 1
TFEU as well in the comparability assessment
STEP 2: Restriction/discrimination
In order for a restriction to exist, there must be:
i. Comparability (between the domestic and cross-border situation)
o A measure is discriminatory (or a restriction) only if the domestic and cross-border
situation are comparable (See other notes for case law on comparability!!!)
1
Article 65: ‘The provisions of Article 63 shall be without prejudice to the right of Member States:
(a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation
with regard to their place of residence or with regard to the place where their capital is invested;
, o Important: in case of free movement of capital make reference to Art. 65(1)(a)
TFEU -> in order to assess whether comparability exists
o Comparability test: the factual cross-border situation is compared, therefore, with a
hypothetical similar domestic situation. This involves 2 steps:
i. Superficial comparison between domestic and cross-border situations
ii. ‘Objective’ comparison in light of the aim of the national measure
This aspect has the role of a quasi-justification (however, without the
proportionality test)
o Only if there is comparability the next elements of the analysis can be assessed. If no
comparability then there is no restriction/discrimination
ii. Restriction/discrimination (disadvantageous treatment for the cross-border situation)
o Principle of non-discrimination -> comparable situations should not be treated differently,
and different situations should not be treated in the same way, unless doing so is
objectively justified
o Different types of cross-border impediments exist:
i. Direct discrimination -> Different treatment on the basis of nationality/corporate
seat
ii. Indirect discrimination -> when a measure, on its face, it does not differentiate on
grounds of nationality but de facto operates at the disadvantage of foreign
nationals
iii. Restrictions -> To impede, hinder or make less attractive free movement
If there is (i) comparability and (ii) a restriction/discrimination -> the relevant EU freedom will
be prima facie breached.
STEP 3: Justification
In order for a restriction/discrimination to be compatible with the EU freedoms it must be justified (also
proportional). In this regard, a distinction in justifications exists between:
i. Direct discrimination
o Can be justified only under the explicit justification under the TFEU
ii. Indirect discrimination
o Can be justified on the basis of the ‘rule of reason’ -> in Cassis de Dijon, the ECJ accepted
that restrictive measures that are not directly discriminatory might be justified on general
grounds of public interest as long as they comply with the principle of proportionality.
Justifications accepted by the ECJ Justification rejected by the ECJ
1) Cohesion of the tax system justification 1) Loss of revenue
It requires a nexus between a tax advantage and a The Court has never accepted the potential
future tax levy that offsets it (e.g. what is deducted loss of tax revenue in cross-border situations
now must be taxed later for the cohesion as an overriding reason of public interest that
justification to work) can justify restrictive measures, in itself.
It is generally invoked with the balanced allocation
of taxing rights justification -> difficult to be
successful on its own
2) Balanced allocation of taxing rights justification 2) Difficulties in obtaining information
Ensures that the taxing rights are fairly shared According to the Court there are no such
between MSs difficulties
3) Anti-abuse justification 3) Compensation of unfavourable tax treatment
According to the ECJ, 2 conditions exists for the by other tax advantage
justification to apply: In some cases, governments have argued that
a) There is a wholly artificial arrangement, the discrimination may be compensated for
