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3 Selective Advantage: The Reference System and the Right Comparison for Double Taxation Relief

3 Selective Advantage: The Reference System and the Right Comparison for Double Taxation Relief

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Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law


with the question whether there is an inconsistent manner of providing double

taxation relief that applies to comparable taxpayers, which leaves certain of

them in an economically better position than others. This view is also in line with

the approach taken by the Commission. It had initially indicated that provisions to

prevent double taxation would normally be considered as general measures of a

mere technical nature and would thus not constitute state aid as long as they applied

without distinction to all firms.11 Nevertheless, it later found the exceptional

application of the exemption method for certain undertakings to constitute

prohibited state aid, where the general rule for double taxation relief provided for

a credit.12

If measures for double taxation relief do therefore fall squarely within the ambit

of state aid review, how is one to assess their compatibility with Article 107 TFEU?

The element of comparability has to be determined in light of the objective of the

relevant tax system. When tied to the tax system as defined by one specific Member

State, this ‘comparability approach’ is fundamentally equivalent to the standard

‘derogation approach’ to determine the selectivity of a tax measure. Under both

approaches, the key element to a finding of selectivity is the definition of the

reference framework. Under the first approach, this requires the definition of the

relevant system in light of whose objectives differently treated taxpayers might be

comparable13; under the second approach, it requires the definition of the relevant

system from which a measure derogates. Applying these principles, one has to

decide whether the right reference framework to analyse double taxation relief

measures consists of (1) domestic law applying to domestic income (no relief from

double taxation), (2) domestic law rules on foreign income (unilateral relief provisions), (3) the tax treaty network of a Member State as a whole, (4) each

individual tax treaty in its entirety or (5) the provisions applied to particular foreign

income under an individual tax treaty. The related question under the comparability

approach is whether a resident taxpayer with foreign income that is exempt under

the provisions of a tax treaty is comparable to (1) a resident taxpayer with domestic

income, (2) a resident taxpayer without tax treaty protection, who is taxed on

foreign income but receives a credit under unilateral relief provisions in domestic

law, (3) a resident taxpayer with foreign income who is subject to tax with credit on

the basis of another tax treaty, (4) a resident taxpayer who is subject to tax with

credit under the same treaty earning income falling under a different distributive

rule or (5) a resident taxpayer who is subject to tax with credit under the same treaty

earning income falling under the same distributive rule. It is not immediately


Commission notice on the application of State aid rules to measures relating to direct business

taxation of 11 November 1998, OJ C 384/3 (10 December 1998), para 13.


Commission decision 2003/601/EC of 17 February 2003, OJ L 204/51 (13 October 2003).


For a different view, see Lang (2011), p. 593 at 598, who argues that comparability should be

established based on the existence and degree of competition between the categories of taxpayers.

See also Lang (2012), p. 85 at 99.


W. Haslehner

apparent how to draw the right comparison under these circumstances. Let’s look at

them in turn:

(1) If the reference framework to be used were domestic law as it applies to

domestic income, any relief that reduces the residence state’s tax claim would

constitute a prima facie selective advantage. This will not be convincing if

double taxation relief measures are generally available in situations where

double taxation occurs. Under these conditions, it is equally clear that taxpayers

with purely domestic income and those with foreign income are not comparable

in light of the objectives of a tax system that is based on the ability-to-pay


(2) The second option is more difficult to dismiss. It would compare the general

rules applicable to foreign income under domestic law to those that apply

exceptionally in cases covered by a tax treaty. Luja argues that differences in

the conditions for double taxation relief and the type of relief granted in both

situations are part of the nature and general scheme of a tax system, taking into

account Member States’ freedom to negotiate and conclude bilateral agreements, which necessarily involves a compromise.14 Such freedom would

become meaningless if Member States were unable to derogate from their

domestic law, as such derogation is the only reason to conclude such treaties.

That argument corresponds to the Court of Justice’s acceptance of different

rules applied to taxpayers falling under different tax treaties in the D case,

where it held that the bilateral nature of a tax treaty rendered the situation of a

person protected by a tax treaty and another person who was not so protected

incomparable.15 However, the Court’s position in that case only concerned the

comparability of non-resident taxpayers, which the Court had already held

would—under the circumstances of the case—not be comparable to a resident.

The same reasoning cannot be as easily applied to the question at hand, which

concerns the different treatment of resident taxpayers. Notably, the Court of

Justice has also dismissed a claim of discrimination resulting from the application of different relief methods following the German switch-over clause in

its Columbus Container Services judgment.16 Yet the Court’s holding was not

based on the incomparability of situations, but rather on the one-sided nature of

the fundamental freedoms: since the application of the credit method was not

less favourable than national treatment, no relevant discrimination could be

found. By contrast, state aid rules are not limited in their scope to the comparison between domestic and cross-border situations. More beneficial treatment

of cross-border situations—whether agreed in a tax treaty or granted unilaterally—falls within the scope of the state aid provisions. The bilateral nature and

attendant give-and-take of a tax treaty are also not very strong arguments when


Luja (2004), p. 234 at 235.

D (C-376/03, EU:C:2005:424, paragraph 61).


Columbus Container Services (C-298/05, EU:C:2007:754).


Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law


reviewing exceptional benefits granted by a Member State to its own residents,

as the concrete method of relief for source taxation appears more often to be

chosen in accordance with the preferences of each residence state rather than

granted as a concession to the source state.

(3) The same arguments could also be brought forward against the comparison

between taxpayers falling under different treaties, but this approach would

additionally be complicated by the difficulty to determine which method of

relief should constitute the relevant benchmark. Although normal tax system

and exception are not generally identified on the basis of the number of

taxpayers to which each applies,17 it would not be unreasonable to take the

view that the more commonly used method in tax treaties should constitute the

reference framework for the taxation of a treaty protected resident’s foreign

income if one had to define a benchmark for the entire tax treaty network of a

given Member State.

(4) Alternatively, each individual tax treaty could constitute its own reference

system. Even in this instance, state aid could still arise from the application

of different methods of double taxation relief to different categories of income,

unless the objectives of the treaty provide an inherent justification for such


(5) Finally, one cannot escape the conclusion that taxpayers in the same circumstances with respect to all the factors that are relevant to determine tax jurisdiction under a tax treaty, that is to say the taxpayers’ residence and the source

and category of income earned, are comparable for purposes of state aid law. It

follows that more beneficial double taxation relief granted to some of those

taxpayers, for instance, based on their use of that income, would constitute state



Equivalence of Relief Methods?

According to this analysis, any of the proposed comparisons in (2)–(5) are potentially relevant. Whichever view one follows, it does not in itself take away a

Member State’s power to apply different relief methods, however. First, it is

certainly possible to find specific system-inherent justifications for distinctions

made in different tax treaties in many cases. Second, the analysis so far is based

on the assumption that certain types of relief can be considered more beneficial than


See Lang (2011), p. 593 at 596; Haslehner (2012), p. 301 at 317. For a different view, see Flett

and Walkerova (2008), p. 223 at 228.


Such was essentially the finding of the Commission in its decision 2003/601/EC of 17 February

2003, OJ L 204/51 (13 October 2003) concerning the exceptional application of the exemption

method to foreign dividends that are reinvested in Ireland.


W. Haslehner

others from a state aid perspective. It has been using the distinction between the

credit and the exemption method as an example. But it still has to address the

argument that both methods might indeed be considered to be equivalent, arguably

mirroring the position taken both by the Court of Justice19 and secondary EU law20

in the context of relief from economic double taxation. Both credit and exemption

lead to the same result for both taxpayer and Member State if source and residence

state impose equivalent tax rates on the taxpayer’s income. As a finding of state aid

should not depend on the vagaries of tax rate changes by other countries, it is

reasonable to make the existence of equivalent tax rates a necessary simplifying

assumption for purposes of assessing the validity of the relief provisions. Any

advantage accruing to the taxpayer as a consequence of a tax rate mismatch

would then not be attributed to the residence state and could be ignored. Such

approach would notably coincide with the Court of Justice’s view on tax system

disparities in the context of the fundamental freedoms.21 However, the Court of

Justice could make the acceptance of different methods of juridical double taxation

relief contingent on certain design features, in the same way as it predicates the

equivalence of credit and exemption in the context of inter-company dividend

taxation on the condition that credit is provided on the basis of the source country’s

nominal rate.22 Systematic overcompensation in particular should trigger

warning lights. This will certainly be the case where a Member State exceptionally

grants tax-sparing credits, which are designed to keep tax incentives granted by the

source country intact. If the benchmark for comparison is the application of the

ordinary credit method, this could provide an unjustified advantage to taxpayers

who exceptionally benefit from it.23 More controversially, the exemption method

might be considered to be prone to systematic overcompensation as measured

against its own primary objective (to avoid double taxation), if it applied without

distinction to cases of virtual and actual double taxation.24 Such result would be

based on a breach of the tax system’s internal logic: if exemption itself were a

deviation from normal taxation that is justified by the ability-to-pay principle, the

provision of relief in cases where no double taxation exists would constitute an

inconsistency in light of the tax system’s general principles. A strict application of

this view might require Member States to include subject-to-tax clauses in all

of its treaties. Such a view is certain to run into strong objections from Member

States with a tradition of exempting foreign income. One counterargument to such


Supra Section 2.1.

Cf. Art. 4 Parent Subsidiary Directive.


See Gilly (C-336/96, EU:C:1998:221, paragraph 34).


See FII Group Litigation (C-35/11, EU:C:2012:707, paragraph 65).


Luja considers both tax sparing and matching credits, finding the former more problematic as

their objective is indeed to maintain incentives for investment without any real justification based

on the need to avoid double taxation, whereas the latter provide relief at a standard rate that may

over- but can also undercompensate. See Luja (2004), p. 234 at 236.


Luja (2004), p. 234 at 236.


Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law


objections is that this analysis requires nothing more than consistent treatment of

foreign income, and merely objects to the exceptional exemption of certain foreign

income where such cannot be justified on the basis of the ability-to-pay principle.

However, in light of their competence to negotiate bilateral tax treaties, the standard

of consistency required from Member States’ tax systems should not be set

too high.


A Higher Standard of Selectivity to the Member States’


In addition to this last objection to mandatory subject-to-tax clauses, a further

argument to the rescue of Member States’ freedom to apply different methods of

relief comes from the criterion of specificity. Following the General Court’s

judgments in Autogrill25 and Banco Santander26 and AG Kokott’s analysis in

Finanzamt Linz,27 increasing weight appears to be put on a requirement for

beneficial rules not only to constitute derogations from the general system, but

also for them to identify their beneficiaries as a privileged group of enterprises on

the basis of characteristics that are specific to them. In light of this, it is questionable

whether the application of a more beneficial mechanism for double taxation relief

granted to all taxpayers protected by a particular tax treaty as compared to taxpayers

whose income falls under another (or no) tax treaty is sufficient to identify those

taxpayers as a distinct group of beneficiaries, if any undertaking could avail itself

of the same benefit by engaging in gainful activity protected by that treaty.28

The standard is not yet settled, however. Notably, AG Wathelet has rejected the

General Court’s approach in his recent Opinion on the appeals in both cases,

holding that no specific category of undertakings needs to be identifiable from a

legal regime for it to grant a selective advantage.29


Autogrill Espa~na (T-219/10, EU:T:2014:939, paragraph 52 et seq).

Banco Santander and Santusa (T-399/11, EU:T:2014:938, paragraph 56 and seq).


See Opinion of AG Kokott in Finanzamt Linz (C-66/14, EU:C:2015:242, paragraph 108 et seq)

referring to Gibraltar (C-106/09 P and C-107/09 P, EU:C:2011:732, paragraph 104): “[T]he

criteria forming the basis of assessment which are adopted by a tax system must also, in order to

be capable of being recognised as conferring selective advantages, be such as to characterise the

recipient undertakings, by virtue of the properties which are specific to them, as a privileged



Luja answers this question in the affirmative, considering investors in a specific country to be a

sufficiently selective group for purposes of Article 107(1) TFEU. See Luja (2004), p. 234 at 236.


Cases C-20/15 P and C-21/15 P, EU:C:2016:624, paragraph 84 et seq.



W. Haslehner

3 Transfer Pricing Adjustments and State Aid Law


Introduction: Transfer Pricing Adjustments

as Coordination Measures to Avoid Double Taxation

Transfer pricing adjustment rules share some similarity with the relief provisions

discussed so far. Their primary purpose is to ensure the proper allocation of profits

to tax jurisdictions in line with the criteria agreed upon in a tax treaty. Additionally,

they also aim to avoid double taxation by aligning otherwise unilateral transfer

pricing adjustments with a common standard for both contracting states.30 A

notable difference to the previously analysed relief methods is that this concerns

instances of economic double taxation rather than juridical double taxation. It is

debatable whether this difference matters for the analysis of the rules from a state

aid perspective. On the one hand, both the Commission and the EU Courts consistently hold that state aid analysis has to be carried out based on the economic effects

of a measure regardless of their legal form. It is clear that the distinction between

juridical and economic double taxation is a mere technicality based on the difference between opaque and transparent entity structures. The distinction thus should

not be of relevance. On the other hand, since the distinction between opaque and

transparent entities is fundamental to direct taxation systems, it would seem fanciful to suggest that the granting of relief from economic double taxation in a crossborder situation (as required by the Court of Justice’s case law31) constituted a

selective benefit in the absence of relief from juridical double taxation for a

company’s foreign permanent establishment profits. Considering the fundamental

differences between both types of legal structures under domestic laws, it seems

more appropriate to extend the Court’s approach in its fundamental freedoms case

law to consider them incomparable from the home state’s perspective32 to the area

of state aid law. Relief provisions for the different types of double taxation thus do

not have to be necessarily aligned. Nevertheless, the analysis for both remains

substantially the same.

From a state aid perspective, a specific question arising for the discussion of

economic double taxation relief is whether there is only “one correct way” of

adjusting transfer prices for multinational enterprises. The Commission appears

to take that view and effectively require Member States to follow the arm’s length

standard for the determination of their taxable profits. It is debatable, however,


See Art. 9(2) OECD Model Tax Convention concerning mandatory corresponding adjustments.

See, e.g. Manninen (C-319/02, EU:C:2004:484), FII Group Litigation I (C-446/04, EU:

C:2006:774), Meilicke (C-292/04, EU:C:2007:132), Haribo and Salinen (C-436/08 and C-437/

08, EU:C:2011:61), Meilicke II (C-262/09, EU:C:2011:438), FII Group Litigation II (C-35/11,



See, e.g. Bosal (C-168/01, EU:C:2003:479, paragraph 32), Columbus Container Services

(C-298/05, EU:C:2007:754, paragraph 51 et seq), X Holding (C-337/08, EU:C:2010:89, paragraph



Double Taxation Relief, Transfer Pricing Adjustments and State Aid Law


whether state aid law requires the application of the arm’s length standard to

multinationals. First, the standard is itself increasingly controversial in the international tax law debate, not only because of technical difficulties of determining its

content in practice, but also because of its significant theoretical shortcomings.33

Second, even if it were a sound principle to allocate tax burdens in a bilateral

setting, the standard approaches to determine state aid under Article 107(1) TFEU

does not rely on a comparison of a Member State’s tax system with an international

standard. The consistent implementation of another method to determine the

taxation of multinational enterprises by any Member State must be accepted by

the Commission, unless such other method can be shown to be inherently biased to

the benefit of certain undertakings.

Further questions arise from such initial doubts: if two Member States agree on a

common approach to allocate profits of an enterprise that operates in both jurisdictions, it would seem odd to consider the resultant delineation of tax bases subject to

scrutiny by state aid rules. Under the assumption of equivalent taxation in both

Member States, no benefit would accrue to that enterprise as a whole regardless of

any tax base shifts between them. In principle, this result is the same as under the

application of the credit method with respect to juridical double taxation. One

Member Sate might be required to tax on a lower base compared to that which its

domestic law would set as a consequence of a corresponding adjustment in line with

Article 9(2) OECD Model Tax Convention. To the extent that one might consider

such reduced taxation in that Member State an advantage to the enterprise, it would

then also be justified by nature and general scheme of the tax system based on the

ability-to-pay principle and its attendant predisposition against double taxation. It is

not clear whether the coordination with the other country changes the situation,

however. The same justification would be applicable if a corresponding measure

were taken unilaterally to avoid double taxation of an enterprise.

As with unconditional relief for virtual double taxation discussed above, the

situation may be different where a Member State grants downward adjustments

to its tax base that are not matched by upward adjustments in another country.

Subsequent partial non-taxation or “white income” might thus be indicative of state

aid.34 However, not every instance where income remains partially untaxed in a

cross-border setting can be tackled by state aid rules. Where white income results

from genuine mismatches of—in themselves coherent—different tax systems in

two Member States, no aid arises, since it cannot be shown that either State suffered

a reduction in tax revenue.35

By contrast, the Commission appears to defend the position that the arm’s length

standard is the only correct way of allocating profits to companies that form part of

a multinational enterprise. For that to be true in all circumstances, a lower tax

burden applying to a single company of an international group would be sufficient


See, e.g. Brauner (2013), p. 387; Sch€

on (2012b), p. 47 at 53 et seq.; Wilkie (2012), p. 137.

See Rossi-Maccanico (2015), pp. 63–77. See also further infra 3.4.


Cf. Lyal (2015), p. 1017 at 1043.


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