The EU’s Official Journal of December 12th 2012 published the Commission’s Recommendation of 6 December 2012 (2012/772/EU) on “aggressive tax planning”. This Recommendation is applicable only to direct taxes and it is addressed to the Member States.
Whereas “tax planning” as such is considered legitimate, is considered as “aggressive” (and thus illegitimate) sophisticated and international tax planning which consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing taxes (such as: double deductions or double non-taxation). Such tax planning develops across various jurisdictions and shifts taxable profits towards States with beneficial tax regimes.
The Commission considers that in order to improve the functioning of the Internal Market, all Member States should take the same general approach towards aggressive tax planning, which would help diminishing existing distortions, and in particular avoid double non-taxations.
The following two main principles should be applied by the Member States:
1. Limitation of measures intended to prevent double taxation
Where the precisely aim of double taxation conventions between States is to implement rules preventing that the same revenues are subject to taxes in both contracting States, the Commission considers that the scope of such measures should be limited in order to avoid that revenues are not taxed in either country (which typically is the case where according to the tax treaty one State has the right to levy taxes on a specific income, but such income is not subject to a tax in that State (or a very low tax)).
Tax conventions should therefore contain the following clause:
"Where this Convention provides that an item of income shall be taxable only in one of the contracting States or that it may be taxed in one of the contracting States, the other contracting State shall be precluded from taxing such item only if this item is subject to tax in the first contracting State".
Furthermore, if according to the national rules of a Member State, income sourced in another jurisdiction is exempted from tax, the Member State should derogate to such exemption in case the revenue is not taxed in that other jurisdiction.
2. General anti-abuse rule
The Commission encourages Member States to include in their national legislation a general anti-abuse rule applicable to domestic and cross-border situations:
“An artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of avoiding taxation and leads to a tax benefit shall be ignored. National authorities shall treat these arrangements for tax purposes by reference to their economic substance".
An “arrangement” means “any transaction, scheme, action, operation, agreement, grant, understanding, promise, undertaking or event (it may comprise more than one step or part)”.
An arrangement is “artificial” if “it lacks commercial substance” (situations such as: – the legal characterisation of the individual steps which an arrangement consists of is inconsistent with the legal substance of the arrangement as a whole; – the arrangement or series of arrangements is carried out in a manner which would not ordinarily be employed in what is expected to be a reasonable business conduct; – the arrangement or series of arrangements includes elements which have the effect of offsetting or cancelling each other; – transactions concluded are circular in nature; – the arrangement or series of arrangements results in a significant tax benefit but this is not reflected in the business risks undertaken by the taxpayer or its cash flows;).
An arrangement consists in avoiding taxation “where, regardless of any subjective intentions of the taxpayer, it defeats the object, spirit and purpose of the tax provisions that would otherwise apply”.
Tax avoiding purpose is to be considered essential “where any other purpose that is or could be attributed to the arrangement or series of arrangements appears at most negligible, in view of all the circumstances of the case”.
Finally, in determining whether an arrangement or series of arrangements has led to a tax benefit, one should compare the amount of tax due by a taxpayer, having regard to those arrangement(s), with the amount that the same taxpayer would owe under the same circumstances in the absence of the arrangement(s). In particular the following situations should be considered: – an amount is not included in the tax base; – the taxpayer benefits from a deduction; – a loss for tax purposes is incurred; – no withholding tax is due; – foreign tax is offset.
The Commission invites the Member States to keep the Commission informed on the measures taken in order to comply with those Recommendations and announces an evaluation of the implementation of the Recommendation within 3 years.
Future measures of this kind confirm that Luxembourg life insurance undertakings are right to concentrate on tax compliant on shore investment solutions which have numerous other advantages for clients than the supposed tax advantages.”