CFC Rules, BEPS Action 3 (Draft), and EU Law

25 Pages Posted: 17 Sep 2015

See all articles by Blazej Kuzniacki

Blazej Kuzniacki

The Amsterdam Centre for Tax Law (University of Amsterdam)

Date Written: 2015


Currently CFC rules are in force in 13 among 28 EU Member States, yet due to the prospective influence of the recommendations under Base Erosion and Profit Shifting (BEPS) Action 3, such rules may be implemented in the other Member States in the near future. Nevertheless, even now, the compatibility of CFC rules with EU law affects 13 EU Member States and thus is of high importance. The threshold for taxpayer’s protection under EU law before the application of CFC rules was established by the judgment of the Court of Justice of the European Union (CJEU) of 12 September 2006 in the Cadbury Schweppes case (C-196/04). Since then, it is clear that EU Member States are bound by the wholly artificial arrangement restriction in applying CFC rules, while non-Member States legally speaking are not bound by this restriction. In that respect, the OECD Working Party No. 11 (WP11) in Public Discussion Draft on BEPS Action 3 (published in April 2015) acknowledges that EU Member States may not have the same effective CFC rules in force as third countries, owing to the wholly artificial arrangement limitation. It shows that the process of collaborative approach to strengthening CFC rules is doubtful.

It is true, though, that combatting only wholly artificial arrangements is not enough for CFC rules to be effective. Simultaneously, the effectiveness of CFC rules cannot overrule the requirements stemming from the CJEU’ case law for their compatibility with EU law. This being said, the WP11’s extremely challenging task is to develop recommendations for CFC rules that are effective in dealing with base erosion and profit shifting (which is the ultimate purpose of Action 3) within the EU. In that regard, the WP11 developed four recommendations for CFC rules: (i) including a substance analysis that would only subject taxpayers to CFC rules if the CFCs did not engage in genuine economic activities; (ii) applying CFC rules equally to both domestic subsidiaries and cross-border subsidiaries; (iii) designing CFC rules to explicitly ensure a balanced allocation of taxing powers; and (iv) applying CFC rules to transactions that are “partly wholly artificial”. The recommendation (i) was in fact followed by all EU Member States which have CFC rules in force, more or less successfully, after the CJEU’s judgment in the Cadbury Schweppes case. Hence, I have decided to focus in this paper only the three remaining recommendations. In this paper I will critically analyse each of the said three recommendations of the WP11 and then provide final conclusions.

Suggested Citation

Kuzniacki, Blazej, CFC Rules, BEPS Action 3 (Draft), and EU Law (2015). WU International Taxation Research Paper Series No. 2015-21. Available at SSRN:

Blazej Kuzniacki (Contact Author)

The Amsterdam Centre for Tax Law (University of Amsterdam) ( email )


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