Dual-residency of Companies and EU Law: Accessing Corporate Tax Directives’ Benefits After the 2017 OECD Model Tax Convention Changes in the Dual-residency Tie-breaker for Companies

Abstract

Cross-referencing in law was always problematic. This is more the case when the cross-reference is made between two different legal systems, with the decision-making at each level being exercised by different entities. The case at hand is even more complicated since it involves, at the same time, three different legal systems: the EU system, the domestic law system and the public international law system - each one with its specificities in what concerns normative creation.

Due observance of the EU principles of subsidiarity and proportionality may make it hard to remove many instances of cross-referencing between the EU and domestic or public international law levels. In any case, the EU legislator should be careful in the cross-referencing, not remitting to a certain label or categorisation but to the underlying legal treatment associated with that label. Even if that increases complexity in the legislation, it may be the only way of ensuring that posterior changes in the referred provisions do not undermine the EU law instrument, preventing or deviating it from its underlying rationale.

Corporate tax directives were designed on the assumption of an underlying tax obstacle, being it juridical or economic double taxation. That assumption is explicitly referred to in the Preamble of the Directives. However, the way they were designed does not ensure a strict link between such obstacles and the entitlement to the directive benefits. The EU legislator was clearly concerned with limiting access to the Directives’ benefits to cases in which all parties to the transaction / restructuring operation were residents for tax treaty purposes in the Union. However, as demonstrated, the real requirement is that the tax obstacle occurs within the EU, and that beneficiaries of the EU directives are subject to worldwide taxation in the EU. Here, reference should not be made to the epiphenomena (the residence) but to real phenomena (the worldwide taxation of that item of income in all of the involved companies).

Better-designed provisions, with a more robust and stricter alignment between the wording and the rationale, reduce administrative and compliance costs while decreasing cases where the EU-nationals may exploit frictions between the wording of the provision and its object and purpose, decreasing the instances where national administrations and/or Courts are forced to resort to anti-avoidance provisions or (unwritten) principles.

Only by proceeding in this way can the EU legislator ensure that the EU legal order is truly at the service of the Member States and its nationals and that the internal market is strengthened, as required by the founding treaties.

Keywords: Dual-residency, EU Law, OECD Model