EU Code of Conduct on Business Taxation updated

EU Member States have agreed to widen the scope of the EU Code of Conduct for Business Taxation. It is the first revision of the Code since it was introduced in 1997. The Code covers tax measures in EU Member States with the aim of preventing Member States applying harmful and preferential tax measures.

The agreed revision to the Code means that it will apply not only to directly preferential measures, but also to general measures or tax features of general application which will be regarded as harmful if they lead to double non-taxation or the double/multiple use of tax benefits.

Background

The Code is a political commitment that was agreed by Member States in 1997 as an intergovernmental, legally non-binding instrument. It is used primarily by the EU Code of Conduct Group to identify and assess preferential tax measures in EU Member States (ie measures that provide for a lower level of taxation than the level which is applicable in general) that are possibly harmful.

The Code of Conduct Group’s work also has an international dimension which aims to promote effective changes in respect of worldwide tax good governance through cooperation. The Code of Conduct Group carries out the technical work, screening and assessment leading to the regular revision by the Council of the EU list of non-cooperative jurisdictions for tax purposes. This EU list is regularly revised following a review of the implementation of commitments taken by all third-country jurisdictions that are part of the process. For the most recent update to the EU list of non-cooperative jurisdictions for tax purposes see our insights article.

Revised Code

The revised Code of Conduct introduces the concept of 'tax features of general application'. Whereas previously only preferential measures (such as special regimes or exemptions from the general taxation system) were examined, under the new rules the scope will also include tax features of general application. These will be regarded as harmful if they lead to double non-taxation or the double/multiple use of tax benefits.

To establish whether a tax measure falls under the Code, it has to meet a gateway criterion: only preferential tax measures affecting or potentially affecting the place of business activities fall under the revised Code of Conduct.

For preferential measures, an additional specific gateway criterion is applied. For a measure to be covered by the Code, it must stipulate an effective level of taxation that is significantly lower than the general level of taxation.

To determine whether the measures under scrutiny are effectively harmful, they are assessed against four criteria:

1. Are the advantages ‘ring-fenced’ from the domestic market? Are they for example granted only to non-residents or for transactions with non-residents, or do they leave the national tax base unaffected?

2. Are the advantages granted even without any real economic activity and substantial economic presence within the member state offering these tax advantages?

3. Do the rules for determining profits of multinational groups deviate from internationally accepted principles, in particular the rules agreed within the OECD?

4. Do the tax measures lack transparency? This could mean situations where legal provisions are relaxed at administrative level in a non-transparent way.

For tax measures of general application, there is also a specific gateway criterion. For a measure to be assessed, it must lead to a lower tax liability than the nominal tax rate (or no tax liability at all), or to deferred taxation as a feature of a distribution tax system.

Two criteria are used to assess whether tax features of general application are effectively harmful:

1. Does the tax feature of general application lead to double non-taxation or does it allow the double or multiple use of tax benefits in connection with the same expenses, amount of income or chain of transactions, because it is not accompanied by appropriate anti-abuse provisions or other adequate safeguards?

2. Does this affect in a significant way the place of business activity in the EU?

The update of the code took the form of a resolution of the Council on a revised Code. The revised Code will apply from 1 January 2024 and it will cover tax features of general application introduced after 1 January 2023.

Under the Code, EU Member States commit to roll back existing tax measures that constitute harmful tax competition and refrain from introducing any such measures in the future.