take a different view when faced with a company entitlement as opposed to that which
it took in the ‘D’ case which related to an individual.
Another potential problem that may arise in relation to double taxation treaties relates
to the anti-“treaty shopping” or “limitation on benefit” clauses which are contained in
many treaties with third countries. These clauses seek to confine treaty benefits to
genuine residents of the two Contracting States only, and the Commentaries to the
OECD Model Treaty specifically authorise their use. Terra and Wattel (2005) suggest
that it may be possible for a Member State to justify existing clauses on the basis that
no tax treaty would have been concluded at all if it had not agreed on the clause
insisted upon by a third country.33 The provisions generally exclude from treaty
benefits, however, resident companies which are controlled by non-resident
shareholders, even when these shareholders are resident in another EU Member State.
While the “good residents” test in several Member State/US Treaties may safeguard
the ‘limitation on benefits’ clauses from ECJ attack, it remains to be seen whether the
reasoning in the Open Skies cases may be further extended. In these (non-tax) cases,
the court struck down a similar nationality clause in the bilateral aviation agreements
of eight Member States with the US.34 Treaties concluded after the Open Skies case
and containing limitation on benefit provisions may be found to be in violation of the
fundamental freedoms.
Concluding Comments
When examining cases for compatibility with the provisions of the EC Treaty, the
ECJ has been seen to adopt a three-step approach. It first asks if there has been a
breach of one of the fundamental freedoms enshrined in the Treaty. If the answer is
yes, it then asks whether the measure can be justified by pressing reasons of public
interest. If the answer is again yes, it asks if the measure is proportionate, in the sense
of not going beyond what was necessary to ensure achievement of the aim in question.
Member States have invoked justifications based on overriding public-interest reasons,
but each of the following attempted justifications has been rejected, in one way or
another, by the ECJ:
- the risk of tax avoidance. The ECJ consistently rejects this justification if
the legislation at stake does not have the specific purpose of preventing
wholly artificial arrangements.
- the loss of tax revenue. A reduction in tax revenue cannot be regarded as
an overriding reason in the public interest to justify a measure which is in
principle contrary to a fundamental freedom.
- other tax advantages. Unfavourable tax treatment contrary to a
fundamental freedom cannot be justified by the existence of other tax
advantages, even if those advantages exist.
- the existence of lower tax rates in other Member States.
- that harmonisation has not been achieved. In the absence of harmonisation
at Community level, the Member States must nevertheless comply with
Community law.
33 The clauses are particularly common in treaties concluded with the US, indicative of US insistence
on their inclusion.
34 (Cases C471-472/98 and 475-476/98) [2001] ECR I-9427.
17