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After an intense political debate, the European Anti-Tax Avoidance Directive (ATAD) was finally approved by the Council on 12 July 2016. In essence, ATAD will require Member States to transpose into their domestic laws, as a general rule by 31 December 2018, certain measures forming part of the G20/OECD Base Erosion and Profit Shifting action plan. ATAD is indeed intended to set a common minimum framework against aggressive tax planning with a view to avoid a fragmentation of the internal market. In particular, CFC rules, which have only led to recommendations at the OECD level (BEPS action 3) and which are currently not applied by all Member States, become a minimum standard under ATAD. In this area, the new directive allows however a bias in favour of business operations conducted within the internal market by permitting Member States to apply their CFC rules more broadly to subsidiaries and permanent establishments located in non-EEA countries such as Switzerland. This policy is also confirmed by the proposals for directives first on a Common and then Consolidated Corporate Tax Base (CCCTB) which were released by the Commission on 25 October 2016.
In this contribution, we argue that this policy approach to CFC rules, which has a protectionist flavour, is not justified, contradicts and goes beyond the BEPS agenda which ATAD seeks to implement. Under EU law, the ATAD CFC rule is also difficult to reconcile with the principles of subsidiarity and proportionality (art. 5 TEU). Further, we also hold the view that a domestic CFC rule designed according to ATAD and applying to third countries such as Switzerland beyond wholly artificial arrangements could possibly be regarded as an unjustified restriction to free movement of capital (art. 63 TFEU). This is because the ATAD CFC model potentially applies to cases in which the parent company is merely entitled to receive more than 50 % of the profits of the subsidiary. As a result, according to the recent case law of the CJEU, in a third country scenario, this may be enough to attract the rule within the scope of free movement of capital, even if the parent company has a controlling interest in the concrete case.
Finally, the application of a CFC rule to Swiss based subsidiaries or permanent establishments without any carve out for genuine business activities appears problematic under the EU-Swiss joint statement of October 2014 on corporate taxation in which the parties have expressly agreed that the application of anti-abuse rules «needs to be justified» i.e. proportionate. In light of this joint statement, we believe that the same carve out should mandatorily be applied by Member States to both EU and Swiss based operations. Finally, and from a more concrete perspective, the present contribution looks at selected CFC legislations (France, Germany and Italy) and considers practical issues such as the existence and scope of a carve out clause with respect to third countries, the issue of voluntary increase of the tax liability to avoid CFC legislation and, in the event the latter is applicable, the possibility to avail of incentives (notional interest deduction, patent box, etc.) generally available to residents at the parent company level.
