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Taxation and Customs Union

Harmful tax competition

Code of Conduct

The Code of Conduct for business taxation was set out in the conclusions of the Council of Economics and Finance Ministers (ECOFIN) of 1 December 1997. The text of these conclusions
The Code is not a legally binding instrument but it clearly does have political force. By adopting this Code, the Member States have undertaken to

  • roll back existing tax measures that constitute harmful tax competition and
  • refrain from introducing any such measures in the future ("standstill").

The Council, when adopting the Code, acknowledged the positive effects of fair competition, which can indeed be beneficial. Mindful of this, the Code was specifically designed to detect only such measures which unduly affect the location of business activity in the Community by being targeted merely at non-residents and by providing them with a more favourable tax treatment than that which is generally available in the Member State concerned. For the purpose of identifying such harmful measures the Code sets out the criteria against which any potentially harmful measures are to be tested.

The Code of Conduct requires Member States to refrain from introducing any new harmful tax measures ("standstill") and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code ("rollback"). The code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on the location of business in the Union.

The criteria for identifying potentially harmful measures include:

  • an effective level of taxation which is significantly lower than the general level of taxation in the country concerned;
  • tax benefits reserved for non-residents;
  • tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;
  • granting of tax advantages even in the absence of any real economic activity;
  • the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD;
  • lack of transparency.

The EU's Finance Ministers established the Code of Conduct Group (Business Taxation) at a Council meeting on 9 March 1998, under the chairmanship of UK Paymaster General Dawn Primarolo, to assess the tax measures that may fall within the scope of the Code of Conduct for business taxation.

In a report of November 1999 the Group identified 66 tax measures with harmful features (40 in EU Member States, 3 in Gibraltar and 23 in dependent or associated territories).

The text of this report .

Member States and their dependent and associated territories have now introduced or are in the process of introducing revised or replacement measures in substitution for the 66 measures.

For beneficiaries of those regimes on or before 31/12/2000, a "grand-fathering" clause has been provided under which benefits have to lapse no later than 31/12/2005, independently of whether or not they were granted for a fixed period. Some extensions of benefits for defined periods of time beyond 2005 have been agreed for measures in Member States and their dependent and associated territories.

Since then, the Code of Conduct Group has been monitoring standstill and the implementation of rollback and reported regularly to the Council.

OECD - Harmful tax practices

Following a report in 1998 ("Harmful Tax Competition: An Emerging Global Issue") the OECD (Organisation for Economic Cooperation and Development) created a special forum, "Forum on Harmful Tax Practices".

To end harmful tax practices the work of the Forum has focussed on three areas:

  • Harmful tax practices in Member Countries;
  • Tax havens;
  • Involving non-OECD economies.

The Forum has produced three progress reports. Furthermore, together with cooperative tax havens the Forum has produced a "Model Tax Agreement on Exchange of Information in Tax Matters".

In the framework of its work on Base Erosion and Profit Shifting (BEPS) the OECD has agreed on recommendations on a number of issues in October 2015 including:

  • Hybrid mismatch arrangements (Action 2)
  • Transparency of rulings (Action 5)
  • Patent boxes (Action 5)

All relevant information (including reports) on this work is available on this website.

Other EU work related to harmful tax practices

In September 2004 the Commission adopted a Communication on Preventing and Combating Financial and Corporate Malpractice (COM (2004) 611), which provides a strategy for co-ordinated action in the financial services, company law, accounting, tax, supervision and enforcement areas, to reduce the risk of financial malpractice (see press release IP/04/1164 ). In the tax field, the Commission suggests more transparency and information exchange in the company tax area so that tax systems are better able to deal with complex corporate structures. The Commission also wishes to ensure coherent EU policies concerning offshore financial centres, to encourage these jurisdictions also to move towards transparency and effective exchange of information.

The Commission on 28 April 2009 adopted a Communication identifying actions that EU Member States should take to promote "good governance" in the tax area (i.e. more transparency, exchange of information and fair tax competition). The Communication identifies how good governance could be improved within the EU. It also lists the tools the EU and its Member States have at their disposal to ensure that good governance principles are applied at international level. Finally, it calls on Member States to adopt an approach that is more coherent with good governance principles in their bilateral relations with third countries and in international fora. The Communication builds on the existing EU policy on good governance and the 2 April G20 conclusions concerning uncooperative tax jurisdictions. See the Communication and the press release (IP/09/650 ).

The Action Plan adopted by the Commission on 17 June 2015 for fair and efficient corporate taxation in the EU also dealt with issues related to harmful tax practices and to the work of the Code of Conduct Group.

The Anti Tax Avoidance Package adopted on 28 January 2016 is part of the Commission's ambitious agenda for fairer, simpler and more effective corporate taxation in the EU. The Package contains concrete measures to prevent aggressive tax planning, boost tax transparency and create a level playing field for all businesses in the EU.

Fiscal State Aid

As part of the commitment in the Code of conduct on business taxation (cf. paragraph J of the Code) the Commission committed itself to publishing guidelines on the application of the State Aid rules to measures relating to direct business taxation - these were adopted by the Commission on 11 November 1998 (see Commission notice 98/C 384/03 in Official Journal C 384 of 10/12/1998 p. 3) .

The latest Commission report on the action taken by it in the field of tax aid was adopted by the Commission on 9 February 2004.


The tax systems in Member States also have to be in line with Community State aid rules. According to Article 87, paragraph 1 of the EC Treaty any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market. State aid rules apply regardless of the form the aid is given in, i.e. any kind of tax relief can constitute State aid if the other criteria are fulfilled.

However, even if a measure fulfils the criteria for being State aid there are a number of situations where an aid can be deemed as compatible State aid (cf. Article 87, paragraphs 2 and 3 of the EC Treaty). Furthermore, the Commission has issued a large number of regulations, notices, guidelines, frameworks and communications in the area of State aid. In particular, in the area of direct taxation the Commission has issued a notice on the application of State aid rules to measures relating to direct business taxation in 1998 and a report from 2004 on the implementation of that notice (see link below to the website of the Directorate-General for Competition).

It is the Directorate-General for Competition that is mainly responsible for State aid (including most tax measures). However, in cases falling under the competence of the Directorate-General for Agriculture, Fisheries or Energy and Transport those directorates are responsible. Questions concerning specific cases should therefore be asked directly to those directorates.


Directorate-General for Competition

Directorate-General for Agriculture

Directorate-General for Fisheries

Directorate-General for Energy and Transport