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Taxation and Customs Union

Company Taxation overview

In October 2001 the Commission presented its new plans for the coming years for company taxation in the European Union in a Communication (COM(2001) 582 of 23/10/2001) based on a detailed study (see also press release IP/01/1468 and frequently asked questions MEMO/01/335 ). The Communication identified several steps which could be taken to remove individual tax obstacles to cross-border trade in the Internal Market and the Commission and Member States are currently discussing these. However, the Commission also concluded that in the longer term Member States should agree to allow EU companies to use a single consolidated base for computing tax on their EU-wide profits.

The Commission has since been engaged in intensive follow-up work both on various individual measures to address specific problems in the company tax field and on its long-term proposals for a common tax base.

The Commission presented a follow-up Company tax Communication in November 2003 (COM (2003) 726 - see also press release IP/03/1593 and frequently asked questions MEMO/03/237 ) confirming the commitment taken in the 2001 strategy,

  • reviewing its efforts to remove obstacles affecting businesses operating within the Internal Market and
  • presenting ideas for a pilot scheme that would allow small and medium-sized enterprises to use the tax rules of their home state for computing their EU-wide taxable profits.

In 2005 the Commission proposed a re-launching of the Lisbon strategy, with the focus on growth and jobs (COM (2005) 24 of 2.2.2005 and COM(2005) 330 final of 20.07.2005). The contribution of taxation and customs policies to the Lisbon strategy was highlighted in the subsequent Commission Communication COM(2005) 532 final of 25.10.2005. As far as corporate taxation is concerned, the Commission confirmed its policy to provide companies operating in the single market with a common tax base.


Unlike indirect taxes, the EC Treaty does not specifically call for direct taxes (income and corporate taxes) to be harmonised. However, Article 94 of the EC Treaty provides for approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market. In any event, national tax rules must respect the fundamental freedoms provided for the EC Treaty.

Since the founding of the European Communities, company taxation has received particular attention as an important element for the establishment and the completion of the Internal Market.

Studies like the Neumark Report of 1962 and the Tempel Report of 1970 were followed by a number of initiatives designed to achieve a limited degree of harmonisation of the corporate tax system. The Commission presented a proposal for a directive in 1975 and two, focussed more on loss compensation, in 1984 and 1985. Those were later withdrawn. A draft proposal of 1988 for the harmonisation of the tax base of enterprises was never tabled, due to the reluctance of most Member States. However, EU Member States did early on accept that economic integration will require greater cooperation in the field of tax collection, and Council Directive 77/799/EEC provides for mutual assistance between national tax authorities.

In 1990 the Commission asked a Committee of independent experts chaired by former Dutch Finance Minister Onno Ruding to examine whether differences in corporation tax caused distortions in the Internal Market, particularly as regards investment decisions and competition, and to suggest ways of overcoming this problem. The Committee made specific recommendations (see Report of the Committee of Independent Experts on Company Taxation, Commission of the European Communities , Official Publications of the EC, ISBN 92-826-4277-1, March 1992). The need to eliminate double taxation, ensure effective taxation and prevent tax evasion was recognised by the Council, but there was little progress on some of the more concrete proposals contained in the "Ruding" report.

Recognising the lack of success in progressing existing initiatives, the Commission Communication on company taxation in 1990 (SEC(90) 601) suggested that, subject to the principle of subsidiarity, all initiatives should be defined through a consultative process with the Member States.

On that basis, following Commission proposals which originated in the late 1960s, three measures - two directives and a convention - were finally adopted in July 1990 the Merger Directive 90/434/EEC, the Parent-Subsidiary Directive 90/435/EEC and the Arbitration Convention 90/436/EEC.

A proposal on loss-offset cross-border in the Council (COM(90) 595) has been withdrawn because a revised proposal is forthcoming. In 1994, the Commission withdrew a first proposal aimed at abolishing withholding taxes levied on cross-border interest and royalty payments between associated companies of different Member States, presenting a new one in 1998 which has since been adopted.

The 1990 approach was developed further in 1996/1997 in a Commission Communication (COM(97) 495 of 01/10/1997). The 'tax package', and notably the Code of Conduct for business taxation, have introduced a new dimension to the discussion.

The Single-Market driven approach was supplemented with the objectives of stabilising Member States' revenues and promoting employment which are now taken up and re-assessed in the 2001 Communication on the priorities of EU tax policy. In 1999/2000 the Council, in order to supplement the ongoing work on the 'tax package' which had been agreed by EU Finance Ministers in December 1997, requested the Commission to carry out the comprehensive study on company taxation referred to above.