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  • EU Law & UK Tax – A ‘High Level’ Analysis


    This note is a ‘high level’ analysis of the impact of EU law on the UK tax system and some of the protections that EU law might provide a taxpayer.


    EU law affects the UK tax system in a number of ways. This includes:

    • The four treaty[1]freedoms:
      • Free movement of Goods;
      • Free movement of Workers;
      • Freedom of Establishment; and
      • Freedom of Movement of Capital
    • State Aid rules – these can act to prohibit and / or restrict the application of tax reliefs (eg R&D relief)
    • EU Directives, including:
      • Parent-subsidiary directive
      • Interest and royalty directive
      • Merger directive
    • VAT – this is largely a tax borne out of the EU VAT directive

    This note focuses on the treaty freedoms and, specifically, the Freedom of Movement of Capital (“FMC”) and the Freedom of Establishment (“FE”)[2].

    Primacy of EU law

    EU law has primacy over UK law[3]whilst the UK remains part of the EU. Like any other member state, the UK must therefore conduct its tax system in a manner that conforms with EU law.

    Freedom of Movement of Capital (“FMC”)[4]

    Under this freedom, there is a prohibition on fetters restrictions on the movement of capital:

    • Between member states; and
    • Between member states and so-called Third Countries

    Similar restrictions also apply to ‘payments’.

    A Third Country is shorthand for Non-EU member states. As such, FMC applies where there is a transfer of capital from a member state to one outside of the EU (or vice versa) . FMC is the only one of the four treaty freedoms where this is the case.

    In respect of Third Countries, one needs to be aware of the ‘standstill agreement’[5]. Broadly, this means that certain restrictions that already existed at 31 December 1993 remain are allowable.

    This seems quite a significant carve out, especially when one considers that most UK anti-avoidance measures were in force at this date. However, amendments to these provisions[6]since this time have been so numerous that it must be doubtful that the standstill agreement applies to these.

    FMC applies absent any economic activity, unlike FE. As such, FMC can apply to gifts and inheritances.


    Freedom of Establishment (“FE”)[7]

     The EU prohibits any fetter on the Freedom of Establishment of nationals of a Member State in the territory of another Member State.

    This can be distilled in to two significant prohibitions:

    • Member State 1 cannot restrict nationals of Member State 2 from establishment in Member State 1; and
    • Member State 1 cannot restrict nationals of Member State 1 from establishing in Member State 2

    In Cadbury Schweppesthe European Court of Justice stated that the:

    “…objective is to allow a national of a member state to set up a secondary establishment in another member state to carry on his activities there and thus assist economic and social interpenetration within the Community in the sphere of activities as self-employed persons”

    It goes on to say:

    “To that end, [FE] is intended to allow a Community national to participate, on a stable and continuing basis, in the economic life of a member state other than his state of origin and to profit therefrom.”

    There is a requirement that there is both:

    • Actual establishment of a fixed establishment in the member state; and
    • The pursuit of a genuine economic activity there. Passiveinvestment is not an establishment[8]

    It should be noted that FE applies to “undertakings” so, as well as applying to Companies, FE also applies to trusts[9].  All interested parties – settlors, trustees and beneficiaries – hold rights.

    FE also applies to a self-employed person as well.

    Permitted restrictions  

    A restriction to a treaty freedom may be permitted where:

    • It is justifiable; and
    • It is proportionate

    Justification often comes down to whether there is an “abuse” of the freedom[10].  In Cadbury Schweppes it was held that a company established in a Member State to avoid tax was not, in itself, an abuse of FE.

    In the same case, it was set out that:

     “for a restriction… to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct… involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.” 

    Even where a measure to restrict a freedom is found to be justified, then it may not be proportionate. In other words, is the restriction targeted appropriately such that it only applies to cases of abuse.

    In this regard, in Fisher v HMRC it was found that the Transfer of Assets Abroad provisions were neither justified nor proportionate. Proportionality is a general issue with UK tax avoidance provisions.

    No discrimination in domestic law

    It should be noted that the UK has failed in its arguments that there cannot be an infringement of EU Treaty Freedoms in cases where there is no discrimination in the domestic law concerned.

    In Cadbury Schweppes, it was argued by the UK government that a CFC charge on non-resident subsidiaries of UK resident parents was not an infringement as a similar amount of tax would have been excised on resident subsidiaries.

    However, the CJEU disagreed with this argument:

    “That difference in treatment creates a tax disadvantage for the resident company to which the legislation on CFCs is applicable. Even taking into account, as suggested by the United Kingdom, Danish, German, French, Portuguese, Finnish, and Swedish Governments, the fact referred to by the national court that such a resident company does not pay, on the profits of a CFC within the scope of application of that legislation, more tax than that which would have been payable on those profits if they had been made by a subsidiary established in the United Kingdom, the fact remains that under such legislation the resident company is taxed on profits of another legal person. That is not the case for a resident company with a subsidiary taxed in the United Kingdom or a subsidiary established outside that Member State which is not subject to a lower level of taxation.”

    The test therefore is not whether the position would have been different had the taxpayer concerned established (or re-established) in the UK (or there had been a movement of capital within the UK). Rather the question is whether the national provision restricts the right to establish in another EU MS or whether it restricts the free movement of capital to other EU MS or third countries. This was accepted in Fisher.

    EU Tax Avoidance Directive

    A new EU directive regarding cross border tax arrangements will need to be taken in to account by intermediaries such as accountants, tax advisers and lawyers.

    Further information can be found at


    Brexit raises a number of issues in the context of the analysis above.

    Until Brexit takes effect, EU law will continue to apply to the UK and, under the European Union (Withdrawal Act) 2018, the intention is that any divergence will only be gradual.

    It seems rather unlikely that any EU law will be amended retrospectively. However, it is likely that, as time passes by, HMRC will feel less bound by EU law that adversely impacts their ability to maximise revenues.

    This is clearly an area that will need to be monitored as the situation develops.

    If you have any queries about this article, or EU law and UK tax, then please get in touch

    [1]Treaty on the Functioning of the European Union (“TFEU”)

    [2]Does it matter whether FMC or FE applies? Generally, the answer here is no.

    [3]Thoburn v Sunderland City Council,aka the Metric Martyrs

    [4]Article 63 of TFEU

    [5]Article 64 of TFEU

    [6]For example, see the numerous changes to the Transfer of Assets Abroad provisions since this time

    [7]Article 49 of TFEU

    [8]Centro di Musicologia Walter Stauffer v Finanzant Munchen fur Korperschaften[2008] STC 1439

    [9]Olsen v Norwegian StateCase E-3/13

    [10]There are other justifications – including loss of revenue, preventing evasion, counteracting non-residence tax advantage etc