Freedom of establishment and free movement of capital are of utmost importance for taxpayers avoiding taxation under EU law insofar as they allow them to freely divert income to any Member State or third country respectively. The freedoms are directly available to EU nationals, both individuals and companies, and indirectly to non-EU individuals or companies that established a company under the law of a Member State.1 In the latter case, a company resident in a third country, for example US MNE, can establish a subsidiary under the Dutch company law and if this subsidiary has a real and continuous link with the territory of the Netherlands, i.e. it is not a mere registered office without any economic substance and purpose, but has central administration or principal place of business in the Netherlands, then
1 C-212/97, paragraph 19 and C-208/00 paragraphs 74-75.
5 it benefits from EU law, including primary law (e.g. fundamental freedoms)2 and directives (e.g. Parent-Subsidiary Directive3 or Interest & Royalties Directive).4 Considering that the US MNE wholly owns its Dutch subsidiary, directly or indirectly, the subsidiary is fully controlled by its US parent and therefore it may be used for any purpose, including receiving and transferring income for tax avoidance purposes. It is also noteworthy that the subsidiary will most likely be considered – functionally – a CFC5 of the US MNE (legally speaking this may not be possible under check-the-box rules as applied by the US MNE).6
Depending on the transactions involved, the subsidiary (CFC) may be protected by freedom of establishment within the EU or globally by free movement of capital.7 Thus, residents of non-Member States are, as a matter of fact, not restricted from benefiting from EU law indirectly.8 Their attempts to avoid taxation through the use of CFCs under EU law are not excluded from the scope of these benefits as such. This shows that the EU freedoms may be used by EU and non-EU tax residents to avoid taxation via CFCs established in Member States. The freedoms, however, have a different impact on the tax avoidance practices of EU and non-EU tax residents.
To a large extent, the freedoms protect taxpayers before taxation under the domestic anti-avoidance provisions found in the Member State of their tax residence, such as CFC rules.9 The protection follows from the fact that Member States are bound by the concept of the wholly artificial arrangement developed by the Court of Justice of the European Union (CJEU), which significantly restricts the application of their CFC rules.10 By contrast, legally speaking, non-Member States are not bound by this impediment. Tax avoidance by EU tax residents may therefore be less effectively prevented than tax avoidance by non-EU tax residents due to the effect of EU law.11 Now this suggests that currently the EU law still seems to facilitate tax avoidance both for EU and non-EU taxpayers instead of curbing this phenomenon, with a bias in favor of EU taxpayers.
2 Art. 28 (free movement of goods), Art. 45 (free movement of employees), Art. 49 (freedom of establishment), Art. 56 (free movement of services), and Art. 63 (free movement of capital) Treaty on the Functioning of the European Union (TFEU).
3 Parent-Subsidiary Directive (2011/96).
4 Interest & Royalties Directive (2003/49).
5 See infra 2.2.
6 Cf. Fuest et al. (2013), pp. 310-312; Avi-Yonah (2007), pp. 35-37, 132 and 135; Avi-Yonah (2015), p. 42.
7 See Art. 63(1) TFEU. However, the free movement of capital between member states and third countries is subject to several limitations; the most important of them is the so-called standstill clause included in Art. 64(1) TFEU. See also the limitation under Art. 65 TFEU.
8 Cf. O’Shea (2007), p. 373.
9 C-196/04, paragraph 51.
10 See infra section 3.
11 Cf. OECD (2015), paragraph 19.
6 Such a state of affairs is unacceptable if one takes into consideration that tax avoidance via CFCs may seriously distort optimal allocation of resources within the EU by jeopardizing “balanced allocation between Member States of the power to impose taxes”.12 This, in turn, may distort the establishment of an internal market,13 which constitutes one of the most important purposes of the functioning of the EU.14 Hence, Member States should be rather encouraged by EU law to implement and apply effective CFC rules rather than the opposite.
This study aims to verify whether the use of EU law by taxpayers may result in flourishing tax avoidance. The attention is given to tax avoidance with the use of CFC, since this is one of the most frequently used means of avoiding taxation by taxpayers.15 The objective of the study, in addition to the introduction, will be achieved by pursuing the analysis along three main parts of the article, 2-5, followed by the conclusions in part 6. Part 2 provides terminological considerations regarding CFCs, tax havens, low-tax jurisdictions, and CFC tax avoidance. Part 3 focuses on empirical data and schemes16 concerning CFC tax avoidance globally and in Poland. Part 4 includes legal analysis of tax avoidance under EU law. Part 5 provides my solution to effective and EU law-compatible prevention of CFC tax avoidance within the legal framework of EU law. Corresponding conclusions will follow in Part 6.
The issues to be discussed in this study include, among others, economic data that highlight the large-scale tax avoidance practices of Polish taxpayers, as well as a detailed discussion of the examples of three blatant tax avoidance schemes used by Polish taxpayers.
However, these are of global relevance, and do not concern Poland only. Taking Poland as a case study to the mentioned extent is of a special interest for an international audience, especially on account of the dearth of knowledge in the US and other Western Countries about the countries of Central and Eastern Europe (as Poland) where legislatures have had to reconstruct their legal systems after the collapse of the Soviet system (Poland was not part of the Soviet Union, but was under its influence).17 Moreover, the analysis of Poland will show how tax avoidance can increase dramatically when countries become member of the EU.
12 See C-196/04, paragraph 56 and C-446/03, paragraph 46. Cf. more generally negative impact of tax avoidance.
13 Cf. Schön (2008), p. 82. Concurring: Karimeri (2011), p. 314.
14 Art. 3(3) Treaty on European Union (TEU) says that the Union shall establish an internal market. See also Kemmeren (2008), pp. 559 and 585; Cordevener (2006), pp. 4-6, 39 and 43.
15 See OECD (2013), p. 40 and OECD (2015), p. 9.
16 Three selected Polish tax avoidance schemes will be presented and analysed in details (remaining schemes are described in Appendix).
17 Cf. Zweigert and Kötz (1998), p. 17. More precisely, Poland has been classified for comparative tax law purposes to a post-conflict area, see Thuronyi (2003), pp. 33-37 and 43.
7 Beyond that, the discussion is of global focus and relevance, because every taxpayer, regardless of its tax residence within or outside the EU, may practically speaking use the EU law for their tax avoidance purposes.