The CJEU recalled that under the Treaty on the Functioning of the European Union (TFEU) Directives are binding as to the result to be achieved, whilst allowing Member States discretion in the choice of form and methods. Nevertheless, this freedom does not reduce their obligation to fully comply with the objectives and obligations and within the deadline set out by the Directives.
The Court then noted that the key issue in the case at hand was whether – based on the wording, context, and objectives of Article 8(7) of the ATAD, Member States are required to transpose that provision in all situations listed in Article 7(2) of the same Directive. In this context, the CJEU noted that a literal interpretation of Article 8(7) introduces a mandatory obligation to grant taxpayers a deduction for the foreign taxes paid in the state of the CFC. Furthermore, the Court took the view that the context of Article 8(7) confirms its literal interpretation. The CJEU based this conclusion on several grounds, as follows:
- Applicability of Article 8(7): the Court upheld the EC’s plea that the text of the Directive extends the obligation to allow a deduction for taxes paid in the CFC’s jurisdiction to both Model A and Model B.
- Relationship between Model B and the GAAR: the CJEU noted that Model B is a lex specialis that takes precedence over Article 6 of the ATAD on the general anti-abuse rule (GAAR). As a result, Member States cannot choose to deny the deduction of foreign taxes required by Article 8(7) on the grounds of the GAAR.
- Minimum harmonization: the Court held that although Article 3 of the ATAD allows Member States to adopt stricter measures to better protect their tax base, this does not relieve them of the obligation to implement Article 8(7). In that regard, the CJEU recalled its settled case-law under which, in the context of minimum harmonization Directives, stricter national measures are permissible only insofar as they do not seriously compromise the result prescribed by the Directive and are compliant with the TFEU. Moreover, under the same case-law, where a minimum harmonization Directive exhaustively regulates a specific issue, Member States have no discretion to introduce stricter rules in that area. Additionally, Member States are not allowed to adopt measures that are contrary to the obligations imposed by such a Directive. In the case at hand, the Court found that Article 8(7) comprehensively governs the taxpayer’s right to deduct taxes paid by the CFC and leaves no margin of discretion to Member States to refuse or limit its implementation.
The CJEU further held that the above interpretation of Article 8(7) is consistent with the objectives of the ATAD. Referring to the Directive’s Recitals, the Court noted its dual objective: not only to combat tax avoidance and base erosion, but also to prevent the creation of new obstacles to the internal market, including double taxation. In the Court’s view, Article 8(7) contributes to the achievement of these objectives, by eliminating the double taxation that would arise otherwise due to the fact that the CFC income is included in the taxpayer’s corporate income tax base. In the specific case of Model B, the CJEU further noted that, without a credit for foreign taxes, the resulting additional taxation would cause the group’s overall tax burden to exceed the level it would have reached if the artificial arrangement had not been put in place. Under settled case-law, for the purposes of combating base erosion, it is sufficient to neutralize the tax advantage derived from the non-genuine arrangement.
The Court also rejected Belgium’s plea that its failure to implement a credit for foreign taxes paid by the CFC could be justified on the basis that any resulting disadvantages arose merely from the parallel exercise of taxing powers by different Member States – which is allowed under settled CJEU case-law provided it is non-discriminatory. In this context, the Court noted that the case-law invoked by Belgium applies only in the absence of EU unification or harmonization measures limiting Member States’ competence to allocate taxing powers, whether by treaty or unilaterally, particularly with a view to eliminating double taxation. By contrast, in the case at hand, Articles 7 and 8 of the ATAD constitute harmonization measures that expressly limit Member States’ discretion in this area.
The Court also noted that if Member States were allowed not to implement Article 8(7), taxpayers could face a difference in treatment depending on whether the national legislation applicable to them includes mechanisms to prevent double taxation of CFC income. The CJEU held that such differences would breach the general principle of equality as it would concern comparable situations and it couldn’t be justified by the Directive’s objectives.
In light of the above, the Court concluded that, in order to comply with Article 8(7), Member States are required to grant taxpayers a deduction for the tax paid by a CFC in all cases falling within the scope of Article 7 – namely, under both Model A and Model B.
Please note that Belgium had already modified its CFC rules in December 2023, shifting from model B to model A and implementing article 8(7) of the Directive.