Article: The De Minimis Exclusions in the ATAD’s CFC Rules: A Normative Analysis

Abstract

This study undertakes a normative analysis of the four de minimis exclusions in the controlled foreign company (CFC) rules of Article 7 of the European Union’s (EU’s) Anti-Tax Avoidance Directive (ATAD). In the EU, CFC legislation inherently restricts either the freedom of establishment or the free movement of capital. Case law from the Court of Justice of the European Union (CJEU) confirms that, for this restriction to be permissible, the scope of application of CFC legislation must be limited to only capture income from wholly artificial arrangements. First, this study evaluates the design of the four different de minimis exclusions in Article 7 against their stated objective to limit the administrative burden and compliance costs in order to ascertain their (relative) effectiveness. Second, the normative coherence of these provisions is evaluated in the context of the limited application – only to cases of abuse – of the CFC rules in the EU. The study finds that the de minimis exclusions pertaining to Model A (in Article 7(3)) are only effective to a limited extent in achieving their objective and could be redesigned to improve their effectiveness. Further, those pertaining to Model B (in Article 7(4)) are not normatively coherent in an EU context. Therefore, their inclusion cannot be justified, and it is recommended that they be deleted.