Saving the ATAD CFC Regime Through Abuse of Law or the Rule of Reason

Abstract

This article revisits the debate about the extent to which the controlled foreign company (CFC) rules in the Anti-Tax Avoidande Directive (ATAD) are compatible with the EU fundamental freedoms. It considers why the ATAD CFC rules may restrict those freedoms and whether that conflict may be resolved by recourse to the general principle of abuse of law, which may prevent a taxpayer from relying on a fundamental freedom and thus prevent the restriction from arising, or to the rule of reason, which may serve to justify the restriction. The paper considers whether these may be treated as separate doctrines and some implications of doing so. The paper reaffirms that the ATAD CFC rules may be considered to be incompatible with the fundamental freedoms as interpreted in Cadbury Schweppes. Then, by reference to recent CJEU decisions, the paper interprets new standards of artificiality and reassesses the aforementioned incompatibility. Firstly, the now expanded anti-abuse principle may, in many instances, prevent the restriction from arising. Secondly, the now more generous rule of reason holds the restriction largely justified in relation to third states, and this should be extended also to intra-EU situations. Ultimately, the ATAD CFC regime is likely to be considered mostly compatible with the fundamental freedoms. Direct tax, EU law, ATAD, CFC rules, Cadbury Schweppes, fundamental freedoms, rule of reason, abuse of law, overriding reason in the public interest, avoidance.