Tax Design Issues in Respect to Foreign Branches and Controlled Companies and the Feasibility of a Consolidation Area in the EU

Abstract

The Common Consolidated Corporate Tax Base (CCCTB) architecture seems to address the major tax design issues relating to foreign business profits in the EU which result from the intrinsic limitations of domestic tax consolidation systems but would intervene in a scenario in which Member States retain prerogatives in developing their own policies in respect to cross-border profits and losses of affiliated companies. The purpose of this article is to shed light on those policies and on the major tax design issues relating to foreign business profits in the EU in light of the case law of the European Court of Justice (ECJ) and of the potential adoption of the CCCTB Directive. The paper first addresses the tax treatment of foreign branches both in the case in which foreign profits are taxable and in the case in which are exempt in the residence-country (section 2) and then discusses the issues related to the tax consolidation of foreign controlled companies (section 3), with additional remarks about the tax design issues faced by host countries whose tax base can be eroded through certain tax planning strategies by resident companies that are controlled by foreign entities (section 4). The paper concludes by describing the common core of rules already existing at EU level and how this rules are conveyed in the CCCTB model which might be approved through enhanced cooperation (section 5) and finally draws a few conclusions of the feasibility of a residence-based consolidation area in the EU (section 6).