Neutralizing the Effects of Hybrid Mismatch Arrangements on a EU Level - To what extent can Member States be obliged to align their tax systems to each other?

Abstract: Due to the on-going discussion regarding the OECD/G20 BEPS project and its particular actions it is an important task for the EU legislator to establish a reasonable and functional legal framework in order to ensure a certain degree of uniformity of Anti-BEPS measures within the European Union. In doing so, the protagonists must respect the boundaries set to domestic law as well as to measures of secondary legislation by primary EU law. With regard to hybrid financial instruments the European Commission recently made efforts in order to align the tax treatment of hybrid payments between Member States. These efforts include particular amendments to the Parent-Subsidiary Directive as well as a specific provision on this subject in the recently proposed Anti-Tax Avoidance Directive. Even though the concepts used in both Directives may differ, the targeted result is, in any case, the alignment of the legal systems of two Member States in order to achieve symmetrical taxation of hybrid financial instruments. From a EU law perspective, however, it can be questioned whether such an alignment meets the requirements of primary law. The case law of the CJEU on the interpretation of the fundamental freedoms provided for by the TFEU demonstrates considerably potential inconsistencies. Whenever the application of linking rules would leave a taxpayer in a less favourable situation, its right of free movement might be infringed. It is not reasonable for the CJEU to take into account deviating tax consequences in another Member States. Neither is it the competence of the CJEU to rule about double taxation or double non-taxation as both phenomena are simply the consequence of differences in the Member States tax systems. Due to the lack of harmonization in the field of direct taxation such disparities are not assessable in the light of EU law. It can further not be assumed that an infringement of the fundamental freedoms caused by linking rules can be justified by overriding reasons of public interest. The target pursued by linking rules, namely, to prevent double non-taxation by ensuring that every income is taxed once somewhere, does not fit in the current legal landscape of the EU as it undermines the sovereignty of the Member States. As long as the CJEU refuses to interpret the fundamental freedoms as not prohibiting double taxation, restrictive measures with the aim to tackle double non-taxation, which have their origin in the different tax systems, cannot be justified by overriding reasons of public interest. It will be seen whether or not the CJEU will acknowledge linking rules and the alignment of Member States tax systems as an appropriate measure. Without any doubt, a case will find its way to the CJEU in the near future.