Tricky Taxation: The Evolution of EU Rules Regarding Cross-Border Loss Shifting and Their Impact on Business Locational Decisions

Abstract: Direct tax harmonisation in the EU is the next and perhaps the last step towards complete economic integration after the creation of Economic and Monetary Union. However, because of political sensitivity of taxation only indirect taxes are harmonised in the EU, while direct tax competition between Member States stays. Countries are still free to introduce various tax incentives in order to attract more investments, yet by doing so they risk fulfilling the ‘race to the bottom’ scenario. Differing regulatory tax regimes might foster economic activity, but it can also impede normal functioning of business: tax differentials now have greater importance on the real behaviour of companies and their investment location decisions because other differences within the EU diminish. Focused on a specific tax point - cross border transfer of losses rules- the thesis studies whether there is a need for the EU level direct taxation. The question consists of two interconnected components, a business and a legal one. The business perspective deals with the position that corporate taxation occupies in the MNE’s investment location decisions. The legal perspective investigates the current legal situation in the EU Member States and overviews the EU’s attempts to establish a legal framework for cross- border loss relief as well as the content and implications of the ECJ’s decisions on the freedom of establishment for the harmonisation of corporate taxation issue over transfer of losses in the EU.