The Principal Purpose Test under BEPS Action 6: Does the OECD Proposal Fit the EU Legal Framework?

Abstract: On October 5, 2015, the Organization for Economic Cooperation and Development published the final package of 15 actions under the BEPS initiative. This package, in particular, includes the Final Report on Action 6 – ‘Preventing the granting of treaty benefits in inappropriate circumstances’, which is intended to provide countries with the ‘minimum level of protection against treaty abuse’. To that end, the principal purpose test (so-called ‘PPT’ rule) is to be implemented into double tax treaties. In general, although the BEPS proposal is soft law and cannot take precedence over EU law, it nonetheless has been committed to gradual implementation by the Member States and thus may cause a number of problems. In particular, BEPS actions and EU law, namely fundamental freedoms might be intrinsically difficult to reconcile. The EU freedoms are the cornerstone of the single market and aim at securing free movements to ensure neutrality between domestic and cross-border transactions, while BEPS rules seek to counteract aggressive tax planning schemes that naturally cannot be used in domestic situations. Therefore, should BEPS actions were implemented, they would impose a restrictive or discriminatory tax treatment on cross-border transactions merely because they involve more than one state. In this respect, the PPT provision proposed under BEPS Action 6 is not an exception. In this master thesis, the author continues the discussion on BEPS and its compatibility with EU law, focusing specifically on the PPT rule. The major research question is whether a Member State could implement the proposed rule into its double tax treaties in compliance with EU law. In addition, the PPT formula chosen by the European Commission in the recently released Anti-tax avoidance package is also analyzed. The author deduces that the PPT rule frustrates the exercise of the freedom of establishment and/or free movement of capital. Further, considering the Court of Justice of the European Union’s case law, this restriction is unlikely to be justified by the overriding reason of public interest. What is more, it has been shown that even supposing that the PPT is justified, neither the BEPS proposal nor the European Commission’s recommendation fulfils the requirements of the principle of proportionality. As a conclusion remark, the present research stresses that in order to be consistent with EU law, the Member States are to consider the PPT carefully before implementing either BEPS proposal or European Commission’s recommendation.