TAX NEWS - DECEMber 2009

Eu tax: Lisbon Treaty enters into force

The Lisbon Treaty entered into force on 1 December 2009 following its ratification by all 27 EU Member States. Originally signed in 2007 following the rejection of the European Constitution in referenda held by Member States, the Lisbon Treaty is designed to streamline EU institutions and help the expanded EU function more democratically and effectively in international affairs.

Some of the main effects of the Lisbon Treaty relevant to direct taxation are as follows:

- The Lisbon Treaty amends the EU Treaty and the EC Treaty. The EC Treaty has been renamed the Treaty on the Functioning of the European Union (TFEU) and will continue to provide the basic rules relevant for, among other areas, direct taxation at the EU level. Such rules include the basic freedoms, the rules on competition and the limited conferral of legislative powers to the Council and judicial review by the European Court of Justice (ECJ), including in tax matters.

- The EU created under the Treaty on the European Union (TEU/Lisbon) and the TFEU now has, for the first time, full legal personality and replaces and succeeds the European Community. Therefore, all secondary legislation (e.g. the Parent

-Subsidiary, Interest and Royalties, Merger, Taxation of Savings and the Mutual Assistance Directives) remain in place and the EU has assumed the legal position of the EC under international agreements with third countries (e.g. concerning the taxation of savings in the form of interest payments).

- The European Charter of Fundamental Rights of the European Union of 7 December 2000, as adapted at Strasbourg on 12 December 2007, has become directly legally binding and has the same legal effect as the TEU/Lisbon and the TFEU. Furthermore, the EU will accede to the European Convention for the Protection of Human Rights and Fundamental Freedoms. Both sets of fundamental rights will be relevant for all actions of the EU.

- The numbering of the EC Treaty provisions has changed, although it generally can be stated that the material scope of the provisions have not changed insofar as their relevance to direct taxation:
     . General nondiscrimination principle: article 18 TFEU (previously article 12 EC);
     . General principle of free movement and residence of EU citizens: article 21(1) TFEU (previously article 18(1) EC);
     . Free movement of workers: article 45, et seq. TFEU (previously article 39, et seq.);
     . Freedom of establishment: article 49, et seq. TFEU (previously article 43, et seq. EC);
     . Freedom to provide services: article 56, et seq. TFEU (previously article 49, et seq. EC);
     . Free movement of capital and payments: article 63, et seq. TFEU (previously article 56, et seq. EC);
     . Prohibition of state aid: article 107, et seq. TFEU (previously article 87, et seq. EC);
     . Limited conferral of powers to harmonize the direct tax rules of the Member States: article 114, et seq. TFEU (previously article 95, et seq. EC);
     . Infringement procedures of the European Commission against Member States: article 258 TFEU (previously article 226 EC);
     . Referrals by national courts to the ECJ: article 267 TFEU (previously article 234 EC).

- As regards state aid, the Council may decide five years after the Lisbon Treaty's entry into force that aid granted to the economy of certain areas of Germany affected by the former division of Germany will no longer be regarded as per se compatible with the internal market. New wording is included in TFEU that aid to promote the economic development of Guadeloupe, French Guiana, Martinique, Réunion, Saint Barthélemy, Saint Martin, the Azores, Madeira and the Canary Islands may be considered compatible with the internal market due to their structural, economic and social situations. Further, the TFEU specifically provides that the Commission may adopt regulations relating to categories of state aid the Council has decided to exempt from the prior notification requirement. It remains to be seen, however, whether any of these clarifications will require the Commission to revise its general and individual state aid decision practice.

- Although the role of the European Parliament has been strengthened in other areas, the approximation of fiscal provisions of the Member States remains reserved for the Council deciding unanimously on proposals of the Commission and after consulting with the European Parliament and the Economic and Social Committee. Additionally, in response to the negative results of the first 2008 referendum on the Lisbon Treaty in Ireland, the heads of government of the 27 EU Member States have agreed "that nothing of the Treaty of Lisbon makes any change of any kind, for any Member State to the extent or operation of the Union's competences in relation to taxation."

- Article 293 EC, which provided that Member States would, insofar as necessary, enter into negotiations with each other with a view, inter alia, to securing for the benefit of their nationals the abolition of double taxation within the Community, has been repealed and not rolled over into the TFEU. The provision did not directly confer rights upon EU citizens and in the field of direct taxation only the Arbitration Convention referred to the article. Even though the provision was generally regarded as confirmation that a goal of the EC Treaty was the abolition of double taxation, the ECJ has held that double taxation as such is not generally prohibited within the EU and may be permitted, for example, as a result of the nondiscriminatory application of the national tax laws of different Member States.