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Ref. Ares(2015)1978122 - 11/05/2015
ROOM DOCUMENT # 5    
Code of Conduct Group (Business Taxation) 
30 January 2013 
ORIGIN: Commission 
 
 
WORK PACKAGE 2011 – PREPARATION OF GUIDANCE NOTES 
REVISED DRAFT GUIDANCE 
 
Introduction 
1.  On 19 December 2011 the Council approved the Code of Conduct Group's 2011 Work Package 
as set out in the annex to document 17081/1/11 REV 1 FISC 144 and asked the Group to start 
working on this package during the Danish Presidency (18398/11 FISC 167).  Point 4 of the 
Work Package concerned the preparation of guidance or application notes.  It stated that: 
While noticing that past assessments will not be affected, the Group will undertake efforts to 
consolidate, per type of regime, various case-by-case assessments into general guidance or 
application notes for future use. Initially, these efforts will concentrate on regimes concerning 
income from mobile capital (intangibles and debt claims) and on regimes for free zones or special 
economic zones. 

2.  At the Code Group meeting on 17 April 2012, the Group held an initial debate on this process. 
It agreed to limit work to four different categories (interest regimes, royalty regimes, 
intermediary regimes and special economic zones).  It discussed and agreed the overview of 
regimes for these categories and the annotated descriptions and characteristics prepared by the 
Commission as an annex to room document #5 of 17 April 2012.  The Group decided to move 
forward by asking the Commission to prepare the necessary documents for that purpose. 
3.  To that extent, the Commission prepared draft guidance which was discussed at the meeting of 
10 September and again at that on 17 October 2012 following Member States' written 
comments on the draft.  At the second meeting it was agreed that COM would revise the draft 
guidance and clarify its status, taking Member States' comments into account.  
4.  This was presented in room document 2 at the meeting on 8 November 2012.  Several MS 
raised points at the meeting.  A deadline for the submission of written comments after the 
meeting was set as 16 November 2012. 
Comments Received 
 
  
 
 
 
 
 
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Annex 1 
Draft guidance for regimes concerning interest, royalties,  
intermediaries and special economic zones 
 
I. 
Introduction 
 
Purpose of the Guidance 
1.  The guidance set out below is based on past decisions of the Code of Conduct Group and is 
intended to improve the transparency of the Code Group's work.  It is also intended to help 
Member States as well as third countries identify more easily potentially harmful tax measures 
covering beneficially owned income received under four specific types of regime.1 
2.  The guidance neither replaces the principles and criteria of the Code of Conduct nor prejudges 
the harmfulness of any particular regime.  The guidance presents a non-exhaustive list of 
elements and characteristics which indicate that a tax measure may be harmful when fully 
assessed2 against the criteria in the Code.  Every assessment will continue to be based on the 
five criteria of the Code of conduct on a case-by-case approach. 
3.  The purpose of the text is to provide a guide for the application of the criteria in the Code but it 
does not go beyond those criteria nor does it limit them. The guidance can never provide a safe 
harbour for a particular regime.  A tax measure that is the object of particular scrutiny or that 
requires particular attention under the guidance may be found non-harmful by the Code Group; 
likewise a measure that is not the object of particular scrutiny or that does not require particular 
attention under the guidance may be found to be harmful when assessed by the Group. 
4.  The purpose of the guidance is not to confine the Group to applying pre-determined general 
criteria; rather it should continue to subject each particular regime to a case by case 
examination against the Code criteria in the light of the Group's guiding principles set out in 
document 16410/08 FISC 174.3 
 
 
                                                            
1 IT. 
2 LU. 
3 BE & LU. 
 
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Annex 1 
 
Relationship with past assessments 
5.  As the Work Programme originally noted past assessments will not be affected by the 
guidance. Likewise, regimes that have not been considered by the Group cannot be regarded as 
complying with the Code on the basis of this4  guidance. The current procedure for reopening 
past assessments remains in place. 
 
Review of Guidance 
6.  The countering of harmful tax measures is an ongoing process; therefore the guidance notes 
could be periodically reviewed by the Code Group to ensure that they reflect future 
developments. 
 
II.  Regimes offering privileged treatment for interest income 
7.  In view of the high mobility of capital and their potentially significant harmful effects for other 
Member States, tax regimes of a Member State providing beneficial treatment (within the 
meaning of paragraph B of the Code of Conduct) for interest income compared to the general 
tax treatment for business income in that Member State will be the object of particular scrutiny 
by the Code of Conduct Group, taking special account of the circumstances listed in paragraphs 
9 to 11 below. 
8.  Beneficial treatment, whether granted by law or as an administrative practice, includes but is 
not limited to: 
a.  the non-inclusion in or exemption from the tax base of interest income, whether in whole or 
in part; 
b.  situations in which the tax base for interest income is determined in an artificial way, for 
example, if it is not determined using the arm's length principle or if it relies on a formulary 
                                                            
4 BE. 
 
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Annex 1 
approach such as pre-determined margins or non-arm's length mark-ups on operating5 
expenses, or; 
c.  the allowance of a deduction for deemed expenses such as deemed interest or management 
charges, a contribution to a risk reserve or deemed profit allocations to or from foreign 
permanent establishments where this departs from internationally accepted principles, 
notably the rules and guidance agreed within the OECD 6.7 
9.  In view of the Code's substance criterion and the high mobility of capital, interest regimes will 
require particular attention especially where, whether in law or in fact, the beneficial treatment 
is not generally available and targets non-trading interest income. This would be the case if the 
regime: 
a.  does not allow domestic commercial activities or; 
b.  does not require substance in terms of8 economic presence.  
10.  In view of the high risk of international tax planning and its corresponding harmful effects on 
other Member States, such regimes will require particular attention especially where, whether 
in law or in practice, the beneficial treatment is not general and benefits intercompany and 
cross border interest income. A non-limitative and non-cumulative list of indicators in this 
respect are: 
a.  the regime does not apply to all companies, for example, if it requires the beneficiary to be 
part of an international group; 
b.  the regime does not apply to all interest income, for example when it mainly affects foreign 
source interest income or to financial transactions carried out with non-residents, or; 
c.  the beneficial regime is linked to specific limitations on the deduction of domestic expenses.  
11.  In view of the Code's reference to the location of business activity in the Community a tax 
measure may be potentially harmful if it is not genuinely intended to contribute to a Member 
State's economic objectives such as the stimulation of economic growth or innovation.  
                                                            
5 IT. 
6 IT. 
7 LU & NL. 
8 LU. 
 
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Annex 1 
Indicators of a fiscal purpose rather than a genuine intention to promote economic objectives 
might be: 
a.  the policy purpose underlying the legislation, as supported for example by consultations and 
data prepared when introducing the regime;  
b.  evidence that the regime leads to de facto ring-fencing, i.e. the majority of the companies 
under the regime are 9foreign owned. 
 
III.  Regimes offering privileged treatment for royalty income 
12.  In view of the relatively high mobility of intangibles and their potentially significant harmful 
effects for other Member States, tax regimes of a Member State providing beneficial treatment 
(within the meaning of paragraph B of the Code of Conduct)10 for royalty income compared to 
the general tax treatment for business income in that Member State will be the object of 
particular scrutiny by the Code of Conduct Group.  
13.  Beneficial treatment, whether granted by law or as an administrative practice, includes but is 
not limited to: 
a.  the non-inclusion in or exemption from the tax base in whole or in part of royalty income; 
b.  situations in which the tax base for royalty income is calculated in an artificial way, for 
example, if it is not determined using the arm's length principle or it relies on a formulary 
approach, such as pre-determined margins or non-arm's length mark ups on operating11 
expenses; 
c.  the allowance of a deduction for deemed expenses such as deemed interest expenses, 
deemed management charges, a contribution to a risk reserve or deemed profit allocations to 
or from foreign PEs where this departs from internationally accepted principles, notably 
rules and guidance agreed within the OECD12.13 
                                                            
9 COM (typographical error identified at meeting of 8 November 2012). 
10 NL. 
11 IT. 
12 IT. 
13 LU & NL. 
 
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Annex 1 
14.  In view of the high risk of international tax planning and its corresponding harmful effects for 
other Member States such regimes will require particular attention, especially where in law or 
in fact the beneficial treatment is not general or targets intercompany or cross border royalty 
income.  A non-limitative and non-cumulative list of indicators in that respect are: 
a.  the regime does not apply to all companies, for example it requires the beneficiary to be part 
of an international group; 
b.  the regime does not apply to all such income, for example when it mainly affects to foreign 
source royalty income or to license agreements with non-residents, or; 
c.  the beneficial regime is linked to specific limitations on the deduction of domestic expenses.  
15.  Furthermore, in the light of the potential value of such regimes in stimulating real economic 
activity such as R&D, economic growth and innovation, such regimes will require particular 
attention of the following non-exhaustive list of indicators; 
a.  the regime does not contribute – de-jure or de-facto – an economic advantage for the 
Member State such as the stimulation of R&D because, for example, it attracts passive 
income rather than material investments in scientific research activities; 
b.  the regime does not allow domestic commercial activities or even does not require 
substantial economic presence; 
c.  the legislative motivation and data prepared when introducing the regime does not clearly 
demonstrate the economic motive; 
d.  the regime is not limited to self-developed intangibles, or; 
e.  the regime does not require the performance of activities related to monitoring, preserving 
and maintaining the intangible and its income streams in a manner that is in line with the 
nature and value of the intangible. 
16.  To ensure sufficient transparency the conditions of the regime must be clear and based on 
objective terms and conditions.  A non-exhaustive list of indicators of a potentially harmful 
lack of transparency includes; 
a.  a lack of any limitation in the regime to intangibles officially registered in a formal Register 
 
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Annex 1 
b.  the lack of transparent and objective regulations for embedded royalties in line with OECD 
standards, and; 
c.  a lack of regular audit processes including a material check that all conditions have been met 
before the regime is applied. 
17.  The significance of the beneficial treatment available under the regime (e.g. effective tax rate 
available both in absolute terms and in relation to the generally applicable rate) must be 
considered in relation to the its overall positive economic effects.   If the beneficial treatment is 
not proportionate to the economic objectives attained this may be evidence that a regime is 
potentially harmful. 
 
IV.  Regimes concerning intermediate financing or licensing activities 
18.  Regimes providing advance certainty to intermediary financing or licensing activities, whether 
by law or by administrative practice, will in principle be the object of particular scrutiny by the 
Code of Conduct Group if one or more of the following circumstances apply: 
a.  the regime provides for a standard approach including fixed spreads for intermediary type 
companies rather than relying on a case by case approach taking account of all the facts and 
circumstances involved with particular regard to the functions performed and risks assumed; 
b.  advance certainty provided by a tax administration concerning the profits reported by an 
intermediary company does not comply with the OECD Transfer Pricing Guidelines 
throughout the period to which it relates including the use of an inappropriate transfer 
pricing methodology. 
c.  advance certainty provided by a tax administration is granted de jure or de facto without any 
terminal date or with automatic renewal.  Similarly if a renewal were granted on application 
it would be potentially harmful if such cases were not periodically reviewed by the tax 
authority to ensure an individual examination of the underlying facts and to check the 
conditions are at arm's length. 
d.  The regulations covering the conditions for granting advance certainty for intermediary 
companies are not publicly available; 
 
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Annex 1 
e.  The regulations covering the conditions for granting advance certainty for intermediary 
companies does not ensure effective exchange of information of the methodology applied 
and of the arm's length profit agreed with other concerned MS. 
f.  The regime is not equally available (whether on a de jure or de facto basis) to domestic 
commercial activities or requires no substantial domestic presence. 
 
V.  Tax privileges related to special economic zones 
19.  Without prejudice to the specific and detailed State Aid rules based on Article 107 TFEU, 
business tax privileges available for a special geographic area of a Member State ("special 
economic zones") will be the object of particular scrutiny by the Code of Conduct Group when 
one or more of the following circumstances are met: 
a.  access to the zone, either de jure or de facto, specifically favours foreign investors or 
discriminates against domestic investors or the tax benefits available to companies operating 
in the zone specifically favour transactions with non-residents or discriminate against 
domestic transactions; 
b.  the regulations for the zone place restrictions on activities that require a substantial 
economic presence or highly mobile activities typical of the banking or insurance industry 
or intra-group services are permitted in the zone; 
c.  there is a lack of regular tax audits verifying that the profits accruing in the zone are 
commensurate with the business activities carried on within in it; 
d.  the terms and conditions for establishing a zone, for being allowed to operate in the zone 
and the benefits available for companies operating in a zone are not clearly defined in public 
legislation, are not limited in time and permission to establish a zone or to be active in a 
zone is subject to discretionary powers. 
 
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Annex 2 
Additional Comments by Members States following Meeting of 8 November 2012 
 
 
 
 
 
 
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Annex 2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Annex 2 
 
 
 
  
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
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Annex 2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
1 Underlined text highlighted by Luxembourg delegation. 
 
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Annex 2 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Annex 3 
 
 
 
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