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Ref. Ares(2015)1978171 - 11/05/2015
ROOM DOCUMENT # 5 + Annexes 1 and 2    
Code of Conduct Group (Business Taxation) 

20 March 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REVISED DRAFT GUIDANCE 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.  Point 4 of the 
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 
matter.  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.  The Commission therefore prepared draft guidance which was discussed at the meeting 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 the Commission would 
revise the draft guidance taking Member States' comments into account.  
4.  The revised guidance 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. 
5.  A second revised text was presented in room document 5 of 30 January 2013.  Following 
interventions by a number of Member States at the meeting it was agreed that additional 
written comments should be sent to the Commission by 1 March 2013. 
Comments received 
 
 
 
Page 1 of 19 
 

 
 
 
Revised version of the guidance 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
  
   
Rationale for paragraph 15 
 
 
 
 
 
 
 
 
 
 
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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 
 
Relationship with past assessments 
                                                            
1 IT & LU. 
2 LU. 
3 BE & LU. 
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Annex 1 
5.  As the Work Programme originally noted past assessments, and regimes for which the Group 
has agreed in the past that there was no need to assess,  will not be affected by the guidance. 
Likewise,  only 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 
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 
                                                            
4 BE. 
5 IT. 
Page 6 of 19 
 

Annex 1 
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 potential 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 only 
applies to 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.  
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;  
                                                            
6 IT. 
7 LU & NL. 
8 LU. 
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Annex 1 
b.  evidence that the regime leads to de facto ring fencing, i.e. the majority of the companies 
under the regime are foreign 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)9 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 operating10 
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 OECD11.12 
14.  In view of the high risk of international tax planning and its corresponding potential 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: 
                                                            
9 NL. 
10 IT. 
11 IT. 
12 LU & NL. 
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Annex 1 
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 only applies to mainly 
affects 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 if they display any13 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 substance 
in terms of14 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 
b.  the lack of transparent and objective regulations for embedded royalties in line with OECD 
standards, and; 
                                                            
13 COM (5 March 2013). 
14 LU (change in line with that in paragraph 9c; identified at meeting of 30 January 2013) 
Page 9 of 19 
 

Annex 1 
c.  a lack of an audit process to ensure correct application of the regime, including a risk 
assessment approach.15 
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, it being understood that the 
size and openness of a Member State have to be taken into account.   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; 
                                                            
15 UK (30 January 2013). 
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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. 
Page 11 of 19 
 

 
Page 12 of 19 
 

Annex 2 
MS Para 
Comments 
COM's 
response 
LU 

Revised wording in opening sentence proposed by COM 
Accept. 
in response to LU's comments on paragraph 17. 
IT 

IT comments were made in respect of the intermediaries 
Accept. 
regime – recognises that beneficial ownership of the 
relevant income is implicit in the guidance but asks for 
some wording (upfront somewhere in the document) 
stating the “scope” of the guidance in this respect. 
LU 

Insertion of "possibly" before "indicate…may be 
Reject "possibly" as conditionality already present in 
harmful"; replace "considered" with "assessed" and insert 
"may be harmful"; accept "assessed" as more accurate 
"exclusively" to emphasis reliance on Code criteria. 
word; reject "exclusively" as unnecessary. 
LU 

Asks for explanation of paragraph's purpose in the light of  Paragraph 4 was added simply for emphasis hence degree 
the last sentence of paragraph 2. 
of repetition with preceding paragraphs. 
BE, LU

Insertion of reference to document 16410/08 in response 
Accept. 
to comments on paragraphs 11 and 17. 
BE, 

Insertion of reference to regimes which the Group has 
COM's view is that this addition is unnecessary.  No 
LU, NL
decided not to assess. 
regime can be revisited whether or not it has been 
formally assessed by the Group without a broad 
consensus in the Group.  A commitment never to look 
again at regimes that have not been assessed does not 
accord with the consensual approach taken by the Group. 
 
Page 13 of 19 
 

Annex 2 
MS Para 
Comments 
COM's 
response 
BE, 

Insertion of "only" into second sentence. 
COM is not entirely certain what this change means.  It 
LU, NL
appears to distinguish between regimes which the Group 
has decided not assess with regimes which have not been 
discussed at all (e.g. regimes that were never notified or 
regimes in third countries).  COM thinks that BE, LU and 
NL believe that only regimes that have been never been 
discussed at all should not be considered as complying 
with the Code.   
BE 

BE queried the phrasing of the second sentence. 
The comment was intended to prevent regimes that had 
not been considered by the Group from being portrayed 
as Code compliant because they satisfy the guidance.  
The sentence has been amended to make this clear. 
IT 
8b 
Proposed additional wording for clarification purposes; 
Accept. 
avoid suggesting that “pre-determined” applies only to 
margins and not to mark-ups. 
LU 
8c 
Deletion of reference to asymmetric treatment as a recent 
Accept. 
addition to the text and not based on either past 
assessments or criteria in the Code.   
IT 
8c 
Suggested amendment as the current reference to the 
Accept. 
OECD TP guidelines will not cover article 7 of the 
OECD MTC; change to "rules and guidance agreed 
within the OECD". 
Page 14 of 19 
 

Annex 2 
MS Para 
Comments 
COM's 
response 
NL 
8c, 13c 
Suggest deleting the phrase “or where this could 
Accept. 
foreseeably lead to asymmetric treatment” as it is unclear 
and difficult to establish. 
LU 
9b, 15b 
Insert "appropriate for the type of activities" to describe 
Disagree but see alternative proposed text.  In the light of 
an economic presence.   
paragraph B3 of the Code it is appropriate that the 
Guidance reflects the Group's interest in activities that 
require little substance as they typically involve mobile 
passive income.   
BE, 
10 
Qualifying harmful effects of avoidance as "potential". 
Disagree; the document's concern is with the harmful 
LU, NL
effects of international tax planning not with any 
beneficial impact that it may have on MS.  This is not a 
question of legal versus illegal actions but of the harmful 
consequences for MS. 
LU 
10 
Deletion of reference to de jure and de facto tests 
Disagree; LU has never accepted the de facto 
("whether in law or practice"). 
interpretation of criteria 1 and 2 but this does not reflect 
the consensus in the Group.  
BE, 
10b 
Delete "mainly effects" and replaces with "only applies 
Disagree; the original wording was intended to ensure 
LU, NL
to" in describing what an interest regime covers (e.g. 
that a regime which permits small amount of domestic 
'mainly effects foreign source income' rather than 'only 
income will still be covered. 
applies to foreign source income'). 
 
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Annex 2 
MS Para 
Comments 
COM's 
response 
BE, 
11, 11a, 
Deletion of paragraph. 
Disagree in part.  Paragraph 11 relies on paragraph B3 of 
LU, NL
11b 
the Code which refers to the granting of tax advantages 
without any real economic activity being undertaken.  
Regarding paragraph 11a, statements made by MS during 
the legislative process (e.g. during consultation) may well 
help the Group understand the purpose of a particular 
measure as well as its likely or actual practical effect.  
Regarding paragraph 11b, COM believes that the 
emphasis in paragraphs 1 to 4 on the Code and the agreed 
"guiding principles" in document 16410/08 make it clear 
that paragraph 11b cannot itself make a regime harmful.  
However COM also recognises that the sentence is 
worded very broadly.  COM would therefore propose 
retaining paragraphs 11, 11a and 11b with the exception 
of the words "i.e. the majority of the companies under the 
regime are not foreign owned" in 11b. 
LU 
11, 11b 
Deletion of "genuine" and "genuinely".   
Disagree with specific changes but accept the wider point 
about 16410/08, see below paragraph 17. 
 
 
 
 
Page 16 of 19 
 

Annex 2 
MS Para 
Comments 
COM's 
response 
NL 
11, 16 
Suggest deleting both as they believe the paragraphs will 
Reference to paragraph 16 probably meant to say 17 as 
present practical problems, e.g. the burden of proof still 
these comments reflect NL's earlier comments on para 3c 
lies with the Member States and the meaning of 
of the old guidance (now para 17).  Do not agree that the 
"genuine" (paragraph 11) is unclear. 
paragraphs should be removed.  Most MS will monitor 
the effectiveness of tax incentives they have introduced 
so information is likely to be available on the de facto 
impact of a regime.  Ultimately the question would be 
whether the information available convinces the Group 
members. 
IT 
13b 
As for paragraph 8b above. 
Accept. 
IT 
13c 
Changes to make the text consistent with proposals for 
Accept. 
paragraph 8c. 
LU 
13c 
Deletion of reference to asymmetric treatment as a recent 
Accept. 
addition to the text and not based on either past 
assessments or criteria in the Code.   
BE, 
14 
Qualifying harmful effects of avoidance as "potential". 
Disagree; the document's concern is with the harmful 
LU, NL
effects of international tax planning not with any 
beneficial impact that it may have on MS.  This is not a 
question of legal versus illegal actions but of the harmful 
consequences for MS. 
 
Page 17 of 19 
 

link to page 2 link to page 3 Annex 2 
MS Para 
Comments 
COM's 
response 
BE, 
14b 
Delete "mainly effects" and replaces with "only applies 
Disagree; the original wording was intended to ensure 
LU, NL
to" in describing what an interest regime covers (e.g. 
that a regime which permits small amount of domestic 
'mainly effects foreign source income' rather than 'only 
income will still be covered. 
applies to foreign source income'). 
COM 
15 
Insertion of the words "if they display any". 
These words make have been added to make it clear that 
the factors listed in paragraph 15 should be considered by 
the Group when deciding whether or not to consider a 
particular measure in more detail. 
LU 
15b 
Change analogous to that in paragraph 9b. 
See 9b above. 
BE, 
15d, 15e  Deleted. 
Reject.  These do not add additional criteria to the Code 
LU, NL
but identify possible features of a regime which may be 
of interest to the Group.  Any subsequent assessment of 
that regime would rely on the criteria in the Code.  See 
additional comments, pages 2 and 3 above. 
UK 
16c 
Suggests changes to wording to take account national 
Accept. 
rules which operate on a self-assessment basis. 
 
 
 
 
Page 18 of 19 
 

Annex 2 
MS Para 
Comments 
COM's 
response 
BE, 
17 
Insert reference to taking account of size and openness of 
Accept in principle and addressed in the introductory 
LU, NL
a MS. 
comments to the effect that the Code remains paramount 
and new text saying that this that includes procedural 
matters outlined in document 16410/08.  The economic 
effects of a particular measure can only be understood in 
the context of the MS to which they apply.  This covers 
not just absolute factors such as the size of the MS but 
also dynamic factors such as the state of its economy. 
 
 
Page 19 of 19