Double taxation: European Council agrees system for dispute resolution

On 23 May 2017, the European Council agreed on a new system for resolving double taxation disputes within the EU.

The proposal sets out to improve the mechanisms used for resolving disputes between member states when disputes arise from the interpretation of agreements on the elimination of double taxation. It builds on convention 90/436/EEC on the elimination of double taxation in connection with the adjustments of profits of associated enterprises.

“This directive is an important part of our plan for strengthening tax certainty and improving the business environment in Europe”, said Edward Scicluna, minister for finance of Malta, which currently holds the Council presidency.

Situations where different member states tax the same income or capital twice can create serious obstacles to doing business across borders. They create an excessive tax burden, can cause economic distortions and have a negative impact on cross-border investment.

The draft directive requires dispute resolution mechanisms to be mandatory and binding, with clear time limits and an obligation to reach results. It thereby sets out to secure a tax environment where compliance costs for businesses are reduced to a minimum.

The text allows for a ‘mutual agreement procedure’ to be initiated by the taxpayer, under which member states must reach an agreement within two years. If the procedure fails, an arbitration procedure is launched to resolve the dispute within specified timelines. For this, an advisory panel of three to five independent arbitrators is appointed together with up to two representatives of each member state. The panel (‘advisory commission’) issues an opinion for eliminating the double taxation in the disputed case, which is binding on the member states involved unless they agree on an alternative solution.

The Council endorsed a compromise reached on the following issues:

  • scope of the directive, i.e. the types of disputes that should be covered. The Council agreed on a broad scope but with the possibility, on a case-by-case basis, of excluding disputes that do not involve double taxation;
  • ‘independent persons of standing’: criteria to ensure the independence of those appointed to a pool of independent arbitrators. It was agreed that arbitrators must not be employees of tax advice companies or have given tax advice on a professional basis. Unless agreed otherwise, the panel chair must be a judge;
  • standing committee: the possibility of setting up a permanent structure to deal with dispute resolution cases if member states so agree.

Next steps

Agreement was reached at a meeting of the Economic and Financial Council. The Council will adopt the directive once the European Parliament has given its opinion.

The Council will adopt the directive once the European Parliament has given its opinion.

Member states will have until 30 June 2019 to transpose the directive into national laws and regulations. It will apply to complaints submitted after that date on questions relating to the tax year starting on or after 1 January 2018. The member states may however agree to apply the directive to complaints related to earlier tax years.

May 2017 draft directive on the resolution of double taxation disputes