The subject of this study is the analysis of the relationship occurring between the freedoms of the internal market of the European Union guaranteed by the main act of primary EU law – the Treaty on the Functioning of the European Union (hereinafter – “TFEU”) and the application of double taxation agreements. The starting point of this study is Article 26(2) of the TFEU, which states that “the internal market comprises an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.” The main tenets of the internal market are to facilitate the ability of citizens to work and study abroad, settle in EU countries, shop, travel and move freely between countries, and the free movement of capital between member state banks. We also need such an effective mechanism because of additional rights whether in the field of security of goods or guarantees. Also important is the principle of non-discrimination under Article 18 TFEU: “within the scope of application of the Treaties and without prejudice to any special provisions which they provide for, any discrimination on grounds of nationality shall be prohibited.” Understood in this way, the prohibition stems from the aforementioned foundations of the EU, under which the internal market was created. This principle consists of individual freedoms flowing from the TFEU, which are intended to guarantee respect for the internal market. The following freedoms can be mentioned here: freedom of establishment (Article 49 TFEU), freedom of economic activity (Article 49 in conjunction with 54 TFEU) freedom of capital movements (Article 63 TFEU).

Freedoms of the European Union’s internal market

The possibility of creating a single internal market was provided by the first major modification of the 1957 Treaty of Rome – the Single European Act concluded within the European Communities in 1986. Thanks to this act, citizens of all 28 EU member states can enjoy 4 freedoms:

  • movement of goods,
  • movement of services,
  • movement of capital,
  • movement of people.

Movement of goods

Most important here is Article 28 TFEU, according to which the basis of the EU is a customs union which extends to all trade in goods and includes the prohibition of import and export duties between member states and all charges having equivalent effect, as well as the adoption of a common customs tariff in relations with third countries. This freedom makes it possible for goods originating from member states or from third countries if they are in free circulation in member states (Article 28(2) TFEU) to move without any hindrance within member states. The free economic circulation ensured in the EU internal market area implies the abolition by member states of various types of barriers that discriminate in any way against the goods of other member states, as well as impede circulation within the Union. To this end, EU law provides for:

  • prohibition of the introduction of customs duties (import and export) and charges having equivalent effect to customs duties
  • A ban on the introduction by member states of:
  1. direct or indirect taxes that are higher than those imposed on similar domestic products (the so-called “prohibition of discrimination”)
  2. direct taxes that indirectly protect other products (the so-called protection ban)
  • the prohibition of quantitative restrictions and measures that have equivalent effects to quantitative restrictions.

It is also worth mentioning here two rulings of the Court of Justice of the European Union (hereinafter – “CJEU”) on the basis of which two general principles concerning the free movement of goods were derived. I am referring to the 1974 ruling in the case of the Belgian company Dassonville (C-8/74) importing Scotch whisky from France without a certificate of origin for the alcohol. The Belgian court ruled that the company had broken the law due to its inability to confirm the source country of the goods. However, the CJEU acquitted the entrepreneurs, claiming that the requirement for such a certificate constitutes a violation of the free movement of goods. According to the ruling, all goods lawfully produced and marketed in one member state cannot be subject to restrictions as to sale and marketing in another country. A limitation of the Dassonville formula is the Cassis de Dijon ruling, stating that:
– a good legally manufactured in a member state should be allowed to circulate freely in all other member states (recognition of standards),

– each state may impose certain restrictions on the free movement of goods by invoking important and legitimate public interests (imperative requirements).

Freedom of movement of goods does not include:

  • products specified in the Euratom Treaty
  • agricultural products covered by a common market organization
  • products related to the freedom of movement of services
  • products related to the free movement of capital

Movement of services

The purpose of the free movement of services is to prevent the creation of barriers to trade, unequal conditions for the provision of services in the EU internal market, and to ensure the best possible enjoyment of services. Under Article 56 TFEU, restrictions on the free provision of services within the Union are prohibited for nationals of Member States who have an establishment in a Member State other than that of the recipient of the service, with the proviso that the provider of the service may perform temporarily (for the purpose of performance) in the state of provision under the same conditions as that state imposes on its nationals. This means the exclusion of national provisions that impede the provision of services between member states directly or indirectly (ordering the interpretation of national law in accordance with the principle of free movement of goods). To provide services in the territory of another country, it is not required to have an establishment in the country of service provision or in the country of residence. It is sufficient to have an establishment or residence in one of the EU member states where the entrepreneur is registered.

Movement of capital

Free movement of capital means the freedom to transfer property values to another country to enable investment in another member state through various financial instruments. By capital movement is meant payments and cross-border transfers of money, as well as all transactions that enable the transfer of ownership of assets and liabilities and payment systems. According to Article 63 TFEU, all restrictions on the movement of capital between Member States and between Member States and third countries are prohibited. These guarantees include in their scope both direct and indirect discrimination but also restrictions of a non-discriminatory nature.

Movement of persons

Freedom of movement of persons is largely related to the employment sector. It aims to make it easier for citizens of member states to seek and take up employment within the European Union. It was created to prevent discrimination and the imposition of any restrictions on employees or self-employed persons with the nationality of a member state (Articles 45 and 49 TFEU). In addition to the aspect related to the employment sector, freedom of movement of persons also allows free movement within the territory of member states, entering higher education or settling in a member state. This freedom is particularly linked to the principle of equality and also the prohibition of discrimination (Article 18 TFEU) . Equal treatment must be ensured in every aspect governing employment and work – wages, working conditions, termination (gender equality, prohibition of discrimination as to nationality, origin, etc.).

Tax law breakthrough

It is worth mentioning the fact that initially the above-mentioned freedoms contained in the TFEU were not applied to matters relating to direct taxes. They were denied features of a tax nature. In the field of tax law, regulations on international tax law were applied. This situation was changed by the CJEU ruling in the Avoir fiscal case (270/83). In the proceedings initiated by an action brought by the European Commission (hereinafter – “EC”) against the French Republic, the CJEU decided the question of whether Article 52 of the EC Treaty (now Article 49 of the TFEU) grants French branches of foreign companies the right to be treated analogously to French companies with respect to the right to a tax credit for dividends received. The shareholder was entitled to deduct the tax paid by the legal entity from its income tax, resulting in no double taxation at the level of the individual and the company. Under French law, this special credit was only available to companies with a registered office in France (non-residents were not entitled to the tax credit). The CJEU held that the Republic, by denying the right to avoir fiscal to branches of foreign companies, discriminated against them and thus failed to comply with its obligations under Article 52 TEC (now Article 49 TFEU). The CJEU argued that if the tax laws of a member state (France) apply the same rules for residents and non-residents when determining the amount of tax to be paid by a company, they should apply identical rules when exercising additional privileges. The ruling completely changed the outlook on tax law in the context of the freedoms guaranteed by the internal market. It also laid the groundwork for today’s interpretation of the principle of freedom of establishment (listed alongside the other 4 freedoms guaranteed by the EU internal market) in the context of direct taxation.

Double taxation treaties

The phenomenon of so-called double taxation is encountered when the same income has been taxed both in the country where the income was earned and in the country of residence. As is well known, the risk of double taxation of business activities arises from the fact that conducting activities and deriving benefits from them in another country triggers tax obligations towards that country. This is to be prevented by concluding bilateral double taxation treaties. Double taxation agreements (hereinafter – “DTAs”) are legal acts concluded between two countries. Their content consists of regulations that facilitate the determination of the correct tax residence. They authorize the source country of a non-resident’s income to tax designated categories of income and to determine the rate at which such income is to be taxed. The PSAs contain four methods to avoid paying double taxes. These are: proportional deduction, exclusion with progression, full exclusion and full disconnection.

In the case of proportional deduction, income earned abroad is taxed in the home country. The tax paid abroad is deducted from the amount of tax due. However, the value of the deduction cannot be higher than the ratio of foreign income to the total amount of income earned.

The method of exclusion with progression consists in the fact that the parties to the agreement give up their tax claim on income that has been taxed in another country. At the same time, the party giving up such a claim reserves the right to take foreign income into account when determining the tax rate.

Full exclusion involves excluding from the tax base in the taxpayer’s country of residence income or assets taxed in the source country of that income. Using this method, the country of residence fully disregards income earned outside its borders. Foreign methods in this case have no effect on the amount of taxes paid in the taxpayer’s country of residence (or domicile).

Jacques Damseaux v. Belgian State (C-128/08)

Jacques Damseaux, who resides in Belgium, received dividends from Total, a joint-stock company based in France, between 2005 and 2007. These dividends were taxed in France, subject to Article 15 of the agreement of March 10, 1964 between France and Belgium concerning the avoidance of double taxation and the principles of mutual administrative and legal assistance in the field of income taxes, as amended by the annex signed in Brussels on February 8, 1999 (hereinafter – “BE-F UPO 1964”) – with a tax of 15% of the gross amount of the dividends. Belgium, on the other hand, levied an advance capital gains tax of 15%, determined on the basis of the amount less the tax collected in France.

In accordance with Article 19A para. 1, second paragraph, of the Franco-Belgian agreement, in view of dividends received by Belgian resident shareholders on which withholding tax has been withheld in France, the tax due in Belgium on the amount less tax withheld in France (net amounts) will be reduced, first, by the advance capital gains tax withheld at the ordinary rate, and second, by the lump sum amount of tax paid abroad, deductible under the terms of Belgian legislation, but this lump sum cannot be less than 15% of the net amount.

It is worth noting that the BE-F UPO 1964 contains a direct reference to Belgium’s domestic tax law, which at the time did not provide for the application of a tax credit to foreign dividends, as a result of which double taxation was not eliminated. Damseaux argued that Belgium’s proper application of Article 19A BE-F UPO 1964 would eliminate double taxation. Thus, this not only constitutes a violation of BE-F UPO 1964 itself, but also a violation of the prohibition flowing from Article 56 TEC (now Article 63 TFEU). At the same time, Jacques Damseaux pointed out that dividends of French origin are taxed at a higher rate than dividends of Belgian origin, and that Belgium, as a resident state, by agreeing to withholding tax in France, should thus allow the French tax to be deducted from the Belgian advance payment of capital gains tax, or forego the advance payment altogether in order to eliminate double taxation. The Belgian tax administration rejected the objections raised, as a result of which Damseaux brought the case before the Tribunal de première instance de Liège.

That tribunal held that although the situation of Belgian residents is objectively comparable, these individuals are subject to different tax regimes depending on whether they receive dividends from a company based in Belgium or from a company based in another member state. Indeed, if dividends paid by a foreign company to a Belgian resident are subject to double taxation under international law, dividends paid by Belgian companies to a Belgian resident are taxed at a rate of 15% in accordance and are not subject to double taxation.

In these circumstances, the Tribunal de première instance de Liège decided to suspend the proceedings and refer the following questions to the Court for a preliminary ruling:

(1) Is Article 56 TEC (now Article 63 TFEU) to be interpreted as prohibiting the restriction arising from BE-F UPO 1964, which allows for the existence of partial double taxation of dividends on shares of companies domiciled in France and which makes the taxation of such dividends higher than the Belgian advance capital gains tax levied on dividends paid by a Belgian company to a shareholder domiciled in Belgium?

(2) Is Article 293 EC to be interpreted as meaning that the Kingdom of Belgium’s failure to take steps to renegotiate with the French Republic a new way of abolishing double taxation of dividends on shares of companies domiciled in France is incompatible with Community law?

The CJEU considered that the first question seeks to determine whether Article 56 TEC (now Article 63 TFEU) precludes a bilateral tax treaty under which dividends paid by a company domiciled in a member state to a shareholder domiciled in another member state may be subject to taxation in both member states, and the shareholder’s member state of residence does not counteract the resulting double taxation. The power to determine the criteria for the allocation of tax powers, in particular to avoid double taxation, is vested in the member states due to the lack of unifying and harmonizing legislation at the Community level. It is the task of the member states to adopt the necessary provisions to assist in the prevention of double taxation, and in doing so, the criteria adopted in international tax practice should be used. According to the panel, the elimination of double taxation of dividends does not belong solely to the resident state, as this would mean going too far in giving the source state priority in taxation. The state of residence is not obliged under Community law to counteract the negative effects that could result from the exercise by member states of the competence thus distributed. Given the answer to the first question, it was not necessary to answer the second question.

The CJEU stated that double taxation, which is not fully eliminated even by a bilateral double taxation agreement, does not violate the free movement of capital. A side effect of the sovereign exercise of their taxing powers by the contracting member states is precisely the occurrence of double taxation. These adverse effects, however, do not constitute a violation of the restrictions prohibited by the TEC ( including the other three freedoms guaranteed by the EU internal market). Double taxation is the result of overlapping tax claims of the source state. Yes, this phenomenon is detrimental to the functioning of the single internal market, but it cannot be completely eliminated. Therefore, incompatible with EU law, differential treatment of taxpayers may, in principle, result from the provisions of double taxation treaties, in which the subjective scope of taxpayers is related to their enjoyment of the guaranteed freedoms of the internal market.

As can be seen, the freedoms of the EU internal market and double taxation treaties are closely intertwined. Very often cases are brought before the Court of Justice of the European Union in which claimants argue that their freedoms are violated with regard to the different treatment of taxpayers exercising the freedoms of the internal market taking place precisely on the basis of the provisions of double taxation treaties. Examples, in addition to the ruling cited above, include the Gilly spouses ruling (C-336/96), the Compagnie de Saint Gobain ruling (C-307/97) or the D. (C-376/03).


“Tax Law of the European Union,” edited by B. Brzezinski, M. Kalinowski, ODDK, Gdansk 2017
“Jurisprudence of the Court of Justice of the European Union in Tax Matters,” scientific editors: W. Nykiel, A. Zalasinski, Warsaw 2017