Against the backdrop of the continuing evolution of European tax law, the judgment of the Court of Justice of the European Union in Case C-524/23 provides important guidance on the relationship between EU law and the fiscal autonomy of Member States, particularly with regard to the Controlled Foreign Company (CFC) regime laid down in Council Directive (EU) 2016/1164 of 12 July 2016 (the Anti-Tax Avoidance Directive – ATAD).
The judgment arose from infringement proceedings brought by the European Commission against Belgium for its failure to correctly implement Article 8(7) of the ATAD, which establishes the mechanism designed to eliminate double taxation in relation to CFC income.
As is well known, the ATAD introduced a harmonised CFC regime among its anti-avoidance measures, with the objective of preventing the artificial diversion of profits to low-tax jurisdictions.
Within this framework, Article 8(7) requires Member States to prevent economic double taxation by granting taxpayers a tax credit for taxes already paid by the foreign controlled entity on income subsequently attributed to the taxpayer under the CFC rules. Specifically, the Directive provides that:
“The Member State of the taxpayer shall allow a deduction of the tax paid by the entity or permanent establishment from the tax liability of the taxpayer in the Member State where the taxpayer is resident for tax purposes or situated. The deduction shall be calculated in accordance with national law.”
Although the ATAD is a minimum harmonisation directive, Member States remain under an obligation to ensure that its objectives are fully achieved, while retaining discretion as to the legislative techniques adopted for its implementation.
The central issue addressed by the Court concerned the extent of that discretion: to what extent may a Member State depart from the model established by the Directive without infringing EU law?
According to the European Commission, the Belgian legislation failed to ensure the effective elimination of double taxation required by the Directive and therefore did not correctly implement the CFC provisions.
Belgium, by contrast, argued that it had lawfully exercised the discretion afforded by a minimum harmonisation directive when transposing the ATAD into domestic law.
The Court ultimately upheld the Commission’s position and declared that Belgium had failed to fulfil its obligations under EU law.
In particular, the Court held that, while the ATAD leaves Member States a degree of flexibility, such discretion cannot extend to undermining the effectiveness of the double taxation relief mechanism provided for in Article 8(7).
Accordingly, the Belgian legislation was found to be incompatible with the obligations imposed by the Directive and therefore in breach of EU law.
The judgment is particularly significant for taxpayers and practitioners because it:
- confirms that, even within a framework of minimum harmonisation, Member States remain bound to achieve the objectives laid down by the ATAD;
- reiterates that national discretion cannot be exercised in a manner that diminishes the effectiveness of the EU anti-avoidance framework;
- highlights the need to assess the compliance of domestic CFC regimes with the standards established by the ATAD.
In Italy, the mechanism for eliminating double taxation under the CFC rules is governed by Article 167(6) of the Italian Income Tax Code (TUIR), which grants a foreign tax credit in respect of taxes paid abroad on income attributed to the Italian taxpayer under the transparency regime.
The judgment in Case C-524/23 confirms the central importance of this mechanism and suggests that any domestic limitations or conditions capable of reducing its practical effectiveness may be incompatible with the minimum standards imposed by the ATAD.
For Italian taxpayers, this means that particular attention should be paid to the practical application of the foreign tax credit, especially where complex international structures or jurisdictions with specific tax regimes are involved.
More broadly, the decision represents an important point of balance between European tax harmonisation and the fiscal sovereignty of Member States.
On the one hand, the Court confirms that the ATAD does not require full harmonisation of national tax legislation but rather establishes minimum common standards. On the other hand, it makes clear that the flexibility granted to Member States is limited by the obligation to ensure the full effectiveness of EU law.
The result is a model of “conditional harmonisation”, under which Member States retain legislative autonomy only insofar as the objectives pursued by the Directive are effectively achieved.
The judgment further clarifies that the minimum harmonisation nature of the ATAD cannot be relied upon to justify incomplete or ineffective implementation of its provisions.
For taxpayers and practitioners alike, the decision underlines the importance of carefully assessing differences between national CFC regimes—particularly with regard to double taxation relief mechanisms—within a legal framework in which EU law continues to impose binding standards as to the results to be achieved.
