In order to prevent tax abuse, member states have implemented anti-abuse rules with the aim of preventing economic operators from eroding the tax base in their territory by diverting their income to other countries. However, member states' existing anti-abuse rules often do not properly take into consideration the freedoms of the European Treaty, and are therefore increasingly challenged.

In the framework of an EU-coordinated approach to direct taxation, the Commission announced on Monday that it is willing to assist member states in bringing their anti-abuse rules in line with EC law requirements, and to explore the scope for coordinated responses to the challenges faced by EU governments.

Commenting on the initiative, Laszlo Kovacs, Commissioner responsible for Taxation and Customs Union stated:

"The recent rulings by the European Court of Justice in this field clearly show that Member States need to urgently carry out a critical review of their existing anti-abuse rules. I understand that Member States need to ensure that their tax bases are not unduly eroded because of abusive and overtly aggressive tax planning schemes but we cannot tolerate disproportionate obstacles to cross-border activity within the EU. I invite Member States, in order to strike the proper balance, together to explore the potential and scope for possible coordinated solutions."

The EC argues that the catalyst for the need to address issues related to the application of anti-abuse rules lies with the development of the European tax law. Over the past few years, the European Court of Justice has handed down a number of important rulings in this area, such as the Cadbury-Schweppes decision, and the thin capitalisation group litigation order, in which it clarified the limitations on the lawful use of anti-avoidance rules. The Commission says that these must not be framed too broadly, but must be targeted at wholly artificial arrangements, i.e. situations where there is no genuine establishment or more generally where there is a lack of commercial underpinning.

The rulings, the EC noted, have a significant impact on the existing rules, which had not been formulated with the Community constraints in mind.

The Commission believes that while there should be no undue obstacles to the exercise of the rights conferred upon individuals and economic operators under EU law, member states also need to be able to operate effective tax systems and prevent their tax bases from being unduly eroded because of abuse and inadvertent non-taxation. The EC also wants better coordination of efforts to formulate anti-abuse measures in relation to "third countries", in order to protect member states' tax bases.