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1-1-2006

Bosal Holding BV v. Staatssecretaris Van Financien:

The ECJ Moves the EU Closer to Unlegislated
Harmonization of Corporate Taxes
Justin Bowen

Recommended Citation
Justin Bowen, Bosal Holding BV v. Staatssecretaris Van Financien: The ECJ Moves the EU Closer to Unlegislated Harmonization of
Corporate Taxes, 28 Loy. L.A. Int'l & Comp. L. Rev. 171 (2006).
Available at: http://digitalcommons.lmu.edu/ilr/vol28/iss1/5

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Bosal Holding BV V. Staatssecretaris Van
Financien: The ECJ Moves the EU Closer
to Unlegislated Harmonization of
Corporate Taxes

I. INTRODUCTION
In 1993, Bosal Holding BV, a company engaged in holding,
financing, and licensing/royalty related activities, and subject to
corporate income tax in the Netherlands, wished to offset its
profits taxable there with costs incurred in the financing of its
holdings in nine other European Union Member States.' The
Dutch taxing authority refused Bosal's claim based on the Dutch
requirement that costs related to subsidiaries are only deductible if
they are indirectly instrumental in making profits that are taxable
in the Netherlands.2 The company brought an action before the
Gerechtshof te Arnhem ("Court of Justice-Arnhem,
Netherlands"), which upheld the taxing authority's decision. Bosal
then appealed to the Hoge Raad der Nederlanden ("Supreme
Court of the Netherlands").3 The appellate court decided that a
referral to the European Court of Justice ("ECJ" or "Court") was
necessary to determine whether Article 13(1) of the Netherlands
law, upon which the Dutch taxing authority relied, could be upheld
in light of the freedom of establishment contained in Articles 43
and 48 of the European Community (EC) Treaty.4
In deciding this case, the ECJ went further than it ever had in
striking down a national tax law as violative of the basic freedoms
contained in the Treaty. This case represents a step toward the
unlegislated harmonization of corporate taxes in the European

1. Case C-168/01, Bosal Holding BV v. Staatssecretaris van Financien, 2003 E.C.R.

1-9409, para. 9.
2. Id. at para. 8.
3. Id. at para. 10.
4. Id. at para. 11.
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

Union ("EU"), a goal that many EU members strongly disagree

with. In striking down the Dutch legislation, the Court rejected
several strong arguments put forth by the European Commission
and the governments of the Netherlands and the UK.5 This article
will examine those arguments, as well as the Court's analysis of
them. Additionally, it will illustrate a path that the Court could
have taken to uphold the ability of Member States to determine
their own tax policy. Section II discusses some important
background information: the EU Treaty itself and the union that it
created, the relationship between EU law and the law of Member
States, and the specific laws at issue in this case. Section III
contains analysis of the case itself and some important
counterarguments to the Court's reasoning. Section IV describes
the policy considerations behind the argument against this
decision, and proposes how the Member States can assure the
sovereignty of their tax laws.

II. LEGAL BACKGROUND

A. Background of the EU and the Role of the Court

In 1957, the Treaty of Rome was signed, creating the
European Communities and establishing the ECJ.6 The treaty was
revised in 1985 and 1992, culminating in the creation of the
European Union in 1994. 7 Since the mid-1980s, the ECJ has
asserted that the Treaties represent the constitutional charter of
the Union, and that it is the Court's role to supervise compliance
with this "constitution." 8 Decisions of the ECJ are binding on the
Member States, and require Member States to set aside domestic
laws that are inconsistent with Union law as interpreted by the
Court. 9

5. See id., at paras. 17-21.

6. TREATY ESTABLISHING THE EUROPEAN COMMUNITY, Dec. 24, 2002, O.J. (C-
235) 1 (2002) [hereinafter EC TREATY].
7. PAUL B. STEPHAN ET AL., INTERNATIONAL BUSINESS AND ECONOMICS LAW
AND POLICY 72 (3d ed. 2004).
8. Grdinne de Burca, The Institutional Development of the EU." A Constitutional
Analysis, in THE EVOLUTION OF EU LAW 57 (Paul Craig & Grdinne de Burca eds., 1999).
9. Michel Rosenfeld, ConstitutionalAdjudication in Europe and the United States:
Paradoxesand Contrasts,2 INT'L J. CONST. L. 633,654 (2004).
2006] Bosal Holding Case

B. Directives
Directives are a form of legislative pronouncement that
declare a desired result, and allow the Member States to decide
individually how they will enact laws which lead to that result. As
such, it is the result which is binding on the members, and not the
means chosen. °
C. Direct Taxation
Direct taxation is not specifically addressed in the EC Treaty.
As such, it technically does not fall within the jurisdiction of the
ECJ, and is left to the Member States.' However, through
precedent, the ECJ established the rule that "although direct
taxation falls within their competence, the Member States must
none the less 2exercise that competence consistently with
Community law.'
D. EU and Domestic Law
The EU law at issue in this case includes Treaty provisions
and a Council Directive. The Treaty section involved is the
freedom of establishment, announced in Article 43 and Article 48
of the EC Treaty. 3 Article 43 declares that "restrictions on the
freedom of establishment of nationals of a Member State in the4
territory of another Member State shall be prohibited."'
Furthermore, Council Directive 90/435/EEC ("Directive") was
under consideration. The preamble to the Directive indicates that
its purpose is to eliminate the disadvantage experienced by parent
companies having subsidiaries in different Member States. 5
Article 4 of the Directive reads: "However, each Member State
shall retain the option of providing that any charges relating to the
holding and any losses resulting from the distribution of the profits
of the subsidiary may not be deducted from the taxable profits of

10. PAULO MENGOZZI, EUROPEAN COMMUNITY LAW 125 (Patrick Del Duca trans.,
Kluwer Law Int'l 2d ed. 1999).
11. Richard Palmer, Tax. Owing Me, Owing You, THE LAWYER, Aug. 9, 2004 at 18.
12. C-35/98, Staatssecretaris van Financien v. B.G.M. Verkooijen, 2000 E.C.R. I-
4071, at para. 32. See also Case C-279/93, Finanzamt Kvln-Altstadt v. Schumacker, 1995
E.C.R. 1-225, at para. 21; Case C-80/94, Wielockx v Inspecteur der Directe Belastingen,
1995 E.C.R. 1-2493.
13. EC TREATY, supra note 6.
14. EC TREATY. art. 43.
15. Council Directive 90/435, 1990 O.J. (L 225/6) [hereinafter Directive].
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171
6
the parent company.'0
The Netherlands law challenged in Bosal Holding is Article
13(1) of the Wet op de Vennootschapsbelasting 1969 ("Law on
Corporation Tax"), which directs that only costs which are
"indirectly instrumental in making profit that is taxable in the
Netherlands" is deductible to a Netherlands parent company.17
The allegation is that this law violates the Freedom of
Establishment provided by the EC Treaty.

III. ANALYSIS

A. The Arguments
Bosal argued that Article 13(1) restricted the freedom of
establishment by penalizing parent companies for establishing
subsidiaries in Member States other than the Netherlands.18 The
Netherlands, supported by the UK and the Commission of the
European Communities, countered that the law was not contrary
to the freedom of establishment at all, and if it was, it was
justified.' 9
The Netherlands first argued that Article 13(1) did not
discriminate at all, because the subsidiaries of parent companies
established in the Netherlands make profits in that Member State,
and those which do not are not in an objectively comparable
position. 20 This argument is premised on the fact that the first
group of companies (where parent and subsidiaries all make a
profit in the Netherlands) is subject to tax in the Netherlands,
while the second group (with subsidiaries earning profits in other
Member States) is not. The Netherlands, therefore, believed that
a distinction between the two groups was appropriate and did not
violate the freedom of establishment.
In the alternative, the Netherlands argued that if their refusal
to allow deduction of costs for holdings in other Member States
did violate the Treaty, it was justified. The Netherlands first
asserted that the infringement was justified by the need to

16. Id. art. 4.

17. Art. 13(1) WET OP DE VENNOOTSCHAPSBELASTING (Law on Corporations Tax
of 1969, 1993 version) (Neth.) [hereinafter NETHERLANDS LAW].
18. Bosal Holding BV, 2003 E.C.R. at para. 12.
19. Id. at para. 17-19.
20. Id.
2006] Bosal Holding Case

maintain the coherence of their system of taxation. Coherence of

a Member State's tax regime has been recognized by the ECJ as an
acceptable justification for infringement of an EU freedom. The
Netherlands further argued that their tax scheme was justified in
infringing the freedom of establishment because it was necessary
to avoid an erosion of the tax base going beyond a mere
diminution in tax receipts. 3 Finally, the Netherlands pointed out
that Article 4 of Council Directive 90/435 authorized Member
States to prohibit parent companies from deducting holding costs
from taxable income completely. Therefore, the Netherlands
contended that Article 13(1) should be sustained as merely an
implementation of the option contained in the Directive.

B. Summary of Holding
Rejecting the arguments asserted on behalf of the
Netherlands, the Court ruled that the Dutch law violated the
freedom of establishment by discouraging parent companies from
establishing subsidiaries in other Member States." In reaching this
conclusion, the Court rejected the Netherlands two asserted
justifications: coherence of the tax system, and the need to prevent
an erosion of the tax base.

C. The Court's Analysis

1. Compliance with the Directive

The Court began by analyzing the Netherlands law for
compliance with the Directive. 26 It noted that the Netherlands was
basically arguing that the greater power granted by the Directive
of prohibiting the deduction of holding costs altogether necessarily
implied the lesser power of limiting such deductions to situations
where the costs were associated with earning taxable profits in the

21. Id.
22. See Case C-204/90, Bachman v. Belgium,1992 E.C.J. 583; Case C-300/90, Comm'n
v. Belgium, 1992 E.C.R. 1-305.
23. Bosal Holding, 2003 E.C.R. at para. 20. The Court had previously rejected the
argument that protection from a mere diminution of tax revenue could justify infringement
of a Treaty freedom in Case C-264/96, Imperial Chemical Industries plc v. Colmer, 1998
E.C.R. 1-4695, 1-4723 (emphasis added).
24. Bosal Holding, 2003 E.C.R. at para. 21.
25. Id. at para. 27.
26. Id. at para. 22.
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

Netherlands. The Court initially acknowledged that Article 13(1)

comported with the Directive insofar as it was merely
implementing the option provided by Article 4(2) of the
Directive.27 The ECJ, however, cited settled law, holding that even
if the Dutch law was merely an implementation of the Directive, it
must conform to "fundamental provisions of the Treaty., 2 That
brought the ECJ to the issue at hand-whether the Netherlands
law violated the freedom of establishment found in Article 43
(formerly Article 52) of the Treaty, and if so, whether there were
any justifications for the infringement.
2. Violation of the Freedom of Establishment
The Court found a violation of the freedom because Article
13(1) might dissuade a parent company from establishing or
operating a subsidiary in another Member State. 29 Thus, the Court
turned to the issue of whether the Netherlands could justify this
intrusion.
The Court's analysis and rejection of the justifications put
forward by the Netherlands and UK governments as well as the
Commission shows a narrowing of the acceptable justifications for
freedom infringement, and deserves special attention. This
narrowing is a step towards requiring the harmonization of
corporate income taxes across EU Member States - a requirement
that many Member States vehemently oppose. Sections 3-6 will
discuss the Court's analysis and present counterarguments, which
suggest an alternative path. This path would have upheld the
freedom of establishment while preserving the Member States'
sovereignty over direct taxation.

3. Coherence Justification

a. Coherence and the Direct Link Requirement

Demonstrative of its opposition to harmonization, the
Netherlands put forth the argument that the infringement was
justified by a need to maintain the coherence of its tax code. ° The
coherence argument was accepted by the ECJ in the 1992 cases of

27. Id. at para. 25.

28. Id. at para. 26. For a brief discussion of Directives, see MENGOZZI,supra note 10.
29. See Bosal Holding, 2003 E.C.R. at para. 27.
30. Id. at para. 19.
20061 Bosal Holding Case

Bachmann v. Belgium and Commission v. Belgium.3' These cases

upheld a Belgian law that allows deduction of insurance premiums
and pension contributions only if the insurer was established in
Belgium. Specifically, where the deduction of contributions was
linked to the eventual taxation of any distributions under such
contract they were not in violation of the EC Treaty. The Court
recognized that forcing Belgium to allow deductions for foreign
insurers would remove the crucial link between the tax benefit and
its related tax liability.32 Proving such a link is the key to a
successful coherence justification argument.
According to the Court in this case, there was no such direct
link, which would allow the coherence argument to stand.3 To
invalidate the link, the Court inferred a "same taxpayer"
requirement that had never been a part of the direct link analysis
before. The Court cited Baars v. Inspecteur for the proposition
that there can be no direct link where the law involves two
different taxpayers, or two different taxes.-4
In Baars, the issue was whether a cohesion argument could
stand where a resident of the Netherlands had a wealth tax
exemption for substantial amounts of equity held in a company
established in the Netherlands, but no similar exemption existed
for holdings in companies established in other Member States.35
The Court rejected the cohesion argument made by the
Netherlands, holding that since the wealth tax was a totally
separate tax, and indeed completely unrelated to the distribution
of already taxed corporate profits, there was no link between the
tax relief (for personal wealth tax) and the tax liability (for
corporate income tax).
Unlike the situation in Baars, the tax relief provided in Bosal
Holding is directly linked to a corresponding tax liability. The tax
relief and the tax liability in this case both involve the same tax
(corporate income). The link, however, is even stronger than
that-the premise underlying the allowance of a deduction for
business expenses in an income tax is that the expenses represent

31. Bachman, 1992 E.C.R. at 571; Belgium, 1992 E.C.R. at 1-318.

32. Bachman, 1992 E.C.R. 575; Belgium, 1992 E.C.R. at 1-319.
33. Bosal Holding, 2003 E.C.R. at para. 32.
34. Case C-251/98, C. Baars v Inspecteur der Belastingen Particulieren/
Ondernemingen Gorinchem, 2000 E.C.R. 1-2787, 1-2819.
35. Id. at 2814
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

the cost of earning taxable profits.36 Therefore, there is a direct

link between the deduction of the holding costs and the liability for
income tax, which the Bosal Holdings Court should have
recognized.
Still citing to Baars, the Court went on to state that since
parent companies and their subsidiaries are separate legal entities,
there can be no link, apparently inferring a "single taxpayer"
requirement from Baars. However, the Court in Baars did not
rely on a distinction between the individual taxpayer and the
company in which he held a substantial interest as two separate
legal entities. Instead, the Baars's decision turned on the fact that
the two taxes involved were completely unrelated and had no
impact on one another. 38 The ECJ's reliance on Baars here is
misplaced because in Bosal Holding, unlike in Baars, the benefit
and the liability were offsetting parts of the same tax.
Article 13(1) is analogous to the law upheld in the
consolidated cases of Bachmann v. Belgium and Commission v.
Belgium.39 In that case, allowing the deduction of contributions to
insurance policies outside of Belgium would have forced Belgium
to incur the deduction, without the corresponding tax inflow when
the policies paid out, since disbursements outside of Belgium were
beyond the reach of the Belgian taxing authority.40 Similarly,
allowing deductions for costs of earning profits abroad would
cause the Netherlands to incur only the deduction, while losing the
corresponding revenue since the profits earned as a result of the
costs would only be taxable in the Member State where the
subsidiary is located, and not in the Netherlands.
There is a direct link between a nation's grant of a deduction
for holding costs of a subsidiary located abroad, and that nation's
ability to tax the profits obtained as a result of the operation of the
subsidiary. By failing to recognize this link, the ECJ in Bosal
Holdings has forced EU Member States to incur only the
deductions, without the ability to tax the related profits. This is
directly counter to the Court's rationale in Bachmann v. Belgium
and Commission v. Belgium, and demonstrates an expanding view
of the freedom of establishment in regards to direct taxation.

36. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

37. Bosal Holding, 2003 E.C.R. at para. 62.
38. Baars, 2000 E.C.R. at 1-2819.
39. See Bachman, 1992 E.C.R. at 583; Belgium, 1992 E.C.R. at 305.
40. Id.
2006] Bosal Holding Case

b. Does the Direct Link Requirement

Include a Temporal Element?
In the analysis above, the Court inferred a "same taxpayer"
requirement to invalidate the direct link in this case. Similarly, the
ECJ also created a temporal requirement not found in earlier
precedent. Still discussing the direct link requirement, and still
relying on Baars, the Court declared that the deductibility of costs
under Article 13(1) did not depend on whether or not the
subsidiary earned a profit in the relevant tax year. Therefore,
there was no direct link.4 ' The Court seems to be inferring a
temporal requirement from Baars that the liability and benefit
must arise in the same year. This would be an extremely restrictive
reading of the cohesion justification's direct link requirement. No
such requirement existed in Baars.
In that case, the individual was responsible for the wealth tax
based on the size of his holdings in a company.42 Therefore, his
liability was totally independent of the profitability of the
company. Thus, the Court in that case said "whether or not the
company makes a profit does not in any event affect liability to
wealth tax. ' 4 3 The situation the ECJ referred to in Baars is easily
distinguished from the facts of Bosal Holding. The only reason a
parent company incurs costs in operating a subsidiary is in
anticipation of earning profits at some point. This is a much
stronger link than the one invalidated in Baars.
There was also no temporal requirement in the link
recognized in Bachmann v. Belgium."4 The deduction given in
Bachmann included "sickness and invalidity insurance
contributions. 4 5 The direct link there was not premised on
Belgium's recovery of taxable distributions in the same year that
the deduction was taken, but rather on the relationship between
the deduction given, and the ability of Belgium to tax distributions,
when and if they occurred. 6 Similarly, in Bosal Holding, the link is
premised on the relationship between holding costs and profits
taxable in the Netherlands.

41. Bosal Holding,2003 E.C.R. at para. 35.

42. Baars, 2000 E.C.R. 1-2814.
43. Id.at 1-2819.
44. Bachman, 1992 E.C.R. at 583.
45. Id. at 559.
46. Notice that receipt of any revenue under these policies was conditioned on the
insured becoming sick or disabled, and was therefore by no means assured. Id.
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

Additionally, for the statement from Baars to apply to this

case, it would have to be said that whether or not the subsidiary
makes a profit does not in any event affect the parent company's
liability to income tax. This would be an inaccurate statement.
There are circumstances, such as when a permanent establishment
in another Member State is converted into a subsidiary, where
profits of a foreign subsidiary are taxable to the Netherlands
parent company. 47
4. Over, or Under-Taxation?
The ECJ additionally decided that the condition in Article
13(1) amounted to over-taxation since the "limitation" was not
compensated for by a corresponding "advantage." 48 This,
however, seems to assume the conclusion that the parent
companies were entitled to the deduction in the first place. This
circular reasoning added nothing to the opinion, since the
Netherlands would merely view the opposite situation as under-
taxation, as it would be forced to allow a deduction with no
corresponding tax liability.

5. Objectively Comparable
The next argument put forth by the Netherlands that the ECJ
addressed was that parent companies with subsidiaries in the
Netherlands, and those with subsidiaries in other Member States
are not in objectively comparable situations. If the Court found
that the two groups were not comparably situated, then Article
13(1) would not be discriminatory.49 The Court declared this
distinction irrelevant since the difference in tax treatment
concerned the parent companies, and the profits of the subsidiaries
were not taxable in the hands of the parents regardless of where
the subsidiaries were located. 50 The Court appears to have decided
that even if the subsidiaries are not comparably situated, the
parent companies are, since they are all established in the
Netherlands and are totally separate taxpayers from their

47. MINISTRY OF FINANCE, GOVERNMENT OF THE NETHERLANDS, TAXATION IN

THE NETHERLANDS 2001 §3.3.5, at 24, available at http://www.minfin.nl/default.asp?CMS-
TCP=tcpAsset&id=A5AC250C5B6745B5B67B94342DDBEB21.
48. Bosal Holding,2003 E.C.R. at para. 33.
49. Case C-250/95, Futura Participations SA v. Administration des contributions,
1997 E.C.R. 1-2471, para. 22.
50. Bosal Holding, 2003 E.C.R. at para. 39.
2006] Bosal Holding Case

subsidiaries. This appears to be a restatement of the previously

discussed "same taxpayer" requirement, which until this case has
never been a requirement at all. 1
To further its argument rejecting the justifications, the Court
analogized a judgment issued in 2001 in the joined cases of
Metallgesellschaft Ltd and Others and Hoechst AG v.
Commissioners of Inland Revenue. 2 In those cases, the UK
allowed subsidiaries established in the UK with parent companies
in the UK to opt out of a prepayment of corporate taxes, whereas
subsidiaries in the UK having a parent outside of the UK were
required to make the prepayment." The ECJ found an
infringement of the freedom of establishment, which was
unjustified since all of the subsidiaries, regardless of the location of
their parent company, were eventually subject to mainstream
corporations tax.' The advantage in Metallgesellschaft Ltd and
Others and Hoechst AG v. Commissioners of Inland Revenue was
merely a deferment of taxes owed, rather than a complete
avoidance of tax on the profits. The situation is different where, as
in Bosal Holding, the issue is not whether the deduction will be
taken now or later, but whether it can be taken at all. The revenue
loss to the Netherlands is much greater if forced to allow
deduction of costs for profits earned abroad, than it was to the UK
in Metallgesellschaft Ltd and Others and Hoechst AG v.
Commissioners of Inland Revenue where it was required to allow
the deferment regardless of the location of the parent company.
6. Erosion of Tax Base Justification
To argue that this revenue loss was a justification for the
infringement in this case, the Netherlands government and the
Commission asserted that the loss would represent an erosion of
the tax base going beyond a mere diminution of tax revenue.5 The
ECJ has previously rejected the argument that protection from a
mere diminution of tax revenue justifies infringement of the
freedom of establishment. 6 The Court in Bosal Holding, without

51. See discussion of Baars, infra p. 7-8.

52. Joined Cases C-397/98, Metallgesellschaft Ltd and Others, and C-410/98, Hoechst
AG v. Commissioners of Inland Revenue, 2001 E.C.R. 1-1727, para 30.
53. Id.
54. Id.
55. Bosal Holding, 2003 E.C.R. at para. 20.
56. Imperial Chemical Industries plc, 1998 E.C.R. at 4695.
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

discussion, ruled that a justification relying on tax base erosion

going beyond a mere diminution in revenue does not differ from a
justification involving revenue losses amounting to a mere
diminution.57 The two circumstances, however, are easily
distinguishable.
LC.L v. Colmer involved a UK parent company deducting,
pro-rata, its share of losses incurred by a UK subsidiary owned
through a holding company, which also owned subsidiaries in
other Member States. 8 The loss of revenue complained of (and
rejected by the ECJ) amounted to a mere diminution because the
losses would offset profits taxable in the UK whether charged to
the subsidiary or to the parent, since both were established in the
UK.5 9 The diminution is much greater where, as in the present
case, a parent company is deducting costs which are incurred to
earn profits taxable only outside of the Netherlands. By refusing
to draw a distinction between the two situations, the ECJ has ruled
that an infringement upon a basic freedom cannot be justified by
an erosion of the tax base, no matter how large. This is a further
narrowing of the arguments available to Member States to justify
their tax policies, and could lead to large diminutions in the
national tax bases.
IV. POLICY CONSIDERATIONS

A. JudicialHarmonization
"The decision [in Bosal Holdings] makes it clear that not a
single political authority, when signing the EC Treaty, could have
surmised what its impact would be on the levy of corporate income
tax in the various Member States." 6 This statement by a Dutch
journalist describes the surprised reaction by many Member States
to the ruling. By invalidating all of the Netherlands proposed
justifications for its policy, the Court has clearly indicated that it
intends to pursue harmonization of corporate tax codes in the EU.
This is an objective that is hotly contested within the EU, and one
that should only be pursued through the democratic process, if it is

57. Bosal Holding, 2003 E.C.R. at para. 42.

58. Imperial Chemical Industriesplc, 1998 E.C.R. at para. 3-5.
59. Id. at para. 30.
60. Gerard T.K. Meussen, Netherlands: Bosal Holding Case and the Freedom of
Establishment: A Dutch Perspective, 44 EUROPEAN TAXATION 59,63 (2004).
 2006] Bosal Holding Case

to be achieved at all.
The Court's pursuit of harmonization is visible in its recent
tax jurisprudence. Since 1990, the ECJ has increasingly asserted
power over matters of direct taxation, an area traditionally and
textually reserved to the Member States." Through its decisions,
the ECJ is achieving harmonization through what some have
deemed "the back door, 62 because of the lack of explicit EU
authority over tax harmonization. By eliminating justifications for
Treaty infringement, the Court is eroding the national tax bases,
and moving Member States towards a single-market tax system,
contrary to the wishes of many Member States.63
EU Member States, especially smaller and less developed
states, are strongly against this harmonization. 64 These countries
rely on tax advantages to attract investment in their growing
economies. If they lose the ability to offer tax incentives to
corporations, it is possible that their fragile economies will falter.65
It is not only these younger members that oppose
harmonization. The UK Chancellor of the Exchequer publicly
encouraged resistance to harmonization of the corporate tax
codes. 66 The movement does have its proponents, however. Some
older, more established Member States, such as France and
Germany, do favor harmonization. It would allow them to
compete more effectively with the emerging economies of the east
without adopting more market-friendly tax structures.67
While these few states do support harmonization of corporate
taxes, the disagreement over this issue indicates that it hould be
left to the political process, rather than judicial intervention. The
European Commission itself acknowledged that "a piecemeal
approach to tax obstacles by way of litigation could lead to new
problems in Member States' tax legislation . ,68 The ECJ should

61. Mark Persoff, The Impact of EU Developments on Member States' Tax Systems,
15 INT'L TAX REV. 10, 11-12 (2004), available at 2004 WLNR 500338.
62. Ed Crooks, EU Court Rulings Raise Worries for Tax Revenues and Business, FIN.
TIMES, Dec. 4, 2003 at 3.
63. See Persoff, supra note 61.
64. ANDREAS HAUFLER, TAXATION IN A GLOBAL ECONOMY 20 (Cambridge
University Press 2001); See EU Corporation Tax Harmonization Plans Will "Slowly Die,"
Polish MinisterSays, WORLD NEWS CONNECTION, Sep. 17, 2004, 2005 WL 4587083.
65. See Daniel Altman, Turning the Tables on Reform with Interest, INT'L HERALD
TRIB., Sept. 18, 2004, at 10.
66. Persoff, supra note 61, at 11.
67. Altman, supra note 65.
68. Persoff, supra note 61 at 11-12.
 Loy. L.A. Int'l & Comp. L. Rev. [Vol. 28:171

have upheld the Netherlands law in this case to allow the Member
States to settle this dispute politically.
B. A PoliticalSolution
Through an amendment to the EC Treaty, the Member States
could enshrine their right to protect domestic tax revenues. By
formalizing the right in the treaty, it would be protected from
challenge based on other Treaty sections (such as Articles 43 &
48). This path is not without challenge, however, as the fractious69
environment within the EU is likely to hamper any agreement.
Absent amendment, states may follow Spain's lead, and simply
refuse to refer tax cases to the ECJ. 0 This, however, represents a
breakdown in the system, rather than a constructive solution.
Instead, the ECJ should exhibit restraint in this area, and allow the
political process to work.
V. CONCLUSION

The Court in Bosal Holding struck down the Netherlands tax

law as violative of the freedom of establishment. To reach this
conclusion, the Court engaged in legal reasoning which indicated a
desire to arrive at a particular result: harmonization of corporation
taxes in the EU. Had it not had this result in mind, the Court
could have easily distinguished the facts in Bosal Holding from the
precedent relied on.
The ECJ also failed to adequately consider the policy
justifications for upholding the Netherlands law. The countries of
the EU reserved power over direct taxation to themselves at the
formation of the EU, and consensus over harmonization of
corporate taxation has not yet been reached. Rather than allowing
that consensus to occur through experience and negotiation, the
ECJ has marched towards harmonization through precedent.
With the decision in Bosal Holding, a significant step has been
taken towards extinguishing all justifications for infringement of
EC freedoms based on national tax sovereignty. Ironically, this
may provide the impetus needed for an amendment to the Treaty,
forcing the Court to accept the outcome of the political process.

69. See Crooks, supra note 62 at 11.

70. Lee A. Sheppard, Responding to Marks & Spencer, or Not, 104 TAX NOTES 1489.
2006] Bosal Holding Case 185

Justin Bowen*

Juris Doctor Candidate, May 2006, Loyola Law School.