BEPS Action 6 and the LOB Provision: Restoring the Debate on the Compatibility with EU Law

On 5 October 2015, the OECD published the Final Report on Action 6 (the Action 6 Report) as part of its package of final BEPS Reports. The Action 6 Report is entitled Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. In essence, the OECD has aimed at raising the bar for tax treaty entitlement by setting minimum standards in order to tackle tax treaty abuse. Among the proposed measures, the Action 6 Report suggests the possible adoption of a limitation on benefits (LOB) provision.

The question of the compatibility of LOB provisions with EU law is the subject of a long-standing debate. The Court of Justice of the European Union (ECJ) even had the opportunity to address this issue in ACT GLO. The proposed wording in the Action 6 Report has revived this debate on whether a LOB provision is in line with the Treaty on the Functioning of the European Union (TFEU). The potential problem is highlighted by the OECD itself, which, in different parts of the Action 6 Report, points to the fact that there may be EU law restrictions that prevent Member States from adopting the same wording. Therefore, the Action 6 Report recognizes [5] that the LOB rule may need to be adapted to reflect certain constraints or policy choices concerning other aspects of tax treaties concluded between two contracting states, notably concerns based on EU law.

This chapter provides an analysis of this issue in light of the proposed LOB provision. For this purpose, it begins with an overview of the Action 6 Report, specifically the proposed LOB provision wording. It then revisits the ECJ case law dealing with anti-abuse provisions, following the most relevant case law for the interpretation of LOB provisions. The arguments of the European Commission (the Commission) on the compatibility of LOB provisions with EU Law are then analysed. Finally, an assessment is made on whether the proposed LOB provision in the Action 6 Report is in line with the TFEU.