National Tax Policy, the Directives and Hybrid Finance : Options for Tax Policy in the Context of the Treatment of Hybrid Financial Instruments in the Parent-Subsidiary Directive and the Interest and Royalties Directive

The right of legislation in the area of taxation is part of the sovereign right of each Member State, providing that State with autonomy of decision-making as regards its tax policy measures. This autonomy, however, is restricted by EU law in three ways:1. member States are bound by the Four Freedoms, and in the determination of those freedoms by the jurisdiction of the ECJ. 2. member States are subject to secondary EU Law in the form of regulations, directives and decisions.3. member States are bound by the code of conduct for business taxation.The focus of this article rests on the effect of secondary EU Law, in the form of directives, on the autonomy of national tax policy in the Member States in the area of direct taxation. Up to now, directives have been a major tool used by the Council in bringing the national law of the Member States into line with the requirements of a common domestic market within the European Community. Most of these directives contain very detailed provisions in order to achieve their intended goals. Directives in the area of direct taxation, although few in number, are rather detailed and, thus, effectively constrain the Member States' autonomy in implementing tax policy. Nevertheless, apart from a wilful decision not to implement a directive, either in full or in part, some leeway remains for tax policy in the Member States in the course of the implementation of the directives. It is the aim of this article to show that there is indeed room for tax policy in the Member States, taking the treatment of hybrid cross-border finance between associated companies as an example. We look at this in the context of the Parent-Subsidiary Directive (90/435/ECC) and the Interest and Royalties Directive (2003/49/EC). These directives have been chosen, because they are interrelated, very detailed and have been implemented by the majority of the Member States