There are three ways freedoms guaranteed by the EC Treaty may be impeded, either in whole or in part, by national tax legislation:

  • direct discrimination
  • indirect discrimination
  • creating obstacles

Sometimes, such impediments are justified.

Direct and indirect discrimination

The Court of Justice of the European Communities (“ECJ”) has always assessed questions of discrimination by comparing equal cases. Discrimination based on citizenship is considered to be direct discrimination. The use of other distinguishing criteria that effectively result in the same outcome, constitutes covert, or indirect, discrimination. The best-known of these criteria is a private individual’s or company’s country of residence. According to the ECJ’s holding in the O'Flynn case, a statutory provision need only be liable to result in less advantageous treatment to be deemed covertly discriminatory.

Although less advantageous treatment of non-residents may suggest direct discrimination based on citizenship, this only applies to equal cases. Although the situations of residents and non-residents are generally not the same, ECJ case law permits limited comparisons between residents and non-residents. For example, there is no objective difference between the situation of a non-resident who receives no significant income in his State of residence and obtains the major part of his taxable income in another Member State, and the situation of a resident of that other Member State (see the Schumacker case). If the territoriality principle, which is essentially the basic difference in taxation between the State of residence and the source State, results in non-residents being treated differently from residents, the cases are not considered equal, which obviates any discrimination issue. This was the situation in the Futura case.


The question that arises is whether a State of origin must secure the free movement of its nationals to a host State. For example, is a Member State permitted to tax the economic activities a resident/citizen pursues in another Member State more heavily than those pursued in its own territory? In other words, may a Member State’s residents/citizens who pursue economic activities in other Member States be treated less favorably than those who pursue activities exclusively in its own territory? Such a situation would not involve discrimination based on citizenship, since all residents/citizens who pursue economic activities in another Member State are taxed more heavily. Nevertheless, it has become apparent that a State of origin is also precluded from obstructing free movement (see the De Groot case on the Dutch regulations for avoiding double taxation; see also the Bosal case on the deductibility of costs relating to non-Dutch participations).


Generally, direct discrimination can only be justified if a treaty provision permits disparate treatment. In addition, a statutory provision or measure that is indirectly discriminatory or obstructive may be justified on the basis of criteria developed in case law. Most of these are premised on the existence of overriding reasons in the general public interest. In addition, the provision concerned must be appropriate and necessary to realizing its objective, and it may not overreach what is necessary to attain that objective.

With respect to direct taxation, the following arguments are those most often used to justify a disputed measure: 

  • The need to preserve the coherence of the tax system. This means that there is a close link between the disputed provision (e.g., the right to deduct insurance premiums) and another provision (e.g., as the taxability of benefits related to that deductibility, such as in the Bachmann case). This argument appears to be of limited use, because if tax coherence is preserved at a bilateral level (e.g., in a tax treaty), the argument will be rejected (see theWielockx case). Tax coherence will be accepted only if, in the case of one and the same taxpayer, there is a direct link between the conferring of a tax advantage and the offsetting of that advantage by a fiscal levy, both of which relate to the same tax (see the Verkooijen case).
  • The need for fiscal supervision. To refute this argument, the ECJ often refers to EC Directive 77/799, which enables each Member States to request information from the authorities of other Member States. In the ECJ’s opinion, this ability adequately secures fiscal supervision.
  • The risk of tax fraud or tax evasion. This argument is often rejected if the measure or provision in question is found not to be specifically designed to prevent abuse because it is overly broad (see the X and Y case). Likewise, a diminution in tax revenue is not accepted as justification for such a measure or provision (see the ICI case and the Bosal case).