Dysfunctionality from the Sovereignty Conflict in the ATAD GAAR

Deriving from the internal structure of Article 6 of the EU Anti-Tax Avoidance Directive, the abuse of tax law is overcome in two stages—elimination and requalification. While the elimination stage (addressing how not to tax) is harmonized by the EU for the purpose of fighting against aggressive tax planning, the requalification stage (addressing how to tax then) remains under the sovereignty of Member States. Applying such a two-level mechanism becomes problematic if there is a mismatch between these two stages so that the harmonized GAAR requires elimination of an arrangement, but the domestic law does not provide an alternative basis for taxation of it. This raises a question of whether Article 6 of the ATAD requires the Member States to impose new taxable objects regardless of the literal interpretation of Article 6(3) which recognizes the full sovereignty of Member States to decide what to tax. By applying interpretation methods used by the CJEU in its case-law—i.e., literal, contextual, teleological and comparative—the author argues that the answer to this question is “no”. This is supported by all the interpretations under the above method, while the dysfunctionality of these two stages could be overcome by treating the economic reality test as an objective test regardless of the notion of “commercial reasons” used in Article 6(2).