A Legal and Economic Analysis of the European-Commission's Proposed Directive CCTB Article 11

Christine Franke & Ying Xian Zhao

Student thesis: Master thesis


This thesis examines Article 11 in the European Commission disclosed directive proposal COM(2016) 685 final “On a Common Corporate Tax Base” (hereinafter referred to as “CCTB”). CCTB introduces an “Allowance for Growth and Investment” (hereinafter referred to as AGIallowance), which in theory anticipates a reduction of the debt bias. In most Member States of the European Union interest expenditures on debt are deductible from the corporate tax base while expenditures on equity capital are not, hence leading to a tax advantage for debt financing and distorting financial decisions made by firms. The European Commission has made an intensified effort to simplify and harmonise the rules regarding corporate taxation across the Member States. The aim of the thesis is to analyse the consequences of the implementation of CCTB Article 11 both in terms of legal and economic advantages and disadvantages, and examine how these will affect the Member States of the European Union. The legal methodology is applied to derive the scope of application and the legal effects of the provision, while the economic analysis is applied to derive the economic effects of the provision. Finally, based on the findings, the economical theory of law and economics is applied to compile a suggested solution to optimise the provision in order to maximise the welfare in the Member States. It is concluded through the legal analysis that CCTB Article 11 introduces an allowance for increases and taxation of decreases in the equity capital base. Moreover, the analysis identifies parts of the provision CCTB Article 11, which is put in place to form an anti-avoidance framework to tackle abuses, yet the provision includes terms which are unclear and therefore might cause interpretative risks in regards to the implementation. The economic analysis concludes that the imposition of the AGI-allowance leads to a shift in the supply-curve, which infers an increase in the welfare. Conversely, the taxation of decreases in equity capital base infers an increase in the deadweight loss and affects the overall welfare negatively. In conclusion, the thesis compares the findings to compile a suggested solution consisting of three parts to optimise the provision CCTB Article 11. The first part extends the size of the AGI-allowance, the second part reduces the taxation of decreases in the equity capital base and the third part addresses and attempts to specify the unclear terms in the CCTB Article 11 in order to reduce the interpretative risks.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2018
Number of pages113
SupervisorsPeter Koerver Schmidt