The Rule of Reason Doctrine in European Court of Justice Jurisprudence on Direct Taxation

Abstract

This article critically reviews the doctrine of justification developed by the European Court of Justice in its jurisprudence on direct taxation concerning whether, and the circumstances under which, a national measure that is found to restrict the exercise of one or more of the fundamental freedoms guaranteed by the EC treaty, or that is discriminatory in its application or effect, may be justified as representing an imperative requirement in the public interest.The article begins with an overview of the court's development of the doctrine of justification, or of reason, with emphasis on its application in cases involving direct taxation. The limitations on the exercise of the fundamental freedoms contained in the EC treaty and the grounds on which a restrictive or discriminatory national tax measure may be justified as being in the public interest have traditionally been interpreted very narrowly by the court. The article suggests that the non-discrimination principle developed by the court in its jurisprudence on direct taxation supports a more expansive interpretation of the potential grounds of justification that the court has considered to date in its rule of reason doctrine, and argues that some of the court's recent judgments may form the framework for a more balanced interpretation of the rule of reason in which the justification doctrine is broadened to include an analysis of relevant international tax policy principles. This issue will be of relevance as well in the context of the application of the free movement of capital provisions in article 56 of the EC treaty to third-country investment in Europe, as the court continues to define the circumstances under which the various grounds of justification it has considered to date may be applied to nationals of non-EC member states.