Part 1 - AL-Tax

Chapter 9literature dealing with comparative taxation, see, for instance, Thuronyi, 2000,2003; Ault and Arnold, 2004). At this level there is a selection of partially differentand alternative policy choices by EU countries aimed at solving commonproblems concerning the treatment of corporate income. Therefore, while at thefirst level (common core) we can identify a single common EU tax family, at leastfor the EU-15 countries, at the second level different EU corporate tax modelsemerge. The main EU corporate tax models can be referred to the basic corporatetax problems listed at the beginning of this section. 9In relation to the tax treatment of corporate distributions, these models are:1. The classical system, which can be divided into two sub-models: Theunmodified classical system (which does not provide relief for personalincome tax on dividends) and the modified classical system, or shareholderrelief (which provides shareholder relief of various kinds for personalincome tax on dividends unconnected with corporate income taxpaid on distributions).2. The imputation system, which can also be divided into two sub-models:The partial imputation system (according to which partial credit is givenfor a shareholder’s personal income tax liability in respect to corporateincome tax paid on distributed dividends) and the full imputation system(according to which full credit is given for a shareholder’s personal incometax liability in respect to corporate income tax paid on dividends).3. Reduced taxation of distributed profits. 104. Participation exemption, which provides zero or reduced taxation on dividendsand/or gains from sales of qualified participations.In relation to the limitation to the deduction on interest, the EU tax models are:1. The fixed debt/equity ratio (or tax treatment of thin capitalization), whichentails that if the debt/equity ratio exceeds a given threshold, the exceedinginterest remuneration is deemed as constructive dividends. In thiscase, the debtor cannot deduct interest paid on loans granted by qualifiedshareholders and/or related parties.2. The recharacterization of interest as nondeductible expenses, according towhich interest is recharacterized as nondeductible expenses in so far asthe underlying financial source meets crucial requirements of equityrather than of debt.3. The ‘arm’s length’ approach, which entails the nondeductibility of interestpaid between affiliated companies which is in excess of what would be221