The Code of Conduct for Business Taxation 27 was set up in 1998 to address harmful tax competition within the EU. It has assessed a great number of national measures and in around 100 cases the Member States concerned have agreed to abolish or modify ("roll back") the regimes that have been found harmful under the criteria of the Code of Conduct.
In 2009, the Code Group started examining anti-abuse issues related to hybrid mismatches. It first concentrated its work on hybrid entities and hybrid Permanent Establishments (PE). Guidance on hybrid entities mismatches was agreed in December 2014, on the basis of the fixed alignment approach. It would compel Member States to change their qualification of the hybrid entity from transparent to non-transparent in double deduction situations, or from non-transparent to transparent in deduction/no inclusion cases. Guidance was agreed in June 2015 for hybrid PEs, and in December 2015 for hybrid entities in situations involving third countries (based on a modified fixed alignment approach).
Recently, the Code Group has looked extensively into patent box regimes that exist in 10 Member States. In 2014, it agreed that preferential regimes, such as patent boxes, should be aligned with the "modified nexus approach", discussed in the OECD/G20 BEPS project (Action 5 on Harmful Tax Practices). Under this approach, the tax benefits must be directly linked to the underlying research and development activities. The agreement on the modified nexus approach re-establishes the link between taxation and economic activity.
The Code Group has also entered into dialogues with third states in order to try to ensure that tax regimes in those states comply with the criteria of the Code of Conduct. So far an agreement has been reached with Switzerland and a dialogue has been initiated with Liechtenstein. The 2015 Work program of the Code Group provides that this exercise should be continued and expanded to further third states.
In the Action Plan for Fair and Efficient Corporate Taxation in the EU, the Commission recommended reforming the Code Group in order to focus more on ensuring effective taxation and react more efficiently to instances of harmful tax competition.
