Is the symmetrical classification method EU proof?

One way to solve classification conflicts involving hybrid entities is for states to apply a so-called symmetrical classification method, whereby a state adopts for its domestic tax purposes the tax classification applied to an entity by another state. The outcome of applying such a method can be that a state classifies foreign entities differently from domestic entities, raising potential issues from an EU law perspective when EU Member States are involved. For instance, in case a cross-border situation leads to more burdensome taxation compared to the domestic situation, a violation of the EU fundamental freedoms can be present, whereas if the classification leads to a lower tax burden for certain enterprises, a violation of EU State aid rules can be the result.

In this article, we assess the conformity with primary EU law of tax classification methods, and especially of the symmetrical classification method. It is concluded that the risk of incompatibility with the EU fundamental freedoms and EU State aid rules should typically be limited when EU Member States align their tax classification rules with those of other states to alleviate risks of double (non-)taxation. Risks can increase, however, for instance if nationality is used as a distinguishing criterion, or where under- or overkill occurs.