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The Commission in its Communication "Tax Policy in the European Union - Priorities for the years ahead" (COM(2001) 260) of 23 May 2001 stated its belief that taxes on personal income may be left to Member States even when the European Union achieves a higher level of integration than at present (see IP/01/737 Choose translations of the previous link  and MEMO/01/193 Choose translations of the previous link  ) . At the same time the Commission acknowledged that co-ordination at EU level is in some cases necessary to safeguard the application of the Treaty freedoms and to eliminate tax obstacles to cross-border activities. The Commission also referred to the need to co-ordinate personal income taxes to prevent double taxation or unintentional non-taxation in cross-border situations, or to tackle cross-border tax evasion.

The European Court of Justice has consistently held that, in the absence of harmonisation, taxes on personal income fall within the competence of the Member States but they must respect the fundamental Treaty principles on the free movement of workers, services and capital and the freedom of establishment (Articles 39, 43, 49 and 56 of the EC Treaty). In particular, there must not be any direct or indirect discrimination on the basis of nationality, nor may there be any unjustified restrictions to the four freedoms.

Moreover, in more general terms, the Treaty provides that every citizen of the Union has the right to move and reside freely within the territory of the Member States (Article 18 of the Treaty). It should be noted that the applicability of the four freedoms is extended to Norway , Liechtenstein and Iceland through the Agreement creating the European Economic Area (Articles 28 to 45).

The Communications on the taxation of pensions of April 2001 and dividends of December 2003 are the first two examples of the Commission's new approach to achieve a co-ordinated response from Member States to important case-law of the European Court of Justice and eliminate tax obstacles to the Internal Market. Both Communications stress that Member States are free to choose their pension and dividend taxation systems as long as they respect the four freedoms of the EC Treaty.

Respect for the Treaty freedoms is equally important in the area of migrant and cross-border workers, where the European Court of Justice has already given a number of rulings on the taxation of persons earning income in Member States other than where they live.

Double taxation agreements form an integral part of Member States' tax rules, and the personal tax rules included in these agreements have to remain within the boundaries set by the EC Treaty, just like any other national laws.

Finally, the need to avoid distortions to the movement of capital and the need to ensure effective taxation of interest payments received by individuals in Member States other than the Member State of residence have led to the adoption of a Directive on the taxation of savings income in the form of interest payments. This Directive enables such interest payments to be made subject to effective taxation in accordance with the laws of the Member State of residence.