Despite of lack of harmonization of direct taxation in the European Union several landmark decisions of the European Court of Justice (ECJ) in recent years have clearly put the focus on the far-reaching impact of the fundamental freedoms of the EC Treaty on direct taxation. Based on the principles of non-discrimination on grounds of nationality, the ECJ has expanded the reach of the fundamental freedoms well beyond this initial basis, thus holding that, for example, inequal treatment of resident and non-resident taxpayers in comparable situations constitutes a violation of EC Law, unless such treatment is justified under the “rule of reason.” However, an unsolved issue is whether an EU Member State is obligated under EC Law to treat non-resident taxpayers equally, meaning that an EU taxpayer is eligible for the benefit of the most favourable tax treaty concluded by the Member State from which he derives income.

From a policy standpoint it seems unacceptable in the Internal Market that bilateral tax treaties between Member States give preferential tax treatment to enterprises in one or several member states and not to enterprises resident in the remaining Member States. Such conclusion, however, would lead to most-favoured-nation treatment, or, synonymously, community preference, in direct taxation, which would have an immediate multilateralization of all bilateral tax treaties concluded by EU Member States as a consequence. Due to this far-reaching impact there is strong hesitation from a policy as well as from a legal standpoint to draw such conclusion, although recent case law of the ECJ seems to point in this direction. Based on the EC Treaty, the case-law of the ECJ, and the current state of scholary discussion this article attempts to derive an appropriate approach towards the issue of Community most-favoured nation treatment and its impact on direct taxation in the European Union.