ABSTRACT In 1992, the Ruding Committee, appointed by the European Commission to examine the need for company tax harmonization in the European Union, proposed various measures to abolish tax obstacles to cross-border investment. This contribution argues that neutrality and subsidiarity considerations call for more radical reform of company income taxation. Neutrality necessitates that domestic distortions should be eliminated, because external neutrality is inseparable from internal neutrality. Subsidiarity requires that the need for concerted coordination by member states should be reduced to a minimum. To meet these objectives, taxes on capital income should be levied on the basis of the source principle. Under this approach, interest, like dividends, would no longer be deductible in ascertaining taxable profits at company level. Moreover, dividend and interest income would be exempted from the personal income tax.