The legal framework for the shadow economy in the European Union

This paper fills a gap in the literature by providing the necessary legal background for all studies of the shadow economy that make policy recommendations for transferring the activities of the shadow economy to the official/formal economy. Matters related to tax evasion and undeclared work are in principle a responsibility of the Member States of the European Union (EU). According to EU institutional law, the union is only able to legislate with regard to the internal market (free movement of goods, services, capital and persons). The most important legislative actions of the EU in the field of the shadow economy have been so far rules that aim to improve cooperation and exchange of information between national authorities. However, recent developments have stimulated efforts of European institutions to regulate matters of tax transparency and undeclared work.