The EU’s anti-tax avoidance directive proposal

03-07-2016

The EU’s anti-tax avoidance directive proposal is available. The proposed directive is entitled “directive about laying down rules against tax avoidance practices that directly affect the functioning of the internal market”, and in case of the Council’s consent, remarkable changes can be expected on the field of corporate taxation.

The OECD’s “BEPS” (Base Erosion and Profit Shifting) action plans can be regarded as the directive’s definite antecedents thus the explanatory memorandum explains that the directive intends to be in accordance with the “BEPS” action plans, and strongly builds on the rules determined by them.

The directive-proposal states explicitly that it’s aim is the creation of a “fair and effective corporate tax system” and in order to achieve this aim, it lays down rules connecting to the following six areas:

1: Deductibility of interests:

the directive would maximize the deductible costs coming from paid interests for the other members of the company group. (According to the plans the rate would be 30 % of the EBITDA maximally.)

2: Exit taxation:

According to the exit taxation rule the assets which represent a non-realized profit transmitted/transferred to another country with lower tax rates, would be taxed. At the same time in the case of the companies which have a non-realized profit, and transfer their tax residence to another country, the non-realized profit would be taxed in the country of original tax residence.

3: Switch-over clause

In case of an income coming from abroad instead of being deductible the taxpayers would be subject to taxation and would be given credit for the paid taxes.

4: A general anti-abuse rule (GAAR)

Those arrangements which’s primary aim is to gain unfair tax advantages are not to be taken into consideration when establishing the corporate tax base. GAAR’s goal is to provide a general rule which enables the tackling of abusive tax practices even if there is no specific rule that would be applicable in the particular case.

5: Controlled foreign company (CFC) rules

The profits allocated to foreign companies in a state with low tax rates (usually located in a third, non-member state) would be attributed to the mother company, and the taxes would be payable in the country of the mother company.

6: A framework to tackle hybrid mismatches 

Taxpayers often use the different legal qualification of some assets in some countries to gain tax advantages (for example as a resuls receiving tax credits in both countries). The proposal attempts to hinder that practice by stating that the given member state accepts the legal qualification of the other member state, from which the payment, cost or loss comes from.

Obviously the directive – in case it passes through European legislation – by itself can bring very substantial changes to corporate taxation, however it is to be noted, that the directive establishes minimum-requirements so the member states can apply stricter rules than the those of the directive. As a result, it can happen that in more member states even stricter rules will be applicable than the rules of the directive.

Thus it is not surprising, that the primarily concerned multinational companies intend to change their structure because – if the directive actually enters into force – many so far applied practices will not have any tax advantages anymore.

The whole directive proposal in English can be read here:

http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52016PC0026