On January 28th 2016, the European Commission unveiled new anti-tax avoidance measures, the most notable of which being a draft Anti-Tax Avoidance Directive (“ATAD”). This draft directive still requires unanimous agreement from Member States prior to finalisation, at which point it will have to be transposed by each Member State.
The ATAD proposes to introduce anti-avoidance rules in the six following areas, identified as directly affecting the functioning of the EU internal market:
- Limitation on deductibility of interest
The rule aims at limiting the amount of net interest a taxpayer is entitled to deduct in a given tax year. It is proposed that the net interest (i.e. the negative difference between the interest income and the interest expenses) would only be deductible up to the highest of 30% of the taxpayer’s EBITDA or EUR 1,000,000. In case of a higher debt-to-equity ratio at group level, exemptions could apply, provided certain conditions are met. The non-deductible part of the interest expenses could however be carried forward indefinitely. Finally, financial undertakings (i.e. credit institution, insurance and reinsurance companies, UCITS, pension funds or AIFs) are completely excluded from this provision.
- Exit taxation
This rule aims at ensuring that any transfer of assets or residency out of a Member State that would cause said Member State to lose its taxation rights, is recognised and taxed based on the fair market value. This would apply in cases where assets are contributed from the head office to a foreign permanent establishment and vice-versa or in case of a migration of a taxpayer or its permanent establishment from one Member State to another. Under certain conditions, the resulting tax charge could be deferred and paid in instalments.
- Switch-over clause
Pursuant to this provision, capital gains and income from dividends and permanent establishments from/in a non-EU country would not be exempted at the level of the shareholder/head office in case the subsidiary/permanent establishment is subject to a tax on profits at a statutory corporate tax rate lower than 40% of the statutory tax rate that would have been charged under the tax system of the shareholder/head office. Taxes effectively paid in the country of the subsidiary/permanent establishment on the gain/income should however be credited on the tax charge at the level of the shareholder/head office. With regards to losses incurred on the disposal of shares/by the permanent establishment, said mechanism would not apply.
- General anti-abuse rule
Pursuant to this rule, any non-genuine arrangement carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of a tax provision shall be ignored when calculating the applicable corporate tax liability.
- Controlled foreign company rule (“CFC”)
This rule aims at taxing at the level of the shareholder the non-distributed income of a subsidiary, provided that (i) the shareholder holds directly or indirectly more than 50% of the voting rights, capital or income entitlement, (ii) the subsidiary is taxed on profits at an effective tax rate lower than 40% of the effective tax rate of the shareholder and (iii) the subsidiary earns a majority of passive income (i.e. interest, dividend, royalties, financial leasing, insurance, banking or related parties services income) from which more than half is derived from transactions with related parties. Subsidiaries whose shares are regularly traded on recognised stock exchanges as well as financial undertakings (as detailed above) are however excluded from the above rule. The CFC rule would not apply to EU subsidiaries unless their establishment is wholly artificial or in case they engage in non-genuine arrangements, with the essential purpose of obtaining a tax advantage.
- Anti-hybrid mismatches
This last measure requires that the legal characterisation of a hybrid entity or a hybrid instrument made by the source country should be followed by the other country, thus avoiding cases where a deduction of a payment is not followed by an inclusion or where expenses are deducted in more than one country. This rule is only applicable where two Member States are involved and hence not to a situation involving a non-EU country.
The ATAD only provides for de minimis rules and thus does not preclude the application of more stringent domestic rules.