Anti-Tax Avoidance Directive

On June 17th 2016, the Economic and Financial Affairs Council of the European Union (ECOFIN) reached a political agreement on the proposal for a Council Directive laying down new rules against tax avoidance practices that directly affect the functioning of the internal market, i.e. the so-called “anti-tax avoidance directive” (“ATAD”). The initial proposal by the European Commission was made in January 2016 (the “Commission Proposal”). Please refer to our April 2016 Newsletter.

"The Commission Proposal has been amended on several points in order to reach Member States’ unanimous consent."

The switch-over-clause has been deleted in the final compromise text. Moreover, with respect to the remaining five items in the ATAD, the following amendments to the Commission Proposal have been agreed upon by the Member States:

1. Interest limitation rules:

exceeding borrowing costs will be deductible up to 30% of the company’s EBITDA or, optionally, up to a EUR 3m threshold (this upper limit would apply to a group if the taxpayer is part of a consolidated group). Member States may further allow (i) standalone entities to fully deduct exceeding borrowing costs, (ii) carrying forward the non-deductible exceeding borrowing costs indefinitely and (iii) carry them back for a limited period of time.

2. Exit taxation rules:

in the compromise text of June 17th 2016, the exit taxable rules are applicable to certain cross-border transfers of assets or residence within the EU or to a third country. For transfers within the EU or EEA countries, the rule includes a tax deferral mechanism that broadly reflects EU case-law in this field;

3. General anti-abuse rule (GAAR):

this broad provision follows now the GAAR inserted in the EU Parent-Subsidiary Directive and tackles arrangements within the EU and vis-à-vis third countries that are considered as non-genuine due to the lack of valid commercial reasons that reflect economic reality;

4. Controlled foreign company (CFC) rules:

as opposed to the Commission Proposal, CFC rules are applicable if the corporate income tax paid by the CFC is lower than 50% of tax that would have been charged in the home/controlling jurisdiction; A carve-out for companies with substantive economic activity is applicable but Member States may limit this carve-out to companies resident in the EEA.

5. Rules on hybrid mismatches:

this provision tackles cross-border arrangements (within the EU only) that result in either (i) a double deduction or (ii) a deduction without inclusion between national tax systems.

The ATAD has been formally adopted at the ECOFIN Council meeting on July 12th 2016 and is to be transposed by the Member States by the end of 2018, taking effect as of 2019. As regards exit taxation and interest limitation rules, the implementation might be delayed in certain circumstances.