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BEPS Measures included in Proposed EU Council Directive on a Common Consolidated Corporate Tax Base

The recently proposed EU Council Directive on a Common Consolidated Corporate Tax Base (CCCTB) for the EU includes a number measures aimed at preventing base erosion and profit shifting (BEPS), including measures based on the outcomes of various Actions of the OECD BEPS Project. The measures are summarized as follows.

General Anti-Abuse Rule

The general anti-abuse rule includes that an EU Member State will ignore an arrangement or a series of arrangements that have been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law.

Artificial Avoidance of PE

The rules regarding artificial avoidance of a permanent establishment (PE) include defined cases that will or will not give rise to a PE based on Action 7. This is marked as unresolved until the definition of PE is finalized under the OECD Multilateral Instrument to amend tax treaties (Action 15).

Interest Deduction Limitation

The interest deduction limitation rules are based on Action 4, with the deduction limit equal to the higher of:

  • 30% of EBITDA (fixed ratio rule); or
  • EUR 1 million (de minimis rule).

Also included is a carve-out rule whereby Member States may allow a full deduction if the taxpayer's ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group.

Switch-Over Clause

A switch-over clause is included where passive foreign income will not be exempted but instead subject to tax, with a deduction allowed for tax paid in a third country on the income, if:

  • The tax rate on profits in the third country is lower than 40% of the tax rate that would have applied on the income in the Member State of the taxpayer; and
  • The third country has not entered into an agreement on automatic information exchange with the Member State of the taxpayer.

The switch-over clause may be made an option to the CFC rules (below).

CFC Rules

The controlled foreign company rules are based on Action 3. Under the rules, the tax base of a taxpayer will include the non-distributed income of any entity resident in a third country (non-EU) if:

  • The taxpayer itself or with related parties directly or indirectly holds 50% of the voting rights or capital of the foreign entity or is entitled to receive more than 50% of the profits of the foreign entity;
  • The tax rate on profits in the third country is lower than 40% of the tax rate that would have applied on the income in the Member State of the taxpayer;
  • More than 50% of the income accruing to the entity is derived from passive income types (interest, royalties, dividends and others as set out in the proposed Directive); and
  • The company's principal class of shares is not regularly traded on one or more recognized stock exchanges (not a final condition).

The rule will not apply for any third country that is part of the European Economic Area or that has concluded an automatic exchange of information agreement with the EU.

Exit Tax Rules

The exit tax rules include that tax will apply on the amount equal to the market value of transferred assets less their value for tax purposes, with the option to defer the tax payment for 5 years or pay installments over 5 years in certain cases. The deferral or installment option is decided by the Member State, not the taxpayer.

The rules also set out the cases in which exit tax and the option for deferral or installments applies.

Hybrid Mismatches involving EU Member States

Rules based on Action 2 are included for determining the treatment of hybrid mismatches for tax purposes between Member States in the following cases:

  • Double deduction - The hybrid entity will be treated as not being transparent or the business activity concerned as not carried on through a permanent establishment;
  • Deduction without inclusion - The hybrid entity will be treated as being transparent; and
  • Non-taxation without inclusion - The business activity concerned will be treated as not carried on through a permanent establishment.

Hybrid Mismatches involving Third Countries

Rules for determining the treatment of hybrid mismatches for tax purposes in cases involving third countries cover the same cases as for those involving EU Member States. However, instead of specifying set treatment, the rules specify that the EU Member State will apply the same treatment as applied by the third country.

Click the following links for the proposed Directive and the Explanatory Notes.

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