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EU Commission Presents Anti Avoidance Measures Package

On 28 January 2016, the European Commission presented a package of measures targeted at corporate tax avoidance in the EU. The package includes:

  • A draft anti tax avoidance Directive based on the outcomes of the OECD BEPS Project;
  • A draft revision of the administrative cooperation Directive that would required the exchange of Country-by-Country (CbC) reports;
  • Commission recommendations on the implementation of measures against tax treaty abuse; and
  • A Commission communication on an external strategy for effective taxation with measures against problematic tax jurisdictions outside the EU.

The main measures are the anti tax avoidance Directive and the revision of the administrative cooperation Directive for CbC report exchange, which are summarized as follows.

Anti Tax Avoidance Directive

Interest Limitation Rule

The interest limitation rules include a deduction limit equal to the higher of:

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

The limit applies to interest expense exceeding interest income or other taxable income from financial assets.

Also included is a carve-out rule whereby EU 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.

Interest expense exceeding the limits may be carried forward to future years, and where the EBITDA limit is not fully absorbed, the difference may be carried forward as well.

The limits do not apply to financial undertakings.

Exit Tax

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 in the following cases:

  • Assets are transferred from a head office to its permanent establishment in another EU Member State or in a third country;
  • Assets are transferred from a permanent establishment in a Member State to its head office or another permanent establishment in another Member State or in a third country;
  • The taxpayer's residence is transferred to another Member State or to a third country, except for those assets that remain effectively connected with a permanent establishment in the first Member State; and
  • A permanent establishment is transferred out of a Member State.

The rules include the option to defer the full tax payment by paying in installments over five years in certain cases. Interest may apply and a guarantee may be required.

Switch-over Clause

The switch-over clause includes that income received from:

  • a profit distribution from an entity in a third country;
  • proceeds from the disposal of shares in an entity in a third country; or
  • income from a permanent establishment (PE) in a third country;

may not be exempted from tax in an EU Member State 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. In such cases, a deduction of the foreign tax paid in the third country will be allowed.

GAAR

The general anti-abuse rule (GAAR) includes that an EU Member State may ignore an arrangement or a series of arrangements that have been put into place for the essential purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, and not for valid commercial reasons that reflect economic reality.

CFC Rules

The controlled foreign company rules include that the tax base of a taxpayer in an EU Member State will include the non-distributed income of a foreign entity 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 country of the foreign entity 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 draft Directive); and
  • The foreign entity is not a company whose principal class of shares are regularly traded on one or more recognized stock exchanges.

The rules would generally not apply if the foreign entity is resident in a Member State or European Economic Area (EEA) country. However, the rules may apply if the establishment of the foreign entity is wholly artificial or the entity engages in non-genuine arrangements that have been put into place for the essential purpose of obtaining a tax advantage.

Hybrid Mismatch Rules

The hybrid mismatch rules are simpler than the rules initially proposed, and only cover hybrid mismatches involving EU Member States. Under the rules, if two Member States have differing interpretations of a hybrid entity leading to a double deduction of a payment, expense or loss, or a deduction of a payment without inclusion, then the interpretation of the Member State in which the payment has its source, the expense is incurred or the loss suffered will apply in both States.

Similarly, if two Member States have differing interpretations of a hybrid instrument leading to a deduction in the source State and non-inclusion in the other State, the interpretation of the source State will apply.

Click the following link for the draft anti tax avoidance Directive

CbC Report Exchange

The draft Directive to amend the administrative cooperation Directive (Directive 2011/16/EU) would require the exchange of Country-by-Country (CbC) reports between EU Member States based on guidelines developed as part of Action 13 of the OECD BEPS Project.

The draft Directive includes that each Member State must implement the requirement that a CbC report based on Action 13 guidelines be filed by an ultimate parent entity of an MNE group, or reporting entity, within 12 months following the fiscal year concerned if resident in that State. The explanatory memorandum in the draft also includes the EUR 750 million consolidated group revenue threshold for filing as recommended by the OECD.

The exchange does not require the existence of a tax treaty, tax information exchange agreement or any other instrument between the exchanging Member States. In addition, it does not require the conclusion of a competent authority agreement of any kind. The exchange will be done through the EU CCN network (Common Communication Network), which will be upgraded by the Commission for these purposes.

Although previously called for, the draft Directive does not include the public disclosure of CbC reports in any form.

If approved, all EU Member States will be required to transpose the Directive into domestic legislation by the end of 2016 and apply it from 1 January 2017. The first CbC reports to be exchanged, are those covering fiscal years beginning on or after 1 January 2016.

Click the following link for the draft Directive amending Directive 2011/16/EU.

Next Steps

Both draft Directives will be submitted to the European Parliament for consultation and to the Council for adoption.

Click the following link for the press release on the package, which includes links for further information.

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