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EU Council Announces Agreement on Anti Tax Avoidance Directive

On 21 June 2016, the Council of the European Union issued a release announcing that agreement has been reached on a final draft of the Anti Tax Avoidance Directive originally proposed by the European Commission (previous coverage). The announcement follows a tentative agreement reached on 17 June 2016, subject to a silence procedure that ended at midnight on 20 June. The final draft includes anti-avoidance rules in five areas based on outcomes of Actions 2, 3 and 4 of the OECD BEPS Project and BEPS-related aspects of the proposed common consolidated corporate tax base (CCCTB). These include

  • Interest limitation rules, which include a required deduction limit on net borrowing costs equal to (up to) 30% of EBITDA (based on tax numbers and excluding tax-exempt income), with a number of implementation options for EU Member States, including:
    • Calculating the limit at the level of a group as defined according to national tax law;
    • Allowing a deduction up to EUR 3 million;
    • Allowing a full deduction for stand-alone companies;
    • Excluding loans concluded before 17 June 2016 unless subsequently modified;
    • Providing for carry forward/back;
  • Exit taxation rules, which include that exit 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 exit tax by paying in installments over five years in certain cases;
  • A general anti-abuse rule (GAAR), which 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;
  • Controlled foreign company (CFC) rules, which include that the Member State of a taxpayer will treat a foreign entity or permanent establishment (PE) as a CFC if:
    • The taxpayer directly or indirectly holds itself, or with associated enterprises,  more than 50% of the foreign entity's (PE's) capital, voting rights or rights to profit; and
    • The actual corporate tax paid by the foreign entity or PE on its profits is less than the difference between the corporate tax that would have been paid in the Member State under its corporate tax system and the actual corporate tax paid on the profits.
  • Hybrid mismatch rules, which include that when a hybrid mismatch results in a double deduction, the deduction shall be given only in the Member State where such payment has its source, and when a hybrid mismatch results in a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.

EU Member States will have until 31 December 2018 to transpose the directive into their national laws and regulations, except for the exit taxation rules, which must be transposed by 31 December 2019. In addition, Member States that already have interest limitation rules in place may continue to apply those rules if they are equally effective as those under the Directive. The continued application of such existing interest limitation rules is allowed until the OECD reaches agreement on a minimum standard or until 1 January 2024 at the latest.

Formal adoption of the directive will take place at an upcoming Council meeting, and it will enter into force 20 days after it is published in the Official Journal of the EU.

Click the following link for the Council release and the draft directive agreed to.

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