The European Union Direct Tax Recast – Part IV: Better Rules for Tax Disputes

In Part I of this series about the EU Tax Simplification Package, I looked at the proposed amendments to the Parent-Subsidiary Directive and the Interest and Royalty Directive. Part II addressed the Merger Directive, while Part III turned to the proposed recalibration of ATAD.

Part IV deals with a less visible but still essential element of the EU tax framework: the Dispute Resolution Mechanisms Directive (or DRM).

The problem is rather straightforward to understand. When two Member States interpret or apply a tax treaty differently, the same income may be taxed twice. The resulting dispute can tie-up capital, generate interest and penalties, increase legal costs and discourage cross-border activity.

Simplifying and accelerating the resolution of these disputes is therefore not merely a technical exercise. It is an important part of making the internal market work.

What is at stake?

The Dispute Resolution Mechanisms Directive, applicable since 1 July 2019, created an EU framework for disputes arising from the interpretation and application of double tax treaties and the EU Arbitration Convention.

The procedure broadly follows four stages:

1. An affected taxpayer files a complaint with the competent authorities of the Member States concerned, generally within three years from the first notification of the measure giving rise to the dispute.
2. The competent authorities decide whether the complaint is admissible. If all authorities accept it, they enter into a Mutual Agreement Procedure, or MAP.
3. If no agreement is reached within the applicable period, the taxpayer may request the establishment of an Advisory Commission or, where agreed between the Member States, an Alternative Dispute Resolution Commission.
4. The competent authorities must adopt a final decision. If they cannot agree, they are generally bound by the opinion of the dispute resolution body.

The Directive was already an important improvement over traditional MAP procedures because it introduced deadlines, procedural rights and the possibility of a binding outcome. But experience revealed some levels of uncertainty, inconsistent practices and worrisome delays. The Commission is now proposing within the simplification exercise a series of targeted amendments. They are useful, but they still remain mainly procedural corrections rather than a full redesign.

Proposed amendments to the DRM Directive

• A clearer definition of "affected person". Where the taxation of several persons is directly affected by the same dispute, each of them would qualify as an affected person. This is particularly relevant in transfer pricing cases involving associated companies in different Member States. Each affected person would generally submit the complaint to the authority of its own State of residence.
• Thirty days instead of "simultaneously". The current requirement to submit the same complaint "simultaneously" has been interpreted inconsistently. The proposal replaces it with a clear 30-calendar-day window, while preserving the overall three-year time limit.
• A right to correct deficiencies. Before rejecting an incomplete complaint, the authority would have to give the taxpayer 30 days to remedy the deficiency. A rejected complaint could also be resubmitted, provided the three-year period has not expired. Authorities would still be able to reject complaints but would have to provide the general reasons.
• Earlier recognition that MAP has failed. The authorities currently have two years to resolve the dispute, with a possible one-year extension. Where they agree that no settlement is possible, the proposal requires them to inform the taxpayer without undue delay, allowing the case to move earlier to dispute resolution.
• Greater flexibility for admissibility disputes. An Alternative Dispute Resolution Commission could decide whether a complaint should be admitted where at least one, but not all, competent authorities reject it.
• Suspension rather than termination of parallel procedures. Filing a DRM complaint would suspend, rather than immediately terminate, other MAP or dispute resolution procedures concerning the same question. Those procedures would only end once all competent authorities had accepted the DRM complaint. This does not affect the separate rules governing domestic judicial proceedings.
• A deadline for objections to arbitrators. Any objection concerning the independence of an independent person of standing would have to be raised before the authorities agree on the final decision.
• More implementing rules and better statistics. The Council could adopt further technical and procedural rules, while Member States would provide annual statistical data to be published in anonymised form. This may allow to assess how long cases actually take and how often arbitration is used.

Key takeaways

• Better access, but the same architecture. The 30-day filing window, the right to remedy deficiencies, the possibility of resubmission and the suspension of parallel procedures are all welcome. But the taxpayer still initiates the procedure and bears its economic consequences while the substantive MAP negotiations remain almost entirely between tax administrations.
• The taxpayer remains outside the MAP room. Stakeholders asked for more meaningful taxpayer participation to accelerate fact-finding and correct misunderstandings. The proposal does not materially change the taxpayer’s role. Taxpayers may provide information, but they are not parties to the MAP negotiations.
• Deadlines remain relatively weak. The two-year MAP period may still be extended by one year on written justification. The proposal does not establish clear substantive criteria for extensions or give the taxpayer a meaningful way to challenge unnecessary delay.
• Eliminating double taxation may not eliminate its cost. The State ultimately entitled to tax the income may charge several years of late-payment interest, while the State refunding tax may pay little or no compensatory interest. The proposal does not address this imbalance.
• Pillar Two remains outside the framework. The amendments do not extend the Directive to disputes arising directly under Pillar Two. This may become increasingly difficult to justify as the EU develops common charging rules without a corresponding binding dispute resolution mechanism.

The next development: the ITDRC

The International Tax Dispute Resolution Commission (ITDRC) initiative is not formally part of the Tax Simplification Package, but it may ultimately prove more transformative than the amendments to the Directive itself.

This is a separate and more ambitious development emerging under Article 10 of the Directive. Austria, Bulgaria, Denmark, France, Germany, Ireland, the Netherlands, Poland, Spain and Sweden recently announced that they had completed negotiations on a Multilateral Convention establishing the ITDRC.

The proposed Commission would provide permanently available panels to conduct the arbitration phase of MAP cases, supported by a professional secretariat. The negotiations were concluded in Warsaw on 12 May 2026, with signature of the Convention as the next step and participation remaining open to other States.

The details and text of the Convention are not yet public, but its origins can be traced to the work of the Fiscalis project group. Between October 2018 and July 2019, the group examined how Article 10 could be used to establish an Alternative Dispute Resolution Commission on a more permanent basis. Its detailed technical report considered different models, including full-time and part-time arbitrators and ad hoc commissions, as well as the role of a permanent secretariat and the choice between independent-opinion and final-offer arbitration.

The main advantages of moving towards a standing structure would be to preserve institutional knowledge, develop specialist expertise, standardise procedures, reduce the time required to constitute panels and promote greater consistency. The Fiscalis report also recognised, however, that permanence involves trade-offs, including costs, caseload, independence, the composition and rotation of panels, and the extent to which greater consistency might evolve into a form of implicit precedent.

Time will tell, but the success of the Convention and of the ITDRC will depend above all on their design and use in practice.

Final assessment

The proposed amendments in the Tax Simplification Package are sensible. They reduce procedural traps, clarify filing requirements, allow deficiencies to be corrected, preserve alternative remedies and permit earlier movement to arbitration where MAP has clearly failed.

But the reform remains cautious. It improves access without fundamentally changing who controls the procedure. Taxpayers remain largely outside MAP negotiations. Extensions remain insufficiently transparent. Interest and penalties are left unresolved. Pillar Two disputes remain outside the framework.

The EU is making the road to dispute resolution easier to enter, while the ITDRC is preparing to join the journey. It has not yet made that journey sufficiently short or less bumpy.