The European Union Direct Tax Recast – Part I

Foreword

The European Commission on 24 June 2026 released the long-awaited draft redesign of the EU direct taxation framework. The exercise is part of a comprehensive exercise aimed at improving EU competitiveness by cutting red tape, reducing the compliance cost of doing business, and addressing the fragmentation of the EU savings, investment and capital markets. The simplification package consists of two major parts: the Direct Taxation Omnibus and the DAC Recast, which together impact 16 individual directives and usher in a redesigned direct taxation framework within the EU that is of relevance not only to EU businesses, but also to third country MNEs doing business in the EU. Kore Partners founder and international tax stalwart Tiago Cassiano Neves has kindly accepted to decipher the draft proposals for Orbitax’s Expert Corner series. Given the sheer breadth of the draft proposals, this will be done in several instalments addressing specific elements. In this first instalment: the proposal to abolish withholding tax on payments of dividends, interest and royalties between EU companies.

Part I: The End of Withholding Taxes?

The EU's Tax Simplification Package launched today is one of those proposals that will take several days to properly consolidate, read and understand.

Rather than trying to digest hundreds of pages and outline those in a summary document, I’ve decided to break down the package into a series of short notes, each focusing on a specific topic.

I'll start with an area that is likely to attract significant attention from investors and multinational groups, namely withholding taxes within the EU.

At first glance, the proposed amendments to the Parent-Subsidiary Directive and the Interest and Royalty Directive appear more significant than the "simplification" label might suggest.

If approved, this proposal has the possibility to deliver a meaningful reduction in tax friction within the Internal Market.

So lets first look at the key amendments and then identify the key takeaways.

Amendments to the Parent-Subsidiary Directive

• The proposal removes the minimum participation and holding period requirements applicable under the concept of "parent company", thereby extending the scope of the Directive irrespective of the level or duration of the shareholding.
• The option for Member States to deny the deduction of charges relating to the holding or losses connected with the distribution of profits is limited to participations of at least 10%.
• The scope of the Parent-Subsidiary Directive is extended to pension funds, irrespective of their legal form, through a derogation from the subject-to-tax condition.
• Member States will no longer be able to require prior authorisation or administrative procedures to verify whether the conditions for the withholding tax exemption are met at the time of payment, subject to ex post controls and the application of anti-abuse rules.
• In cases where withholding tax is levied, the procedures under the FASTER Directive or domestic refund procedures within a reasonable period will apply.
• The Annex listing eligible company forms is updated and the Commission is empowered to amend it further through delegated acts.

Amendments to the Interest and Royalty Directive

• The material scope of the Directive is extended by removing the minimum participation requirement contained in the definition of "associated company", thereby allowing withholding tax exemption irrespective of the level of participation between qualifying companies.
• A safeguard against double non-taxation is introduced. For payments made to recipients established in third-country jurisdictions that do not levy corporate income tax or apply a zero tax rate to interest and royalty income, Member States must either levy withholding tax or deny deductibility of the payment. The safeguard does not apply in certain Pillar Two situations.
• The Directive will apply to payments attributable to the activities of a permanent establishment irrespective of whether such payments are tax deductible in the permanent establishment jurisdiction.
• Eligibility for the exemption will generally be self-assessed by taxpayers, subject to ex post controls and the application of anti-abuse and beneficial ownership rules.
• In cases where withholding tax is levied, the procedures under the FASTER Directive or domestic refund procedures within a reasonable period will apply.
• The Annex listing eligible company forms is updated and the Commission is empowered to amend it further through delegated acts.

Key Takeaways

• The long-term budgetary impact may vary significantly from Member State to Member State, particularly for more capital-importing jurisdictions.
• The removal of the minimum participation thresholds could substantially reduce the need for intermediate holding structures historically used to access Directive benefits. This is a major shift as regards tax structuring. This is also the implicit recognition that different ownership thresholds across the EU were themselves a source of Internal Market distortion.
• If economic double taxation between companies is neutralised as proposed, more attention will likely shift to the taxation and residence of the ultimate shareholders, beneficial ownership and to the use of closely held entities to accumulate dividends.
• The proposal simplifies access to Directive benefits but does not address the fragmentation of anti-abuse standards across the EU. The risk of withdrawal of benefits based on domestic anti-abuse provisions under the Parent-Subsidiary Directive, or on the "principal purpose" / "main purpose" tests under the Interest and Royalty Directive, remains largely unchanged. Rather than further harmonising these concepts through the ATAD GAAR framework, the proposal leaves taxpayers exposed to divergent interpretations by Member States.
• Extending the interest and royalty withholding tax exemption to all qualifying associated companies, regardless of participation percentage, may increase funding flexibility for EU companies in certain markets.
• The extension of the Parent-Subsidiary Directive to pension funds is very welcome. However, discussions may arise around the treatment of investment funds under different corporate forms and third-country based funds.
• The impact on third-country shareholders and associated entities will also be important, particularly given the extensive CJEU case law on withholding taxes and the interaction between domestic law, EU freedoms and anti-abuse principles.
• The broader shift from administrative gatekeeping towards taxpayer self-assessment and ex-post verification through audits rather than pre-clearance procedures is a welcome development.