On 20 June 2014, the ministers of the EU Economic and Financial Affairs Council announced that they have agreed to amend EU tax rules in order to close a loophole that allows cross-border corporate groups to benefit from double non-taxation through hybrid financing arrangements.
The amendment applies to the EU parent-subsidiary directive (2011/96/EU), which was implemented to ensure that profits from cross-border groups are not subject to double taxation. The directive requires EU Member States to exempt from taxation profits received by parent companies from their subsidiaries in other Member States.
An unintended consequence of the directive was how it applies to hybrid financing arrangements, which have characteristics of both debt and equity. In some States, the payments are treated as profit distributions for the parent company, which are non-taxable under the directive. In other States the payments are treated as debt payments, which are tax-deductible for the subsidiary. The result is that cross-border groups can use hybrid financial arrangements as a means to achieve double non-taxation.
In order to close this loophole, the amendment to the directive stipulates that profit payments made to a parent company will only be exempt from tax in the Member State of the parent if the payments are not deductible in the Member State of the Subsidiary.
Final adoption of the amendment will take place at an upcoming Council session, and Member States will have until 31 December 2015 to transpose the amendment into national law.