European Union: European Union Reaches Political Agreement On Anti-Tax Avoidance Directive

On June 21, 2016, the Economic and Financial Affairs Council (ECOFIN) of the European Union (EU) reached final agreement on the EU's anti-tax avoidance directive (the Directive). The Directive targets certain arrangements that have the effect of shifting profits among taxing jurisdictions to reduce the total amount of taxes paid. The Directive builds on global standards developed by the Organisation for Economic Co-operation and Development (OECD) last year as part of the Base Erosion and Profit Shifting (BEPS) initiative.  

The political agreement on the Directive is expected to be submitted to ECOFIN on July 12 and will likely be formally adopted without further discussion.

The Directive will apply to any taxpayer that is subject to corporate tax in one or more EU member states, including permanent establishments or subsidiaries based in a "third country." A third country, in EU parlance, refers to any country outside the EU.

Background

The Directive is intended to harmonize the EU member states' approach to limiting tax avoidance strategies. The Directive strives to accomplish this goal by establishing minimum standards with respect to the following five areas:

  • An interest deductibility limitation to discourage companies from creating debt arrangements to minimize taxes through earnings stripping (described below)
  • A general anti-abuse rule (GAAR) to counteract aggressive tax planning whereby one of the main purposes is obtaining a tax advantage by avoiding otherwise applicable tax provisions
  • A controlled foreign company (CFC) rule to discourage artificial profit shifting to low- or no-tax countries
  • Hybrid mismatch rules to prevent companies from exploiting differences in legal characterization to reduce taxation
  • An exit tax on assets moved from a member state's jurisdiction under certain circumstances.

Interest deductibility limitation rules

Multinational groups may finance group entities in high-tax jurisdictions through debt and arrange that interest is paid to entities that reside in low-tax jurisdictions. This practice is often referred to as "earnings stripping." The Directive targets earnings stripping by limiting the deduction of "exceeding borrowing costs" to 30% of taxable income before interest, taxes, depreciation and amortization (the fixed ratio rule). Exceeding borrowing costs means the amount by which a taxpayer's borrowing costs (including interest expense) exceed taxable interest revenues and other economically equivalent revenues.

The rules also include exemptions, a de minimis threshold, equity escape rules, group ratio rules and grandfather provisions. In general, the rules are similar in nature to those recommended by the OECD under BEPS Action 4.

General anti-abuse rule

The GAAR, which is designed to cover gaps in a country's specific anti-abuse rules, allows tax authorities to deny taxpayers the benefit of "non-genuine arrangements" or a series of arrangements carried out by which one of the main purposes is obtaining a tax advantage that defeats the object or purpose of the otherwise applicable tax provisions. The GAAR rules were drafted to generally reflect existing EU case law.  Arrangements are considered non-genuine if they have not been put in place for valid commercial reasons reflecting economic reality.

CFC rules

Companies sometimes shift profits from their parent company (or home jurisdiction) in a high-tax country to controlled subsidiaries, or permanent establishments, in low- or no-tax countries to reduce the group's tax liability. To prevent this form of tax avoidance, the Directive included CFC rules.

The rules require member states of a taxpayer to treat entities that meet certain thresholds as CFCs. An entity is treated as a CFC if the taxpayer has more than 50% ownership (by vote, capital or profit allocation) and the corporate tax paid by the CFC is lower than the difference of tax that would have been charged in the EU member state of the taxpayer and the actual tax paid under the applicable corporate tax system. The rules apply to EU entities, permanent establishments (PEs) and third-country entities that satisfy the threshold requirements.

If the entity or PE is treated as a CFC, the member state of the taxpayer should include in its tax base the nondistributed income of the CFC generated from certain categories of income. The rules also include certain exceptions and de minimis thresholds.

Hybrid mismatches

Member states may treat the same income or entities differently for tax and/or legal purposes, which may give rise to double deductions or a deduction in one jurisdiction but without a corresponding income inclusion in another. This is often referred to as a "hybrid mismatch."

The Directive provides specific rules limiting deductions when a hybrid mismatch occurs. These rules generally apply in cases of double deductions by limiting the deductions only to the member state where the payment has its source.  The rules also apply when a deduction does not include a corresponding income inclusion in another jurisdiction and acts to deny the deduction taken in the member state of the payer.

It should be noted that the scope of these rules is limited to hybrid mismatches between member states. Although currently not included in the scope of these rules, hybrid mismatches between member states and third countries may be subject to a European Commission proposal anticipated for October 2016.  

Exit taxation

Currently, certain assets are not always taxed when expatriated from a member state. The Directive introduces an exit taxation rule whereby a taxpayer shall be subject to tax at an amount equal to the market value of the transferred assets at the time of exit, less tax basis under certain circumstances.

The Directive further sets out that a taxpayer may defer the payment of an exit tax by paying it in installments over at least five years if certain conditions are satisfied.

Effective Dates

In principle, the Directive does not carry the weight of law. Rather, it will have an implementation period during which member states are required to implement the Directive in their local laws.

Member states will generally have until Dec. 31, 2018, to implement the Directive provisions covering hybrid mismatches, interest limitations, CFCs and GAAR in their local laws to be effective as of Jan. 1, 2019. Member states have until Dec. 31, 2019, to implement the exit taxation rules in their local laws to be effective as of Jan. 1, 2020. Member states that have targeted rules that are equally effective to the interest limitation rules included in the Directive may apply their rules until the end of the first full fiscal year following the publication of an agreement between the OECD members on a minimum standard, but no later than Jan. 1, 2024.

Preliminary Observations

The Directive is a profound step toward EU tax reform and synchronization of member state taxation. The rules apply broadly and may impede many cross-border transactions by U.S. multinationals with EU operations. As drafted, the Directive would dramatically affect existing structures and arrangements such as EU holding companies, structured financing arrangements, intellectual property structures and supply chain operations. Taxpayers potentially subject to the Directive should evaluate the effect of the measures. The provision could have a significant impact on a company's global effective tax rate, tax benefits obtained from pre-existing arrangements, movement of assets both within and outside the EU and many other common transactions.  Given the breadth and complexity of the changes, an in-depth evaluation of existing arrangements and structures is recommended to fully appreciate the ramifications.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Jones Day
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Jones Day
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions