The EU's Tax Simplification Package: Practical Implications And Key Considerations

On June 24, 2026, the European Commission (“Commission”) published the EU Tax Simplification Package representing the most comprehensive review of the EU direct tax framework to date. The package marks a significant shift in EU tax policy: moving away from an era defined by anti-avoidance measures and towards a focus on competitiveness, simplification and reducing administrative burdens for businesses operating across the single market.

The policy impetus for this shift can be traced to two key documents: the Draghi Report (September 2024) and the European Commission’s Competitiveness Compass (January 2025). The Competitiveness Compass is centred on three pillars, closing the innovation gap, a joint decarbonisation and competitiveness plan, and increasing security and reducing dependencies, with simplification of rules and reduction of administrative burdens identified as one of five horizontal enablers of competitiveness. The Commission has set a target of reducing administrative burdens by 25% by 2029. 

The package encompasses two principal workstreams: (1) simplification of several EU tax directives through an "omnibus" proposal (the Tax Omnibus); and (2) a recast of the Directive on Administrative Cooperation (DAC). The Commission estimates the package will deliver approximately EUR8 billion in annual savings. 

For clients, this represents both an opportunity and a challenge. The proposals will simplify many cross-border structures and reduce compliance costs, but will also require careful analysis of existing arrangements, particularly those involving withholding taxes, interest deductions, and holding structures, to identify where transitional planning may be needed. 

Key proposals

Withholding taxes: Interest and Royalties Directive

The proposed amendments to the Interest and Royalties Directive (IRD) represent one of the most significant elements of the package. The current rule which restricts the directive’s application to payments between associated companies is to be removed in its entirety. The IRD would instead apply to cross-border payments of interest and royalties between any eligible EU companies, irrespective of whether they are related parties. No minimum holding period or association criteria would be required. 

The practical effect is that, within the EU, cross-border payments of interest and royalties would not be subject to withholding tax (or tax by assessment) in the source jurisdiction. The definition of interest, which would not change, is drawn very broadly, encompassing interest on debentures, interest on debt secured on real estate, and profit-participating interest (though member states retain an option not to apply the directive to profit-participating interest). 

New anti-abuse measure: Where payments are made to recipients in third countries that do not levy corporate income tax (or levy at a zero rate), the source member state must either apply a withholding tax or disallow the deduction. This provision is subject to exclusions where a qualified top-up tax under the global minimum tax rules (Pillar 2) or similar rules apply. 

Procedurally, the proposals shift the compliance model from upfront certification to post-payment verification, with faster refund procedures and an obligation on authorities to pay interest on refunds not processed within one year. 

Impact on businesses

These changes will have significant implications for clients utilising certain structures in jurisdictions, where no withholding tax is currently levied on interest, as gateways for investment into Europe from non-tax jurisdictions such as the Cayman Islands or Jersey. 

Under the new rules, such jurisdictions would be required to impose withholding tax or deny tax deductions on payments to zero-tax jurisdictions. For German clients, the current regime under which Germany levies tax by assessment on interest from loans secured on German real estate would need to be abolished for intra-EU payments. 

More broadly, the changes should eliminate the need for complex structuring within the EU to secure withholding tax exemptions. However, clients should note the long implementation horizon: withholding tax changes would only apply from 2037 onwards (assuming the proposals are enacted in their current form).

For large corporates that already satisfy existing minimum holding requirements, the immediate impact may be less pronounced; the changes are most relevant for third-party interest payments. Another point of attention is to what extent the broadening of the IRD would also impact interest and royalty payments to third jurisdictions bearing in mind that freedom of capital movement also applies to third jurisdictions.

Dividend taxation: Parent-Subsidiary Directive

The proposed amendments to the Parent-Subsidiary Directive (PSD) are equally far-reaching. The participation criterion, currently requiring a minimum threshold in voting rights or capital, is to be abolished. Only a 10% threshold remains for the limited purpose of disallowing deduction of related expenses or adding back a 5% fictitious amount at the level of the EU parent company receiving the dividends. Critically, there is no longer any holding period requirement: the directive would apply from day one of ownership. 

Portfolio dividends would now benefit both from withholding tax exemption in the source member state and the corporate tax exemption in the member state of the parent company. Pension institutions would benefit regardless of their legal form and tax status from the withholding tax exemption. As for the IRD, these changes will only apply from 2037 onwards. 

The Commission has also removed optionality for member states, preventing “gold plating” of the directive. Interestingly, infringement procedures were separately initiated in July 2026 by the Commission against Germany, France and Italy for incorrect implementation of the current PSD, so even aside from the Omnibus proposals, there is already pressure in that regard. 

The Commission estimates savings of EUR5.3bn per year in withholding taxes, a large portion of which arises from the elimination of unwanted double taxation. 

Impact on businesses

These changes are particularly beneficial for fund structures. By way of example, a limited partner in corporate form that holds less than 10% through a transparent partnership would now qualify for the exemption (unless a lower threshold applies domestically). More generally, these changes would remove the need for structures using alphabet shares to convert dividends which are subject to withholding tax into capital gains not subject to withholding tax.

The reforms could also create pressure on domestic rules: if cross-border payments are exempt from withholding and corporate tax, there will be commercial and political pressure for domestic payments to receive equivalent treatment. In addition, the freedom of capital movement may require extending the benefit to profit distributions to, or from, third countries.

For the private capital industry and funds sector more broadly, these changes represent a welcome simplification. The impact is less significant for large corporates with majority shareholdings, which typically already satisfy existing thresholds. National anti-abuse measures can still apply, and clients should be mindful of the risk of overreach by certain member states in this regard.

R&D allowances

A new chapter is to be added to the Anti-Tax Avoidance Directive (ATAD) introducing a mandatory minimum standard for research and development (R&D) allowances across the EU. Previously, provisions in this area were limited to non-binding recommendations; the new rules would establish a mandatory floor for all member states. 

Qualifying expenditure encompasses tangible assets (plant, machinery and other tangible assets) wholly and exclusively used for R&D for at least three years. The allowance may be taken as either a deduction in the year of acquisition or spread over four tax periods. A special provision ensures that the additional deduction does not impact the Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) calculation used for interest limitation rules. The Commission estimates a 0.2% GDP boost per year from this measure. 

Impact on businesses

Whilst welcome in principle, the proposal has notable limitations. It operates as an accelerated tax deduction rather than a (transferable) credit system (unlike the U.S. approach), meaning that start-ups and scale-ups without a sufficient tax base will not benefit to the same degree.

Several member states (including Germany, Spain and Belgium) already apply accelerated depreciation provisions that may exceed the new minimum. The proposal establishes a floor rather than a ceiling, and member states remain free to offer more generous R&D incentives. Whilst this measure represents a step in the right direction, arguably, it is not ambitious enough to drive meaningful change for innovative businesses at the early stage of their development.

Interest limitation rules

The package introduces significant amendments to the ATAD interest limitation rules. The 30% EBITDA threshold becomes mandatory, member states will no longer be permitted to apply lower caps (the Netherlands, for example, currently applies a 24.5% threshold). A EUR3 million safe harbour becomes mandatory for all jurisdictions with effect from January 1, 2032 (the Netherlands, for example, currently applies a EUR1m safe harbour). 

Low-risk third-party borrowing carve-out: A new carve-out is introduced for borrowings used for the company’s own activities. Critically, however, this does not extend to on-lending (even to subsidiaries), or where the funds are used for capital contribution to a subsidiary. 

Additional changes include: abolition of the stand-alone entity exemption; an economic downturn safeguard (where EBITDA declines by 50% or more, the rules do not apply); a mandatory group escape allowing use of the consolidated group ratio; a broadened public benefit project carve-out; and a new defence project carve-out exempting financing of critical defence capability. 

The proposals also prevent member states from deviating from the directive text, which may have consequences for existing national exemptions. It should be noted that pending court cases at the CJEU have raised questions about whether the existing interest limitation rules may be contrary to the Treaty on the Functioning of the EU.

Impact on businesses

These changes are of particular significance for the private equity sector and leveraged finance. A key uncertainty remains: whether (private equity (PE)) acquisition debt (i.e., borrowing to acquire shares rather than to contribute capital) qualifies as “low-risk third-party borrowing.” The current drafting leaves this question open, and clients should plan for the possibility that it does not. 

For Dutch clients, the increase from 24.5% to 30% is beneficial. For Luxembourg clients, there is a risk that existing local exemptions, including the securitisation special purpose entity (SPE) exemption and single-entity group exemption for capital markets vehicles, may need to be abolished. The economic downturn safeguard is helpful in principle, but the 50% decline threshold is high and the one-year limitation may prove insufficient in a typical downturn. The defence industry benefits from the new carve-out for critical defence capability. 

Controlled foreign company (CFC) rules

Where Pillar 2 applies to a group, CFC rules will no longer apply (including where safe harbour rules apply, provided the CFC is subject to a qualifying domestic top-up tax). SMEs are excluded from CFC rules entirely. The complex “Model B” approach (which examined the artificiality of arrangements) is abolished, leaving only the simpler Model A that merely looks at specific classes of low taxed passive income.

Impact on businesses

For large groups already subject to Pillar 2, this provides meaningful simplification by removing a redundant compliance layer. SMEs benefit from complete relief from CFC obligations. The retention of Model A only (the simpler approach) reduces complexity across the board.

Clients should review their CFC compliance processes to identify where these simplifications can be realised. There are already concerns being raised from some member states about these exclusions, and meanwhile U.S. industry bodies are raising concerns about U.S.-headed groups that fall within the side-by-side safe harbour not benefiting from the Pillar 2 exclusion. 

Other changes to ATAD

The ATAD General Anti-Abuse Rule (GAAR) is broadened by removing the word “corporate” before “tax”, such that it now applies to all direct taxes, including Pillar 2 top-up taxes and withholding taxes. While most member states already apply their domestic GAAR provisions broadly, this change gives member states an additional EU-law basis to target abusive structures across a wider range of taxes. 

The imported hybrid mismatch rule, under which a taxpayer could be adversely affected by facilitating (even unknowingly) a mismatch elsewhere in a structure, is abolished. This is a welcome simplification, removing a “brother’s keeper” rule that was widely regarded as complex and operationally difficult to apply.

Merger Directive amendments

The Merger Directive is updated to align with recent EU company law changes, particularly the Mobility Directive. New categories of tax-neutral transactions are introduced, including: 

• simplified mergers (where no shares are issued by the absorbing company)
• divisions by separation (where isolated assets and liabilities are transferred without requiring a “branch of activity”)
• and cross-border conversions (e.g., converting a German GmbH into a Luxembourg S. à r.l.). 

The list of eligible entities is updated, with the Commission empowered to keep it updated by delegated act. 

Tax neutrality is preserved only where assets and liabilities remain within the tax net of the country of departure.

Impact on businesses

These amendments are particularly welcome for jurisdictions such as Luxembourg and Belgium, which will need to adjust national legislation. For others, such as Germany and the Netherlands, the changes are less revolutionary as both jurisdictions have already adapted to the Mobility Directive. For cross-border conversions, we do not expect transformative changes, as most such transactions can already be accomplished tax-neutrally provided assets remain in the departing country’s tax net.

However, the changes are important for real estate cross-border conversions of real estate companies, and clients should note the distinction between a conversion (where legal personality continues, with implications for withholding tax) and a merger.

Dispute resolution mechanism

The proposals enhance the EU dispute resolution mechanism with easier access rules, clarification of the “affected person” definition (any person impacted by double taxation), and the ability for each affected person to make their own submission. Taxpayers may now initiate proceedings under both the directive and a double tax treaty simultaneously (with the treaty procedure suspended and capable of reactivation).

Tax authorities are required to respond more promptly and cannot defer until the expiry of existing deadlines. Incorrect or incomplete submissions can be corrected without losing the right to relief.

Impact on businesses

These reforms improve the practical ability to resolve double taxation disputes and provide greater flexibility in choosing the appropriate mechanism. The accelerated timelines and enhanced procedural protections represent meaningful improvements for taxpayers pursuing cross-border dispute resolution.

DAC Recast

The nine iterations of the Directive on Administrative Cooperation are consolidated into a single, more readable instrument.

Key changes to DAC 6 include: abolition of Category A hallmarks (including in particular the hallmark on standardised documentations); amendment of the hallmark on non-cooperative jurisdictions to reference only the EU list (the reference to the OECD list will be removed); and an exclusion from DAC 6 reporting for Pillar 2 groups.

Reporting deadlines are extended from 30 to 90 days and only the first implementation step of an arrangement will trigger DAC 6 reporting going forward.. The European Commission is expected to issue guidance on the main benefits test interpretation, and a Council Implementation Act on substance criteria (derived from the abandoned Unshell proposal, i.e., ATAD 3) is anticipated, though unanimity requirements make this challenging. 

DAC 7 changes include the abolition of the 30-transaction activity threshold and an increase in the monetary threshold from EUR2,000 to EUR3,000. A digital/automated verification system becomes mandatory for tax authorities. A single filing option is introduced for annual CbCR notifications and Pillar 2 Top-Up Tax Information Returns (GIR).

Impact on businesses

The extension of the reporting deadline from 30 to 90 days is a practical improvement for advisers and compliance teams. The Pillar 2 group exclusion from DAC 6 reporting would meaningfully reduce the compliance burden for in-scope groups, though some member states reportedly are already taking issue with such a broad exclusion. Clients should monitor the expected substance criteria, which may affect shell company structures. For larger platform operators, the DAC 7 threshold changes are expected to have minimal practical impact.

Timeline and next steps

The proposals have been sent to the European Parliament for consultation. Key milestones are as follows: 

• DAC Recast: Council adoption expected by end of 2026 and to become effective January 1, 2028, except for the single notification mechanism for CbCR and Pillar 2, which is to beome effective January 1, 2030.
• Tax Omnibus: Council adoption expected by end of 2027 and to become effective January 1, 2029, except for:
  • Interest limitation rule changes (EUR3m safe harbour): effective January 1, 2032.
  • Withholding tax exemption changes (IRD/PSD): effective from 2037 onwards (assuming enactment as contemplated with effect from 2029). 

Unanimity is required for adoption, and political challenges are expected. Member states are unlikely to implement domestically ahead of EU-level consensus, although we could see that member states that still need to align domestic tax rules with the changes in corporate laws pursuant to the Mobility Directive may do so at their own initiative earlier. The staggered implementation dates mean that different elements of the package will take effect at different times, requiring clients to plan across multiple timelines.

The package is welcomed as a step in the right direction. However, one could say that it does not go far enough, particularly in respect of R&D incentives for start-ups and scale-ups, and needs to be implemented more quickly if the EU’s competitiveness objectives are to be met. 

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.