OUR INSIGHTS AT A GLANCE

  • EU Member States Governments, tax authorities and taxpayers are facing very busy and challenging times. They have to adapt to constantly evolving tax rules and constantly increasing reporting obligations.
  • The proposal for a Directive to prevent the misuse of shell entities for tax purposes, i.e. the Unshell Directive proposal, is still under discussion at EU level and, despite positive political statements, nobody is sure when these discussions will end and whether the EU Member States will ever manage to reach an agreement.
  • Uncertainties regarding the Unshell Directive proposal led the EU Commission to suspend its initiative on "enablers" of tax evasion and aggressive tax planning, called SAFE.
  • The EU Commission also decided to suspend the examination of the Debt-Equity Bias Reduction Allowance (DEBRA) Directive Proposal and it is expected that the project will be kept on hold in the coming months.
  • Nonetheless, additional Directive proposals are still in the pipeline, such as the one on Business in Europe: Framework for Income Taxation, i.e. BEFIT, which will introduce a new framework for EU corporate taxation.
  • Hereafter, we provide an overview of the state of play of these various EU corporate tax initiatives and asses their chances to succeed in the near future.

With the Directive on ensuring a global minimum level of taxation for multinational and large-scale domestic groups in the Union ("Pillar2") in the process of being implemented in EU Member States, the 7th Directive on administrative cooperation in tax matters ("DAC7") now in force and "DAC8", EU Member States Governments, tax authorities and taxpayers are facing very busy and challenging times. They have to adapt to constantly evolving tax rules and constantly increasing reporting obligations.

Still, the times of changes are far from over. Other tax initiatives are in preparation at EU level and the release of additional draft directives (such as the one on Business in Europe: Framework for Income Taxation ("BEFIT"), which will introduce a new framework for EU corporate taxation) is coming closer. A new proposal for a Directive on Faster and Safer Relief of Excess Withholding Taxes has been released and some ongoing proposals are still under review at EU level (such as the Proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes, the "Unshell" Directive Proposal).

We will provide an overview of the state of play of these various EU direct tax initiatives and assess their chances of success in the near future.

The Unshell Directive Proposal

On 22 December 2021, the European Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU. The objective of the proposal is to prevent tax avoidance and evasion through actions by undertakings without minimal substance. The proposal aims to fight against the misuse of shell entities for improper tax purposes and to ensure that shell companies in the EU that have no or minimal economic activity are unable to benefit from certain tax advantages (for a presentation of the Unshell proposal, please read the article "The new Directive proposal to fight against the misuse of shell entities" in our April 2022 ATOZ Insights).

During the French Presidency (January - June 2021), the Czech Presidency (July - December 2022) and the Swedish Presidency of the Council of the EU (January - June 2023), the technical analysis of the proposal was carried out during various meetings of the Working Party on Tax Questions - Direct Taxation ("WPTQ"). However, as indicated in the Economic and Financial Affairs Council ("ECOFIN") report to the European Council on tax issues on 16 June 2023, while the objective of the Swedish Presidency was to make as much progress as possible on this file, focusing inter alia on finding accurate substance criteria and tax consequences, no agreement has been reached among the EU Member States so far.

The ECOFIN report indicates that some progress was made on a number of controversial issues, such as the scope, criteria of minimum substance, tax consequences and tax residency certificate. It indicates further that the Working Party on Tax Questions (High Level) ("HLWP") provided guidance for further work on these and also other outstanding issues. Still, further discussions will be needed in order to find compromise solutions on these outstanding issues, also with the common objective to limit administrative burdens for both taxpayers and tax administrations. Delegations of the different EU Member States stressed the interlinkages between different parts of this complex Directive, meaning that an orientation chosen in one part of the Directive might influence the solution in other parts. This probably explains the difficulties encountered to find an agreement. Indeed, what Member States consider appropriate criteria for being a shell entity depends, to some extent, on what the tax consequences of being classified as a shell entity are, and vice-versa.

On 12 July 2023, the Unshell Directive Proposal was discussed at the European Parliament. Many MEPs criticised the Council for "blocking" the file, despite the overwhelming support that this proposal got from the Parliament. Others raised concerns about "red tape" and administrative burdens for tax authorities and law-abiding businesses. The Spanish Presidency has indicated that reaching agreement on the Unshell Directive Proposal is a priority for them and they hope to be able to do so at the ECOFIN meeting in November 2023.

Nevertheless, the fact that technical discussions are ongoing does not mean that EU Member States will manage to agree on all pending issues so the final outcome of this proposal is still uncertain at this stage and we recommend that taxpayers should still rather adopt a "wait and see" strategy before taking any definitive action.

The SAFE initiative on "enablers" of tax evasion and aggressive tax planning

When the Unshell proposal was adopted, the Commission announced that it would propose a follow-up initiative to respond to the challenges linked to non-EU shell entities. This follow-up initiative was started on 6 July 2022, when the EU Commission launched a public consultation regarding a proposal for a Council Directive to tackle tax advisers and other professionals rendering tax advice (collectively referred to as "enablers") that facilitate tax evasion and aggressive tax planning.

Interested parties had until 12 October 2022 to provide their feedback in a questionnaire referred to as "EU Survey: Proposal for a Council Directive to tackle the role of enablers that facilitate tax evasion and aggressive tax planning in the European Union (Securing the Activity Framework of Enablers - SAFE)". The results of this survey were published on 31 January 2023. We summarised these results in our article "EU Commission's initiatives in direct tax matters: state of play" released in our April 2023 ATOZ Insights.

While the European Commission initially planned to adopt the SAFE Directive proposal on 7 June 2023, the Commission finally backed off. Since the SAFE initiative is a follow-up initiative to the Unshell Directive Proposal, which did not evolve as quickly as initially expected by the Commission (no agreement reached so far and still discussions ongoing on several aspects), the Commission has decided to indefinitely postpone the release of the SAFE Directive proposal. Therefore, the timing of the release (if any) will depend on the progress of the negotiations of the Unshell Directive Proposal in the coming months.

At this stage, even though it has been communicated that the SAFE Directive proposal is technically ready, there is still too much uncertainty regarding the proposal (and there will probably not be any SAFE Directive proposal if no agreement can be reached on the Unshell Directive Proposal) and its potential content, to assess its chances of success. However, should the SAFE initiative finally move forward, it can be expected that it will give rise to controversial discussions amongst the EU Members States, considering that Member States already have a very comprehensive toolbox to tackle tax evasion and aggressive tax planning. To find out more on the SAFE initiative, you can read the article "SAFE - The new EU initiative targeting tax advisers" in our December 2022 ATOZ Insights.

The BEFIT initiative

On 17 October 2022, the European Commission announced the launch of a public consultation on Business in Europe: Framework for Income Taxation ("BEFIT"), a new framework for EU corporate taxation. BEFIT is one of the initiatives announced by the European Commission in its May 2021 communication on Business Taxation for the 21st Century. The initiative would, according to the Commission, "introduce a common set of rules for EU companies to calculate their taxable base while ensuring a more effective allocation of profits between EU countries, based on a formula." BEFIT strongly resembles the previous Common Consolidated Corporate Tax Base ("CCCTB") proposal, which was withdrawn at the time the BEFIT initiative was announced. To find out more on the BEFIT initiative, you can read the article "BEFIT - EU Commission wants to introduce a common set of tax rules for EU companies" in our December 2022 ATOZ Insights.

On 8 May 2023, the European Commission published the report "Public consultation on the "Business in Europe: Framework for Income Taxation – BEFIT" initiative: Factual Summary Report". The report summarises the online contributions made by stakeholders during the public consultation process.

According to the report, almost two thirds of the public consultation survey respondents (50/77) agree or strongly agree that the current situation with 27 different national corporate tax systems gives rise to problems in the internal market. Most of them are business associations, companies and some EU citizens. Respondents who disagree or strongly disagree with the problem (7/77) come from the field of business associations and companies. In our view, the figures reflected in the report, which the European Commission generally uses as a tool to support its actions, should be considered with great care: while 7 out of 77 does not seem to be representative of the opinion of the majority, one should keep in mind that a business association is one single voice representing a lot of interested parties. Many stakeholders, and often the big players, have decided not to contribute to the public consultation on their own but preferred to contribute via the business associations they belong to.

The respondents who do not agree that the current situation with 27 different national corporate tax systems gives rise to problems, and are therefore of the opinion that no EU action is needed, consider the existing regulation sufficient and state that businesses around Europe are already used to the current system. Moreover, they underline that BEFIT could add complexity and costs and cause additional disputes while the European Commission is of the view that its action will bring some simplification. As far as the aim of the BEFIT initiative is concerned, the report indicates that according to the respondents, the three most important objectives of a new corporate tax framework should be: the growth of business activity in Europe (20/77), the attractiveness for investors due to a more competitive single market and greater legal certainty within the EU. Approximately 30% (25/77) considered that raising higher tax revenues should be the least important objective of a new corporate tax framework. The summary report then presents the view of the public on the main features of BEFIT and the different options presented by the Commission to introduce BEFIT.

A draft Directive is expected to be released during the third quarter of 2023. The tentative agenda of the European Commission, as released on 17 May 2023, indicates that the European Commission is expected to adopt a Directive proposal on BEFIT on 12 September 2023. However, this remains to be confirmed (as the planning in terms of release of draft Directives often evolves). As far as the chances of success of BEFIT are concerned, as mentioned in our previous article "EU Commission's initiatives in direct tax matters: state of play" released in our April 2023 ATOZ Insights, a number of factors speak against the subsequent rapid adoption of the BEFIT proposal: the project looks very much like a remake of the CCCTB which was initially released in 2011 and was re-launched in 2016, but which EU Member States have never managed to agree on during the past twelve years. In addition, the BEFIT initiative is controversial on many aspects, including the fact that it would largely remove the Member State's sovereignty in tax matters, which was one of the main factors causing the CCCTB proposal to fail. And if it might be argued that since Member States have accepted the principle of formulary apportionment by signing up to Pillar One, accepting "CCCTB" by another name is a totally different question.

The Debt-Equity Bias Reduction Allowance (DEBRA) Directive Proposal

On 11 May 2022, the European Commission released a Directive Proposal to address Debt-Equity bias. The proposal is one of the targeted measures announced by the European Commission in May 2021 in its Communication to promote productive investment and entrepreneurship and ensure effective taxation in the EU. The proposal lays down rules on the deduction of an allowance on increases in equity for corporate income tax purposes and additional rules on the limitation of the tax deductibility of exceeding borrowing costs (for a presentation of the DEBRA proposal, please read the article "European Commission releases DEBRA Directive Proposal" in our July 2022 ATOZ Insights).

As mentioned in our previous article "EU Commission's initiatives in direct tax matters: state of play" released in our April 2023 ATOZ Insights, by the end of 2022, it was decided to suspend the examination of the DEBRA proposal in order to, if appropriate, reassess it within a broader context only after other proposals in the area of corporate income taxation announced by the Commission have been put forward. Since then, no development has occurred, and it can be expected that the project will be kept on hold in the coming months and years.

Implications

Over the past few months, the ongoing initiatives of the European Commission in corporate tax matters have evolved. While for some of them, the evolution came as expected (the SAFER Directive Proposal was released), for some other projects, more time will be needed than initially anticipated by the EU for Member States to manage to agree unanimously - if they ever manage to do so (the Unshell Directive Proposal). Because the introduction (vs. the non-introduction) of tax changes at EU level is the result of negotiations and discussions among all EU

Member States, it is important for taxpayers to closely follow these developments so as to anticipate, if needed, the implementation of these changes and their potential impacts on their situations and investments. Finally, more is yet to come given the ongoing work at OECD level on the so-called Pillar One agreement, which aims to provide for the reallocation of a share of the residual profits of the largest and most profitable multinational enterprises to end market jurisdictions where goods or services are used or consumed. While negotiating the practical implementation of the agreement is taking more time than initially expected at OECD level, the EU is currently not willing to consider any further measures on the digital sector, while the OECD's Pillar One is in preparation or in place.

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.