Loyens & Loeff New York regularly posts 'Snippets' on a range of EU tax and legal topics. The topic of this Snippet is the draft EU ATAD 3 directive (the 𝐃𝐢𝐫𝐞𝐜𝐭𝐢𝐯𝐞), which seeks to prevent tax abuse by EU holding companies (𝐇𝐨𝐥𝐝𝐂𝐨𝐬).
Many US multinationals and asset managers use HoldCos for their non-US investments for various reasons, including securing access to the benefits of tax treaties and/or EU tax directives. In the past, it was often decided per investment in which EU jurisdiction the HoldCo would be located and in many cases the HoldCo hired an external service provider to provide its local directors.
In Dec 2021, the European Commission published a first proposal
for the Directive. The proposed Directive seeks to combat HoldCos
with inadequate substance that are used to avoid (withholding)
taxes. It introduces a reporting requirement for HoldCos that
derive cross-border, passive income and have limited substance in
their country of residence. A carve-out applies for, inter alia,
certain regulated financial undertakings (the
𝐂𝐚𝐫𝐯𝐞-𝐎𝐮𝐭).
Information about in-scope HoldCos would be exchanged between the
EU member states (𝐌𝐒). In certain abusive
situations, the Directive could even deny the benefits of tax
treaties and EU tax Directives to HoldCos with inadequate substance
and commercial justification, resulting in higher withholding
taxes.
It was envisaged that the Directive would enter into force as per
Jan 1, 2024. It turned out to be impossible to obtain unanimous
consent from all 27 MS to adopt the Directive and become effective
by that date. Since then, various amendments to the proposed
Directive have been considered, such as initially limiting
consequences for in-scope HoldCos to the exchange of information
and broadening the scope of the Carve-Out to include HoldCos
controlled by alternative investment funds. However, none of those
alternatives obtained unanimous consent either. It is uncertain at
this stage whether the Directive will be adopted and, if so, when
and in what form.
Even though the Directive has not yet been adopted, we have seen
significant changes with respect to HoldCos in recent years. The
introduction of the 'principal purpose test' in tax
treaties pursuant to the OECD's Multilateral Instrument has
given source states more instruments to deny treaty benefits to
HoldCos with insufficient substance. The ability for source
countries to deny treaty benefits to HoldCos is further supported
by EU case law applying the notions of 'beneficial
ownership' and 'abuse' to payments made to HoldCos. As
a result, many taxpayers are centralizing their HoldCos in one
country where they already have an operational presence or open an
office to make sure that their HoldCos have an appropriate level of
substance to withstand scrutiny from source countries.
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.
