Implications EU Anti Tax Avoidance
The EU Member States reached an agreement about the implementation of certain minimum measures to counter tax avoidance in the EU, in follow up to the global anti base erosion discussion. These minimum measures are worked out in the EU anti-tax avoidance directive (ATAD - Outcome of Proceedings).
Overview of the measures
The agreed measures are minimum requirements. Individual EU member states have the freedom to implement more stringent measures or apply certain escape clauses. Please find below an overview:
A. Limitation of deduction borrowings costs to 30% of the taxpayers EBITDA
Borrowing costs are very broadly defined and do not only cover interest payments. This complicated measure includes many escape clauses that may be (optionally) implemented by EU member states, including:
- no deduction limitation if the taxpayer is not part of a (consolidated) group;
- borrowing costs below € 3 million are fully deductible;
- (optionally) If the tax payer is part of a (multinational) group and the tax payer has an equity/asset ratio that is better than the group, the borrowing costs are deductible;
- (optionally) a group EBITDA test may result in full deduction;
- (optionally) loans existing before June 17, 2016 are not subject to borrowing costs and limitation deductions;
- (optionally) borrowing costs related to long term public infrastructural projects are deductible.
B. Exit taxation upon transfer of assets to other countries
The transfer of assets or businesses to other countries may be subject to exit tax for the difference between the fair market value and the book value. It will be possible for taxpayers to defer instant payment of this exit tax, however local governments may require security if there is a substantial risk of ‘default’. The good thing is that the ‘receiving’ country needs to accept the fair market value that has been applied by the ‘exit State’.
C. General anti-abuse rule
The EU will require Member States to implement a general anti-abuse rule in their domestic legislation. The objective of the general anti-abuse rule is that Member States may ignore an arrangement or series of arrangements that have been put in place for the main purpose of obtaining a tax advantage and which are contrary to the purpose of the applicable law.
D. Controlled foreign company rule
Qualification as so-called controlled foreign company (CFC) generally results in the immediate taxation of (un)realized passive income of CFC company at the level of the (EU) shareholder or owner of the branch.
EU companies owning directly or indirectly at least 50% of the shares of subsidiaries or have a local branch that is subject to a low effective tax rate, may qualify as CFC if the following two conditions are met:
- The tax burden of the subsidiary/branch is less than 50% of what would have been ‘charged’ if this subsidiary/branch would have been located (hypothetically) in the relevant EU member state (where the shareholder or branch holder is located); and
EU member states have the 2 alternative options:
Option 1 – the branch or subsidiary is not involved in substantive economic activity
Option 2 – the income of the branch or subsidiary does not results from a) ‘genuine’ arrangements or b) non-genuine arrangements if these arrangements have not been put in place for the essential purpose of obtaining a tax advantage.
Not much guidance is given to the tax payers to determine whether there is ‘substantive economic activity’ or a ‘genuine arrangement(s)’.
E. Hybrid mismatches
Due to the differences in tax qualification of entities or financial instruments between countries, tax payers may create double deductions or a deduction without taxation at the level of the recipient of the income. The type of base erosion will be targeted with the hybrid mismatch proposal in the ATAD. It is no longer possible to create a deduction if it is not subject to tax in another country. In case of a double deduction, the deduction shall only be given to Member States where such income has its source.
This measure is only relevant for hybrid structures set up between EU member states. It is however anticipated that the hybrid mismatch rule will be extended to non-EU countries. This proposal will likely be published at the end of the year. This will have an impact on many structures in relation to inter alia the United States.
Tangible impact and further steps
EU Member States have already significant anti-abuse measures in place. Countries now need to review their existing set of rules and (partially) replace these rules in order to implement the minimum requirements of the ATAD. Member States need to have the new legislation in place on January 1, 2019 (at the latest). The ATAD provides significant flexibility to EU member states to implement different set of rules. Therefore it is highly recommendable to determine the (high) level tangible impact of ATAD for your business and follow the local implementation developments in the relevant countries. We can assist companies in doing an ATAD check in order:
- To determine the impact of ATAD for your business in Europe
- Monitor (local) measurements and design strategies that can be followed to reduce the impact of ATAD
If you have questions or comments, please contact Guido van Asperen (firstname.lastname@example.org or +31 615041623).back to overview