Tackling corporate tax avoidance
Directive (EU) 2016/1164 — preventing tax avoidance by companies introduces rules to prevent tax avoidance by companies and thus to address the issue of aggressive tax planning in the EU’s single market.
The directive builds on the Action Plan for Fair and Efficient Corporate Taxation and is in response to the finalisation of the project against Base Erosion and Profit Shifting (BEPS) by the G20 and the Organisation for Economic Cooperation and Development (OECD).
The directive applies to all taxpayers that are subject to company tax in one or more EU country, including permanent establishments in one or more EU countries of entities resident for tax purposes in a non-EU country.
Combating base erosion and profit shifting (BEPS)
The directive lays down anti-tax-avoidance rules in 4 specific fields to combat BEPS:
Interest limitation rules: where multinational companies artificially erode their tax base by paying inflated interest payments to affiliated companies in low-tax jurisdictions. The directive aims to dissuade companies from this practice by limiting the amount of interest that a taxpayer has the right to deduct in a tax period. The maximum amount of deductible interest is set at a maximum of 30% of the taxpayer’s earnings before interest, tax, depreciation (a measure of how much of an asset’s value has been used up at a given point in time) and amortisation (spreading payments over multiple periods).
Exit taxation rules: where taxpayers try to reduce their tax liability by transferring its tax residence and/or its assets to a low-tax jurisdiction, solely for the purposes for aggressive tax planning. Exit taxation rules aims to prevent the erosion of the tax base in the EU country of origin when high-value assets are transferred with ownership unchanged, outside the tax jurisdiction of that country. The directive gives taxpayers the option of deferring the payment of the amount of tax over 5 years and settling through staggered payments, but only if the transfer takes place within the EU.
General anti-abuse rule: this rule aims to cover gaps that may exist in a country’s specific anti-abuse rules against tax avoidance, and allows tax authorities the power to deny taxpayers the benefit of abusive tax arrangements. The general anti-abuse clause of the directive applies to arrangements that are not genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.
Controlled foreign company (CFC) rules: in order to reduce their overall tax liability, corporate groups are able to shift profits to controlled subsidiaries in low-tax jurisdictions. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its more highly taxed parent company. As a result of this, the parent company is charged to tax on this income in its country of residence.
Amending Directive (EU) 2017/952
Because Directive (EU) 2016/1164 only addressed hybrid mismatches* within the EU, a new Directive (EU) 2017/952 was adopted extending the scope to ensure the rules cover hybrid mismatches with non-EU countries. The rules of the latter directive supersede the rules on hybrid mismatches of Directive EU 2016/1164.
Rules on hybrid mismatches: where corporate taxpayers take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deduction (i.e. deduction on both sides of the border) or a deduction of the income on one side of the border without its inclusion on the other side. To neutralise the effects of hybrid mismatch arrangements, the directive lays down rules whereby 1 of the 2 jurisdictions in a mismatch should deny the deduction of a payment leading to such an outcome.
Directive (EU) 2016/1164 has applied since 8 August 2016 and had to become law in the EU countries by 31 December 2018.Amending Directive (EU) 2017/952 has applied since 27 June 2017 and has to become law in the EU countries by 31 December 2019 (or by 31 December 2021 in the case of hybrid mismatches).
Base erosion and profit shifting (BEPS): tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
Hybrid mismatch: an arrangement exploiting differences in the tax treatment of instruments, companies or transfers between 2 or more countries.
Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ L 193, 19.7.2016, pp. 1-14)
Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (OJ L 144, 7.6.2017, pp. 1-11)