The European Union has announced its resolve to tighten struggle against tax avoidance by proposing amendments to key EU corporate tax legislation.
The amendments, proposed by the European Commission, seek to significantly reduce tax avoidance in Europe and close loopholes in the Parent-Subsidiary Directive, which some companies have been using to escape taxation.
Under the new amendments, companies will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all. The result will be that the Parent-Subsidiary Directive can continue to ensure a level-playing field for honest businesses in the Single Market without opening opportunities for aggressive tax planning.
According to a Commission release, the proposal will be an important contribution to the on-going battle against corporate tax avoidance at both EU and global level.
The Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different Member States, from being taxed twice on the same income (double taxation). However, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any Member State at all (double non-taxation).
The new proposal will ensure that the Directive is tightened up so that specific tax planning arrangements (hybrid loan arrangements) cannot benefit from tax exemptions. Currently, the Parent Subsidiary Directive obliges Member States to give parent companies a tax exemption for the dividends they receive from subsidiaries in other Member States. However, in some cases, the Member States where the subsidiaries are based classify these payments as tax deductible “debt” repayments. The result is that the payments from the subsidiary to the parent company is not taxed anywhere.
Under the proposal, if a hybrid loan payment is tax deductible in the subsidiary’s Member State, then it must be taxed by the Member State where the parent company is established. This will stop cross-border companies from planning their intra-group payments to enjoy double non-taxation, the release said.
For the European Commissioner for Taxation Algirdas Šemeta the amendment “will ensure greater revenues for national budgets and fairer competition for our businesses.”
