The Commission welcomes the entry into force of new rules to eliminate the most common corporate tax avoidance practices.
As of 1 January 2019, all Member States shall apply new legally binding anti-abuse measures that target the main forms of tax avoidance practiced by large multinationals.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: “The Commission has fought consistently and for a long time against aggressive tax planning. The battle is not yet won, but this marks a very important step
in our fight against those who try to take advantage of loopholes in the tax systems of our Member States to avoid billions of euros in tax.”
The rules build on global standards developed by the OECD in 2015 on Base Erosion and Profit Shifting (BEPS) and should help to prevent profits being siphoned out of the EU where they go untaxed. In detail:
- All Member States will now tax profits moved to low-tax countries where the company does not have any genuine economic activity (controlled foreign company rules)
- To discourage companies from using excessive interest payments to minimise taxes, Member States will limit the amount of net interest expenses that a company can deduct from its taxable income (interest limitation rules)
- Member States will be able to tackle tax avoidance schemes in cases where other anti-avoidance provisions cannot be applied (general anti-abuse rule).
Further rules governing hybrid mismatches to prevent companies from exploiting mismatches in the tax laws of two different EU countries in order to avoid taxation, as well as measures to ensure that gains on assets such as intellectual property moved
from a Member State’s territory become taxable in that country (exit taxation rules) will come into force as of 1 January 2020.
Q&A on the entry into force of the Anti-Tax Avoidance
How will the Anti-Tax Avoidance Directive help to ensure profits are effectively
Some companies exploit the differences in Member States’ rules to minimise their tax
bills by shifting profits within the EU. Aggressive tax planners also abuse weaknesses in
one national system, or the absence of anti-avoidance measures in one Member State, to
escape being taxed anywhere in the Single Market. Effective taxation is therefore heavily
dependent on close coordination between Member States, to shut off opportunities for
tax avoidance and prevent profit shifting in the Single Market.
The new rules will ensure that all Member States implement coordinated measures
against tax avoidance, to boost their collective defences against aggressive tax planning.
It also sets out a common approach to tackling external threats of tax avoidance and to
help prevent companies from shifting untaxed profits out of the EU.
What anti-avoidance measures are contained in the new Directive and how will
they help to prevent tax avoidance?
The Anti Tax Avoidance Directive sets out five key anti-avoidance measures, which all
Member States should apply, to counter-act some of the most common types of
aggressive tax planning, as identified in the discussions at the OECD, in Council
discussions on tax avoidance and by the Commission itself. Three of the agreed
measures come into force on 1 January 2019. These are:
a) Controlled Foreign Company (CFC) rule: To deter profit shifting to no or low
Multinational companies sometimes shift profits from their parent company in a high tax
country to controlled subsidiaries in low or no tax countries, in order to reduce the
Group’s tax liability. The proposed Controlled Foreign Company (CFC) rule should
discourage them from doing this.
The CFC rule will ensure that the Member State where the parent company is located will
tax certain profits that the company parks in a no or low tax country. The CFC rule will
be triggered if the tax paid in the third country is less than half of that which would have
been paid in the Member State in question. The company will be given a tax credit for
any taxes that it did pay abroad. This will ensure that profits are effectively taxed, at the
tax rate of the Member State in which they were generated.
Example: A company has its headquarters in an EU Member State. It sets up a
subsidiary in a non-EU country that does not apply corporate tax. This subsidiary does
not carry out substantive activities relating to this income. The company makes inflated
royalty payments to the offshore company, thereby reducing its taxable profits in the EU
Member State. The payments the subsidiary receives are not taxed either, because of the
zero rate in the non-EU country.
With the proposed CFC rule, the EU Member State will tax the subsidiary’s profits as
though they had not been shifted to the no-tax country, thereby ensuring effective
taxation at the tax rate of the Member State concerned.
b) Interest Limitation: To discourage companies from creating artificial debt
arrangements designed to minimise taxes
Interest payments are generally tax deductible in the EU. Some companies arrange their
inter-company loans so that their debt is based in one of the group’s companies in a
high-tax country where interest payments can be deducted. Meanwhile, the interest on
the debt is paid to the group’s “lender” company which is based in a low tax country
where interest is taxed at a low rate (or not at all). In this way, the Group reduces its
overall tax burden. Overall, the group has paid less tax by shifting its profits in loan
arrangements between its companies.
The Directive proposes to limit the amount of net interest that a company can deduct
from its taxable income, based on a fixed ratio of its earnings. This should make it less
attractive for companies to artificially shift debt in order to minimise their taxes. Member
States may choose to apply this rule only to companies which are part of a group, as
standalone companies are not likely to use debt to shift profits.
The interest limitation rule includes an optional grandfathering rule, which means that
Member States may exclude debt in place prior to 17 June 2016 from the scope of the
rule, as they may for interest used to fund long-term public infrastructure projects.
Member States which have equally efficient rules will be allowed to continue with those
rules until the OECD recommends a minimum standard of interest limitation rules or at
the latest by 1 January 2024.
Example: A Group sets up a subsidiary in a no-tax third country, which then provides a
high-interest loan to another company in the group, located in an EU Member State. The
EU-based company must make high interest payments – which are tax deductible – to
the subsidiary. In doing so, it reduces its taxable income in the Member State, while the
corresponding interest income is not taxed in the third country either.
Under the interest limitation rule, the Member State will put a fixed limit on the amount
of interest that the company can deduct. This should discourage companies from shifting
their debts purely to reduce their tax bills.
c) General Anti-Abuse Rule: To counter-act aggressive tax planning when other
rules do not apply
Aggressive tax planning, by its nature, seeks ways around the rules in order to minimise
the taxes a company has to pay. Aggressive tax planners continually try to find ways of
by-passing anti avoidance provisions or new tax avoidance techniques that are not
covered by specific rules.
The Directive sets out a General Anti-Abuse Rule, which will tackle abusive tax
arrangements if there is no other anti-avoidance rule that specifically covers such an
arrangement. The GAAR acts as a safety net in cases where other anti-abuse provisions
cannot be applied. It will allow tax authorities to ignore abusive tax arrangements and
tax on the basis of the real economic substance.
Further rules governing hybrid mismatches to prevent companies from exploiting
mismatches in the tax laws of two different EU countries in order to avoid taxation, as well
as measures to ensure that gains on assets such as intellectual property moved from a
Member State’s territory become taxable in that country (exit taxation rules) will come
into force as of 1 January 2020.