The EU and BEPS principles: approval of the Anti-Tax Avoidance Directive by ECOFIN

Written on 28 Jun 2016

Following several months of difficult political debate, the European Economic and Financial Affairs Council (ECOFIN) finally approved the Anti-Tax Avoidance Directive, the aim of which is to facilitate a consistent implementation by all Member States of several of the measures put forward within the OECD BEPS project.

The approval process of the Anti-Tax Avoidance Directive (ATAD) has again highlighted the difficulty and the tardiness with which EU Member States reach the consensus necessary for any action. It is interesting to point out that the approval of ATAD was scheduled for the ECOFIN meeting of 25th of May 2016. Since agreement proved impossible, it was necessary to postpone approval to the following ECOFIN meeting, on 17th of June 2016. In light of the discussions, the Presidency put forward a final compromise text and announced a ‘silence’ procedure until Monday, 20th of June 2016. As no objections were raised by that deadline, political agreement was reached and the text will be submitted for formal adoption to the ECOFIN meeting, scheduled for the 12th of July 2016.

The ATAD text finally approved lays down anti-tax-avoidance rules in five specific fields:

  • Interest limitation rules;
  • Exit taxation rules;
  • General anti-abuse rule;
  • Controlled foreign company (CFC) rules; and
  • Rules on hybrid mismatches.

Three aspects of the final wording approved deserve specific attention:

As regards the interest limitation rules, in principle no deduction would be allowed for interest exceeding 30% of EBITDA, although a minimum threshold of € 3M is provided for. The final text, therefore, does not contain the EU Parliament’s proposal to lower such thresholds to 20% and € 2M. Moreover, Member States, which already have national targeted rules limiting interest deduction (such as thin capitalisation rules), will have up to January 1, 2024 to implement this provision and phase out their domestic rules (unless the OECD can reach an agreement and publish a minimum standard prior to this date).

CFC rules have also undergone significant amendments. The previous wording which referred to an effective corporate tax rate of at least 50% of that of the parent’s Member State has been replaced with a test based on the difference between actual corporate tax paid and the tax that would have been paid in the parent’s Member State.

Additionally, the final ATAD wording does not contain the controversial “switch-over” clause, which in essence disallowed the tax exemption of dividends and capital gains from holdings in entities resident in third countries with a corporate income tax rate below 40% of the rate applicable in the parent’s Member State of residence. Such clause had generated much debate, since it was perceived as exceeding the scope of the measures outlined in the OECD G20 mandated BEPS project. The clause was also opposed on the basis that the aim of the directive should not be to set minimum rates and that the measure, consequently, could impact on sovereignty issues.

Member States should implement the measures contained in ATAD before 31st of December 2016. As a general rule, these measures should apply as of 1st of January 2019, although some specific measures may benefit from specific transitional arrangements (such as the provisions relating to limitation on interest deductibility, as seen above).