After the European institutions had adopted an automatic exchange of information between the tax authorities of the Member States within only a few months, now the second part of the Anti Tax Avoidance Package of the European Commission came to the vote. The European Parliament had finalised its report on this Directive over the past weeks already; however, the final decision in respect of tax issues depends on the Council of the European Union. The recommendations of the European Parliament and the adopted final version of the Council of the European Union significantly differ in some points.

Commission proposal

As already mentioned on several occasions, the original proposal of the Commission provides for six measures against tax avoidance practices:

Corporations shall only have the option of deducting interest of their tax base up to a certain amount;The move of locations and/or assets to low tax rate countries shall be burdened with an appropriate tax;Income generated abroad shall be taxed if the previous tax rate set up in another country falls below a certain percentage;General regulations to prevent misuse of laws shall be introduced;Income generated by foreign subsidiaries shall be assigned to the parent company; undA hybrid regulatory framework regulation shall be introduced to make it evident which legislation applies to taxation.

A short overview of the recommendations of the European Parliament is available here and here.

Final Directive – Council of the European Union

The deductibility of interest shall be based on earnings before interest, tax, depreciation and amortisation (EBITDA). Interest depreciation shall be at 30 % (the OECD proposal provides for a scope of 10-30 %) or in some circumstances at a value of 3 million euro (the original proposal of the Commission referred to 1 million euro). Standalone entities may be excluded from the interest limitation rule, as well as all loans, which were taken out before 17 June 2016 and which are intended for long-term infrastructure projects within the EU. This Article of the Directive will only come into effect in 2024 for those Member States, which already adopted similar regulations.

With regard to taxing removed/deducted locations and/or assets, those transfers of assets and cash are excluded, which were carried out between parent company and subsidiary. The right to taxation shall be defined at national level.

In respect of assigning income of foreign subsidiaries to the parent company, those corporations will be excluded, which do not generate more than 750,000 euro in profit.

An important point, which is not included in the final version of this Directive, is the so-called “switch-over” clause (see point 3).

Further information

Commission proposal

Report of the European Parliament

Final Directive