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Interest limitation rule (Article 4)
Interest payments are generally tax deductible in the
EU Member States. It is a rather common tax planning
strategy for multinational groups to debt-finance group
companies in a high-tax jurisdiction where interest
payment are deductible and paid to the group’s lender
company which is based in a low-tax country. In this
way, the group reduces its overall tax burden.
In order to make it less attractive for companies to
artificially shift debt in order to minimise their tax bill,
the proposed Directive intends to limit the amount of
net interest that a company can deduct from its taxable
income, based on a fixed ratio of its EBITBA – with a cap.
More in detail, in view of the “minimum level of
protection” set out in Article 3, the Directive set the
rate for deductibility at 30% of EBITDA, which is the top
of the scale (10 to 30%) recommended by the OECD,
capping the deductible amount at 1 mEUR. Member
States are allowed to introduce stricter rules.
It is a Commission’s intention not to penalize taxpayers
which run reduced risks as regards BEPS. Net interest are
therefore considered deductible up to a fixed maximum
amount set a 1 mEUR, which is triggered where it leads
to a higher deduction than the EBITDA-based ratio.
The interest limitation rule applies in relation to a
taxpayer’s net financial costs without distinction of
whether the costs originate in domestic, cross-border
within the EU or with a third country borrowing.
As for what specifically regards financial and insurance
entities, the Commission states it is generally accepted
that they should also be subject to limitations to
the deductibility of net interest; nevertheless,
acknowledging that these sectors have special features,
a more customised approach is necessary and at the
present stage of discussion it is not yet possible to
provide specific rules.
Exit taxation (Article 5)
Quite often no provision exits for taxing assets (e.g.,
intangibles) when they are moved from an EU Member
State to a third country. This facilitates to shift usually
high-value assets out of Member States to no or low
tax countries, thus avoid paying tax in the EU on the
underlying profit.
The rationale behind exit taxes is to ensure States the
right to tax any capital gain created in their territory
even if a taxpayer moves assets or its tax residence out
of the tax jurisdiction of that State and even if this gain
has not yet been realised at the time of the exit.
The Directive allows the EU Member State of origin to
levy tax on the fair market value of the transferred assets
minus their tax book value under given circumstances
such as: the transfer of its head office or permanent
establishment (“PE”) out of the State – regardless of
whether the destination is another Member State or
a third Country; the transfer of assets from PE to head
office and vice-versa, where they are located in different
countries; the transfer of residence out of the Member
State of origin, unless the assets remain effectively
connected to a PE located in that State.
The exit tax payment can optionally be deferred under
certain conditions and to the extent they aremaintained.
For transfers between member States a corresponding
rule is set whereby theMember State of destination shall
accept the market value determined by the Member
State of exit as starting value for its tax purposes.
Asset transfers of a temporary nature are exempted
from taxation provided they are intended to revert to
the Member State of origin.
Switch-over clause (Article 6)
Considering the complexities in giving credit relief for
taxes paid abroad, States tend to increasingly exempt
dividend income and capital gains from taxation. The
unintended negative effect of this approach is that it
may encourage untaxed or low-taxed income to enter
the EU and circulate within it thus often enjoying a
double non-taxation status.
Switch-over clauses are targeted against such practices.
The Draft provides for a “taxation and related credit
relief” system for taxes paid abroad when the statutory
CIT rate in the third country of source is lower than 40%
of the statutory CIT rate of the Member State receiving
the income, thus ensuring equal treatment between EU
and third-country origin payments.
General anti-abuse rule – GAAR (Article 7)
Tax systems worldwide have gaps which can be exploited
by those in search of reducing their overall tax bill.
The purpose of general anti-abuse rules (GAARs) in a
tax systems is to fill in those gaps, by tackling abusive
tax practices that have not yet been dealt with through
specifically targeted anti-abuse provisions.
It is widely accepted that taxpayers should have granted
the right to choose themost efficient tax structure. What
the Draft targets are “non-genuine arrangements or a
series thereof”, i.e. those wholly artificial arrangements
carried out for the essential purpose of obtaining a tax
advantage contrary to the object or purpose of the
otherwise applicable tax provisions.
The Draft provides that such (series of) non-genuine
arrangements shall be ignored for the purposes of
calculating the corporate taxpayer’s CIT liability, which
shall therefore be determined with reference to the
economic substance according to the applicable
national law.
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