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The Commission stresses that the importance of
ensuring that the GAARs apply in a uniform manner to
all situations (either domestic, within the Union and vis-à-
vis third countries), so that their scope and results of
application do not differ.
Controlled foreign company (CFC) legislation (Articles 8 & 9)
With the purpose of reducing their overall tax bill,
multinational groups sometimes shift profits from their
parent company in a high tax country to controlled
subsidiaries in low or no tax countries, where profits are
kept indefinitely without being repatriated.
The proposed (CFC) rule is aimed at discouraging such
practices by allowing Member States where the parent
company is located to tax those profits regardless of
their actual repatriation and the amounts of income
attributed to the parent company should be limited to
the portion exceeding the arm’s length principle.
The CFC rule will be triggered only in case certain
conditions are met, namely:
• an effective tax rate in the third country lower than
40% of that in the Member State
• a control relationship between parent and subsidiary
whereby the former holds directly or indirectly more
than 50% of capital, voting rights or entitlement to
profits of the latter
• the subsidiary is not listed on one ormore recognised
stock exchanges, and
• more than 50% of the subsidiary’s income is made
of passive or captive items of income.
•
Exceptions apply, notably with reference to financial
undertakings tax resident within the EU or their PEs,
on the grounds that financial and insurance sectors are
heavily regulated and therefore unlikely to be captured
by artificial situations without economic substance as
those targeted by CFC rules.
In order to avoid double taxation a tax credit for any
taxes paid abroad is granted to the parent company as
well as a recapture mechanism in case the CFC profits
are repatriated.
Hybrid mismatches (Article 10)
When two tax systems give a different legal
characterisation of the very same item the interaction
of their two legal systems may “mismatch”, leading to
a double deduction (i.e. deduction in both states) or a
deduction of the income in one state without inclusion
in the tax base in the other state.
Hybrid mismatches can arise as a difference in the
legal characterisation of payments (financial hybrid
instruments) or entities (hybrid entities).
To prevent that outcome, the Draft lays down rules
whereby in a mismatch situation the Member State
of the source (of income, payment or expense) should
give a legal characterisation to the hybrid instrument or
entity and the other Member State jurisdiction should
accept it. The rule applies between Member States only,
since the tax treatment of hybrid mismatches between
Member States and third countries “need to be further
examined”.
EVALUATION TIMEFRAME
Article 11 provides that the Commission shall evaluate
the implementation of the Directive three years after its
entry into force and report to the Council.
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