As we have reported earlier the Belgian Government has asked for additional time to determine its final position regarding the Presidency proposal for a final compromise text for an EU Anti Tax Avoidance Directive. Therefore during the ECOFIN meeting of June 17, 2016 it was decided to have a so-called silence procedure until Monday June 20, 2016, 24:00 (midnight). This means that EU Member States have until that deadline to raise objections against the text of the compromise. If the deadline expires without any of the Member States objecting, this automatically means that a political agreement has been reached on the matter. The proposal will then be forwarded to the European Council for adoption. Although at this moment the deadline has not yet expired and therefore no political agreement has been reached yet, it still might be interesting to have a look at the text of the final Presidency compromise and to compare it to the initial proposal as presented by the European Commission on January 28, 2016.
Comparison between the text of the final compromise from June 17, 2016 and the original proposal
Below we will discuss a selection of differences we found between the original proposal for a COUNCIL DIRECTIVE laying down rules against tax avoidance practices that directly affect the functioning of the internal market and the text of the Presidency proposal for a final compromise (ECOFIN meeting of June 17, 2016).
First of all the final compromise contains regulations regarding the dates as of which the Member States shall apply the provisions of the Directive. According to the final compromise Member States shall apply the provisions of the Directive as of January 1, 2019. However an exception is made for the provisions of Article 5 (“Exit taxation”), which shall apply from January 1, 2020.
Switch-over clause
Furthermore the most visible differences is that in the final compromise the article containing regulations regarding a so-called Switch-over clause (Article 6 of the original proposal) have been deleted.
Article 2 (Definitions)
Borrowing costs
A.o. the definition of borrowing costs has been changed. In this respect for example some funding instruments are now being specifically mentioned in the definition of borrowing costs.
Financial asset
The definition of financial asset has been deleted.
Associated enterprises
A definition of associated enterprises has been inserted. An associated enterprise is defined as:
(a) an entity in which the taxpayer holds directly or indirectly a participation in terms of voting rights or capital ownership of 25 percent or more or is entitled to receive 25 percent or more of the profits of that entity;
(b) an individual or entity which holds directly or indirectly a participation in terms of voting rights or capital ownership in a taxpayer of 25 percent or more or is entitled to receive 25 percent or more of the profits of the taxpayer;
If an individual or entity holds directly or indirectly a participation of 25 percent or more in a taxpayer and one or more entities, all the entities concerned, including the taxpayer, shall also be regarded as associated enterprises.
For the purposes of Article 9 (Hybrid mismatches) and where the mismatch involves a hybrid entity, this definition is modified so that the 25 percent requirement is replaced by a 50 percent requirement
Hybrid mismatch
The following definition of hybrid mismatch has been inserted:
'hybrid mismatch' means a situation between a taxpayer in one Member State and an associated enterprise in another Member State or a structured arrangement between parties in Member States where the following outcome is attributable to differences in the legal characterisation of a financial instrument or entity:
(a) a deduction of the same payment, expenses or losses occurs both in the Member State in which the payment has its source, the expenses are incurred or the losses are suffered and in another Member State ('double deduction'); or
(b) there is a deduction of a payment in the Member State in which the payment has its source without a corresponding inclusion for tax purposes of the same payment in the other Member State ('deduction without inclusion').
Article 4 (Interest limitation rule)
Article 4, Paragraph 1 as included in the proposal of the European Commission has been deleted.
In the final compromise it is arranged that for the purpose of Article 4, Member States may also treat as a taxpayer:
(a) an entity which is permitted or required to apply the rules on behalf of a group, as defined according to national tax law;
(b) an entity in a group, as defined according to national tax law, which does not consolidate the results of its members for tax purposes.
In such circumstances, exceeding borrowing costs and the EBITDA may be calculated at the level of the group and comprise the results of all its members.
The threshold that Member States are allowed to give to taxpayers has been increased from 1,000,000 Euro to 3,000,000 Euro.
Furthermore under the final compromise it is arranged that Member States may allow a standalone entity to fully deduct exceeding borrowing costs. A standalone entity is defined as a taxpayer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment.
A new fourth Paragraph has been inserted that gives Member States the option to provide for a grandfathering clause. The grandfather clause can be applied to loans that were concluded before June 17, 2016 (but the exclusion of the interest limitation rule shall not extend to any subsequent modification of such loans) and to loans used to fund a long-term public infrastructure project where the project operator, borrowing costs, assets and income are all in the European Union.
The regulations conditions under which a member of a consolidated group can be given more favorable rights to deduct exceeding borrowing costs than those laid down in Article 4, Paragraph 1 have been changed.
Under the final compromise new carry forward rules are introduced. Furthermore the final compromise contains the possibility to carry back non-deductable exceeding borrowing costs (3 year carry back period).
In comparison to the initial proposal the definition of what entities are part of a consolidated group is changed in such way that the possibilities have been widened and narrowed. In the original proposal an entity had to be included in financial statements that are drawn up in accordance with IFRS, a national financial reporting system of a Member State or US GAAP. Under the final compromise an entity has to be included in financial statements that are drawn up in accordance with IFRS, a national financial reporting system of a Member State. It is then added that a taxpayer may be given the right to use consolidated financial statements prepared under other accounting standards. Therefore the possibilities have been narrowed since US GAAP does no longer automatically give access to the facility of Article 4, Paragraph 5. However, at the same time possibilities are widened because Member States can now also grant entities access to the facility of Article 4, Paragraph 5, if such entities are included in financial statements that are drawn up under other accounting standards.
Article 5 (Exit taxation)
The conditions under which a taxpayer will be subject to the exit taxation have been slightly adjusted by adding the phrase “in so far as the Member State of the … no longer has the right to tax the transferred assets due to the transfer” to a few of the situations mentioned.
With respect to the right of a taxpayer to defer the payment of an exit tax by paying it in installments a paragraph is added which limits the possibilities of the taxpayer to defer payment to situations in which the assets are transferred to an EU Member States or to third countries that are party to the EEA Agreement, if these third countries have concluded an agreement on the mutual assistance for the recovery of tax claims, equivalent to the mutual assistance provided for in Directive 2010/24/EU with the Member State of the taxpayer or with the European Union.
Initially the Article granted the taxpayer the right to defer the payment by paying it in installments over at least 5 years. In the Presidency compromise the taxpayer is granted the right to defer the payment by paying it in installments over 5 years.
It looks like the exception that the exit taxation does not apply to asset transfers of a temporary nature have been narrowed. Where the Article 5, Paragraph 7 initially read as follows: “This article shall not apply to asset transfers of a temporary nature where the assets are intended to revert to the Member State of the transferor” it now reads as follows: “Provided that the assets are set to revert to the Member State of the transferor within a period of 12 months, this Article shall not apply to asset transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management.”
Article 6 (General Anti-Abuse Rule)
Under the final compromise Article 7, Paragraph 1 has been changed in such a way that it reads as follows: “For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part.”
Article 7 (Controlled Foreign Company)
Under the final compromise also a permanent establishment can qualify as a Controlled Foreign Company.
Furthermore the definition of “Controlled Foreign Company” has been simplified. It now only contains a minimum ownership condition and a maximum of corporate income tax paid by a company. If the minimum ownership conditions are met and the actual corporate tax paid on its profits by the company is less than 50% (was 40%) of the corporate tax that would have been charged on the company or permanent establishment under the applicable corporate tax system in the Member State of the taxpayer, the company or permanent establishment qualifies as a CFC.
Paragraph 2 arranges that a Member State in principle should include certain categories of non-distributed income derived by the CFC in the tax base of the taxpayer. This inclusion of income however is not done if the CFC on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. A Member State can however decide to still include CFC income in the taxable base of the taxpayer if the CFC is resident or situated in a third country that is not party to the EEA Agreement.
Paragraph 2 also arranges that a Member state should in principle include the non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage in the tax base of the taxpayer. In this respect thresholds apply. The thresholds are provided in Paragraph 4.
Article 8 (Computation of controlled foreign company income)
A new Paragraph is included that contains regulations on what income is to be included in the tax base of the taxpayer with respect to the non-distributed income of the CFC arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage. In this respect the following is arranged: “Where point (b) of Article 7 paragraph 2 applies, the income to be included in the tax base of the taxpayer shall be limited to amounts generated through assets and risks which are linked to significant people functions carried out by the controlling company. The attribution of controlled foreign company income shall be calculated in accordance with the arm's length principle.”
Furthermore an additional Paragraph is inserted that reads as follows: “The Member State of the taxpayer shall allow a deduction of the tax paid by the entity or permanent establishment from the tax liability of the taxpayer in its state of tax residence or location. The deduction shall be calculated in accordance with national law.”
Article 9 (Hybrid mismatches)
The article on hybrid mismatches has been redrafted in such a way that it reads as follows:
1. To the extent that a hybrid mismatch results in a double deduction, the deduction shall be given only in the Member State where such payment has its source.
2. To the extent that a hybrid mismatch results in a deduction without inclusion, the Member State of the payer shall deny the deduction of such payment.
Once again we want to emphasize that above we have only highlighted a selection of differences we have found between the original proposal for an Anti Tax Avoidance Directive as proposed by the European Commission on January 28, 2016 and the text of the final compromise as available on the website of the European Council/Council of the European Union.
Click here to be forwarded to the text of the final compromise as available on the website of the European Council/Council of the European Union.
Click here to be forwarded to the text of the original proposal for an Anti Tax Avoidance Directive as proposed by the European Commission on January 28, 2016.
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