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European Council Adopts New Rules On Tax Avoidance

by Ulrika Lomas,, Brussels

14 July 2016

The European Council has formally adopted a new anti-avoidance directive, which sets rules to prevent base erosion and profit shifting (BEPS).

The directive covers all taxpayers that are subject to corporate tax in European Union (EU) member states, including subsidiaries of companies based in third companies. It does the following:

  • Limits the amount of interest that a corporate taxpayer is entitled to deduct in a tax year, to discourage the practice of artificially shifting debt to jurisdictions with more generous deductibility rules;
  • Establishes exit taxation rules, to prevent tax base erosion in the state of origin;
  • Introduces a general anti-abuse rule, to cover gaps that may exist in member states' specific anti-abuse legislation;
  • Introduces controlled foreign company (CFC) rules, to reattribute the income of a low-taxed controlled foreign subsidiary to its (usually more highly taxed) parent company; and
  • Introduces rules on hybrid mismatches, to prevent companies from taking advantage of disparities between national tax systems to reduce their overall tax liability.

The Council said that the directive will ensure that the anti-BEPS measures drawn up by the Organisation for Economic Cooperation and Development (OECD) are implemented in a coordinated manner by the EU, including by the six member states that do not belong to the OECD. Three of the five areas covered by the directive implement OECD recommendations, namely the interest limitation rules, the CFC rules, and the rules on hybrid mismatches.

EU member states will be given until December 31, 2018, to transpose the directive into their national laws and regulations. They will have until December 31, 2019, to transpose the exit taxation rules. Member states that have targeted rules that are equally effective to the interest limitation rules may apply them until the OECD reaches an agreement on a minimum standard, or until January 1, 2024, at the latest.

Peter Kažimír, President of the Council and Finance Minister for Slovakia, said: "This new directive aims to protect our domestic corporate tax bases against aggressive tax planning practices that directly affect the functioning of the internal market. It is therefore an important step, which also demonstrates that we see the fight against such practices not only as our common priority but also our common commitment."

TAGS: compliance | tax | tax compliance | tax avoidance | interest | law | Slovakia | multinationals | legislation | tax planning | transfer pricing | exit tax | regulation | European Union (EU) | Europe | BEPS

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