On June 21, 2016, the ECOFIN Council agreed on the content of the EU Anti-Tax-Avoidance Directive (ATA Directive).
In last month’s voting, ECOFIN was unable to reach consensus on the ATA Directive. This week’s agreement is a political compromise that was achieved at the expense of some of the initially proposed measures.
The ATA Directive contains the following measures:
- Interest deductibility limitation. The ATA Directive limits the amount of interest that a taxpayer is entitled to deduct in a tax year.
- Exit taxation. The ATA Directive requires all member states to levy an exit tax on unrealized gains in cases where assets are, or the residence of a company is, transferred within the EU, including transfer of assets from a head office to a branch.
- General anti-abuse rule (GAAR). The proposed GAAR aims to address any gaps that could exist in domestic anti-abuse rules by requiring member states to ignore transactions that are not based on valid business reasons.
- Controlled foreign company (CFC) rules. The CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its − usually higher taxed − parent company.
- Hybrid mismatches rules. The anti-hybrid rule requires member states to follow the classification of the instrument or the entity of the source member state (claiming the initial deduction), resulting in an inclusion of the corresponding income at the level of the recipient.
In the final ATA Directive, the earlier proposed switch-over clause, impacting participation exemption regimes, has been completely removed. In addition, as compared to the initial versions, the proposed CFC rules and interest limitation rules offer more flexibility to the EU member states when it comes to adopting these measures in their local legislation. The additional flexibility is also expected to increase the chance of disparity between the ways the different member states implement the rules – that is, clearly the opposite of what the EU is trying to achieve with this initiative.
Another important change from earlier versions of the ATA Directive is that the EU member states are only required to implement and put into effect these new rules in their local legislation as per January 1, 2019. An additional transition period is granted for the provision dealing with exit taxes, which is to be implemented and come into effect no later than January 1, 2020.
The introduction of the new rules by the EU members in relation to interest deductibility can even be postponed until January 1, 2024 provided member states have effective interest deductibility limitation rules already in place.
DLA Piper will provide a more detailed alert on the five measures included in the EU ATA Directive shortly.