At midnight on 20 June 2016, the European Council reached political agreement on the Anti-Tax Avoidance Directive, making one of the proposed measures of the Anti-Tax Avoidance Package a reality.
As a result of the European Council formally agreeing on the wording of the Anti-Tax Avoidance Directive (the "Directive"), the second of the measures proposed by the European Commission in its Anti-Tax Avoidance Package has become a reality.
On the whole, the Directive aims at securing the taxation of companies' income in the country of origin. The Directive is to counteract exploitation of loopholes in Member States' national tax laws in relation to the tax laws of third-countries and to protect the tax bases of the Member States.
The wording and content of the Directive are somewhat different from the initial proposal of the European Commission, as a number of changes were made, including the elimination of the proposed switch-over clause as well as a significant change to the proposed solution mechanism on hybrid mismatch.
The Directive, which is a minimum harmonisation directive, contains the following 5 preventive measures:
- Interest limitation
- Exit taxation
- General anti-abuse rule
- Controlled foreign company rule
- Rules on hybrid mismatch
From a Danish perspective – comments by Bech-Bruun
The Directive is generally not expected to cause significant changes to the overall tax situation of Danish companies, as the majority of the initiatives are already established principles in Denmark.
The introduction of a higher degree of common rules must be considered positive as it will hopefully result in fewer incidents of two tax authorities classifying tax issues differently. In this respect, the Community law elements may contribute to a clarification of the rules.
Regarding the rule on interest limitation, this will in our assessment require only minor amendments to Danish law, as Denmark has already established rules. The amendments will primarily focus on (i) adjusting financial thresholds; (ii) amending the basis for calculating deductions (as the current Danish limit is calculated on the basis of earnings before interest and taxes (EBIT) while the EU-rule calculates on the basis of earnings before interest, tax, depreciation and amortisation (EBITDA); and (iii) implementing the specific exemptions contained in the Directive.
The Directive's rule on exit tax as well as the general anti-avoidance rule are generally consistent with the corresponding provisions in existing Danish law. As such, we do not expect any revision of these provisions as a consequence of the Directive.
The new controlled foreign company rule may present some challenges, as Denmark already applies a CFC-concept in relation to controlled financial companies. The primary differences between the two may be summarised as follows:
Categories of income:
- Danish rule: Financial, e.g. interest, capital gains, dividends and income from the disposal of shares, certain royalties, income from financial leasing and gains from the sale
of CO2 quotas and credits
- Directive rule: The Member States may choose between including non-distributed income (i) from certain categories or (ii) arising from non-genuine arrangements.
Minimum financial income:
- Danish rule: Minimum 10% of the controlled company's assets and minimum 50% of the controlled company's annual income must be classified as financial assets/income.
- Directive rule: The Member States may opt not to treat a controlled company as a CFC if one third or less of the income falls within the categories or comes from transactions with the company or its associated enterprises.
Requirements for taxation level:
- Danish rule: No, applies regardless of the taxation level in the country of the controlled company.
- Directive rule: Yes, only applies if the actual corporate tax rate paid by the controlled company on the profit is less than 50% of the actual corporate tax rate which would have been charged in the in the Member State in which the parent company is registered.
Requirements for country of residence:
- Danish rule: No, applies to all controlled companies registered in a different country than the parent company.
- Directive rule: If the controlled company is registered in a foreign state which is not party to the EEA Agreement and the Member State has chosen to include non-distributed income based on categories, the Member State may apply the rule even if the controlled company performs substantive economic activities in the country of residence.
Taking into account that the Danish CFC rule was amended in 2007 as a consequence of the EU Court's decision in the Cadbury Schweppes-case (C-196/04) as the extent of the decision was not known at the time, we expect that an additional amendment to the Danish CFC rule will be the most likely outcome.
Finally, the consequence of the hybrid mismatch provision leads to somewhat the same result as the current Danish rule on hybrid companies in the Danish Corporation Tax Act. The provision in the Directive does, however, extend a bit further than the current Danish provision, and we expect the Directive may lead to minor amendments to the Danish provision.