The crusade against perceived tax avoidance shows no signs of abating.

The European Commission (EC) this week proposed 2 amendments to the Parent Subsidiary Directive (PSD). The PSD, broadly, exempts cross-border dividends paid by subsidiaries to parents within the EU from withholding taxes, and eliminates double taxation of the dividends at the level of the parent company.

The proposed changes:

  1. would introduce a general anti-abuse provision. This would allow Member States to withdraw the benefit of the PSD if "artificial" arrangements are involved (meaning an arrangement which does not "reflect economic reality"). The targets here are so-called 'letterbox' companies, inserted to take advantage of lower tax rates.
  2. would remove "hybrid loan arrangements", such as profit participating loans, from the scope of the PSD. The EC's concern is that, in certain Member States, 'dividends' that currently fall within the PSD are classified as tax deductible "debt" repayments. As the PSD exempts these payments from tax in the hands of the parent company, the effect is that they escape tax altogether.

Member States will be expected to implement the amendments by 31 December 2014, although there is likely to be significant opposition from certain Member States.

It will be interesting to see whether the proposals, which the EC claim would raise "billions" of Euros in revenue, get beyond the proposal stage.