On January 28, 2016 the European Commission unveiled its new Anti-Tax Avoidance Package. As already announced, this includes two legislative proposals, addressing certain anti-base erosion and profit shifting (BEPS) issues and non-public country-by-country reporting (CBCR), as well as a common approach to tax good governance towards third countries and recommendations to tackle treaty abuse. The new package aims at addressing tax abuse, ensuring sustainable revenues and fostering a better business environment in the internal market.
The legislative proposals should be seen in the context of the European Commission’s Action Plan for Fair and Efficient Corporate Taxation, launched in June 2015 and the final recommendations issued by the OECD in October 2015 on their 15 BEPS Action Points. According to Commissioner Moscovici, the new package not only aims at implementing, in a coordinated manner, the OECD standards at the EU level, but goes beyond these recommendations.
Details of the Commission’s package
The proposed rules lay down common minimum rules in the areas of interest limitation, exit taxation, switch-over clause, general anti-abuse rules (GAAR), controlled foreign companies (CFC) and hybrid mismatches. These standards are intended to provide a minimum level of protection for Member States and national implementing rules may therefore go further.
The switch-over clause concerns the treatment of non-EU resident subsidiaries and non-EU permanent establishments held outside the EU. Under the switch-over clause dividends from/capital gains on the disposal of shares in non-EU subsidiaries and income from non-EU permanent establishments may not be exempted if the subsidiary or the permanent establishment is taxed at a statutory rate lower than 40% of the rate applicable in the receiving Member State. No artificiality/active business test is foreseen.
For the Netherlands this means that, for the purposes of the participation exemption and the exemption of the profits of permanent establishments, a subject-to-tax requirement of 10% should apply in order to benefit from these exemptions. This would mean a dramatic change to the current Dutch tax regime.
The proposed interest limitation rules would apply to companies resident within the European Union or the European Economic Area (EU/EEA) and would take the form of an earnings stripping rule (limitation of 30% of the taxpayer’s EBITDA or EUR 1,000,000, whichever is higher). Interest is always deductible to the extent that the taxpayer receives interest or other taxable income from financial assets. Subject to conditions, a taxpayer may be given the right to fully deduct interest if the taxpayer can demonstrate that its equity/assets ratio is equal to or higher than the equivalent ratio of the taxpayer’s group.
Should the Commission’s proposal be accepted, the question is whether the existing generic and specific provisions in the Netherlands that limit the deduction of interest will be abolished or amended.
The proposed exit tax rules would apply to certain cross-border transfers of assets or residence within the EU or to non-EU countries. The rules broadly reflect EU case law on this and provide for a tax deferral mechanism for transfers within the EU/EEA. In the case of transfer within the EU, the receiving Member State will also have to accept the same market value as defined by the home Member State as the starting value of the assets for tax purposes.
From a Netherlands perspective these rules are not likely to have a major impact.
The rules, which are intended to reflect EU case law on this, would require EU Member States to ignore arrangements that are carried out for the essential purpose of obtaining a tax advantage and which are contrary to the object or purpose of tax provisions. The rules would comprise both a motive test and a substance test.
In general, the GAAR is already part of the Netherlands practice, so we do not expect these rules to have a major impact.
Controlled foreign companies
The proposed rules apply to both EU and non-EU CFCs. The CFC’s income would become taxable if certain thresholds are met as regards ownership (50%), effective tax rate (40%), and passive income (50%). Passive income includes interest, royalties, dividends, income from financial leasing, income from group services, immovable property (in non-treaty situations) and income from insurance, banking and other financial activities. Whereas non-EU CFCs would be subject to an objective test, EU/EEA CFCs would only be caught if they involve purely artificial arrangements. A carve-out clause for EU financial undertakings is also provided. An entity does not qualify as a CFC if its principal class of shares is regularly traded on one or more recognized stock exchanges.
Currently, the Netherlands generally does not have CFC legislation and the introduction of CFC legislation would be a major change. Active group finance, which under certain conditions currently qualifies for the participation exemption, is also captured by the CFC rules. This could have a major impact on current practice.
The proposal only covers intra-EU situations involving hybrid entities and hybrid instruments. The tax characterization used by the source Member State has to be followed to ensure consistent tax treatment within the EU. Despite the absence of rules on hybrids involving non-EU states in the proposal, the recommendations of the EU Code of Conduct Group on hybrids involving non-EU states may impact existing structures and practice.
Dutch tax law and administrative practice already target certain forms of hybrid mismatches, both in EU and non-EU situations.
The European Commission’s package also includes a proposal to implement country-by-country reporting to local tax administrations, as well as the exchange of the reports between them. This takes the form of an amendment to the current EU Directive on Administrative Cooperation (DAC) in the field of direct taxation (2011/16/EU).
The rules, which intend to reflect the OECD recommendations in BEPS Action 13, would only apply to multinational enterprises (MNEs) with a minimum consolidated group turnover of EUR 750 million. Based on the proposal, the relevant reporting entity would have to submit to the tax authorities of its residence Member State certain information (including turnover, pre-tax profit, income tax paid and accrued, number of employees, capital, tangible assets, and business activities) on an annual basis and for each tax jurisdiction where they do business. The residence Member State would then have to automatically exchange data with the other relevant Member States (i.e. where the MNEs are either resident or subject to tax through a permanent establishment).
The European Commission indicated that impact assessments addressing, inter alia, the issues relating to public CBC reporting should be finalized by the end of March 2016. Based on this analysis, the European Commission aims at presenting a decision on this in early spring 2016.
BEPS 13 has already been implemented in the Netherlands for tax years beginning on or after January 1, 2016.
External Strategy for Effective Taxation
Finally, the European Commission follows up on the EU-wide approach to third-country non-cooperative tax jurisdictions developed within the framework of the June 2015 Action Plan. Building in particular on its 2012 Recommendation regarding measures intended to encourage third countries to apply minimum standards of good governance in tax matters (C(2012) 8805), the European Commission proposes the following key measures:
- updating the EU tax good governance criteria developed in the 2012 recommendations, including transparency, information exchange and fair tax competition;
- promoting tax good governance at the global level, via the negotiation of tax good governance clauses and state aid provisions in bilateral and regional agreements with third countries;
- assisting developing countries in meeting tax good governance standards;
- developing an EU process for assessing and listing third-country non-cooperative tax jurisdictions;
- revising the EU Financial Regulation to prevent EU funds from being channeled through low or no tax jurisdictions.
Recommendation on Tax Treaty Abuse
The recommendations are intended to reflect the OECD work on BEPS Action 6 (Treaty Abuse) and 7 (Artificial Avoidance of PE status).
The European Commission thus generally endorses the tax treaty GAAR based on the principal purpose test proposed by the OECD. However, the recommendation also stresses the necessity to align the wording on the principal purpose test proposed by the OECD with case law of the Court of Justice of the European Union (CJEU), by introducing a reference to “genuine economic activities” when assessing an arrangement’s compatibility with such a test.
Finally, Member States are encouraged to implement the new provisions of Article 5 of the OECD Model Tax Convention when concluding or revising tax treaties, especially when addressing issues related to the artificial avoidance of PE status.
The two legislative proposals will now be submitted to the European Parliament for consultation and to the Council for adoption. If approved by all Member States, the proposal on country-by-country reporting will have to be implemented into their domestic legislation by the end of 2016, and be applied from January 1, 2017. Although the proposal for the Anti-BEPS Directive does not provide for a specific implementation date, Commissioner Moscovici has already expressed on several occasions his conviction that a quick adoption should be possible.
The Council and the European Parliament will also have to endorse the Tax Treaties Recommendation and Member States should follow it when revising their tax treaties. Once endorsed by the European Parliament, Member States should also formally agree on the new External Strategy and decide on how to take it forward.
The European Commission is expected to publish a revised proposal addressing the Common Consolidated Corporate Tax Base (CCCTB) initiative in the autumn of 2016, as well as a proposal on enhancing dispute resolution procedures in the summer of 2016.
Observations by Meijburg & Co
The proposals outlined above are likely to undergo changes as the political debate develops. However, both Commissioner Moscovici and the new Dutch presidency have already expressed their intention to adopt the anti-BEPS directive before the end of the Dutch six-month mandate. Therefore a relatively quick adoption of the standards laid down in today’s proposals cannot be excluded. It remains to be seen, however, whether the Netherlands agrees to the switch-over clause and the CFC provision without raising concerns, as both would have a dramatic impact on the participation exemption, which is one of the major cornerstones of the Dutch corporate income tax system.