UK and International Tax news
EC Tightens Key EU Corporate Tax Rules
Friday 6th December 2013
The EC has recently proposed amendments to key EU corporate tax legislation, in order to reduce tax avoidance in Europe. The proposals will close loopholes in the Parent-Subsidiary Directive [PSD], which some companies have been using to escape taxation. In particular, companies will no longer be able to exploit differences in the way intra group payments are taxed across the EU to avoid paying any tax at all.
The PSD was originally conceived to prevent group companies, based in different member states, from being taxed twice on the same income. However, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any member state at all.
The amendments will update the anti abuse provision in the PSD which safeguards against abusive tax practices, by obliging member states to adopt a common anti abuse rule. This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance.
The Directive will also tighten the rules on specific tax planning arrangements including hybrid loans. Currently, the PSD obliges member states to give parent companies a tax exemption for the dividends they receive from subsidiaries in other member states. However, in some cases, the member states where the subsidiaries are based classify these payments as tax deductible “debt” repayments. The result is that the payments from the subsidiary to the parent company may not be taxed anywhere.
Under the proposals, if a hybrid loan payment is tax deductible in the subsidiary’s member state, then it must be taxed by the member state where the parent company is established.
Member States are expected to implement the amended Directive by 31 December 2014.
The revision of the PSD is one of the measures announced in the BEPS action plan.
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