Anti-tax avoidance directive
EU/2016/1164 of
12.07.2016
Prof. em. Frans Vanistendael
TABLE OF CONTENTS
• Context of the directive
• Scope & definitions
• Interest limitation rule
• Exit taxation
• GAAR
• CFC
• Hybrid mismatches
CONTEXT
• Explanatory memorandum analyses the
BEPS proposals and urges a common EU
solution with emphasis on CCTB.
• Basically the idea of the Commission was to
rally the MS around the protection of their
national tax base and entice them at the
same time to agree on the CC(C)TB. That
failed however and ATAD was approved and
CC(C)TB had to wait.
CONTEXT
• The Commission wanted to prevent that
each MS would follow its own national way
in implementing the BEPS rules. ATAD is
intended as a form of EU coordination of
BEPS for the MS.
• However in acting very quickly the EU is
now committed to BEPS, without knowing
whether other countries (US?) will
implement BEPS. Quid UK after Brexit?
CONTEXT
• Through the ATAD the Commission has
already obliged MS to take positions with
respect to BEPS actions that are not
mandatory.
• The BEPS actions that are mandatory under
the Multilateral Convention (LOB clauses,
MAP and Arbitration, if accepted) are not
integrated in the ATAD and each MS can
still go its own way.
CONTEXT
• The directive does not preclude national
and agreement based provisions to
safeguard a higher level of protection for
domestic corporate tax bases (art.3).
• This implies stricter protection of national
tax base through national or treaty rules
(MLConvention), also in cases where there
is clearly no cross-border abuse.
SCOPE art.1
• Directive applies to all taxpayers that
are subject to corporate income tax in
one or more MS, including PE’s in MS
of resident entities of third countries.
• Individuals are excluded.
SCOPE art.1
• Applies not only to groups, but also to
single cos., but some rules may not
apply to single cos. (interest limitation).
• Transparent cos. are excluded, i.e.
partnerships and other forms of
transparent cos. (many transparent
cos. in Germany) are not subject to
ATAD.
Definitions art. 2
• Borrowing costs
• Exceeding borrowing costs
• Associated entreprise: direct or indirect
holding by entity or individual of 25% -
hybrids 50% - CFC > 50%.
• Financial undertaking
Minimum protection art. 3
• This directive shall not preclude the
application of domestic or agreement
based provisions aimed at
safeguarding a higher level of
protection for domestic corporate
tax bases.
INTEREST LIMITATION RULE art.4
• Exceeding borrowing costs are deductible
in the tax period in which they are incurred
up to 30% of EBTIDA (earnings before
interest, tax, depreciation and amortisation).
• Exceeding borrowing costs (ExBC):
amount by which deductible borrowing costs
exceed taxable interest revenue or
equivalent taxable revenue from financial
assets.
INTEREST LIMITATION RULE art.4
• Borrowing costs: interest expenses on all
forms of debt and other costs equivalent to
interests and expenses connected to the
raising of finance in accordance with
national law.
• Borrowing costs are always deductible to
the extent that taxpayer receives interest or
other taxable revenues from financial
assets. But deduction of excess
borrowing cost is limited.
INTEREST LIMITATION RULE art.4
• Borrowing cost: 15 million €
• Interest & equivalent revenue: 10 million €
• Exceeding borrowing cost : 5 million €
• EBITDA 10 million € x 0,3 = 3 million €
• Non deductible interest: 2 million €
INTEREST LIMITATION RULE art.4
Options
• MS may exclude ExBC up to 3 million €
(limit for whole group of associated
enterprises)
• MS may exclude stand alone company,
which can deduct all borrowing costs.
INTEREST LIMITATION RULE art.4
Options
• MS may exclude loans concluded before
17.06.2016, but not subsequent
modification of such loans.
• MS may exclude loans used to fund long-
term public infrastructure projects, when
project operator, borrowing costs, assets &
income are all within the EU.
INTEREST LIMITATION RULE art.4
Options
• Long-term public infra-structure project
consists in providing, upgrading, operating
and /or maintaining a large-scale asset of
general public interest in a MS.
• Any income from loans for such projects is
excluded from EBITDA and any excluded
exceeding borrowing cost is excluded from
calculating the amount of group ExBC vis à
vis third parties, under art. 4.5.b(i).
INTEREST LIMITATION RULE art.4
Options
• Indefinite carry foward of amount of ExBC
that is non deductible in the taxable period.
• Indefinite carry forward of ExBC combined
with carry back for maximum 3 years.
• Indefinite carry forward of ExcBC for
maximum 5 years of any amount of excess
EBITDA exceeding interest deduction in the
tax period.
INTEREST LIMITATION RULE art.4
Options
• MS may exclude financial undertakings
from the interest limitation rule, including
when such financial undertakings are part of
a consolidated group for financial
accounting purposes.
INTEREST LIMITATION RULE art.4
Options for Groups
• Option1: When an entity is member of a
group for financial accounting purposes a
taxpayer may be given the right to deduct
the full amount of its ExBC, if it
demonstrates that the ratio of its equity over
total assets is equal to or > compared to the
equivalent rate of group equity over to total
group assets.
INTEREST LIMITATION RULE art.4
Options for Groups
Option1:
• EX. Full deductibility of ExBC:
Co. in group Group
Equity 1 million Equity 10 million
Total assets 2 million Total assets 30 mill.
Co ratio E/A = 0,5 > Group ratio E/A = 0,33
INTEREST LIMITATION RULE art.4
Options for Groups
• Conditions of comparison between group
and group member:
- a tolerance of 2% in the comparison
between single entity and group ratio
- all assets and liabilities are valued using
the same method in accordance with IFRS,
or national standards of a MS, or other
standards (US GAAP)
INTEREST LIMITATION RULE art.4
Options for Groups
• Option 2: The entity of a group may deduct
the amount of ExCB > 30% of EBITDA up to
a group maximum calculated in two steps:
- the group ratio is calculated by dividing
non deductible ExCB on debt vis à vis third
parties over the amount of group EBITDA
- that group ratio is multiplied by the amount
of EBITDA of the single entity.
INTEREST LIMITATION RULE art.4
Options for Groups
Option 2:
Ex.: Co. in group Group
3 million debt third p.
EBITDA 500K 5 million EBITDA
Deductible debt
0,6 x 500 K in stead of 0,3 x 500 K
Deductible ExBC = 300K > 150K
EXIT TAXATION art.5
• Taxpayer is subject to tax on the difference
between market value and tax value of his
assets, in case of:
- transfer of assets from the head office to a
PE in another MS or third country
- transfer of assets from a PE to the head
office or a PE in another MS or third country
- transfer of tax residence to another MS or
third country, except for assets left in PE
- Transfer of business of PE out of a MS.
EXIT TAXATION art.5
• Step up basis: When transfer of assets, tax
residence or PE is to another MS that MS
shall accept the market value of the assets
established in the MS of origin as the
starting value of the assets for tax purposes.
• Market value is the exchange value or value
of settlement between independent parties
in the market.
EXIT TAXATION art.5
• Return of assets:
• Exit tax does not apply to assets that are
set to return to the MS of the transferor
within a period of 12 months.
• Exception only for transfer of financial
assets related to financing securities,
assets posted as collateral, or transfer of
assets to meet prudential capital
requirements.
EXIT TAXATION art.5
• Quid return of physical assets?
The assets must belong to the taxpayer
and be transferred to be part of a PE in
the other country. A building site > 12
months can be treated as a PE.
EXIT TAXATION art.5
• Deferral of payment:
• Tax payable in installments over 5 years:
- transfer of assets between HQ & PE of MS
or countries of the EEA agreement
- transfers of tax residence or PE between
MS or countries of the EEA agreement
EXIT TAXATION art.5
• Deferral of payment:
- Only for EEA countries if a treaty has been
concluded for the recovery of tax claims
equal to the directive on the recovery of tax
claims.
• Deferral of payment is subject to interest.
• Guarantee in case of risk of non-recovery.
EXIT TAXATION art.5
• Deferral of payment: deferral ends
immediately in case:
- transferred assets are sold or disposed of
- assets are transferred to a third non EEA
country, or EEA without recovery treaty
- tax residence or PE is transferred to non
EEA country, or EEA without recovery treaty
- taxpayer goes bankrupt or is wound up.
GAAR art.6
• MS shall ignore an arrangement or a series
of arrangements, which having put into
place for the main purpose or one of the
main purposes of obtaining a tax
advantage that defeats the object and
purpose of the applicable tax law, are not
genuine regading all facts and
circumstances.
GAAR art.6
• An arrangement shall be regarded as non-
genuine to the extent that it is not put into
place for valid commercial reasons which
reflect economic reality.
• When an arrangement is ignored, the tax
liability shall be calculated in accordance
with national law i.e. depends on national
anti-avoidance clause.
CFC art.7
• CFC rule applies in principle to all PE’s &
cos. Including EU & EEA!
• MS of a taxpayer shall treat an entity
(subsidiary) or PE whose profits are exempt
or not subject to tax, as CFC, only in case of
exemption MS.
CFC art.7
Conditions
• The taxpayer & associated entreprises hold
directly or indirectly a participation > 50% of
the voting rights, of the capital or are
entitled to receive > 50% of the profits, of
the CFC.
CFC art.7
Conditions
• The actual amount of CIT paid by the CFC
is lower than the difference between amount
of CIT on the profit due under the CIT rate in
the MS and the actual amount of CIT paid
in state of CFC.
CFC art.7
Conditions
• I.e. effective tax rate in CFC state < 1/2 rate
in EUMS
• Income of PE of CFC that is exempt in CFC
state, is not taken into account :
PE MS3 – CFC MS2 – Parent MS1, exempt
income PE is not taken as CFC income.
CFC art.7
CFC income included in tax base: option1
• Non-distributed income of the entity or PE
derived from the following categories:
• interest or any income from financial assets
• royalties or any income from IP
• dividends & income from disposal of shares
CFC art.7
CFC income included in tax base: option1
• income from financial leasing
• income from insurance, banking & other
financial activities
CFC art.7
CFC income included in tax base: option1
• Income from invoicing companies that earn
sales and services income from goods and
services traded with associated entreprises
and with little or no economic value.
CFC art.7
CFC income included in tax base: option1
• Exception: CFC rule does not apply when
controlled co. carries on a substantive
economic activity: staff, equipment, assets
& premises.
• MS may elect not to apply the substantive
economic activity exception to cos., resident
or situated in non-EEA third country.
CFC art.7
CFC income included in tax base: option2
• The non-distributed income of the entity or
PE arising from non-genuine
arrangements which have been put into
place for the essential purpose of obtaining
a tax advantage (reference to Halifax i
contradiction with one of the principal
purposes under art.6).
CFC art.7
CFC income included in tax base: option2
• An arrangement is non-genuine to the
extent that the entity or PE would not own
the assets or would not have undertaken
the risks which generate all, or part of its
income, if it were not controlled by a co.
where the significant people functions are
instrumental in generating the CFC income.
(Economic analysis of abuse).
CFC art.7
Exceptions
• When CFC income is calculated in
accordance with option 1 (tainted income
according to art. 7.2 (a)), a MS may opt to
exclude an entity or PE from the CFC rule,
if one third or less of the income falls into
CFC income under option 1.
CFC art.7
Exceptions
• When the tainted income (art. 7.2 (a)) of a
financial undertaking is equal or < a third
of the income of the CFC derived from
transactions with associated entreprises,
MS may exclude from CFC.
CFC art.7
Exceptions
• Small business exclusion
• When accounting profits are equal or < than
750.000 € & non-trading income is equal or
< than 75.000 €
• When accounting profits are equal or < than
10% of operating costs.
• Cos or PE’s may be excluded from tainted
CFC income under art. 7.2(b).
.
CFC art.8
Rules for calculation of taxable profits
• The calulation of tainted income of CFC
(art. 7.2 (a)) into the tax base (option 1) of
the taxpayer of the MS is done in
accordance with the CIT tax rules of that
MS. Losses of the CFC entity or PE are not
deducted but can be carried forward.
CFC art.8
Rules for calculation of taxable profits
• When tainted income is calculated in
accordance with option 2 (art. 7.2 (b))(non-
genuine arrangements) the tax base of the
taxpayer in the MS is limited to the amounts
of income generated through tainted
assets linked to the significant people’s
functions in the controlling co. (ALP!) No
common rules on defining tainted income.
CFC art.8
Rules for calculation of taxable profits
• Income included in the tax base of the
controlling co. is calculated in proportion to
the taxpayer’s participation.
• Double taxation is avoided by deducting
from the tax base of the controlling co. any
CFC income that previously has been
included in its tax base from the amounts of
profits later distributed by the CFC.
CFC art.8
Rules for calculation of taxable profits
• When the controlling co. sells or disposes of
its business in the PE or the participation in
the CFC and any part of the proceeds have
previously included in its tax base, that
amount shall be deducted from the tax base
in calculating the taxable amount of the
profits.
CFC art.8
Rules for calculation of taxable profits
• Tax credit for tax paid in CFC country: MS of
the controlling co. shall allow a deduction of
the tax paid (tax credit) by the CFC entity or
PE from the tax liability of the controlling co.
calculated on the tainted income that has
been integrated in its tax base.
HYBRID MISMATCHES art.9
• Council directive (EU)2017/952 of 29 May
2017, amending ATAD (EU) 2016/1164 as
regards hybrid mismatches with third
countries.
• Principle of single effective taxation in
one tax jurisdiction
HYBRID MISMATCHES art.9
Large scope of hybrids
• Mismatches from different characterisation
of financial instruments as debt or equity
for tax purposes.
HYBRID MISMATCHES art.9
Large scope of hybrids
• Mismatches between tax jurisdictions of
PE & HQ & between different PE’s in
allocating income and expenses between
different parts of the same entity including
mismatches because of disregarding the PE
by the tax jurisdiction of the PE.
HYBRID MISMATCHES art.9
Large scope of hybrids
• Mismatches that arise because of the
hybrid nature of the entity (transparent
entities for tax purposes).
• These mismatches are only addressed in
cases where an associated enterprise has
effective control (50%, entity in
consolidated group, significant influence in
management)
HYBRID MISMATCHES art.9
Large scope of hybrids
• Mismatches do not only include double
deduction resulting from payments but also
from expenses that are not treated as
payments under domestic law, like
deduction of losses resulting from
amortisation and depreciation.
HYBRID MISMATCHES art.9
Large scope of hybrids
• Mismatches also include double deduction
(payments, expenses, losses) made by
taxpayer having a double residence. MS
should deny double deductions arising with
respect to dual resident cos. to the extent
that the deduction is not set off against an
amount that is not treated as income in the
other tax jurisdiction (art. 9b).
HYBRID MISMATCHES art.9
Large scope of hybrids
• When both jurisdictions are MS, the MS
where the taxpayer is not deemed to be a
resident in accordance with the DTC, shall
deny the deduction.
• Why not apply the same rule to thrid
countries?
HYBRID MISMATCHES art.9
Limits of scope: exemption for payee
• Pa yment under a financial instrument is not
a mismatch when the non-taxation in the
payee jurisdiction is solely due to the tax
status of the payee (exempt taxpayer) or the
fact that the financial instrument benefits
from a special (beneficial) tax regime.
HYBRID MISMATCHES art.9
Limits of scope: differences in value between
income and expense
• Differences in tax outcomes that result
exclusively from differences in the value for
which the payments are accounted for in
two tax jurisdictions do not fall within the
scope of a hybrid mismatch.
• Ex.: differences in transfer prices as income
and expense between tax jurisdictions.
HYBRID MISMATCHES art.9
Limits of scope: timing differences
• When the payer jurisdiction allows the
deduction for a payment to be carried
forward to a subsequent tax period (in case
of amortisation or depreciation, or payments
by disregarded PE), the adjustment in the
payee jurisdiction can be deferred until the
deduction is actually set off against non-
dual inclusion income in the payer j.
HYBRID MISMATCHES art.9
Limits of scope: timing differences
• When the mismatch occurs in the form of a
payment under a financial instrument
which cannot be expected to be included in
taxable income within a reasonable period
of time, then the hybrid rules apply.
• Inclusion in income in payee jurisdiction
within 12 months of the end of the payer’s
tax period, or fixed period determined by
MS.
HYBRID MISMATCHES art.9
Principle of single effective taxation
• To the extent that a hybrid mismatch results
in a double deduction, the deduction shall
be denied in the MS of the investor
jurisdiction and if the deduction is not
denied in the investor jurisdiction it shall be
denied in the payer jurisdiction.
HYBRID MISMATCHES art.9
Principle of single effective taxation
• To the extent that a hybrid mismatch results
in a deduction without inclusion, the MS of
the payor shall deny the deduction of
such payment and when the deduction is
not denied in the payer jurisdiction it shall
be included as income of the MS of the
payee.
HYBRID MISMATCHES art.9
• Entry into force: MS shall implement ATAD
by 31.12.2018 and apply as of 01.01.2019.
• Entry into force art. 9: MS shall implement
art. 9 by 31.12.2019 and apply as of
01.01.2020.
• Entry into force of art. 9a (reverse hybrids):
MS shall implement art. 9a as of 31.12.2021
and apply as of 01.01.2022.
HYBRID MISMATCHES art.9
Interpretation: BEPSACTION 2
• In implementing art. 9 MS should use
examples and explanations of OECDBEPS
report on action 2, to the extent that they
are consistent with EU law.
Questions & comments
Competence of EU?
• Art. 115 TFEU states that directives can be
issued for the approximation of (tax) law
that directly affect the establishment or the
functioning of the internal market.
• ATAD is about national tax base and
incidental about internal market: interest
limitation rule, imposition of exit tax, anti-
avoidance rule, CFC & hybrids
Questions & comments
Competence of EU?
• ATAD allows more restrictive national rules
if necessary, is that compatible with
freedoms?
Questions & comments
Options
• ATAD allows many options to widen or
tighten the ATAD rules. The harmonisation
goal of reaching a common solution is not
satisfied. There may be considerable
disharmony between EU MS, which is
particularly difficult for multinational groups.
Questions & comments
Is this anti-avoidance directive or base
erosion directive?
• Interest limitation is purely budgetary
measure of national nature.
• Exclusion of stand alone cos. and financial
institutions is only option for MS and should
be mandatory.
Questions & comments
GAAR <-> ECJ case law
• The new PP test in GAAR is a carbon copy
of the GAAR in the LOB clauses of the
Multilateral Convention and contrary to
controlling ECJ case law (Halifax, Cadbury
Schweppes).
• GAAR with PP test is also <-> CFC anti-
avoidance rule with essential purpose test.
Questions & comments
CFC rule applies to EU cos.
• Differentials in CIT rates within EU are
within scope of CFC rule: IRL 12,5%, BG &
Cyprus 10%, are caught by tax rates > 25%.
• Free movement of financial activities
involving passive income will be restricted
by CFC rule.