COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States
Date: 2013-11-25
Institutions: European Commission
Subjects: EU Member State, corporation tax, enhanced cooperation, financial transaction, parent company, subsidiary, tax on profits of self-employment













EUR-Lex - 52013SC0473 - EN











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52013SC0473

COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States /* SWD/2013/0473 final */









COMMISSION STAFF WORKING DOCUMENT
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Accompanying the document
Proposal for a Council Directive
amending Directive 2011/96/EU on
the common system of taxation applicable in the case of parent companies and
subsidiaries of different Member States
1.           Procedural issues and
consultation of interested parties
EU Context
Hybrid loan mismatches
As part of its work on the distorting
effects of mismatches the Code of Conduct Group reviewed a hybrid form of debt between
associated companies called profit participating loans ("PPLs"). The
issue was that payments under a cross-border PPL were treated as tax deductible
in the source MS and as a tax exempt distribution of profit (dividend) in the
recipient MS resulting in double non-taxation.
In May 2010 the Code Group agreed that the
recipient MS should follow the tax treatment (i.e. as debt or equity) given to
hybrid loan payments by the source MS in order avoid double non-taxation (doc.
10033/10 FISC 47).
However in October 2011, a Commission
analysis showed that this agreed solution clashed with the Parent Subsidiary
Directive[1]
("PSD"). There were two alternatives to address this: (i) develop an
alternative solution in the Code Group or (ii) amend the PSD. A meeting of MS
experts in a Commission working group concluded that a targeted amendment of
the PSD would be preferable to MS.
The Action Plan to strengthen the fight
against tax fraud and tax evasion adopted by the Commission of 6 December 2012
(COM (2012)722) included this amendment as an action to be undertaken in the
short term (2013). As a follow-up to the Action Plan, the Commission
held two consultation meetings for MS experts and external stakeholders from
the private sector, academia, business organisations, tax associations in April
2013 to discuss two policy options.
Under option A1 profit distribution
payments deductible in the source MS would be excluded from the PSD. Under
option A2 the tax exemption benefits in the PSD would be denied to profit
distribution payments deductible in the source MS.
Eight out of the fifteen MS who
participated strongly supported option A2. One MS accepted amending the PSD for
clarity with a slight preference for this option. Four MS said that they would
accept an amendment for clarification purposes, even though they believed that
no amendment to the PSD was necessary. One MS was in favour of option A1.
Another MS was open to both options and urged a quick amendment. Four MS chose
not to attend.
At the Stakeholders' meeting, the views expressed
were different. Although responses to the 2012 public consultation had agreed
in general that such mismatches were undesirable, some business representatives
did not see double non-taxation as negatively. In particular option A2 was
disliked as limiting the rights of taxpayers and MS; allowing double
non-taxation was considered to be a possibly deliberate choice on the part of
MS. Other business representatives supported option A1. Conversely, NGOs and
academics in general supported option A2.
On 21 May 2013, the European Parliament
adopted a resolution[2]
urging MS to embrace the Commission's Action Plan and fully implement the
Recommendation on aggressive tax planning. The European Parliament also called
on the Commission to address mismatches between different tax systems and
present a proposal for the revision of the PSD to revise the anti-abuse clause
and to eliminate double non-taxation in the EU.
In its conclusions of 22 May 2013, the
European Council called for rapid progress on certain tax issues and announced
that "the Commission intends to present a proposal before the end of the
year for the revision of the 'parent/subsidiary' Directive".[3]
Anti-abuse provision
The Action Plan also commits the Commission
to review the anti-abuse provisions of the PSD and the Directives on Interest
and Royalties and Mergers with a view to implementing the principles underlying
the Recommendation on aggressive tax planning.
The Recommendation proposed that MS should
adopt a General Anti-Abuse Rule ("GAAR") to counteract aggressive tax
planning which fall outside the scope of existing specific anti-avoidance
rules. However the Recommendation does not apply to the corporate tax
directives so its underlying principles cannot be relied upon in without
legislative action.
The GAAR proposal follows the approach
taken in article 13 of the proposed Directive implementing enhanced cooperation
in the area of the financial transaction tax ("FTT").[4] Consultations with MS and
stakeholders were held in April 2013.
Four of the five MS who took the floor
argued that a GAAR should not be inserted into the directives. They would
prefer domestic GAARs. Two of them also believed that the GAAR could be
improved.
One MS supported amending all three
directives, although some work would be needed on the drafting of the GAAR. In
a written contribution this MS later reiterated its support for amending the
PSD to create an obligation to have an anti-abuse rule.
Stakeholders did not agree on whether to
amend the directives with a GAAR or not but business representatives were in
general in favour of domestic GAARs instead. On the other hand NGOs and one
business representative seemed to favour including a GAAR clause in the
directives.
International Context
The issue of corporate tax base erosion is
very high in the political agenda of many EU and non-EU countries and has been
on the agenda of recent G20 and G8 meetings[5]
as well as at the OECD which is currently working on base erosion and profit
shifting ("BEPS").[6]
In March 2012 the OECD also published a
Report titled “Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues”
which recommended countries should consider introducing or revising rules
denying benefits in the case of certain hybrid mismatch arrangements. Hybrid
mismatches arrangements and arbitrage have also been identified as a key
element in the BEPS project.[7]
While the Commission recognizes the
importance of global solutions, there is a need for the EU to address
mismatches and abuse taking into account existing EU legislation and the case
law of the Court of Justice. The Commission believes that the revision of the
PSD can be an important contribution to the OECD BEPS work as it would
represent a best practice in fighting base erosion.
2.           Problem definition
Problem description
Hybrid loan mismatches
Hybrid loan arrangements are financial
instruments that have characteristics of both debt and equity. Due to different
tax qualifications given by MS to hybrid loans (debt or equity), payments under
a cross-border hybrid loan are treated as a tax deductible expense in one MS
(the MS of the payor) and as a tax exempt distribution of profits (dividend) in
the other MS (the MS of the payee), thus resulting in an undesirable double
non-taxation. 
Anti-abuse provision
Article 1(2) of the PSD already permits
Member States to adopt domestic anti-abuse provisions. However MS existing
anti-abuse measures are very varied, having been designed to address the
specific concerns of MS and features of their tax systems leading to a lack of
clarity for taxpayers and for tax administrations. The current situation could potentially also lead to improper use of the directive if the
anti-abuse provisions in some Member States are less stringent or non-existent.
Who is affected?
Member States are affected because of
reduced tax revenues. Businesses are affected because large companies with
cross-border operations which can afford to pay for sophisticated tax schemes
enjoy a competitive advantage over small and medium-sized companies and large
companies not involved in aggressive tax planning. Citizens are indirectly
affected by the budget reduction for public services and social benefits.
Public confidence in the fairness of the tax system may be affected by the
ability of some taxpayers to benefit from mismatches.
Subsidiarity and proportionality
This initiative seeks to tackle certain
hybrid financial mismatches using the PSD and introduce a general anti-abuse
rule in order to protect the functioning of this directive.
These objectives require an amendment of
the PSD. In direct tax matters, the relevant legal basis is Article 115 of the
Treaty on the Functioning of the European Union (TFEU) under which the
Commission may issue directives for the approximation of provisions of the
Member States as directly affecting the functioning of the Internal Market.
The objectives of the initiative cannot be
sufficiently achieved unilaterally by the Member States. It is exactly the
differences in national legislation concerning the tax treatment of hybrid
financing which allow taxpayers, in particular groups of companies, to employ
cross-border tax planning strategies which lead to distortions of capital flows
and of competition in the Internal Market. Therefore the proposed amendments
comply with the subsidiarity principle. The proposed amendments also comply
with the proportionality principle as they do not go beyond what is needed to
address the issues at stake and, thereby, to achieve the objectives of the
Treaties, in particular the proper and effective functioning of the Internal
Market.
3.           Objectives
Hybrid loan
mismatches
The objective
of the initiative is that all companies are taxed on the realised profits in
the EU Member State concerned and that companies cannot escape taxation by
exploiting loopholes from hybrid financing in cross-border situations. The
initiative aims at ensuring effective action against double non-taxation in this
area. The application of the PSD should not inadvertently prevent such action.
Anti-abuse
provision
The initiative
aims at providing certainty and clarity for taxpayers and for tax
administrations and at ensuring that companies do not improperly take advantage
of the provisions of the PSD.
4.           Policy
options
Hybrid loan
mismatches
The following
policy options are considered:
Option A0:       No action (baseline
scenario)
Option A1:       Profit distribution payments which are deductible in the source Member State would be excluded from the PSD.
Option A2:       The tax exemption
benefits in the PSD would be denied to profit distribution payments which are
deductible in the source MS. Accordingly, the MS of the receiving company
(parent company or permanent establishment of the parent company) shall tax the
portion of the profit distribution payments which is deductible in the MS of
the paying subsidiary.
Anti-abuse
provision
For the
purposes of clarity and certainty, the following alternative ways of improving
the anti-abuse provision in the PSD are considered:
Option B0:       No
action (baseline scenario)
Option B1:       Updating the current
anti-abuse provisions of the PSD in light of the GAAR proposed in the December
2012 Recommendation on aggressive tax planning. The directive would be amended
to include the recommended common anti-abuse rule. Under this option, Member
States could choose whether or not to adopt the anti-abuse rule.
Option B2:       The same as option B1
with the addition that under this option, it would be an obligation for Member
States to adopt the common anti-abuse rule.
5.           Analysis of impacts
Hybrid financial mismatches
The following table summarises the analysis
of the impacts (ascending scale from --- to +++)
 Expected impact 
   || Option A0: No action   || Option A1: exclude hybrid loans payments from the PSD* || Option A2: exclude hybrid loan payments from the tax exemption benefits of the PSD 
 Effectiveness in achieving policy objective || = || + || +++ 
 Four freedoms || = || = || = 
 Economic impact || = || + || +++ 
 Social impact || = || + || ++ 
 Impact on taxpayers/tax administrations || = || + || +++ 
 Impact on EU budget || = || = || = 
 Impact on other parties || = || = || = 
* the expected impacts would be the same as
in Option A2 if all MS were to implement the Code of Conduct Group guidance
Anti-abuse provision
The following table summarises the analysis
of the impacts (ascending scale from --- to +++)
 Expected impact 
   || Option B0: No action*   || Option B1: optional anti-abuse provision in the PSD* || Option B2: obligatory anti-abuse provision in the PSD 
 Effectiveness in achieving policy objective || = || + || +++ 
 Four freedoms || = || + || + 
 Economic impact || = || = || + 
 Social impact || = || = || = 
 Impact on taxpayers/tax administrations || = || + || + 
 Impact on EU budget || = || = || = 
 Impact on other parties || = || = || = 
* the expected impacts would be the same as
in Option B2 if all MS were to implement the recommended anti-abuse rule
6.           Comparing the options
Hybrid financial mismatches
Option A0 would not
address the double non-taxation issue nor would it allow Member States to
implement in their national legislations the political agreed solution in the
Code of Conduct Group. The baseline scenario is therefore that the loophole
will continue to exist.
Option A1 would be in line with the
solution adopted in the Interest and Royalties Directive, but does not address
possible double non-taxation caused by hybrid financial payments, so each MS
would have to adapt their domestic rules to the Code of Conduct Group guidance
in their own way.
Option A2 would be more effective than
option A1 in counteracting hybrid financial arrangements and would ensure
consistency of treatment across the EU.[8]

Option A2 would help achieve the
fundamental purpose of the PSD, i.e. to create a level playing field between
groups of companies in different MS and groups in the same MS. The increase in
cross-border investments allows cross-border groups to use hybrid financial
instruments to exploit mismatches between different national tax systems. This
leads to a distortion of competition between cross-border and national groups
within the EU, contrary to the purpose of the PSD.
Moreover, option A2 would be in line with
the OECD recommendations and the current EU and non-EU political approach against
tax base erosion and aggressive tax planning.
Thus Option A2 is the preferred Option.
Anti-abuse provision
Option B0 would not
ensure clarity and certainty vis-à-vis anti-abuse provisions. It would not
ensure against improper use of the PSD either.
Option B1 would provide the benefits of
clarity as the provision would be brought in line with CJEU jurisprudence on
abuse of rights, but would not ensure the PSD against abuse.
Option B2 is the only option that would ensure the PSD against abuse. This option would also be more effective than option B1 in achieving a common
standard for anti-abuse provisions tackling abuse of the PSD. A common
anti-abuse provision in all Member States would establish clarity and certainty
for all taxpayers and tax administrations. Option B2 would ensure that the
anti-abuse measures adopted and implemented by EU Member States will raise no
EU compliance issue.
Thus option B2 is the preferred option.
7.           Monitoring and evaluation
It is established practice for the
Commission to monitor the implementation of EU directives by Member States. The
legal changes envisaged by the initiative are so straight forward that it is
not necessary to conduct a study of whether the objectives of the initiative
are met. It is sufficient to monitor that Member States actually transpose the
rules to national legislation.
[1]               Directive
2011/96/EU on the common system of taxation applicable in the case of parent
companies and subsidiaries of different Member States (recast), as amended by
Council Directive 2013/13/EU adapting certain directives in the fields of
taxation by reason of the accession of the Republic of Croatia.
[2]               European Parliament resolution of 21 May 2013 on
Fight against Tax Fraud, Tax Evasion and Tax Havens (2013/2060(INI)).
[3]               EUCO 75/1/13 REV 1.
[4]               COM(2013)71 final, 14 February 2013. 
[5]               Final declarations of the G20 leaders' meeting of
18-19 June 2012; Communiqué of G20 finance ministers and central bankers
governors' meeting of 5-6 November 2012, of 15-16 February 2013 and of 18-19
April 2013; Joint Statement by UK's chancellor of exchequer and Germany's
finance minister on the margin of the G20 meeting in November 2012; Communiqué
of G8 leaders' summit of 17-18 June 2013.
[6]               OECD, Addressing Base Erosion and Profit Shifting,
2013.
[7]               OECD, Action Plan on Base Erosion and Profit
Shifting, 2013,
[8]               There is a pending proposal in Council to align the
shareholding threshold in the Interest and Royalties directive to the 10% of
the PSD Proposal for a Council Directive on a common system applicable to
interest and royalty payments made between associated companies of different
Member States (recast) (COM (2011) 714).