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, double taxation, parent company, restriction on competition, subsidiary, tax evasion, tax harmonisation













EUR-Lex - 52013PC0814 - EN











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52013PC0814

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 /* COM/2013/0814 final - 2013/0400 (CNS) */









EXPLANATORY MEMORANDUM
1.           CONTEXT OF THE PROPOSAL
The issue of corporate 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[1];
the OECD is currently undertaking work on base erosion and profit shifting ('BEPS')
which is widely welcomed[2].

Double non-taxation is one of the key EU
areas for urgent and coordinated action: it forms part of an on-going effort to
improving the proper functioning of the Internal Market, by closing tax
loopholes generated by exploiting the differences in national tax systems. Double
non-taxation deprives Member States of significant revenues and creates unfair
competition between businesses in the Single Market.
A specific example of double non-taxation
was identified in 2009 in the Business Code of Conduct Group[3] concerning certain financial
hybrid mismatches. Responses to the 2012 Commission public consultation on
double non-taxation[4]
had agreed in general such mismatches were undesirable.
Hybrid loans arrangements are financial
instruments that have characteristics of both debt and equity. Due to different
tax qualifications given by Member States to hybrid loans (debt or equity),
payments under a cross border hybrid loan are treated as a tax deductible
expense in one Member State (the Member State of the payer) and as a tax exempt
distribution of profits in the other Member State (the Member State of the
payee), thus resulting in an unintended double non-taxation. 
To solve the issue, the Code of Conduct
Group agreed guidance according to which the recipient Member State should follow the tax qualification given to hybrid loans payments by the source Member State (i.e. no tax exemption should be granted for hybrid loan payments that are deductible
in the source Member State)[5].

However, the solution agreed by the Code of
Conduct Group cannot be safely implemented under directive 2011/96[6], as amended by reason of the
accession of the Republic of Croatia[7],
on the common system of taxation applicable in the case of parent companies and
subsidiaries of different Member States (Parent-Subsidiary Directive – 'PSD'). In
the PSD, subject to various eligibility conditions, Member States are obliged
to exempt from taxation (or to grant credit for the taxation occurred abroad)
profit distributions received by parent companies from subsidiaries of another
Member State. This is the case even if the profit distribution has been treated
as a tax deductible payment in the Member State where the paying subsidiary is
resident.
Both the European Council, in its March
2012 conclusions, and the European Parliament, in its resolution of 19 April
2012, have stressed the need to develop concrete ways to improve the fight
against tax fraud and tax evasion. The European Parliament called for a review
of the PSD in order to eliminate evasion via hybrid financial instruments in
the EU.
The Action Plan to strengthen the fight
against tax fraud and tax evasion adopted by the Commission on 6 December 2012[8] identifies tackling mismatches
between tax systems as one of the actions to be undertaken in the short term
(in 2013). In this respect, the Action Plan states "Detailed discussion
with Member States have shown that in a specific case an agreed solution cannot
be achieved without a legislative amendment of the Parent Subsidiary directive.
The objective will be to ensure that the application of the directive does not
inadvertently prevent effective action against double non-taxation in the area
of hybrid loan structures". 
The Action Plan also announced a review of
anti-abuse provisions in the corporate tax directives, including PSD, with a
view to implement the principles underlying its Recommendation on aggressive
tax planning[9].
In the Recommendation it is recommended that Member States adopt a general
anti-abuse rule ('GAAR') to counteract aggressive tax planning practices.
Although the current PSD contains an anti-abuse
clause, this lacks clarity and potentially creates confusion. The inclusion of
the more comprehensive GAAR, adapted to the specifics of the Parent Subsidiary,
along the principles indicated by the Recommendation on aggressive tax planning
would remove these difficulties and would improve the efficiency of measures
taken at national level to counter international tax avoidance, while enhancing
coordinated actions by Member States and ensuring compliance with Treaty
Freedoms, as interpreted by the Court of Justice of the European Union ('CJEU').
On 21 May 2013, the European Parliament
adopted a resolution[10]
whereby it urged the Member States 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 specifically the problem of
hybrid mismatches between the different tax systems used in the Member States,
as well as to present in 2013 a proposal for the revision of the PSD with a
view to revise the anti-abuse clause and to eliminate double non-taxation in
the EU as facilitated by hybrid arrangements.
In its conclusions of 22 May 2013, the
European Council noted the Commission's intention to present a proposal before
the end of the year for the revision of the 'parent/subsidiary' Directive.
2.           RESULTS OF CONSULTATIONS
WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
In addition to the consultation work done
within the context of the Code of Conduct Group and the public consultation
launched by the Commission on double non-taxation in 2012 (see above under item
1), the Commission held technical meetings with Member States and with
stakeholders in April 2013. 
Impact Assessment
An Impact Assessment on amending the PSD
has been prepared. The impact assessment looks at different options for
amending the PSD which are compared with the 'no action' or 'status quo' scenario.
It was found that counteracting double
non-taxation deriving from hybrid financial arrangements and aggressive tax
planning will have a positive impact on the tax revenue of Member States
otherwise affected from the overall reduction of taxes paid by the parties
involved and by the additional tax deductions of the costs for tax planning and
relevant arrangements. It was not possible in the impact assessment to quantify
the benefits of the preferred amendments. However, the figures involved are not
crucial in the decision to fight hybrid financial arrangements and tax abuse;
reasons of competition, economic efficiency, transparency and fairness - from
which the internal market would greatly benefit - play a determinant role in
this respect. 
Hybrid loan mismatches
In the impact assessment, it was found that
the best option is to deny the tax exemption in the PSD to profit distribution
payments which are deductible in the source Member State. Accordingly, the Member State 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 Member State of the paying subsidiary.
It was found that this option was the most
effective option in counteracting hybrid financial arrangements as it will
ensure consistency of treatment across EU. This option will help achieving the
fundamental purpose of the PSD, i.e. to create a level playing field between
groups of parent companies and subsidiaries of different Member States and groups of parent companies and subsidiaries of the same Member State. The wished
effect is that all enterprises are taxed on the realised profits in the EU
Member State concerned and that not one company can escape taxation by
loopholes from hybrid financing in cross-border situations. The aim is to close
an unacceptable practice whereby companies escape proper taxation.
Anti-abuse provision
In the impact assessment it was found that
the most effective option would be to update the current anti-abuse provisions
of the PSD in light of the general anti-abuse rules proposed in the
Recommendation on aggressive tax planning from December 2012 and make it
obligatory for Member States to adopt the common anti-abuse rule.
This option will be the most effective
option in achieving a common standard for anti-abuse provisions against abuse
of the PSD. A common anti-abuse provision in all Member States will ensure
clarity and certainty for all taxpayers and tax administrations. The existing Member State anti-abuse measures cover a wide variety of forms and targets, having been
designed in a national context to address the specific concerns of MS and
features of their tax systems.
This option will provide the benefits of
clarity as it will be explicitly stated what Member States shall adopt as an
anti-abuse rule for the purpose of the PSD. It will therefore ensure that the
anti-abuse measures adopted and implemented by EU Member States will raise no
EU compliance issue. Furthermore, there will be an
equal application of the EU directive without possibilities for
"directive-shopping" (i.e. to avoid that companies invest through
intermediaries in Member States where the anti-abuse provision is less
stringent or where there is no rule).
3.           LEGAL ELEMENTS OF THE
PROPOSAL
The
proposal seeks to tackle hybrid financial mismatches within the scope of
application of the PSD and to introduce a general anti-abuse rule in order to
protect the functioning of this directive. 
These
objectives require an amendment of the PSD, and therefore the only possible
option is to present a Commission proposal for a directive. 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. In addition, and in a more general sense, the considerable differences
between the approaches of Member States against abusive behaviour lead to legal
uncertainty and undermine the very aim of the PSD as such, namely the abolition
of tax obstacles to the cross-border grouping of companies of different Member
States. Action at EU level is required to better achieve the purpose of the
initiative. 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.
Subsidiarity principle
Hybrid financial mismatches
Individual Member States' reaction to
hybrid financial mismatches would not effectively solve the problem, as the
issue originates from the interaction of different national tax systems.
Indeed, single uncoordinated initiatives may result in additional mismatching
or in the creation of new tax obstacles in the Internal Market.
Amending Double Tax Conventions between
Member States would not be a suitable method for addressing the matter, as each
country pair may arrive at a different solution. Other international
initiatives, such as those undertaken by the OECD on corporate base erosion,
would not be able to address the specific EU concerns as these require an
amendment of the existing EU legislation.
Finally, the agreement reached in the Code of
Conduct Group for Member States to take a coordinated approach can only be
applied after an amendment to the Parent-Subsidiary directive which Member
States cannot do without a proposal from the Commission.
Anti-abuse provision
The current Parent-Subsidiary directive
allows Member States to apply domestic or agreement-based provisions required
for the prevention of fraud or abuse. This provision must however be read as
interpreted by the CJEU. The CJEU jurisprudence sets the principle that Member
States cannot go beyond the general Community law principle when countering
abusive behaviour. In addition, the application of anti-abuse measures must not
lead to results incompatible with fundamental Treaty freedoms.
Furthermore, Member States' existing
domestic anti-abuse measures cover a wide variety of forms and targets, having
been designed in a national context to address the specific concerns of Member States
and features of their tax systems. The current situation gives lack of clarity
for taxpayers and for tax administrations.
Taking all these factors into account,
individual Member States' action would not be as effective as action by the EU.
Proportionality principle
The obligation to tax is limited only the
portion of hybrid financial payments which is deductible in the source Member State.
The proposed GAAR is in line with the
proportionality limits envisaged by the CJEU case law.
Therefore, the proposed amendments comply
with the proportionality principle as they do not go beyond what is needed to
address the issues at stake.
Commentary on the Articles
The proposal aims at modifying the Recitals,
Article 1, Article 4 and to update Annex I Part A of the current PSD. The
modifications and update are contained in Article 1 of the proposal.
Recitals
Under the proposed amendment, the recitals explain
that, in order to prevent that cross-border groups of parent companies and
subsidiaries benefit from unintended advantages compared with national groups,
the benefits of the tax exemption should be denied to distributions of profits
that are deductible in the source Member State. 
The fundamental purpose of the PSD is to
create a level playing field between groups of parent companies and
subsidiaries of different Member States and groups of parent companies and
subsidiaries of the same Member State.
At the time the PSD was adopted,
cross-border groups were generally at a disadvantage in comparison to domestic
groups because of the double taxation to which profit distributions were subject;
otherwise, bilateral double tax conventions were insufficient to create within
the EU conditions analogous to those of an internal market.
To achieve the aimed neutrality, the PSD
provided for the (i) abolition of withholding taxes on profit distributions and
(ii) prevention of economic double taxation of the distributed profits through
either tax exemption or tax credit in the Member States of the parent
companies.
Since then, and in the last decade more and
more rapidly, the situation has evolved.
The increase in cross-border investments
has given cross-board groups the opportunity to use hybrid financial
instruments taking unduly advantages from mismatches between different national
tax treatments and from the international standard rules to relieve double
taxation. This leads, within the EU, to a distortion in the competition between
cross-border and national groups, contrary to the scope of the PSD.
Article 1
The proposed Directive would allow Member
States to take measures in order to prevent fraud and evasion. In this respect,
the Commission service has recalled that tax fraud is a form of deliberate
evasion of tax which is generally punishable under criminal law, and tax
evasion generally comprises illegal arrangements where liability to tax is hidden
or ignored[11].

Furthermore, in order to address the risk
of abuse, it is proposed to replace the current anti-abuse provision by
inserting a common anti-abuse rule, based on the similar clause included in the
Recommendation on aggressive tax planning.
Article 4
Under the proposed amendment, the Member State of the parent company and the Member State of its permanent establishment deny the
benefits of the tax exemption to distributions of profits that are deductible by
the subsidiary of the parent company.
Accordingly, in letter a) of the paragraph
it is specified that the MS of the receiving company (parent company or its
permanent establishment) shall refrain from taxing the received profits
distribution only to the extent that those profits distributions are not
deductible in the source Member State (i.e. in the Member State of the
distributing subsidiary). The Member State of the receiving company shall
therefore tax the portion of profits that is deductible in the source Member State.
No withholding tax would be imposed on the
profits distributed by the subsidiary as the payment in the Member State of the subsidiary would be treated as an interest payment under the Interest and
Royalties directive. There is a pending proposal in Council to align the current
25% eligibility shareholding threshold in the Interest and Royalties directive
to the 10% of the PSD[12].
Moreover, typically hybrid financial arrangements are set up in Members States
having a zero withholding on interest payments under domestic or double tax
conventions provisions. 
Annex I Part A)
The proposed amendments include eligible companies which have been
introduced in the company laws of the Member States after the recast of the
directive. The Commission has received an updating request from Romania.
To this purpose, in letter (w) the following two types of companies
are added: ‘societăți în nume colectiv’, ‘societăți în
comandită simplă’.
4.           BUDGETARY IMPLICATION
This proposal does not have any budgetary
implications for the EU.
2013/0400 (CNS)
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
THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Article 115 thereof,
Having regard to the proposal from the
European Commission,
After transmission of the draft legislative
act to the national Parliaments,
Having regard to the opinion of the European
Parliament[13],
Having regard to the opinion of the
European Economic and Social Committee[14],
Acting in accordance with a special
legislative procedure,
Whereas:
(1)       Council Directive
2011/96/EU exempts dividends and other profit distributions paid by subsidiary
companies to their parent companies from withholding taxes and eliminates
double taxation of such income at the level of the parent company.
(2)       The benefits of Directive 2011/96/EU
should not lead to situations of double non-taxation and, therefore, generate
unintended tax benefits for groups of parent companies and subsidiaries of
different Member States in comparison with groups of companies of the same Member State.
(3)       For the purpose of avoiding
situations of double non-taxation deriving from mismatches in the tax treatment
of profit distributions between Member States, the Member State of the parent
company and the Member State of its permanent establishment should not allow
those companies to benefit from the tax exemption applied to received distributed
profits, to the extent that such profits are deductible by the subsidiary of
the parent company.
(4)       In order to prevent tax
avoidance and abuse through artificial arrangements, a common anti-abuse
provision tailored to the purpose and objectives of Directive 2011/96/EU should
be inserted.
(5)       It is necessary to ensure
that this Directive does not preclude the application of domestic or
agreement-based provisions required for the prevention of tax evasion.
(6)       It is appropriate to
update Annex I, Part A to that Directive to include other forms of companies
which have been introduced in the company laws of Romania.
(7)       Directive 2011/96/EU should
therefore be amended accordingly,
HAS ADOPTED THIS DIRECTIVE:
Article 1
Directive 2011/96/EU is amended as follows:
1.           In Article 1, paragraph 2,
is replaced by the following:
"2. This Directive shall not preclude the
application of domestic or agreement-based provisions required for the
prevention of tax evasion."
2.           The following Article 1a is
inserted:
"Article 1a
1.      Member States shall withdraw the
benefit of this directive in the case of an artificial arrangement or an
artificial series of arrangements which has been put into place for the
essential purpose of obtaining an improper tax advantage under this directive
and which defeats the object, spirit and purpose of the tax provisions invoked.
2.      A transaction, scheme, action,
operation, agreement, understanding, promise, or undertaking is an artificial arrangement
or a part of an artificial series of arrangements where it does not reflect
economic reality.
In determining whether an arrangement or series
of arrangements is artificial, Member States shall ascertain, in particular,
whether they involve one or more of the following situations:
(a)          
the legal characterisation of the individual
steps which an arrangement consists of is inconsistent with the legal substance
of the arrangement as a whole;
(b)         
the arrangement is carried out in a manner which
would not ordinarily be used in a reasonable business conduct;
(c)          
the arrangement includes elements which have the
effect of offsetting or cancelling each other;
(d)         
the transactions concluded are circular in
nature;
(e)          
the arrangement results in a significant tax
benefit which is not reflected in the business risks undertaken by the taxpayer
or its cash flows.
3.           In Article 4, paragraph 1,
point (a) is replaced by the following:
"(a) refrain from taxing such profits to
the extent that such profits are not deductible by the subsidiary of the parent
company; or"
4.           In Annex I, part A, point (w)
is replaced by the following: 
"(w) companies under Romanian law known
as: ‘societăți pe acțiuni’, ‘societăți în
comandită pe acțiuni’, ‘societăți cu răspundere
limitată’, ‘societăți în nume colectiv’, ‘societăți în
comandită simplă’;"
Article 2
1.           Member States shall bring
into force the laws, regulations and administrative provisions necessary to
comply with this Directive by 31 December 2014 at the latest. They
shall forthwith communicate to the Commission the text of those provisions.
When Member States adopt those provisions, they
shall contain a reference to this Directive or be accompanied by such a
reference on the occasion of their official publication. Member States shall
determine how such reference is to be made.
2.           Member States shall
communicate to the Commission the text of the main provisions of national law
which they adopt in the field covered by this Directive.
Article 3
This Directive shall enter into force on
the twentieth day following that of its publication in the Official Journal
of the European Union.
Article 4
This Directive is addressed to the Member
States.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               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.
[2]               OECD, Addressing Base Erosion and Profit Shifting,
2013
[3]               The Code of Conduct on business taxation was set out
in the conclusions of the Council of Economics and Finance Ministers (ECOFIN)
of 1 December 1997.
[4]               On 29 February 2012 the Commission launched a
fact-finding consultation on double non-taxation and its potential impact on
the Internal Market.
[5]               "In as far as payments under a hybrid loan
arrangement are qualified as a tax deductible expense for the debtor in the
arrangement, Member States shall not exempt such payments as profit
distributions under a participation exemption" (Report of the Code of Conduct
Group of 25 May 2010 (doc. 10033/10, FISC 47), par. 31).
[6]               Council Directive 2011/96/EU of 30 November 2011 on
the common system of taxation applicable in the case of parent companies and
subsidiaries of different member States (recast) (OJ L 345, 29.12.2011, p. 8).
[7]               Council Directive 2013/13/EU of 13 May 2013 adapting
certain directives in the fields of taxation, by reason of the access of the
Republic of Croatia (OJ L 141, 28.5.2013, p.30).
[8]               COM (2012)722.
[9]               C(2012)8806.
[10]             European Parliament resolution of 21 May 2013 on Fight
against Tax Fraud, Tax Evasion and Tax Havens (2013/2060(INI)).
[11]             SWD (2012) 403, p. 9.
[12]             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).
[13]             OJ C, , p. .
[14]             OJ C, , p. .