COMMISSION STAFF WORKING DOCUMENT 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: Community loan, EU Member State, corporation tax, parent company, small and medium-sized enterprises, subsidiary, tax avoidance, tax evasion, tax on profits of self-employment













EUR-Lex - 52013SC0474 - EN











|



52013SC0474

COMMISSION STAFF WORKING DOCUMENT 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/2013/0474 final */









TABLE
OF CONTENTS
Executive
Summary Sheet……………………………………………………....3
1.
Procedural issues and consultation of interested parties.……………….........5
2.
Problem definition…………………………………………………………...11
3.
Objectives…………………………………………………………………....15
4.
Policy options………………………………………………………………..16
5.
Analysis of impacts.………………….………………...................................17
6.
Comparing the options.…………………….………………………………..21
7.
Monitoring and evaluation.………………………………………………….24
Annex
1..……………………………………………………………………….26
 Executive Summary Sheet 
 Impact assessment on Proposal for a Directive on amending 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 field of taxation by reason of the accession of the Republic of Croatia 
 A. Need for action 
 Why? What is the problem being addressed? Maximum 11 lines 
 The Commission adopted an Action Plan to strengthen the fight against tax fraud and tax evasion on 6th December 2012 (COM (2012 722). It identifies tackling mismatches between tax systems as one of the actions to be undertaken in 2013. In particular, the Action Plan envisages a legislative amendment of the Parent Subsidiary directive "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 makes reference to the discussions on the interaction between the Parent Subsidiary directive ("PSD") and the political guidance agreed within the Code of Conduct Group to avoid the distorting effects of mismatches resulting from differences in the tax treatment of hybrid loans between Member States. 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 ((C(2012)8806) where it is recommended that Member States should adopt a general anti-abuse rule (GAAR) to counteract aggressive tax planning practices. 
 What is this initiative expected to achieve? Maximum 8 lines 
 The initiative on hybrid loan mismatches aims at ensuring effective action against double non-taxation in this area. The application of the PSD should not inadvertently prevent such action. Avoiding double non-taxation is one of the key EU areas for urgent and coordinated action. It forms part of an on-going effort to improve the proper functioning of the Internal market by removing loopholes in tax legislation. The initiative on an anti-abuse provision in the PSD aims at providing certainty and clarity. The current PSD lacks clarity and could potentially lead to abuse of the directive if some domestic anti-abuse provisions are less stringent or non-existing. The inclusion of the more comprehensive anti-abuse rule would remove these difficulties. It would also bring the wording of the anti-abuse provision in line with the jurisprudence of the ECJ. 
 What is the value added of action at the EU level? Maximum 7 lines 
 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. Additionally, the political agreement reached in the Code of Conduct Group can only be applied after an amendment to the PSD. Member States' existing domestic anti-abuse provisions cover a wide variety of forms and targets. A common anti-abuse provision in line with ECJ jurisprudence would provide clarity and certainty, and would ensure the PSD against abuse. 
 B. Solutions 
 What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why? Maximum 14 lines 
 Options for hybrid loan mismatches A0: No action. A1: Profit distribution payments which are deductible in the source state would be excluded from the PSD. A2: The tax exemption benefits in the PSD would be denied to profit distribution payments which are deductible in the source Member State . The MS of the receiving company shall tax the portion of the profit distribution payments which is deductible in the MS of the paying subsidiary. This is the preferred option. It is the most effective option as it ensures action against double non taxation by all MS. Options for anti-abuse provision B0: No action. B1: Updating the current anti-abuse provisions of the PSD in light of the GAAR proposed in the Recommendation. Under this option, it would be an option for MS whether or not to adopt the anti-abuse rule. B2: As B1, but under this option, it would be an obligation for MS to adopt the common anti-abuse rule. This is the preferred option. It is the most effective option in achieving a common standard for anti-abuse provisions against abuse of the PSD. 
 Who supports which option? Maximum 7 lines 
 Options for hybrid loan mismatches: Option A2 is supported by a clear majority of the MS that have indicated a preference. Only one MS has indicated a preference for A1. Business representatives have indicated a preference for option A1, while representatives from academics and NGOs have indicated a preference for option A 2. Options for anti-abuse provision: Most MS who have stated an opinion would prefer no action on this point. Most business representatives agree with this. One MS has indicated that it prefers option B2. NGOs seem to favour insertion of an anti-abuse provision, but have not indicated preference for B1 or B2. 
 C. Impacts of the preferred option 
 What are the benefits of the preferred option (if any, otherwise main ones)? Maximum 12 lines                                      
 Although hybrid mismatches may significantly reduce overall tax base revenues for taxpayers, it is not possible to quantify the benefits of the initiative. The international features and tax avoidance consequences make it difficult to calculate the revenue lost by the countries involved and, therefore, the tax revenue which would be rescued as a consequence of the amendment. As stated by the 2012 OECD Report on Hybrid Mismatch Arrangements, "although there are no comprehensive data on the collective tax revenue loss caused by such arrangements, anecdotal evidence shows that the amounts at stake in a single transaction or series of transactions are substantial". However, the figures involved are not crucial in the decision to fight hybrid financial arrangements; reasons of competition, economic efficiency, transparency   and fairness - from which the internal market would greatly benefit - play a determinant role in this respect. Similarly, it is It is not possible to quantify the benefits from countering tax avoidance. Neither of the preferred options will have significant direct environmental impact or social impact.   
 What are the costs of the preferred option (if any, otherwise main ones)? Maximum 12 lines                                      
 Costs would be suffered by the taxpayers who are now taking unjustified advantages of the double non-taxation resulting from hybrid financial instruments mismatches or abuse of PSD. Loss of such unjustified benefits should however not be taking into consideration in weighing the costs and benefits of the initiative. Neither of the preferred options will have significant direct negative environmental impact or social impact.   
 How will businesses, SMEs and micro-enterprises be affected? Maximum 8 lines 
 Large businesses making aggressive tax planning are affected. SMEs and micro-enterprises are not affected (or only to a limited extend) as aggressive tax planning requires cross-border operations, and expensive and sophisticated tax expertise. Today large businesses enjoy a competitive advantage over SMEs and micro-enterprises. The initiative will ensure a more level playing field.   
 Will there be significant impacts on national budgets and administrations? Maximum 4 lines 
 Counteracting double non-taxation deriving from hybrid financial arrangements and abuse of the PSD will have a positive impact on the tax revenue of Member States. The impacts can potentially be significant. There is however no comprehensive data on the collective tax revenue loss caused by mismatch arrangements or by abuse of the PSD. 
 Will there be other significant impacts? Max 6 lines 
 No, none of the other impacts will be significant. 
 D. Follow up 
 When will the policy be reviewed? Maximum 4 lines 
 The legal changes envisaged by this initiative are relatively straight forward. It is therefore not necessary to conduct a study of whether the objectives of the initiative are met. The Commission will continue to monitor the proper functioning of the PSD, including the proposed changes, through the Code of Conduct group and the Platform for Tax Good Governance.   
This is a proportionate
impact assessment given the technical nature of the problems addressed.
1. Procedural issues and
consultation of interested parties
EU Context
Hybrid
loan mismatches
Since 2009
the distorting effects of mismatches resulting from differences in the tax
treatment of hybrid loans between Member States have been discussed in the
context of the Code of Conduct Group[1].
The Code of Conduct Group focused its analysis on a form of hybrid loans
between associated companies, the profit participating loan (PPL), whose main
characteristic is that interest payments are dependent on the profits of the
debtor. 
The Code of
Conduct Group agreed that different tax qualifications given by Member States
to cross-border PPLs - one Member State treating them as equivalent to simple
loans, while another Member State regarding them as a form of equity capital -
cause problems. The issue essentially is that payments under a cross-border PPL
are treated as a tax deductible expense in the source Member State and as a tax
exempt distribution of profits (dividend) in the recipient Member State, thus
resulting in a double non-taxation[2].
Double non-taxation deprives Member States of significant revenues and creates
unfair competition between businesses in the Single Market.   
In its Report
of 25 May 2010 to the ECOFIN Council (doc. 10033/10, FISC 47, par. 31), the
Code of Conduct Group agreed upon a guidance according to which the recipient
Member State should follow the tax qualification given to hybrid loan payments
by the source Member State ("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"). This means that no tax exemption shall
be granted for payments that are deductible in the Member State of the payor.
To facilitate
the discussion about the proper form that the agreed guidance should take the
Code of Conduct Group asked the Commission to examine more in detail the tax
treatment of, and the approach to, hybrid loans in each Member State. A
questionnaire was circulated to the Member States and the replies were
presented at the Code of Conduct Group meeting of 17 February 2011. 
The replies
to the questionnaire:
-   indicated
that the legislation of six Member States might enable a situation in which a
payment under a hybrid loan that was deductible abroad would nevertheless be
exempted from taxation; for those Member States, therefore implementation of
the Code of Conduct Group guidance might require national legislation; 
-   confirmed
that for the three Member States earlier identified in an internal study of
January 2009 (on a specific type of PPL), there was no doubt that they would
need to change their legislation in order to comply with the solution agreed by
the Code of Conduct Group. One Member State indicated plans for such a
legislative change, which in fact was made.
In October
2011, an analysis carried out by the Commission Services stated that the
solution agreed by the Code of Conduct Group clashes with the Parent Subsidiary
Directive[3]
("PSD"). Under the PSD, subject to various eligibility conditions,
the Member State of the receiving parent company (or, under certain
circumstance, of a permanent establishment of that parent company) is obliged
to exempt profit distribution payments from subsidiaries of another Member
State from taxation (or to grant a credit for the taxation levied abroad on the
subsidiary level or lower tier levels). 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.[4]
The
interaction between the Code of Conduct Group guidelines and the PSD was
discussed in the Commission Working Party IV meeting on 11 January 2012. At the
meeting the Commission suggested two alternative ways forward: (i) develop an
alternative (different) solution in the Code of Conduct Group; or (ii) amend the
PSD. 
There was no
support for an alternative (different) solution amongst Member States. On the
need to amendment the PSD, some Member States expressed doubts – mainly on the
grounds that they did not believe it was necessary to change the PSD in order
to implement the guidance. Nevertheless, it seemed that most Member States
would either support or not oppose a targeted amendment of the PSD to remove
any possible barrier to the effective implementation of the Code of Conduct
Group solution. 
The fact-finding
public consultation on double non-taxation launched by the Commission on 29
February 2012 showed that mismatches between countries' qualification of hybrid
financial instruments and hybrid entities was found the least acceptable double
non-taxation issue[5].
One contributor reported that "this is one of the most typical and most
exploited forms of double non-taxation". These mismatches have harmful
effects in terms of fairness of the tax systems and distortion of the Internal
Market. 
In a
resolution adopted on 19 April 2012, the European Parliament called also for a
review of the PSD in order to eliminate tax avoidance via hybrid financial
instruments in the EU[6].
The Action
Plan to strengthen the fight against tax fraud and tax evasion adopted by the Commission
of 6 December 2012 (COM (2012)722) identifies 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 that "Detailed discussions 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".
An Impact
Assessment was carried out for the Action Plan ( SWD(2012) 403&404).
As a
follow-up to the Action Plan, the Commission started working on a proposal to
amend the PSD and submitted two alternative options to Member States and
stakeholders (experts from the private sectors, academics, business
organisations, tax associations) to avoid that the PSD be an obstacle to the
implementation of the Code of Conduct Group guidelines on hybrid loan mismatches.
The consultation meetings were held on 11 and 12 April 2013, respectively, and
two policy options (see also point 4. below) were discussed: 
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 Member State.
At the
meeting with Member States, there was general support and positive feedback by
the 15 Member States which took the floor. Their majority (eight Member States)
strongly supported the option where Member States will be obliged to tax if the
payment concerned is deductible in the source state (option A2). One Member State accepted to amend the PSD for clarity and expressed a slight preference for
this option. Four Member States, even though they still believed that an
amendment to the PSD is not necessary, said that they would accept to amend the
PSD for clarification purposes. One Member State was in favour of an option to
exclude hybrid financial payments from the scope of PSD (option A1). Another MS
was open to both options and urged for a quick amendment. Four Member States
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 at the meeting now saw less damage
in double non-taxation and in particular option A2, rather than option A1, was
disliked as limiting the rights of the taxpayers and Member States. Basically
double non-taxation was considered to be a possible deliberate choice on the
part of Member States. Other business representatives supported option A1.
Conversely, in general, NGOs and academics supported option A2.
On 21 May
2013, the European Parliament adopted a resolution[7]
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 called for rapid progress on
certain tax issues; in particular, the European Council announced that
"the Commission intends to present a proposal before the end of the year
for the revision of the 'parent/subsidiary' Directive"[8].
Anti-abuse
provision
The Action
Plan to strengthen the fight against tax fraud and tax evasion also includes the
following future action to be undertaken in the short term (in 2013):
"The
Commission will also review the anti-abuse provisions of the Directives on
Interest and Royalties, Mergers and Parent-Subsidiary, with a view to implement
the principles underlying its Recommendation on aggressive tax planning."
In the
Recommendation on aggressive tax planning it is recommended that Member States
should adopt a General Anti-Abuse Rule ("GAAR") adapted to domestic
and cross-border situations confined to the Union and situations involving
third countries to counteract aggressive tax planning practices which fall
outside the scope of their specific anti-avoidance rules. The recommended
general anti-abuse rule reflects the limits imposed by Union law with regard to
such rules.
So as to
preserve the autonomous operation of tax directives the Recommendation does not
apply within the scope of the corporate tax directives. The underlying
principles cannot therefore be relied upon directly without implementation.
The analysis
of the general anti-abuse rule was carried out in preparation of the
Recommendation on aggressive tax planning, i.e. the Impact Assessment
(SWD(2012)403), where it is stated that
"In the
case of aggressive tax planning the purpose and intention of Member States tax
legislation can be undermined and issues of competition arise in relation to
those taxpayers who do not choose or cannot afford to engage in such practices.
Taxpayers may also be affected because of the additional compliance
requirements that the fight against tax fraud, tax evasion and tax avoidance
may lead the MS to adopt, and by the tax treatment that applies to the
activities they perform in countries subject to anti-abuse measures.
Relating to
SME, there is no indication that they would be specifically affected, since
such elaborated schemes based on international configurations are less likely
to involve SME than large enterprises."
The
underlying principles of the Recommendation were implemented in the proposal
for a Council Directive implementing enhanced cooperation in the area of
financial transaction tax (FTT) of 14 February 2013 (COM(2013)71 final).  This
proposal includes an anti-abuse rule in Article 13 which was directly inspired
by the rule in the December 2012 Recommendation.
The
Commission has held consultations with Member States and stakeholders as part
of the review of the anti-abuse provisions of the PSD, Interest and Royalties
Directive and the Merger Directive.
The
consultation with Member States was held on 11 April 2013.
Four of the
five Member States who took the floor argued that a GAAR should not be inserted
in the corporate tax directives. They would prefer domestic GAARs. Two of them
also believed that the GAAR could be improved. The Member States did not
specify why they prefer domestic anti-abuse provisions. An indication of the
motivation can perhaps be deduced from the fact that they believe that the
common GAAR should be broader than the GAAR recommended by the Commission if a
common GAAR were to be adopted. They could have the opinion that the
Commission's interpretation of the ECJ case law is too restrictive. A common
anti-abuse provision could therefore in their view limit their ability to
adopt/keep a broader domestic anti-abuse provision. However, the Commission
believes that the recommended GAAR reflects the limits imposed by Union law
with regard to such rules. 
There are
also some Member States that as a matter of principle are reluctant to adopt EU
legislation in the direct tax area and believe that direct tax legislation
should be the competence of Member States.
One Member State could support amending all three directives, although some work was needed on
the drafting of the GAAR. In a written contribution this Member State has later reiterated its support for an amendment to the PSD where that amendment creates
an obligation to have an anti-abuse rule.
The
consultation with stakeholders was held on 12 April 2013. Stakeholders did not
agree on whether to amend the directives with a GAAR or not. Business representatives
were in general in favour of a domestic GAAR without implementing it into the
directives. On the other hand NGOs and one business representative seem to
favour the insertion of a GAAR clause in the directives.
In general,
business representative could be of the opinion that the fewer restrictions,
the greater the planning opportunities. Some other business representatives
might therefore favour the current domestic anti-abuse provisions as some of
these might be less stringent or non-existent. 
In the
fact-finding public consultation on double non-taxation launched in February
2012, several business contributors stated that double non-taxation should be
handled at Member State level. One contributor (AmCham EU) stated in relation
to double non-taxation in general that "If EU-wide restrictions were to go
ahead, they would constrain normal commercial transactions and also reduce the
attractiveness of Europe as a place of interest."
Stakeholders
from small- and medium-sized enterprises (SMEs) did not contribute to the
public consultation nor did they contribute during the stakeholder meeting. 
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[9].
Also the OECD is currently undertaking work on base erosion and profit shifting
('BEPS') which is widely welcomed[10].
In March 2012
the OECD published a Report titled “Hybrid Mismatch Arrangements: Tax Policy
and Compliance Issues”. According to the Report, domestic law rules which link
the treatment of an instrument (or entity) in the country concerned to the tax
treatment in another country appear to hold significant potential as a tool to
address hybrid mismatch arrangements, and the experience of the countries which
have introduced these rules has overall been positive. The OECD recommends
countries to consider introducing or revising specific and targeted rules
denying benefits in the case of certain hybrid mismatch arrangements. 
The Report on
BEPS by the OECD stresses that there are various key pressure areas. One of
these areas concerns international mismatches in entity and instruments
characterisation, including hybrid mismatches arrangements and arbitrage.
General anti-avoidance rules or doctrines which limit or deny the availability
of undue tax benefits are seen as one of the most relevant rules against tax
avoidance. 
In order to
address BEPS, the OECD has developed a comprehensive action plan that was
agreed upon by the Committee on Fiscal Affairs at its meeting in June 2013. The
action plan includes proposals to develop, among the others, instruments to put
an end or neutralise the effect of hybrid mismatch arrangements and arbitrage. 
While the
Commission recognizes the importance of global solutions, there is a need for
the EU to address mismatches and anti-abuse taking into account the existing EU
legislation and the case law of the Court of Justice of the EU (CJEU). 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.   
Procedural
issues on the impact assessment (IA)
Due to the
technical nature of the problems addressed a formal impact assessment steering
group was not established. The draft IA note and the executive summary sheet
were instead in July 2013 send to the contact points in DG ECFIN, DG ENTR, DG
COMP, DG MARKT, Legal Services (SJ) and DG SG inviting them for comments on the
draft note.
Legal
Services (SJ) provided a response with proposed changes to the text in track
changes and comments which were incorporated by DG TAXUD in the draft for the
IA Board.
Other
comments received did not include any specific remarks on the technical aspects
of the planned amendments for the PSD. However there are references to the
absence of some usually included general aspects related in particular to the
impact of COM initiatives on SMEs.
Although
there was a suggestion to expand the IA to cover in more detail the specific
implications for SMEs, the very specific character of the proposed changes to
the PSD, namely not extending the scope of the Directive or changing the
provisions/rules in a Directive, meant that this was finally not considered
necessary. The very aim of the proposal is to close a loophole whereby mainly
multi-national Enterprises (MNE) could unduly benefit from mismatches in
national tax regimes. This loophole needs to be closed and one step to reach
this target is the necessary amendment for the PSD. If in few cases also SMEs
had benefited from unjustified tax advantages due to the mismatches in national
tax regimes, the amendments will consequently also take away the tax benefits
from these SMEs. But there are neither any compensating measures planned for
these SMEs nor for the MNEs. The wished effect is that all economic operators
(SMEs and MNEs) 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. Against this background it was also
decided that a competitiveness analysis or the analysis of the costs and
benefits of each option for SMEs was not necessary. 
Impact
assessment Board
A draft of
the IA was submitted to the Impact Assessment Board on 19 July 2013. The
overall opinion of the Board submitted on 6 September 2013 is positive. 
Firstly, the
Board recommended that the report should better indicate the extent of the
problem, i.e. that some companies are currently not taxed on realised profits,
because of the existence of loopholes related to hybrid financing in
cross-border situations. It is difficult to provide a quantitative assessment
of the extent of the problem. There is however a growing awareness of the problem
among tax authorities and international organisations. As reported above, 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. A more specific quantification would therefore not be
proportionate.
Furthermore
the arguments surrounding the inclusion of a General Anti-Abuse Rule (GAAR) in
this Directive have been strengthened by referring to input received from
stakeholders and Member States. As regards the relevance of this initiative for
SMEs; it is explicitly stated that although SME representatives were consulted,
no objections were raised from their side.
Secondly, the
Board recommended that the explanation of the proportionality of the options in
solving the issue should be strengthened. It is now clearly explained why some
of the options are not sufficiently effective. 
Thirdly, the
Board asked that the report should compare the options on the criteria of
effectiveness, efficiency and coherence in achieving the objectives. This is
now included in the report.
2. Problem
definition
Problem
description
Hybrid loan
mismatches
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 payor) and as a tax exempt distribution of profits (dividend) in the other
Member State (the Member State of the payee), thus resulting in an undesirable
double non-taxation (from the perspective of the Member States). 
Example: Member State
MS1, where the parent company is resident, treats a hybrid loan as equity and
received payments as exempt "dividend". Member State MS2, where the
subsidiary is resident, treats the same hybrid loan as debt and payments on it
as deductible "interest". 
 Parent 
MS1
Hybrid loan                                        Hybrid loan payment
 Subsidiary 
MS2
 
To solve the
issue, the Code of Conduct Group agreed upon a guidance according to which no
tax exemption shall be granted in the Member State of the recipient to hybrid
loan payments that are deductible in the source Member State. 
However, as
mentioned in point 1 above, the solution agreed upon by the Code of Conduct
Group cannot be safely implemented under the PSD without an explicit amendment
of the text of the PSD. 
The baseline
scenario with no action 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. If Member States
nevertheless implement the political agreed solution, they risk receiving
complaints from businesses for infringement of EU law. The baseline scenario is
therefore that the loophole will continue to exist. The consequences for the
government finances will worsen as cross-border investments increase with the
fulfilment of the Internal Market. More and more enterprises will be able to
take unduly advantage from mismatches between different national tax treatments
when they make or increase their cross-border investments. Purely national
enterprises will on the other hand suffer a competitive disadvantage.  
This scenario
would also be in contrast with what is envisaged by the Action Plan as well as
with the actions required in the international political context (G8 and G20
finance ministers' declarations).
Anti-abuse
provision
The PSD
already permits Member States to adopt domestic anti-abuse provisions. In its
Article 1, paragraph 2, it provides for the following:
"This
Directive shall not preclude the application of domestic or agreement-based
provisions required for the prevention of fraud or abuse."
According to
the case law of the CJEU Member States, when countering abusive behaviour,
cannot go beyond the general EU law principle that abuse of rights is
prohibited. The anti-abuse provisions adopted by Member States must reflect
this general EU law principle. Individuals and companies must not improperly or
fraudulently take advantage of provisions of EU law. This has been stated by
the CJEU in its case law on the anti-abuse rules in tax directives (see in particular
on the Merger Directive C-352/08 Zwijnenburg, C-321/05 Kofoed and C-126/10
Foggia. 
The Court has
also stated that the principle of legal certainty precludes directives from
being able by themselves to create obligations for individuals. Directives
cannot therefore be relied upon per se by the Member State against individuals.
Member States must therefore make a specific transposition provision
transposing the anti-abuse principle into national law in order to apply the
anti-abuse rule (C-321/05 Kofoed).
Some Member
States, e.g. France and Germany, have their own versions of a general
anti-abuse rule, which are applicable against abuse of the PSD. The German
general anti-abuse rule is found in the Fiscal Code, Section 42 (Abgabenordnung
(AO) § 42):
"Section 42
Abuse of tax planning schemes
(1)
It shall not be possible to circumvent tax legislation by abusing legal options
for tax planning schemes. Where the element of an individual tax law’s
provision to prevent circumventions of tax has been fulfilled, the legal
consequences shall be determined pursuant to that provision. Where this is not
the case, the tax claim shall in the event of an abuse within the meaning of
subsection (2) below arise in the same manner as it arises through the use
of legal options appropriate to the economic transactions concerned.
(2)
An abuse shall be deemed to exist where an inappropriate legal option is
selected which, in comparison with an appropriate option, leads to tax
advantages unintended by law for the taxpayer or a third party. This shall not
apply where the taxpayer provides evidence of non-tax reasons for the selected
option which is relevant when viewed from an overall perspective." [11]
Other Member
States, such as Denmark, do not have a legislative general anti-abuse rule, but
rely on other measures like domestic case law against abuse.
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 MS and features of their tax systems.[12]
Some of the anti-abuse provisions adopted by Member States may raise compliance
issues with the PSD if they go beyond the general EU law principle on abuse of
rights.
Taking all
these factors into account it is clear that individual EU MS action would not
be as effective as action on the EU level. This is why the Commission adopted
its Recommendation on a GAAR in December 2012. 
The current
situation leads to a lack of clarity for taxpayers and for tax administrations and could
potentially lead to improper use of the directive if the anti-abuse provisions
in some Member States are less stringent or non-existent. The
baseline scenario with no further action would therefore not ensure clarity and
certainty and would not ensure against improper use of the PSD. In this case it
will only be achieved if all Member States adopt the common General Anti-Abuse
Rule as recommended by the Commission in December 2012. The General Anti-Abuse
Rule, if adopted in domestic legislation by Member States, would be applicable
for prevention of abuse of PSD as the directive permits Member States to adopt
domestic provisions required for the prevention of fraud or abuse within the
limits imposed by ECJ case law. 
On 14 May
2013, the Council concluded[13]
that it 
"16.
  CALLS upon Member States to consider where appropriate, to what extent their
current national legal framework may include a General Anti Avoidance Rule
which allows effective action, in compliance with the EU Treaties, against
abusive tax arrangements. 
17.
    INVITES Member States to consider the appropriateness of incorporating a
General Anti Avoidance Rule, such as that suggested in the Recommendation
(17617/12), in their national legislation. "
It would
therefore seem as though implementation of the recommendation in some Member
States could be relatively slow. 
Who is
affected 
Hybrid
financial instruments mismatches and tax avoidance have harmful effects in
terms of tax revenue, economic efficiency, transparency, competition and
fairness. 
Member States
are affected because of the budgetary impact deriving from the overall
reduction of taxes paid by the parties involved and by the additional tax
deductions represented by the costs incurred by the business for advice and set
up of the arrangements. 
Businesses
are affected because certain large companies which operate cross-border and can
afford to pay for sophisticated tax expertise enjoy a competitive advantage
over small and medium-sized companies and over those large companies not using
the hybrid financial mismatches. 
Citizens are
indirectly affected by the budget reduction for public services and social
benefits.
Public
confidence in the fairness and the transparency of the tax system may be
affected by the possibility for some taxpayers to reduce their effective
taxation by profiting from mismatch opportunities or tax avoidance.
Subsidiarity
and proportionality
This
initiative 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.
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
political 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 PSD
which Member States cannot do without a proposal from the Commission.
As to the
respect of the proportionality principle, the obligation to tax is limited to
the portion of hybrid financial payments which is deductible in the source Member State.
Anti-abuse
provision
The
jurisprudence of the CJEU sets the principle that Member States cannot go
beyond the general EU law principle when countering abusive behaviour which
leads to undue benefits from the PSD. In addition, the application of
anti-abuse measures must not lead to results incompatible with fundamental
treaty freedoms.
However,
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. 
Taking all
these factors into account it is clear that individual EU Member States action
would not be as effective as EU action.
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 the
area of hybrid loan structures. The application of the PSD should not
inadvertently prevent such action. The amendment will improve the functioning
of the PSD and of the Internal Market.
The Action
Plan initiative against hybrid loan mismatches is the result of previous
consultations and politically agreed solutions on double non-taxation (see
point 1. above) Double non-taxation is one of the key EU areas for urgent and
coordinated action: it forms part of an on-going effort to improve the proper
functioning of the Internal Market, by closing tax loopholes generated by
exploiting the differences in national tax systems.
The Action
Plan initiative is also in line with the fundamental purpose of the PSD that
double taxation of distributed profits shall be avoided when profits have
already been taxed in the source state where the subsidiary is resident. There
is no taxation of the profits in the source state when the payment can be
deducted therefore there is no double taxation to avoid.
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. The current PSD contains a clause allowing
Member States to create and apply anti-avoidance provisions. However, Member
States have adopted a wide variety of anti-abuse provisions in their current
legislation. This could create lack of clarity and potentially creates
confusion and could potentially lead to improper use of the directive. The
inclusion of the more comprehensive anti-abuse rule could create a common
standard and remove these difficulties.  
It could also
represent further clarification of the current principles underlying the anti-abuse
provision as the anti-abuse provision must be in line with the jurisprudence of
the CJEU.
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 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.
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
-
  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. 
The
consequences for the government finances will worsen as cross-border
investments increase with the fulfilment of the Internal Market. More and more
enterprises will be able to take unduly advantage from mismatches between
different national tax treatments when they make or increase their cross-border
investments. Purely national enterprises will on the other hand suffer a
competitive disadvantage.
-   Option
A1 would merely remove a legal obstacle which is preventing Member States from
fully adopting the guidance agreed within the Code of Conduct Group; it is then
up to Member States to decide whether to implement or not the agreed guidance.
As to the
effective benefits and costs, this will depend upon the actual implementation
by the Member States of the agreed guidance. In case of implementation by all
Member States, the costs and benefits will be as described under option A2.
-
  Option A2 would directly implement the guidance agreed within the Code of
Conduct Group and tackle hybrid financial mismatches in the PSD. This option
aims to solve the double non-taxation issue by providing for the taxation of
payments deductible in the source Member State. This option is more effective
in achieving the intended policy objectives, i.e. avoiding double non-taxation
in the area of hybrid loan structures, as all Member States would be obliged to
tax the profit distributions when the source state has allowed deductions for
the payment. It will not depend upon the actual implementation by the Member
States of the agreed Code of Conduct guidance. 
Counteracting
double non-taxation deriving from hybrid financial arrangements 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.
Indirectly, the positive budget impact will benefit the citizens in terms of
more resources available for public services and social benefits. Domestic and
small or medium-sized companies are not directly affected as tax planning in
hybrid loan mismatches requires sophisticated tax expertise and cross-border
operations. The amendment will however ensure a level playing field as large
businesses will no longer be able to make aggressive tax planning in mismatches
and enjoy an advantage. Public confidence in the fairness and the transparency
of the tax system will also benefit from the amendment. 
As to the
benefits quantification, even though hybrid mismatches may significantly reduce
overall tax base revenues for taxpayers, their international features and tax
avoidance consequences make it difficult to calculate the revenue lost by the
countries involved and, therefore, the tax revenue which would be recovered as
a consequence of the amendment.
There is
however an increased awareness of the problem with hybrid instruments in Member
States' tax administrations and international organisations. The increased
level of sophistication in the structuring of financial cross-border
transactions poses important challenges to tax revenue authorities and tax
policy makers. 
As stated by
the 2012 OECD Report on Hybrid Mismatch Arrangements, "although there
are no comprehensive data on the collective tax revenue loss caused by such
arrangements, anecdotal evidence shows that the amounts at stake in a single
transaction or series of transactions are substantial. For example, New Zealand
settled in 2009 cases involving 4 banks for a combined sum exceeding NZD 2.2
billion (EUR 1.3 billion). Italy recently reported that it has settled a number
of cases involving hybrids for an amount of approximately EUR 1.5 billion. In
the United States, the amount of tax at stake in 11 foreign tax credit
generator transactions has been estimated at USD 3.5 billion"[14].

Furthermore
one contributor (the Hungarian branch of the International Fiscal Association
(IFA)) to the Commission's public consultation on double non-taxation reported that
"This is one of the most typical and most exploited forms of double
non-taxation, and it is impossible to list the many kinds and circumstances. 
However, most of them do seem to follow the basic pattern as described in the
Commission’s example. Mismatching is thus not precluded even in Hungary.  Participating loan is always considered in Hungary as a loan.  The Hungarian
debtor can thus get access to interest deduction in the instance that the
income the creditor receives may be qualified in the non-Hungarian situation as
the dividends received, exempt from taxation there.  Hungarian interest deduction
cannot be denied for this reason.  Such a scheme is proliferated, for example,
in respect of the (quite obsolete) Netherlands – Hungary double tax
convention." 
However, the
figures involved are not crucial in the decision to fight hybrid financial
arrangements; reasons of competition, economic efficiency, transparency and
fairness - from which the Internal Market would greatly benefit - play a
determinant role in this respect. 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, whether 10 or 100 or 1000 companies are making use of
such tax planning. Further quantification would therefore not be proportionate.
Costs would
be suffered by the taxpayers who are now taking unjustified advantages of the
double non-taxation resulting from hybrid financial instruments mismatches.
Loss of such unjustified benefits should not be taken into consideration in
weighing the costs and benefits of the initiative. 
Option A2
could have a simplification impact, on both taxpayers and tax administrations,
as it will clarify the tax treatment, under the PSD, of financial hybrid
payments. 
Bringing
Member States' legislation in line with the modified PSD could involve a burden
on tax administrations for the related implementation aspects. However there
would be corresponding benefits from increased tax revenue. 
No
significant impacts on relationships with other countries or transposition
difficulties have been highlighted by Member States during the consultation
meeting (cfr. point 1. above). Option A2 will have no environmental impact.
Both options
A1 and A2 do not contain exclusion for SMEs, as the PSD applies to eligible
companies, irrespective of their size. Conversely, as mentioned above, SME
would benefit from measures which prevent 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 
 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
-
  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. In this case it will only be
achieved if all Member States adopt the common General Anti-Abuse Rule as
recommended by the Commission in December 2012. The Council conclusions from 14
May 2013 could indicate that progress could be slow for some Member States.
-   Option
B1 would provide the benefits of clarity as the provision would be brought in
line with CJEU jurisprudence on abuse of rights. Furthermore, the anti-abuse
rule is in compliance with Treaty Freedoms as interpreted by the Court. Under
this option, it would be explicitly stated what Member States could adopt as an
anti-abuse rule for the purpose of the PSD. This option would therefore ensure
that the anti-abuse measures adopted and implemented by Member States on this
basis would raise no EU law compliance issue. However, whether an anti-abuse provision
is actually transposed into national legislation would be up to the individual Member State. This option would
therefore not ensure against improper use of the PSD.
-
  Option B2 will ensure that the results mentioned under option B1 and the
objectives of the initiative are achieved quicker and with more certainty as
Member States will be obliged to adopt the anti-abuse provision. This option is
therefore more effective than option B1.
This option
would also ensure 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 no such rule exist).
Furthermore,
the amendment will be in line with recent Commission proposals. Article 80 of
the proposal for a Council Directive on a Common Consolidated Corporate Tax
Base (CCCTB) of 16 March 2011 (COM(2011)121) includes a general anti-abuse rule
and Article 13 of the recent proposal for a Council Directive
implementing enhanced cooperation in the area of financial transaction tax
(FTT) of 14 February 2013 (COM(2013)71 final) includes an anti-abuse
rule which was directly inspired by the rule in the December 2012
Recommendation.
The analysis
of a general anti-abuse rule in Member States' national legislation was carried
out in preparation of the Recommendation on aggressive tax planning, i.e. the
Impact Assessment (SWD(2012)403), p. 36-38. In the Recommendation itself it is
furthermore stated that, "As tax planning structures are ever more
elaborate and national legislators are frequently left with insufficient time
for reaction, specific anti-abuse measures often turn out to be inadequate for
successfully catching up with novel aggressive tax planning structures. Such
structures can be harmful to national tax revenues and to the functioning of
the internal market."
The impacts
of updating the anti-abuse provision in the PSD would be similar, although it
has to be taken into account that the rule would be limited to abuse within the
scope of the directive.
Counteracting
tax avoidance will have similar impacts as countering hybrid financial
mismatches. As already indicated, countering tax avoidance will have a positive
impact on the tax revenue of Member States. Domestic and small or medium-sized
companies will not be directly affected as tax planning requires sophisticated
tax expertise and cross-border operations. However, there will be a level
playing field as no one will be able to abuse the directive. Public confidence
in the fairness and the transparency of the tax system will also benefit from
the amendment. 
It is not
possible to quantify the benefits from countering tax avoidance. However, as
mentioned above, the figures involved are not crucial in the decision to fight
tax avoidance; reasons of competition, economic efficiency, transparency and
fairness - from which the Internal Market would greatly benefit - play a
determinant role in this respect. 
Costs would
be suffered by the taxpayers who are now taking unjustified advantages of the
tax avoidance. The loss of benefits that stem from avoiding legitimate taxation
should however not be taken into consideration in weighing the costs and
benefits of the initiative.
Both options
B1 and B2 could have a simplification impact both on taxpayers and tax
administrations, as it will clarify the tax treatment under the PSD. This will
be more significant under option B2 as the anti-abuse provision must be
transposed to Member States' legislation under this option. 
No
significant impacts on relationships with other countries or transposition
difficulties have been highlighted by Member States during the consultation
meeting. 
The options
will have no environmental impact or social impact.
Both options
B1 and B2 do not contain exclusion for the SMEs, as the PSD applies to eligible
companies, irrespective of their size. It should be noted that although SME
representatives were consulted, no objections were raised from their side.
Conversely, as mentioned above, SME would benefit from measures which prevent
hybrid financial mismatches. 
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 
 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
As explained
in point 5, above, Option A0 would not address the double non-taxation issue.
The baseline scenario is therefore that the loophole will continue to exist. Distributed
profits that are deductible in the source state and not taxed in the receiving
state would continue to be covered by the PSD. This is contrary to the
fundamental purpose of the PSD.
Option A1
would be in line with the solution adopted in the Interest and Royalties
Directive, where the source Member State is not obliged to ensure the benefits
of that directive (i.e. the exemption from any tax, whether by deduction at
source or by assessment, on interest or royalties payments in the Member State
where they arise) to certain hybrid payments[15]. However, this
option does not, per se, solve the possible double non-taxation generated by
hybrid financial payments, leaving it to the Member States to adapt their
internal legislation to the Code of Conduct Group guidance.
Option A2
would be more effective than option A1 in counteracting hybrid financial
arrangements and would ensure consistency of treatment across the EU. No
withholding tax on the distributed profits would be applied by the subsidiary
since it would treat the payment as interest under the Interest and Royalties
directive. As to the residual gap within the current 25% eligibility
shareholding in the Interest and Royalties directive and the 10% shareholding
in the PSD, there is a pending proposal in Council to align the shareholding
threshold in the Interest and Royalties directive to the 10% of the PSD.[16]
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.  
Option A2
would 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 increase in cross-border investments has given cross-border 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 to a distortion of competition
between cross-border and national groups within the EU, contrary to the purpose
of the PSD.
Moreover,
this option A2 would not only be in line with the OECD recommendation to
introduce in national legislation targeted rules denying the exemption for
certain hybrid mismatch arrangements, but also with the current EU and non-EU
political approach against tax base erosion and aggressive tax planning (G8,
G20 finance ministers' declarations and their strong support for the OECD work
on BEPS).
Some business
representatives prefer option A1 rather than option A2 as the latter in their
view would be limiting the rights of taxpayers and Member States. It should,
however, be noted that the effect of non-implementation of the Code of Conduct
guidance in one Member State will affect the tax revenue in another Member
State who allows the deductions for the interest payments. It is therefore
important that all Member States introduce taxation of the profit distributions
when the source state allows deductions for the payment. For these reasons it
should not be left to Member States to decide whether or not they will
implement the Code of Conduct guidance. These are also the reasons why it is in
line with the subsidiarity principle and proportionate to choose option A2
rather than option A1. It is more effective in achieving the intended policy
objectives, i.e. avoiding double non-taxation. 
 Comparing the options 
   || 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 || = || + || +++ 
 Efficiency in achieving policy objective || = || + || +++ 
 Coherence with other tax policy || = || + || +++ 
Thus option
A2 is the preferred Option.
Anti-abuse
provision
Some Member States and some business representative have stated that they would prefer the current
domestic anti-abuse provisions (i.e. option B0). 
Some Member
States seems to believe a common anti-abuse provision could limit their ability
to counter abuse as they believe the Commissions interpretation of CJEU case
law is too narrow. The Commission believes that the recommended GAAR reflects
CJEU case law on abuse of rights.
Other Member States and some business representatives seem to believe that the drafting of
anti-abuse provisions in direct tax legislation should be the competence of
Member States. It must however be recalled that non-implementation by one
Member State of an anti-abuse provision will affect the other Member States as
investments could be channelled through the Member States with the weakest
anti-abuse provisions.
Like one of
the contributors to the public consultation, the Commission believes that
restrictions should not constrain normal commercial transactions and that Europe should be an attractive place of interest. On the other hand, artificial
arrangements targeted by the anti-abuse provision ought not to be protected or
result in tax benefits.       
Furthermore
option B0 would not ensure clarity and certainty vis-à-vis anti-abuse
provisions. The
current situation with lack of clarity for taxpayers and for tax administrations would
continue. The PSD would not be ensured against improper use either if the
anti-abuse provisions are less stringent or non-existent in some Member States. In this case
the objectives will only be achieved if all Member States adopt the common
General Anti-Abuse Rule as recommended by the Commission in December 2012. The
Council conclusions from 14 May 2013 could indicate that progress could be slow
for some Member States.
As explained
in point 5. Above, Option B1 would provide the benefits of clarity as it would
be explicitly stated what Member States could adopt as an anti-abuse rule for
the purpose of the PSD. This option would therefore ensure that the anti-abuse
measures adopted and implemented by Member States on this basis would raise no
EU law compliance issue. However, the decision to actually transpose the
anti-abuse provision into national legislation would be up to the individual Member State. As such, this option would not ensure against improper use of the PSD.
Option B2
would on the other hand ensure against improper use of the PSD. It would also
be more effective than option B0 and 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. 

B2 will be
coherent with the recent policy line of the Commission as seen in the recent
proposal for a Council Directive implementing enhanced cooperation in the
area of financial transaction tax (FTT) of 14 February 2013 (COM(2013)71 final).
B2 would also
be a proportionate option and in line with the subsidiarity principle as it is
the only way to ensure that all MS are placed under an obligation to refrain
from recognizing the benefits of the PSD in the event of abuse. Otherwise,
artificial arrangements such as conduit companies can benefit from less
stringent or non-existing anti-abuse provisions in a Member State. 
 Comparing the options 
   || Option B0: No action   || Option B1: optional anti-abuse provision in the PSD || Option B2: obligatory anti-abuse rule in the PSD 
 Effectiveness in achieving policy objective || = || + || +++ 
 Efficiency in achieving policy objective || = || + || +++ 
 Coherence with other tax policy || = || + || +++ 
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. No transposition issues have been
identified and none are expected given the unanimity requirement for direct tax
legislation. It is sufficient to monitor that Member States actually transpose
the rules to national legislation.  
The
Commission will continue to monitor the proper functioning of the PSD,
including the proposed changes, through the Code of Conduct group (together
with Member States). It should be recalled that the distorting effects of
mismatches resulting in different treatment of hybrid loans were discussed and
analyses in the context of the Code of Conduct Group. 
Furthermore,
a new Platform for Tax Good Governance (where Member States and expert
representatives from business, tax professional and civil society organisations
participate) has been set up this year. The Platform shall assist the
Commission in developing initiatives to promote good governance in tax matters
in third countries, to tackle aggressive tax planning and to identify and
address double taxation issues. 
Additionally,
OECD and G20 have initiated a comprehensive analysis of the international
corporate tax system called Base Erosion and Profit Shifting (BEPS). A BEPS
Action Plan was published on 19 July 2013. The actions outlined in the plan
will be delivered in the coming 18 to 24 months by the joint OECD/G20 BEPS
Project, which involves all OECD members and G20 countries on an equal footing.
The Commission will participate in the work. The Commission will also endeavour
to coordinate the position of the EU.
Annex 1 
[1]     The Code of Conduct on business taxation, set out in the conclusions
of the Council of Economics and Finance Ministers (ECOFIN) of 1 December 1997,
is the EU's main tool for ensuring fair tax competition in the area of business
taxation. The Code is not a legally binding instrument but it clearly does have
political force. It sets out clear criteria for assessing whether or not a tax
regime can be considered harmful. All Member States have committed to adhering
to the principles of the Code. This means refraining from introducing tax
measures deemed to be harmful and changing those that are found to be so. The
Code of Conduct Group oversees the application of the Code, assesses regimes to
determine whether or not they are harmful, and reports back to the ECOFIN on
developments in this area at the end of each Presidency. 
[2]     The problem of double non-taxation does not arise if the Member State of the parent company applies the credit relief method. It only arises where
the Member State applies the exemption relief method. 
[3]        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.
[4]     The tax exemption obligation under Article 4(1)(a) in the PSD
applies unconditionally when Member States have opted for relieving double
taxation on subsidiaries' profit distributions through exemption (see C-138/07
Cobelfret).
[5]Http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/double_non_tax/summary_report.pdf

[6]     European Parliament resolution of 19 April 2012 on the call for
concrete ways to combat tax fraud and tax evasion (2012/2599(RSP)).
[7]     European Parliament resolution of 21 May 2013 on Fight against
Tax Fraud, Tax Evasion and Tax Havens (2013/2060(INI)).
[8]   EUCO
75/1/13 REV 1.
[9]     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.
[10]    OECD,
Addressing Base Erosion and Profit Shifting, 2013.
[11]    An unofficial translation from German:
§
42 Missbrauch von rechtlichen Gestaltungsmöglichkeiten
(1) Durch
Missbrauch von Gestaltungsmöglichkeiten des Rechts kann das Steuergesetz nicht
umgangen werden. Ist der Tatbestand einer Regelung in einem Einzelsteuergesetz
erfüllt, die der Verhinderung von Steuerumgehungen dient, so bestimmen sich die
Rechtsfolgen nach jener Vorschrift. Anderenfalls entsteht der Steueranspruch
beim Vorliegen eines Missbrauchs im Sinne des Absatzes 2 so, wie er bei einer
den wirtschaftlichen Vorgängen angemessenen rechtlichen Gestaltung entsteht.
(2) Ein
Missbrauch liegt vor, wenn eine unangemessene rechtliche Gestaltung gewählt
wird, die beim Steuerpflichtigen oder einem Dritten im Vergleich zu einer
angemessenen Gestaltung zu einem gesetzlich nicht vorgesehenen Steuervorteil
führt. Dies gilt nicht, wenn der Steuerpflichtige für die gewählte Gestaltung
außersteuerliche Gründe nachweist, die nach dem Gesamtbild der Verhältnisse
beachtlich sind.
[12]    Information on anti-abuse provisions in 14 Member States can be
found in annex 1 which contains section 4.6.7. of annex 7 (Study including a
data collection and comparative analysis of information available in the public
domain on existing and proposed tax measures of the 14 Member States in
relation to non-cooperative jurisdictions and aggressive tax planning) in the
Impact Assessment accompanying the Commission's Recommendation on aggressive
tax planning (SWD(2012)403).  
[13]    Council conclusions on tax evasion and tax fraud (doc. 95/49/13,
Fisc 94).
[14]  OECD, Hybrid Mismatches Arrangements: Tax Policy and Compliance
Issues, 2012, page 5.
[15]    Article 4(1) of Council Directive 2003/49/EC. A recast of this
directive (COM (2011) 714) is pending in Council.
[16]    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).