COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT Accompanying the document Proposal for a COUNCIL DIRECTIVE Amending Council Directives 2003/49/EC, 2009/133/EC, 2011/96/EU, (EU) 2016/1164, (EU) 2017/1852, and EU 2025/50 as regards the simplification of the Union framework on direct taxation and supporting growth and competitiveness of the EU
Date: 2026-06-24
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: European tax cooperation, approximation of laws, competitiveness, cross-border cooperation, direct tax, double taxation, economic growth, single market, tax law, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.6.2026  SWD(2026) 561 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT REPORT  Accompanying the document Proposal for a COUNCIL DIRECTIVE Amending Council Directives 2003/49/EC, 2009/133/EC, 2011/96/EU, (EU) 2016/1164, (EU) 2017/1852, and EU 2025/50 as regards the simplification of the Union framework on direct taxation and supporting growth and competitiveness of the EU {COM(2026) 560 final} - {SEC(2026) 560 final} - {SWD(2026) 560 final} - {SWD(2026) 562 final}  
 
 
Table of contents 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ............................................................... 1 
1. 
2. 
PROBLEM DEFINITION .................................................................................................................... 2 
3.  WHY SHOULD THE EU ACT? .........................................................................................................13 
4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? ................................................................................15 
5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? .....................................................................17 
6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? ............................................................39 
7.  HOW DO THE OPTIONS COMPARE? .................................................................................................62 
8. 
PREFERRED OPTION .......................................................................................................................68 
9.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED?...................................73 
ANNEX 1: PROCEDURAL INFORMATION .............................................................................................76 
ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT) .................................................80 
ANNEX 3: WHO IS AFFECTED AND HOW? ...........................................................................................85 
ANNEX 4: ANALYTICAL METHODS ......................................................................................................90 
ANNEX 5: COMPETITIVENESS CHECK ...............................................................................................106 
ANNEX 6: SME CHECK ...........................................................................................................................107 
ANNEX 7:  TIMELINE OF EU DIRECTIVES IN DIRECT TAXATION ................................................110 

 
 
 
 
 
Glossary 

Term or acronym 

Meaning or definition 

ATAD 

Anti-Tax Avoidance Directive 

BEPS 

CJEU 

CFC 

CIT 

DAC 

Base Erosion and Profit Shifting 

Court of Justice of the European Union 

Controlled Foreign Company 

Corporate Income Tax 

Directive on Administrative Cooperation 

Direct taxation 

Tax  concept  where  taxes  are  imposed  directly  on  the 
taxpayer, e.g., a business, and cannot be shifted to others 

DTA 

DRM 

EBITDA 

EFTA 

ETR 

EU 

EU tax rules 

Double Tax Agreement 

Dispute Resolution Mechanisms Directive 

Earnings  before 
amortisation 

interest, 

tax,  depreciation 

and 

The European Free Trade Association 

Effective tax rate 

The European Union 

Rules  deriving  from  the  Directives  adopted  by  the 
Council  of  the  European  Union  in  the  area  of  direct 
taxation 

Existing Directives 

Directives  adopted  by  the  Council  of  the  European 
Union in the area of direct taxation 

FASTER 

Directive on faster and safer relief of excess withholding 
taxes 

 
 
FDI 

GDP 

HOT 

IIR 

ILR 

IRD 

JRC 

MAP 

MNE(s) 

OECD 

Pillar 2  

Foreign direct investment(s) 

Gross Domestic Product  

Head Office Taxation 

Income Inclusion Rule under Pillar 2 

Interest Limitation Rule 

Interest and Royalties Directive 

The Joint Research Centre 

Mutual Agreement Procedure 

Multinational Enterprise(s) 

The  Organisation  for  Economic  Co-operation  and 
Development 

OECD  framework  aiming  at  establishing  a  global 
minimum effective tax rate for multinational enterprises  

Pillar 2 Directive 

Directive  on  ensuring  a  global  minimum  level  of 
taxation  for  multinational  enterprise  groups  and  large-
scale domestic groups in the Union 

PSD 

QDMTT 

R&D 

SbS 

Parent-Subsidiary Directive 

Qualified Domestic Minimum Top-up Tax under Pillar 2 

Research and Development 

Side-by-Side system under Pillar 2 that introduces safe-
harbours  to  reduce  compliance  burdens  for  MNEs  in 
jurisdictions with qualifying domestic tax regimes as of 
1 January 2026. 

SME(s) 

Small and Medium-sized Enterprise(s) 

 
 
TEC 

TEU 

TFEU 

Third-party loan 

TMD 

UN 

UTPR 

WHT 

Treaty establishing the European Community 

Treaty on the European Union 

Treaty on the Functioning of the European Union 

A loan provided by an external lender who is not directly 
the 
involved 
borrower’s business or personal finances 

the  ownership  or  operations  of 

in 

Tax Merger Directive 

The United Nations 

Under-Taxed Profit Rule under Pillar 2 

Withholding tax(es) 

Zero-tax jurisdiction 

Third country that does not levy corporate income tax or 
applies a zero corporate income tax rate 

 
 
 
1.  INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

In  the  Political  Guidelines  for  the  European  Commission1,  President  Von  der  Leyen  stressed  the 
Commission’s  commitment  to  make  business  easier  and  faster  in  Europe.  Simplification  of  EU 
policies and laws, and ensuring their better implementation is essential to attaining these objectives 
and to strengthening European competitiveness.  

Accordingly, the President has tasked each Commissioner to focus on simplification, i.e., less red 
tape,  more  trust,  better  enforcement,  and  faster  permitting.  Concretely,  the  Commission  has  set  a 
target of reducing administrative burden by at least 25% for all businesses, and by at least 35% for 
SMEs,  by  the  end  of  the  mandate,  without  undermining  the  policy  objectives  of  the  revisited 
initiatives. 

On  this  basis,  the  Commission  committed  to  make  proposals  to  simplify,  consolidate  and  codify 
legislation to eliminate any overlaps and contradictions, while maintaining high standards.2 Already 
in  2025,  the  Commission  proposed  ten  omnibus  proposals,  e.g.,  in  the  area  of  environment, 
investment, and digitalisation, that reduce recurrent administrative costs by EUR 11.9 billion.3 

In  accordance  with  the  mission  letter  to  the  Commissioner  for  Climate,  Net  Zero  and  Clean 
Growth, Wopke Hoekstra,4 and as outlined in the 2026 Commission Work Programme5, the present 
proposal for an Omnibus on Taxation aims to simplify, streamline and clarify existing directives in 
the  area  of  direct  taxation:  the  Interest  and  Royalties  Directive  (IRD)6,  the  Parent-Subsidiary 
Directive (PSD)7, the Tax Merger Directive (TMD)8, the Anti-Tax Avoidance Directive (ATAD)9, 
and the Dispute Resolution Mechanisms Directive (DRM)10 (collectively the ‘Directives’).  

The corporate tax directives (IRD, PSD and TMD) aim to eliminate double taxation on cross-border 
dividend,  interest  and  royalty  payments  and  to  ensure  tax  neutrality  for  cross-border  corporate 
reorganisations. The ATAD seeks to prevent aggressive tax planning within the EU, and, in turn, 
the  DRM  aims  to  ensure  effective  resolution  of  cross-border  tax  disputes  that  involve  double 
taxation  or  arising  from  double  taxation  conventions.  The  broad  objectives  of  these  critical 
Directives remain valid, although the means and detailed rules through which these objectives are 
to be met require adjustments to adapt to a changing tax landscape, as well as economic and market 
developments. In preparation of this proposal, this impact assessment report considers the issues at 
stake and different policy options. This analysis is mainly based on the experience and challenges 

1 Political Guidelines 2024 -2029.  
2 Political Guidelines 2024-2029.  
3 Simplification - European Commission 
4 President von der Leyen’s mission letter to Wopke Hoekstra; Mission-letter-Wopke-Hoekstra.pdf 
5  Commission  work  programme  2026  -  European  CommissionCommission  work  programme  2026  -  European 
CommissionCommission  work  programme  2026  -  European  CommissionCommission  work  programme  2026  - 
European Commission 
6  Council  Directive  2003/49/EC  of  3  June  2003  on  a  common  system  of  taxation  applicable  to  interest  and  royalty 
payments made between associated companies of different Member States. 
7  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. 
8  Council  Directive  2009/133/EC  of  19  October  2009  on  the  common  system  of  taxation  applicable  to  mergers, 
divisions,  partial  divisions,  transfers  of  assets  and  exchanges  of  shares  concerning  companies  of  different  Member 
States and to the transfer of the registered office of an SE or SCE between Member States. 
9  Council  Directive  (EU)  2016/1164 of  12  July  2016  laying  down  rules  against  tax  avoidance  practices  that  directly 
affect the functioning of the internal market.  
10 Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union. 

 
 
 
from  applying  these  Directives  in  practice,  as  well  as  their  interaction  with  more  recent  EU  and 
international tax developments, such as the newly adopted Pillar 2 Directive11. 

Simplification  efforts  in  the  area  of  taxation  do  not  only  include  the  Omnibus  on  Taxation,  on 
which this impact assessment focuses; they also include a separate proposal amending and recasting 
all  the  Directives  on  Administrative  Cooperation  (DAC  1-9),  which  is  prepared  in  parallel.  The 
proposal  for  a  DAC  Recast  aims  to  simplify  the  administrative  framework  in  tax  matters  and  to 
enhance clarity and effectiveness in administrative tax cooperation among EU Member States. An 
individual impact assessment report has been prepared for the DAC Recast. 

The importance of the work in this area has been confirmed by the Council of the European Union 
in  its  conclusions  on  a  tax  decluttering  and  simplification  agenda,  which  contributes  to  the  EU’s 
competitiveness.12 

2.  PROBLEM DEFINITION 

This section defines and analyses the problems and their drivers and assesses the evolution of such 
problems  in  the  absence  of  EU  policy  intervention.  The  ‘Problem  tree’  in  Figure  1  presents  the 
context, the drivers, the problems and the negative consequences that the Omnibus on Taxation will 
aim to address. 

Figure 1: Problem Tree 

2.1. What are the problems? 

Tax systems in the Member States consist of national rules. In specific fields of a primarily cross-
border nature, these national rules are juxtaposed with  tax measures that transpose EU directives. 
The  EU  acquis  in  direct  taxation  represents  a  significant  achievement  for  the  EU.  The  relevant 
Directives have successfully facilitated the EU internal market by establishing common rules at EU 
level. These common  rules help  taxpayers expand  their commercial activity  across borders in  the 

11  Council  Directive  (EU) 2022/2523  of  14 December  2022  on  ensuring  a  global  minimum  level  of  taxation  for 
multinational enterprise groups and large-scale domestic groups in the Union. 
12 Taxation: Council sets tax decluttering and simplification agenda - Consilium 

 
 
 
 
internal  market.  Cross-border  operations  have  been  facilitated  in  many  ways,  notably  by 
eliminating  withholding  taxes  and  relieving  double  taxation  on  cross-border  intra-group 
transactions, deferring the tax liability on capital gains in the case of restructurings, and ensuring a 
more consistent  anti-tax  avoidance framework  as opposed to  disparities  and mismatches amongst 
national tax systems in the Member States.  

Since  the  adoption  of  these  Directives,  the  legal,  economic  and  geopolitical  landscape  has 
significantly evolved. Among others, globalisation and digitalisation have further materialised and 
inevitably, resulted in rendering some of the older rules outdated. Additionally, increasing external 
competition is putting pressure on Europe’s tax base and the attractiveness of the internal market is 
being  jeopardised.  In  this  context,  the  EU  and  more  than  thirty  other  countries  worldwide  have 
implemented  global  minimum  taxation  (Pillar  2),  based  on  an  internationally  agreed  common 
approach within the OECD/G20 Inclusive Framework. Pillar 2 creates a necessary safety net, but 
adds an additional layer of rules for businesses and tax administrators to apply. 

The Omnibus on Taxation must be considered in this context where four main problems have been 
identified on the basis of extensive consultations with Member States, private stakeholders, and the 
results of the ATAD evaluation13: 

2.1.1.  Tax compliance requirements that are disproportionate 

The  multilayered  tax  landscape,  combined  with  recent  developments,  have  led  to  significant 
complexity.  The  amount  of  applicable  tax  rules  has  accumulated,  making  tax  compliance  more 
complicated than necessary. Research done by or for other EU institutions,  such as the European 
Parliament, points out that the tax compliance costs have more than doubled since 2014, and that 
corporate  tax  has  been  identified  amongst  those  areas  with  the  highest  compliance  burden.14  On 
average, EU businesses incur annual costs in meeting their tax compliance obligations equivalent to 
almost 2% of their total turnover, placing a particularly heavy burden on smaller businesses.15 It has 
been estimated the current corporate tax compliance cost for companies with cross-border activities 
are annually EUR 3,308 for SMEs and EUR 8,266 for larger businesses.16 

In  the  Call  for  Evidence,  it  was  pointed  out  by  approximately  68%  of  the  117  respondents, 
including all businesses and business associations, that tax compliance requirements in the EU have 
become disproportionate.17 For example, while the IRD and the PSD harmonise the tax treatment of 
interest,  royalty,  and  dividend  payments  within  the  EU,  the  procedures  for  obtaining  the  tax 
exemption are mainly determined by the Member States (Box 1). During the targeted consultations, 
many  businesses  voiced  concerns  about  the  complexity  and,  consequently,  the  significant 

13  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market. 
14  European  Parliamentary  Research  Service,  Tax  compliance  costs  in  the  EU:  Striking  the  right  balance  p.  1;  Study 
requested by the FISC Subcommittee, European Parliament, Removal of taxation-based obstacles and distortions in the 
Single Market in order to encourage cross border investment, p. 9-11. 
15 VVA/KPMG (2022), Tax compliance costs for SMEs: An update and a complement Final Report KPMG/VVA 2022. 
16 Impact Assessment Report Accompanying the proposal for a Council Directive establishing a Head Office Taxation 
(HOT) system (2023), eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX%3A52023SC0308. 
17 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 

 
 
 
compliance burden they face  when operating cross-border. It was noted that unwieldy procedures 
for  obtaining  the  tax  exemption  in  certain  Member  States  may  often  discourage  companies  from 
applying the IRD and PSD, as the burdens outweigh the benefits. Similar views were expressed in 
the Call for Evidence where approximately 67% of the 117 respondents identified issues related to 
the withholding tax relief, including the procedures, under the IRD and PSD18. 

Box 1: Withholding taxes on interests, royalties, and dividends 

As a general rule, a company located in one state, which makes an interest, a royalty, or a 
dividend  payment  to  an  associated  company,  i.e.,  another  company  where  it  holds  a 
significant  degree  of  influence,  control,  or  ownership,  in  another  state,  would  pay  a 
withholding  tax  on  the  transaction  in  the  state  where  the  payor  is  located  (taxation  at 
source). In some cases, the transaction would also be taxable as income in the state of the 
receiving  company.  The  IRD  and  the  PSD  exempt  these  payments  between  associated 
companies in the EU from withholding taxes and eliminate double taxation. Although the 
IRD  and  PSD  pursue  similar  objectives,  the  requirements  for  applying  the  Directives 
differ, as explained in Section 5.1, and the procedures for enforcing the withholding tax 
exemption are broadly left for the Member States to decide. While the FASTER Directive 
streamlined withholding tax procedures for certain cross-border portfolio investments, its 
scope is limited to publicly traded securities and does not extend to all payments covered 
by the IRD and the PSD.  

Furthermore, the adoption of the Pillar 2 Directive, which introduces a global minimum corporate 
tax  rate  of  15%  for  MNEs  to  ensure  a  level  playing  field  across  jurisdictions,  is  an  addition  of  a 
new system of international tax rules layered on top of the existing rules. A recent study estimates 
that the total aggregate one-off compliance costs related to Pillar 2 are about EUR 1.2 billion and 
recurring annual costs for the companies in scope of about EUR 517 million.19  

While the importance of Pillar 2 is indisputable, it has inevitably increased the density of the tax 
architecture. Therefore, it is necessary to consider whether other pre-existing rules on tackling tax 
avoidance behaviours remain relevant, or whether their objectives are effectively achieved by Pillar 
2. For instance, in the Call for Evidence, approximately 68% of the respondents found that Pillar 2 
and  the  Controlled  Foreign  Company  (CFC)  rules  in  ATAD  pursue,  to  a  certain  extent,  similar 
objectives in ensuring that multinational groups pay a fair level of tax. Although the rules differ in 
mechanism and scope, this dual effort may cause some degree of overlap (Box 2Box 2). This issue 
was also emphasised in  the  ATAD evaluation,  as businesses often regard the  CFC rules as  being 
obsolete for companies in scope of Pillar 2.20 

Box 2: Taxation of low-taxed foreign entities  

CFC  rules  are  designed  to  prevent  companies  from  using  foreign  subsidiaries  in  low-tax 

18 Ibid. 
19  OECD  Pillar  2  Compliance  Costs.  A  Quantitative  Assessment  for  EU-Headquartered  Groups  (2025),  Sean  Bray, 
Daniel Bunn, Johannes J. Gaul, Christoph Spengel, DP 25-053. 
20  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 37. 

 
 
 
 
jurisdictions  to  avoid  paying  taxes  in  their  home  country.  Under  CFC  rules,  if  the 
undistributed  profits  of  a  foreign  subsidiary  are  low-taxed  (usually  less  than  half  of  the 
applicable  national  statutory  rate),  the  EU  parent  company  of  the  subsidiary  will  be 
additionally taxed on this income at an appropriate level (usually the national statutory rate of 
its  Member  State).  Undistributed  profits  which  are  taxed  under  CFC  rules  often  relate  to 
passive  income.  Pillar  2  rules  ensure  that  multinational  enterprises  (MNEs)  in  scope  pay  a 
minimum level of tax in each jurisdiction where they operate at an effective rate of 15% on a 
broader tax base comprising passive and active income. This tax can apply at the level of the 
shareholder  under  the  income  inclusion  rule  or  at  the  level  of  the  CFC  under  the  qualified 
domestic top-up tax.  The parallel  application of CFC rules and the Pillar 2 framework may 
result  not  only  in  economic  double  taxation  but  also  duplicative  and  complex  compliance 
obligations  for  MNE  groups,  which  are  required  to  perform  overlapping  calculations  and 
reporting under both sets of rules.  

In the Call for Evidence, it has also been pointed out by approximately 45% of the respondents that 
the  CFC  rules,  and  other  rules  in  ATAD,  such  as  the  Interest  Limitation  Rule  and  the  Hybrid 
Mismatch Rules, are insufficiently targeted leading to  heavy  compliance  burdens, particularly for 
SMEs21.  This  burden  related  to  CFC  rules  and  the  Interest  Limitation  Rule  can  be  considered 
disproportionate  for  SMEs  as  these  businesses  face  high  administrative  costs  associated  with 
applying  the  rules,  although  they  are  less  likely  to  engage  in  aggressive  tax  planning  practices.22 
For  the  Hybrid  Mismatch  Rules,  and  particularly  the  rules  on  imported  mismatches,  it  was 
highlighted  by  approximately  43%  of  the  respondents  in  the  Call  for  Evidence  that  the  rules  are 
overly complex.23 This was identified in the ATAD evaluation as a cause of heavy administrative 
and  compliance  burdens  for  both  businesses  and  tax  authorities.24  Overall,  it  has  been  found  that 
MNEs’  compliance  with  ATAD  rules  may  annually  amount  to  up  to  EUR  100,000  per  company 
depending on the size and corporate complexity.25 

2.1.2.  Legal uncertainty due to unclear tax rules and terms 

Ambiguity in the legal wording can cause lingering doubt on the meaning of certain EU tax rules, 
leading  to  legal  uncertainty  which  way  pointed  out  as  a  problem  by  approximately  73%  of  the 
respondents  in  the  Call  for  Evidence.  Legal  uncertainty  and  an  increased  risk  of  disputes  distort 
investment  decisions  and  makes  it  difficult  for  EU  companies  to  navigate  their  tax  obligations 
across the EU.  

For example, as the holding requirements in the PSD and IRD are not interpreted in the same way 
in all Member States (Box 33), companies may be left uncertain about whether they will be able to 
avail  of  the  tax  exemption  in  one  country  or  another.  Consequently,  companies  are  required  to 

21 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 
22 Base erosion and profit shifting (BEPS) | OECD and Commission Staff Working Document: Evaluation of Council 
Directive  2016/1164  laying  down  rules  against  tax  avoidance  practices  that  directly  affect  the  functioning  of  the 
internal market, p. 39. 
23 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stake holder consultation synopsis report 
24  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 48. 
25 Ibid., p. 29. 

 
 
 
 
 
acquire  country-specific  knowledge  when  they  intend  to  establish  entities  or  carry  out  business 
activities across borders.  

Box 3: Holding requirements under IRD and PSD 

The IRD is applicable to interest and royalty payments between associated companies in the 
EU.  For  companies  to  be  associated,  the  IRD  requires  that  a  company  has  a  holding  of 
minimum 25% in capital or voting rights of another company. As the IRD does not specify 
whether  the  minimum  holding  has  to  be  direct  or  indirect,  the  requirement  has  been 
interpretated  differently  in  the  Member  States.  In  addition,  the  PSD  contains  a  similar 
requirement  as  the  PSD  is  applicable  to  dividend  payments  between  associated  companies, 
i.e., parent companies and subsidiaries, in the EU. However, for companies to be associated 
in this regard, a company must have a direct or indirect minimum holding of 10 % in capital 
or voting rights of another company.  

Legal  uncertainty  has  also  been  identified  in  relation  to  the  DRM.  The  lack  of  clear  terms  and 
requirements,  e.g.,  with  regard  to  the  admission  criteria  and  deadlines,  was  criticised  by 
approximately 38% of the respondents in the Call for Evidence who found that dispute resolution in 
the EU remain too slow and complex, leading to high compliance costs and underuse of the internal 
market.26 

2.1.3.  Different tax treatment depending on national specificities 

Not all existing Directives have been implemented consistently due to various options or differing 
interpretations  of  the  same  rules  and  terms.  This  has  led  to  different  tax  treatment  of  businesses 
depending  on  the  national  approach  to  specific  EU  tax  provisions  and  has  been  identified  as  a 
problem by approximately 73% of the respondents in the Call for Evidence.27 

The  ‘minimum  standard’  approach  to  ATAD,  leaving  a  wide  range  of  national  discretion  to 
Member  States  in  their  implementation  of  the  Directive,  was  criticised  by  approximately  67%  of 
the respondents in the Call for Evidence. Similar findings are presented in the ATAD evaluation.28 
For example, CFC rules, which are applicable to EU businesses with certain low-taxed subsidiaries, 
are  implemented  differently  across  the  EU  based  on  two  different  ‘models’  which  are  presented 
ATAD. This is also the case for the Interest Limitation Rule in the ATAD which, according to the 
ATAD  evaluation,  has  been  considered  as  offering  extensive  flexibility  that  has  resulted  in 
fragmented implementation across the EU29 (Box 44) causing high compliance costs and underuse 
of the internal market. 

Box 4: Interest Limitation Rule in ATAD 

The Interest Limitation Rule caps the amount of interest that corporate taxpayers are entitled 

26 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 
27 Ibid. 
28  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 46-47 
29 Ibid., p. 46-47 

 
 
 
 
 
to deduct in a tax year. The purpose of this rule is to limit deductible interest expenses which 
can  be  strategically  used  by  taxpayers  to  place  excessive  debt  in  high-tax  jurisdictions  in 
order to reduce their tax liability. However, this rule has not put an end to the fragmentation 
in the internal market as its transposition varies strongly from one Member State to another. 
This  is  a  result  of  the  ATAD  offering  a  number  of  transposition  options  related  to:  i)  the 
deductibility  limit,  ii)  a  de  minimis  safe  harbour,  iii)  a  standalone  entity  exemption,  iv)  a 
grandfathering clause, v) an infrastructure exemption, vi) a group escape, vii) carry forward 
and  carry  back  options,  and  viii)  an  exclusion  of  financial  undertakings.  According  to  the 
ATAD  evaluation,  the  various  options  have  led  to  excessive  fragmentation.  For  instance,  6 
Member  States  adopted  safe  harbours  lower  than  the  minimum  standard  of  EUR  3  million 
established in the ATAD, and 7 did not  exclude the application of the rule to loans used to 
fund long-term public infrastructure projects.30  

In addition, for a variety of reasons that may have been justified at the time, some legal texts were 
not sufficiently aligned with other legal acts when the Directives were drafted or negotiated. Such 
lack of consistency is, for example, the case for the definitions of eligible companies in the PSD, 
IRD,  and  TMD.  These  differences  in  eligibility  requirements  create  problems,  as  they  entail 
inconsistent  access  for  businesses  to  the  benefits  of  the  IRD,  PSD  and  TMD.  This  results  in 
increased risks of disputes, competitiveness concerns and, ultimately, underuse of the potential of 
internal market. 

2.1.4.  Tax barriers on cross-border business activities 

While  the  existing  Directives  have  improved  the  functioning  of  the  internal  market  by  removing 
certain  distortions  caused  by  diverging  national  tax  treatments,  approximately  70%  of  the 
respondents in the Call for Evidence still identified tax barriers in the internal market as a factor for 
preventing businesses to engage more extensively in cross-border activities.31  

In  this  regard,  studies  done  by  or  for  the  European  Parliament  have  criticised  Member  States  for 
finding it much easier to agree on curbing international tax planning, including implementing rules 
agreed at OECD level, such as ATAD and Pillar 2, than on reducing tax and administrative barriers 
in  the internal  market,  resulting  in  what  one study,  for instance,  calls  a  ‘complexity explosion’.32 
According to the Tax Complexity Index, tax rules and procedures are generally more complex in 
the EU than in other big economies, such as the United States and China.33  

Tax  obstacles,  including  complexity,  cause  underuse  of  the  potential  of  internal  market  and 
competitiveness  concerns.  For  instance,  the  IRD  and  PSD  only  exempt  certain  intra-group 
payments from withholding tax, subject to specific conditions and procedural restrictions (Box 5). 
This means that national withholding taxes still apply to many cross-border business transactions in 

30 Ibid., p. 12-14. 
31 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 
32  European  Parliamentary  Research  Service,  Tax  compliance  costs  in  the  EU:  Striking  the  right  balance  p.  1;  Study 
requested by the FISC Subcommittee, European Parliament, Removal of taxation-based obstacles and distortions in the 
Single Market in order to encourage cross border investment, p. 9-11. 
33  Tax  Complexity  Index;  In  2024,  13  Member  States  are  found  to  have  higher  tax  complexity  than  the  US  and  20 
Member States are found to have higher tax complexity than China. 

 
 
 
 
the EU and are coupled with different procedures while interacting with applicable tax treaties. As 
a  result,  businesses  operating  across  borders  generally  face  more  cumbersome  rules  than  purely 
domestic companies. This  limits  business  prospects  for expansion within  the internal  market and, 
consequently, economic growth.  

Box 5: Scope of IRD and PSD 

The IRD does not cover interest and royalty payments made between companies of different 
Member States that directly hold less than 25% in the capital or voting rights. The PSD, on 
the other hand, does not cover profit distributions paid to companies that hold less than 10% 
of  the  capital  or  voting  rights.  In  addition,  payments  of  interests,  royalties,  and  dividends, 
which  are  made  to  a  company  that  takes  a  form  which  is  not  explicitly  covered  by  each 
Annex respectively, are not entitled to benefit from the tax exemptions provided by the IRD 
and PSD (the European Court of Justice (CJEU) has ruled that the Annex to the PSD provides 
for  an  exhaustive  list  of  companies34).  Accordingly,  many  cross-border  payments  remain 
subject  to  withholding  taxation, insofar they are not  already exempt by bilateral  tax treaties 
between EU Member States. 

Another remaining barrier, which was pointed out by businesses in the targeted consultations, was 
disparities  in  the  scope  of  the  TMD and  Company Law Merger  Directive  as  amended  by  the 
Mobility  Directive.  As  the  type  of  restructurings  that  are  recognised  under  EU  company  law  are 
broader than the ones recognised in the TMD, there is a mismatch in the EU acquis which limits the 
possibilities  of  carrying  out  restructurings  in  the  internal  market  without  triggering  immediate 
capital  gains  or  other  tax  liabilities.  This  issue  was  also  identified  by  approximately  38%  of  the 
respondents  in  the  Call  for  Evidence35  causing  competitiveness  concerns  and  underuse  of  the 
internal market. 

However, tax barriers do not only exist due to limited scopes of existing Directives. Other research 
indicates  that  a  comprehensive  harmonisation  of  Member  States’  tax  systems  by  way  of  positive 
integration  would  be  necessary  to  sustainably  eliminate  tax  obstacles  to  cross  border  business 
activities.36 In addition, in the Call for Evidence, approximately 61% of the respondents called for 
simplification  beyond  the  existing  Directives,37  a  clear  signal  that  the  current  landscape  of 
fragmented  national  tax  rules  imposes  unnecessary  complexity  on  businesses  operating  across 
borders and restricts cross-border investments. 

An  easily  identifiable  tax  barrier  is  the  divergent  approach  to  the  tax  treatment  of  research  and 
development  (R&D)  activities.  Businesses  investing  in  R&D  across  the  internal  market  face  a 
fragmented  landscape  of  national  regimes,  e.g.,  divergent  eligibility  criteria,  definitions  of 
qualifying  expenditure,  incentive  rates,  deductibility  rules  and  periods;  all  of  which  complicates 
cross-border investment decisions, raises compliance costs, and makes it harder to plan and develop 
R&D activities across the internal market. Stakeholders have noted that this fragmentation creates a 

34  Judgment  of  the  Court  (First  Chamber)  of  1  October  2009,  Gaz  de  France  -  Berliner  Investissement  SA  v 
Bundeszentralamt für Steuern, Case C-247/08, ECLI:EU:C:2009:600. 
35 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 
36  Study  requested  by  the  FISC  Subcommittee,  European  Parliament,  Removal  of  taxation-based  obstacles  and 
distortions in the Single Market in order to encourage cross border investment, p. 17. 
37 Ibid. 

 
 
 
 
major barrier for scaling38. Accordingly, this also undermines the EU’s attractiveness as a location 
for  innovation-driven  investment  vis-à-vis  major  international  competitors,  such  as  the  United 
States. 

The  growing  regulatory  fragmentation  and  administrative  complexity  across  Member  States  is  a 
structural  factor  contributing  to  the  EU’s  widening  innovation  gap.  As  highlighted  in  the  Draghi 
Report39, Europe’s current R&I framework is not sufficiently coordinated to support breakthrough 
innovation,  resulting  in  firms  concentrating  on  mature  technologies  with  limited  disruptive 
potential. 

This is reflected in the persistent underinvestment in research and innovation. EU companies spent 
approximately EUR 270 billion less than their US counterparts in 202140. The lack of a genuinely 
integrated approach weakens  scale effects,  slows  diffusion of innovation, and limits  the ability to 
translate research into globally competitive technologies. 

In  addition,  divergent  national  definitions  of  qualifying  R&D  expenditure  across  Member  States 
create  a  specific  and  identifiable  compliance  cost  burden  for  cross-border  operators41  and  the 
absence  of  greater  coordination  in  the  tax  treatment  of  R&D  across  the  EU  risks  undermines  the 
common  market42.  This  makes  the  tax  treatment  of  R&D  expenditure  a  particular  issue  that  a 
common EU approach would be well-placed to address. 

R&D  is  critical  for  innovation;  yet  the  EU  falls  behind  its  key  global  trading  partners.  Based  on 
2024 figures in purchasing power parity–adjusted terms, R&D expenditure in the United States and 
China amounted to approximately USD 1 trillion, compared to roughly USD 600 billion in the EU 
(thus about 60% of the United States’ level, marking a 10 percentage point decrease from 70% in 
2014).43  

More specifically, the EU’s R&D intensity gap relative to its main global competitors is primarily 
driven by lower levels of private-sector investment. In 2020, China surpassed the EU for the first 
time in R&D intensity (2.4%), while the EU’s R&D intensity stood at 2.3% in 2021 and declined 
further to 2.2% in 2022, remaining well below that of the United States (3.5%), Japan (3.3%), and 
South Korea (4.9%). 

Although  the  EU  has  increased  its  R&D  investment  over  the  past  two  decades,  a  significant  gap 
persists compared with its principal international competitors, and its relative share of global R&D 
activity  continues  to  decline.  Furthermore,  evidence  suggests  that  the  overall  reduction  in 

38 Communication from the Commission to the European Parliament, the Council, the European Economic and Social 
Committee and the Committee of the Regions (Commission Staff Working Document), The EU Startup and Scaleup 
Strategy, COM(2025)270 final, pages 53 and 54.  

39  M.  Draghi,  The  future  of  European  competitiveness  (Part  A,  A  competitiveness  strategy  for  Europe),  September 
2024. 
40 Ibid, p. 6. 
41 European Law Institute, For a European Approach to R&D Tax Incentive(s), 2021. 
42  D.  D’Andria,  D.  Pontikakis,  A.  Skonieczna,  Towards  a  European  R&D  Incentive?  An  assessment  of  R&D 
Provisions under a Common Corporate Tax Base, Working Paper No 69 – 2017, p. 4. 
43  OECD  R&D  statistics  released  on  31  March  2026,  cf.  https://www.oecd.org/en/data/insights/statistical-
releases/2026/03/oecd-overall-rd-growth-stable-government-rd-budgets-decline-and-reorient-towards-defence.html. 

 
 
 
government  support  for  private  R&D  within  the  EU  has  been  partly  driven  by  a  decline  in  tax-
based support measures.44 

While  taxation  is  not  the  sole  determinant  of  R&D  investment  decisions,  it  plays  an  important 
enabling role. It is therefore closely linked to the objectives of reducing tax-related barriers within 
the internal market, promoting simplification, and strengthening competitiveness. 

2.2. What are the problem drivers? 

The  problems  identified  in  the  previous  section  have  two  main  drivers:  The  first  driver  is  the 
inconsistent  application  of  the  EU  direct  tax  acquis.  The  second  is  the  existence  of  outdated  and 
overlapping rules. 

The  inconsistent  implementation  and  application  of  the  EU  direct  tax  acquis  relate  to  the 
current fragmentation of the internal market. The EU tax framework has grown over decades and 
while old directives remain in place, new anti-abuse layers were added. Member States have also 
implemented  EU  rules  differently  and  added  additional  rules  or  obligations.  Inconsistency  and 
fragmentation were pointed to as the root of the identified problems by 77% of the respondents in 
the Call for Evidence. The inconsistency cannot be solved by infringement procedures, guidance or 
other  tools,  since  the  existing  Directives  themselves  provide  for  several  options,  and  include 
undefined terms or constructively ambiguous wording. Hence, there are several inconsistencies that 
can only be sufficiently addressed by legislative action. Firstly, certain provisions provide options 
to  Member  States,  to  choose  the  most  appropriate  implementation  at  national  level.  ATAD,  for 
example,  allows  Member  States  to  choose  between  several  options  for  the  application  of  the 
Interest Limitation Rule and CFC taxation. Consequently, the limited degree of harmonisation has 
proven insufficient, and the EU framework remains fragmented, with a costly compliance burden, 
legal uncertainty, different tax treatment and tax barriers for taxpayers as a result.  These findings 
reflect the conclusion in the ATAD evaluation which indicates that the excessive flexibility of the 
rules  causes  problems,  despite  the  overall  positive  assessment  that  the  ATAD  remains  fit  for 
purpose.45 

Moreover, inconsistent applications have even occasionally lead to problems concerning provisions 
that do not include options for implementation. This has occurred in some instances where the legal 
texts  are  not  fully  aligned.  For  example,  there  are  differences  in  the  holding  requirements  for 
entitlement to the IRD and PSD. In others, a lack of precision or the flexible nature of certain rules 
has led to divergent interpretations of the Directives, fuelled by unintended inconsistencies. By way 
of example, where variations in the interpretation of certain provisions of the DRM exist – such as 
the  admission  criteria  and  imposed  deadlines  –  have  been  demonstrated  to  contribute  to  legal 
uncertainty.46  

The  existing  direct  taxation  Directives  have  been  adopted  over  the  past  35  years  (Annex  7)  and 
most  of  these  Directives  have  undergone  only  very  limited  amendments  since.  Consequently, 
outdated  and  overlapping  rules  cause  problems  in  the  internal  market.  Attempts  to  revisit  their 
content have previously been made, for example, with the IRD recast in 2011, but this attempt did 

and 

44  Science,  Research 
report,  Chapter 
performance 
https://op.europa.eu/en/publication-detail/-/publication/c683268c-3cdc-11ef-ab8f-01aa75ed71a1/language-en  
45  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 46-48. 
46 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 

Innovation 

the  EU 

2024 

cf. 

of 

2, 

 
 
 
not advance in Council. As a result, certain provisions in the existing direct taxation Directives do 
not sufficiently reflect economic reality. In the Call for Evidence, issues related to the IRD and the 
PSD were pointed out by approximately 67% of the respondents who inter alia identified outdated 
requirements, which are not flexible enough to include new company forms, as a cause. Concerning 
the ATAD Interest Limitation Rule, approximately 52% of the respondents in the Call for Evidence 
noted  problems,  e.g.,  because  the  rule  was  designed  at  a  time  where  the  macroeconomic 
environment was characterised by a prolonged period of historically low interest rates, before the 
significant changes observed in more recent years.47  

It is important to also consider that subsequent global and EU tax developments have resulted in the 
further extension of a complex international tax architecture over time. This has inevitably created 
some  overlaps  between  different  sets  of  rules,  which  pursue  similar  objectives  or  have  a 
comparable  scope,  as  it  is  further  explained  below.  Such  duplications,  or  layering,  make  tax 
compliance  more  burdensome  than  necessary  for  businesses.  In  the  Call  for  Evidence, 
approximately 68% of respondents identified overlaps, especially between ATAD and Pillar 2, as a 
problem driver.48 

2.3. How likely is the problem to persist? 

In  the  absence  of  EU  policy  action,  businesses  operating  across  the  EU  internal  market  will 
continue to face high compliance costs, increased risks of disputes, and it will be more difficult for 
EU businesses to make use of the opportunities of the internal market and compete globally.  

During  targeted  consultations,  many  key  stakeholders  voiced  concerns  about  the  significant  and 
growing  compliance  burden  they  face  when  operating  in  the  internal  market  and  called  for 
enhanced  clarity  and  certainty  around  different  concepts  as  well  as  for  simplifying  procedures 
going  forward.  While  there  is  significant  progress  on  simplifying  rules  and  procedures  in  some 
other areas, complexity and fragmentation remain very substantial in direct taxation.  

If no action is taken at EU level, the identified problems are expected to persist and worsen as long 
as  tax  rules  are  added,  but  not  revised,  replaced  or  repealed.  Research  done  by  or  for  other  EU 
institutions,  such  as  the  European  Parliament,  also  conclude  that  some  of  the  fundamental  tax 
obstacles  and  distortions,  such  as  complexity,  in  the  internal  market  can  only  be  addressed  by  a 
substantial  harmonisation  of  corporate  taxation  in  the  EU.49  Similar  views  were  expressed  by 
approximately  77%  of  respondents  in  the  Call  for  Evidence  who  called  for  enhanced  tax 
harmonisation at EU level.50 

While  Member  States  can  embark  on  initiatives  to  simplify  their  national  tax  rules,  unilateral 
actions  cannot  achieve  the  general interest  objectives of  ensuring  that  obstacles  do  not  restrict 
businesses  activities  in  the  internal  market,  facilitate  more  efficient  operations  and  compliance, 
particularly  in  a  cross-border  context,  or  impose  heavy  administrative  burdens  on  the  tax 
administrations. In addition, it should be recalled that some problems are related to complexity and 
fragmentation in the area of direct taxation. Action at the individual Member State level would only 
aggravate the complexity in adhering to and applying EU tax rules. Such individual actions would 

47 Ibid. 
48 Ibid. 
49  European  Parliamentary  Research  Service,  Tax  compliance  costs  in  the  EU:  Striking  the  right  balance  p.  1;  Study 
requested by the FISC Subcommittee, European Parliament, Removal of taxation-based obstacles and distortions in the 
Single Market in order to encourage cross border investment p. 9-11. 
50 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report 

 
 
 
cause  impediments  to  cross-border  operations,  increase  the  compliance  burden  on  taxpayers,  and 
undermine the level playing field. As the tax landscape keeps on evolving, the problems are only 
expected to grow, and the current state of play will be aggravated over the years to come.  

3.  WHY SHOULD THE EU ACT? 

The  Union  can  only  act  in  areas  where  the  Treaties  confer  competence  to  it.  In  areas  not  falling 
under its exclusive competence, it must be established that the objectives of a Union action cannot 
be sufficiently achieved by independent action of individual countries without equal action by other 
Member States (principle of subsidiarity). Consequently, this section will scrutinise the legal basis 
and the principle of subsidiarity regarding the Omnibus on Taxation. 

3.1. Legal basis 

The  proposal  for  an  Omnibus  on  Taxation  is  intended  to  amend  existing  EU  direct  taxation 
Directives which have been adopted over the last 35 years (Annex 7) on the basis on Article 115 
TFEU  (ex  Article  94  TEC).  This  provision  allows  for  the  approximation  of  laws  of  the  Member 
States, which directly affect the establishment or functioning of the internal market. On this basis, 
the overall objective of the existing Directives is to ensure that business activities, which are carried 
out between taxpayers of different Member States, are not subject to more, or less, favourable tax 
conditions  than  those  applied  to  business  activities  carried  out  between  companies  of  the  same 
Member State.  

Article  115  TFEU  will  also  be  the  legal  basis  for  the  Omnibus  on  Taxation  proposal  that  entail 
adoption  through  the  special  legislative  procedure,  requiring  unanimous  vote  in  Council  and 
consultation  of  the  European  Parliament  and  Economic  and  Social  Committee.  The  Omnibus  on 
Taxation  will,  by  amending  existing  EU  Directives,  have  an  impact  on  cross-border  business 
activities  with  a  view  to  enhance  the  functioning  of  the  internal  market  by  making  the  common 
rules on direct taxation clearer, simpler and up to date. 

3.2. Subsidiarity: Necessity of EU action 

EU  competence  in  the  area  of  direct  taxation  is  shared  with  the  Member  States  on  the  basis  of 
Article 115 TFEU.  In accordance with the subsidiarity principle laid down in Article 5(3) TFEU, 
action  at  EU  level  should  be  taken  only  when  the  envisaged  objectives  cannot  be  achieved 
sufficiently by Member States acting alone and in addition, by reason of the scale or effects of the 
proposed action, can be better achieved by the EU. 

On  this  basis,  all  Member  States  have  their  own  domestic  tax  systems  which  are  determined  by 
different economic approaches, financial needs and policy choices. However, in some cases, it has 
become apparent that EU action is necessary to  ensure the functioning of the internal market and 
the effectiveness of the fundamental freedoms. This is, for example, the case with the IRD and PSD 
which were adopted to ensure equal tax treatment of dividends, royalties and interests when these 
payments  are  carried  out  between  taxpayers  in  different  Member  States.  In  the  same  vein,  the 
TMD, ensures that tax rules applicable to business operations, like mergers, divisions, transfers of 
assets,  and  exchange  of  shares,  concerning  taxpayers  of  different  Member  States  are  neutral  and 
non-decisive for business decisions in the internal market. ATAD introduced a set of common anti-
tax  avoidance  rules  to  address  base  erosion  and  profit  shifting,  often  caused  or  aggravated  by 
mismatches or fragmentation between the tax systems of the Member States. The DRM establishes 
rules for resolving disputes that arise from the interpretation and application of double tax treaties 
among EU Member States.  

 
 
Although the application of these Directives remains crucial for the good functioning of the internal 
market,  the  EU  faces  new  challenges.  Enhanced  globalisation,  economic  developments,  and  an 
increasingly complex international tax architecture have made it necessary to revisit the functioning 
of  established  rules.  This  issue  is  not  specific  to  the  EU,  but  burdensome  regulation  and 
administration are a clog on EU growth and EU competitiveness vis-à-vis third countries. While it 
would be for the Member States to simplify domestic tax rules, only an EU action can amend the 
existing EU direct tax acquis in accordance with the Treaties, to simplify and clarify the common 
rules, address identified challenges, and thus enhance the competitiveness of EU businesses. As a 
result, the objectives of the Omnibus on Taxation cannot be achieved sufficiently by the Member 
States acting alone. 

Finally, in accordance with the principle of proportionality, the Omnibus on Taxation will focus on 
the  simplification  of  existing  EU  rules  that  are  linked  to  identified  problems  (Section  2.1)  which 
could  only  be  addressed  by  legislative  action.  Other  problems  that  have  been  identified  in  the 
stakeholder  consultations  or  in  the  ATAD  evaluation,  e.g.,  related  to  Exit  Taxation  Rules  or  the 
General-Anti  Abuse  Rule  (GAAR)  in  ATAD,51  which  could  be  addressed  by  soft  law  initiatives, 
such as administrative guidance, will not be considered further in this respect. EU action will thus 
be limited to what is necessary to ensure the functioning of the internal market. 

3.3. Subsidiarity: Added value of EU action 

Action at the EU level would bring significant benefits to both businesses and tax administrations. 
The  Omnibus  on  Taxation  will  be  designed  to  tackle  problems  with  the  existing  direct  taxation 
Directives  which  were  identified  in  extensive  consultations  with  Member  States  and  private 
stakeholders,  and  it  will  build  on  the  results  of  ATAD  evaluation52.  The  intention  is  to  remove 
overlapping  or  potentially  now  superfluous  rules,  streamline  procedures,  further  prevent  and 
address  instances  of  double  taxation  and  distortions,  clarify  concepts,  eliminate  outdated 
provisions,  and  address  the  inconsistent  or  divergent  application  of  certain  tax  rules  across  the 
Member States. 

On  the  basis  of  the  Omnibus  on  Taxation  proposal,  EU  tax  rules  and  procedures  should  become 
clearer  and  simpler  making  it  easier  and,  thereby,  less  costly  for  businesses  to  operate  or  expand 
cross-border.  This  would  allow  for  a  better  utilisation  of  the  potential  of  the  internal  market  and 
should also make it more attractive to establish businesses and invest in businesses in the internal 
market.  For  tax  administrations,  simpler  rules  and  streamlined  procedures  should  ease  their  work 
related  to  tax  controls  and  audits  and,  ultimately,  lead  to  fewer  disputes  and  a  reduction  in 
administrative costs. 

The Omnibus on Taxation proposal should also be seen in conjunction with the DAC Recast, which 
entails  simplification  of  certain  reporting  obligations  and  procedures.  Altogether,  the  initiatives 
would entail coordinated and comprehensive actions ensuring that both material tax rules and the 
exchange of information framework are up-to-date and fit for purpose. 

51  Simplifying  EU  rules  on  direct  taxation  –  omnibus;  Annex  2:  Stakeholder  consultation  synopsis  report  and 
Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 19-43. 
52  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market. 

 
 
 
4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

This  section outlines the general  objectives, which are the treaty  and  policy-based objectives that 
the Omnibus on Taxation aims to contribute to, and the specific objectives, which set out concretely 
what  the  initiative  is  meant  to  achieve.  The  ‘Intervention  Logic’  in  Figure  2  presents  these 
objectives jointly with the drivers and the problems that the Omnibus on Taxation aims to address. 

Figure 2: Intervention Logic 

4.1. General objectives 

The general objectives of the Omnibus on Taxation must be seen in the light of the simplification 
agenda  set  by  the  Commission  which  is  generally  linked  to  improving  the  functioning  of  the 
internal market.  

Firstly, the Omnibus on Taxation will seek to simplify existing EU direct tax rules with a view to 
boost  EU  competitiveness  and,  thereby,  making  the  environment  for  doing  business  in  the  EU 
more attractive. The Draghi Report on EU Competitiveness53 pointed out that internal barriers and 
lack  of  coordination  between  different  rules  and  policies  constitute  an  obstacle  to  EU 
competitiveness.  Consequently, complexity, uncertainty, fragmentation, and trade barriers impede 
the  proper  functioning  of  the  internal  market  and  hamper  the  prospect  for  achieving  its  full 
potential. In this  regard, the Omnibus  on Taxation should contribute  to the Commission’s overall 
target of reducing administrative burdens by at least 25% for all businesses, and by at least 35% for 
SMEs.  

53 The Draghi report on EU competitiveness 

 
 
 
 
Secondly,  the  Omnibus  on  Taxation  will  ensure  that  high  tax  standards  in  the  EU  are 
maintained. The original objectives of the existing Directives, such as removing double taxation, 
ensuring tax neutrality, establishing a common framework for dispute resolution, and tackling tax 
avoidance  and  evasion  in  the  internal  market,  remain  valid  today  and  should  not  be  substantially 
affected by the Omnibus on Taxation. Therefore, the Omnibus on Taxation should seek to improve 
the  effectiveness  and  efficiency  of  the  existing  Directives  without  deregulating  or  recreating 
loopholes,  which  can  be  used  for  tax  avoidance  and  evasion,  or  in  any  other  way  undermine  the 
achievements at EU and international level in the area of taxation. Such actions would deteriorate 
the  functioning  of  the  internal  market  rather  than  improve  it  and,  thereby,  be  contrary  to  the  EU 
simplification policy.  

4.2. Specific objectives 

The specific objectives of the initiative contribute to achieving the general objectives.  

Firstly,  in  line  with  the  Commission’s  target  to  reduce  red  tape,  the  Omnibus  on  Taxation 
purposefully  aims  to  eliminate  disproportionate  EU  tax  compliance  burdens.  The  current 
cumulative effect of application of EU tax rules imposes disproportionate compliance costs for EU 
businesses to the detriment of their competitiveness.  

Secondly,  the Omnibus on Taxation  aims to introduce clear and predictable EU tax  rules and 
terms  where  needed.  Ambiguities  in  legal  drafting  lead  to  divergent  national  interpretations, 
complex  heterogeneous  administrative  practice,  double  taxation,  increased  litigation  risks,  and 
precautionary over-documentation, causing  legal  uncertainty  which  adversely  affect  tax standards 
and business decisions in the internal market. 

Thirdly,  the  initiative  also  aims  to  improve  consistency  in  the  application  of  the  existing  tax 
Directives.  Discretionary  implementation  has  resulted  in  significant  fragmentation  in  the 
application  of  the  EU  tax  rules,  undermining  the  original  objectives  for  having  the  existing 
Directives, such as equal tax treatment across the EU. Substantial and procedural inconsistencies in 
the application of different Directives also hinder their effective application.  

Finally,  the  initiative  should  reduce  remaining  tax  obstacles  to  cross-border  investment  and 
commercial  activity.  Limitations  in  the  current  level  of  harmonisation  of  the  EU  tax  rules  are 
counterproductive for making business in the EU easier. Lack of coordination in the Member States 
puts  EU  businesses  in  a  worse  competitive  position  than  other  businesses  operating  in  big, 
comparable  market  jurisdictions  and  weakens  the  growth  prospects  of  the  internal  market,  which 
makes it less attractive to investment in the EU. 

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

This section outlines the EU acquis in the area of direct taxation focusing on a number of existing 
rules  that  can  be  linked  to  the  problem  drivers,  i.e.,  inconsistent  application  and  outdated  or 
overlapping  rules,  which  the  Omnibus  on  Taxation  seeks  to  address.  The  rules  in  question  have 
been  selected  on  the  basis  of  thorough  analysis,  positions  shared  by  Member  States,  a  dedicated 
evaluation, and feedback gathered through  different stakeholder consultations, including the main 
business associations. Consequently, this section will focus on the current rules that are linked to 
identified problems which could only be addressed by legislative action. Other problems that have 
been  identified  e.g.,  in  the  stakeholder  consultations  or  in  the  ATAD  evaluation,  that  could  be 
addressed  by  soft  law  initiatives,  such  as  administrative  guidance,  will  not  feature  in  the  report. 
After the presentation of the current rules linked to the identified problems (the baseline), different 
options for simplification of the rules will be presented.  

 
 
5.1. What is the baseline from which options are assessed? 

5.1.1.  Withholding tax exemption for payments of interests, royalties and dividends 

According to the IRD, interest and royalty payments arising in one Member State are exempt from 
taxes  imposed  in  that  State  provided  that  the  beneficial  owner  is  an  associated  company  from 
another Member State or a permanent establishment situated in another Member State.  

The  PSD  also  exempts  dividends  and  other  profit  distributions  paid  by  subsidiaries  to  parent 
companies  in  different  Member  States  from  withholding  taxes  at  source  and  eliminates  double 
taxation  of  such  income  at  the  level  of  the  parent  company  (participation  exemption  or  relief  by 
credit).  

5.1.1.1. Eligible companies 

The IRD and PSD only apply to companies of a Member State. To be considered a ‘company of a 
Member State’, three cumulative conditions have to be fulfilled: (i) the company must take one of 
the  legal  forms  which  are  listed  in  the  Annex  to  each  Directive,  (ii)  the  company  must  be  tax 
resident  in  a  Member  State,  and  (iii)  the  company  must  be  subject  to  corporate  tax  in  a  Member 
State.  

Regarding the eligible forms of companies listed in the Annexes of the PSD, the European Court of 
Justice (CJEU) has ruled that the Annex to the PSD provides for an exhaustive list of companies.54 
Considering  the  similarity  of  requirements,  this  interpretation  has  been  extended  to  the  IRD. 
Consequently, payments of interests, royalties, and dividends, which are  made to  a company that 
takes a form which is not explicitly covered by each Annex respectively, are not entitled to benefit 
from the tax exemptions provided by the IRD and PSD. This limits the scope of the IRD and the 
PSD  and  makes  the  application  non-flexible  and  outdated  as  there  is  currently  opportunity  to 
include new legal forms of companies constituted under the laws of the Member States. 

Although  these  requirements  seem  alike  in  the  IRD  and  the  PSD,  they  differ  in  substance  as  the 
company  forms  listed  in  the  Annex  to  each  Directive  are  not  aligned.  Inconsistencies  can,  for 
example, be found concerning the European Company (EC) and the European Cooperative Society 
(ECS)55, as well as for some company forms in certain Member States, which makes the application 
of  the  Directives  complex.  These  differences  in  eligibility  requirements  would  continue  to  create 
problems,  as  they  entail  inconsistent  access  for  businesses  to  the  benefits  provided  for  in  the 
Directives.  It  should  also  be  mentioned  that  the  TMD  also  includes  a  definition  of  ‘eligible 
companies’  which  differs  in  substance  from  the  IRD  and  PSD  and  creates  further  complexity. 
Without  action,  the  inconsistency  in  the  application  of  the  Directives  may  increase  as  the  list  of 
eligible companies are not drafted in a dynamic way. While company legal forms may continue to 
develop, in most cases, the scope of the Directives remain the same. 

5.1.1.2. Material scope 

The  IRD and PSD  only  apply  to  associated companies, i.e., businesses linked through significant 
ownership  or  common  corporate  control.  The  IRD  is  only  applicable  to  interest  and  royalty 

54  Judgment  of  the  Court  (First  Chamber)  of  1  October  2009,  Gaz  de  France  -  Berliner  Investissement  SA  v 
Bundeszentralamt für Steuern, Case C-247/08, ECLI:EU:C:2009:600. 
55  Council  Regulation  (EC)  N  2157/2001  of  8  October  2001  on  the  Statute  for  a  European  company  and  Council 
Regulation (EC) N 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society. 

 
 
 
payments  made  between  associated  companies  of  different  Member  States.  The  concept  of  an 
‘associated  company’  requires  a  direct  minimum  holding  of  25%  of  the  capital,  or  a  minimum 
holding of 25% of the voting rights. The PSD is applicable to profit distributions paid by subsidiary 
companies to their parent company. The concept of ‘parent company’ requires a minimum holding, 
either  direct  or  indirect,  of  10%  in  capital,  with  the  option  to  replace  it,  by  means  of  bilateral 
agreements, with that of a minimum holding of voting rights.  

Accordingly, the material scope of the IRD and the PSD differ. While the benefits of the IRD apply 
only to direct holdings of 25% in capital or voting rights, the benefits of the PSD apply to holdings, 
either  direct  or  indirect,  of  10%  in  capital  or  voting  rights.  Therefore,  not  only  the  percentage  of 
holding differs, but also the nature of the holding (direct vs. indirect).  

In  2011,  the  Commission  presented  a  report  on  the  functioning  of  the  IRD  which  inter  alia 
concluded  that  the  holding  requirement  had  been  implemented  in  different  ways  in  the  Member 
States.56  Some  allowed  for  indirect  holdings  to  be  taken  into  account  in  determining  eligibility, 
while  others  limited  the  application  to  direct  holdings.  This  leaves  companies  uncertain  about 
whether they will be able to avail  themselves of the tax exemption in one country or another and 
can  constitute  a  tax  obstacle  to  cross-border  activities.  Missing  alignment  between  the  IRD  and 
PSD  regarding  holding  requirements  will  also  continue  to  result  in  higher  than  necessary 
compliance costs for companies involved in cross-border operations. This will continue to produce 
incongruous results.  

5.1.1.3. Procedural aspects  

Under  the  IRD,  the  procedures  to  obtain  the  tax  exemption  in  the  Member  States  can  either  be 
designed on the basis of the attestation procedure, which is laid down directly in the IRD, or as a 
fully  national  procedure.  Irrespective  of  the  procedure,  the  source  Member  State  must  repay  any 
excess tax withheld within one year. The PSD does not include any procedural rules for entitlement 
to  the  benefits.  Each  Member  State  may  establish  its  own  procedure  to  ensure  that  eligible 
companies can benefit from the rules.  

In  practice,  the  majority  of  Member  States  have  not  implemented  any  upfront  requirement  or 
procedure for companies to benefit from the tax exemptions under the IRD and the PSD, although 
some Member States have chosen to apply a variation of the attestation procedure.  

During  targeted  consultations,  many  private  stakeholders  voiced  concerns  about  the  excessive 
procedural complexity in certain Member States in order to gain entitlement to the withholding tax 
exemption of dividends, interests and royalties under the IRD and the PSD. In this regard, it was 
pointed  out  that  the  length  of  the  administrative  procedures,  sometimes  up  to  24  months,  and 
complex  procedural  requirements  for  obtaining  the  benefit  usually  cause  delays.  In  certain  cases, 
the procedures even have a deterrent  effect  as it may be more cost-efficient  for the companies to 
pay the withholding tax than claiming the exemption.  

More recently, to address such issues, the EU adopted the FASTER Directive, which, among other 
measures,  introduces  standardised  fast-track  procedures.  These  procedures  can  take  the  form  of 
relief at source, quick refund, or a combination of both, as determined by each Member State. The 

56  Report  from  the  Commission  to  the  Council  in  accordance  with  Article  8  of  Council  Directive  2003/49/EC  on  a 
common  system  of  taxation  applicable  to  interest  and  royalty  payments  made  between  associated  companies  of 
different Member States, COM/2009/0179 final. 

 
 
 
scope of these fast-track procedures is limited to dividends on publicly traded shares, while relief 
for  interest  on  publicly  traded  bonds  remains  optional  for  Member  States.  Additionally,  the 
Directive  allows  Member  States  to  deny,  completely  or  partially,  the  application  of  these 
standardised  fast-track  procedures  where  an  exemption  from  withholding  tax  is  claimed.  As  a 
result, Member States may exclude payments exempted under the IRD and PSD from the benefit of 
these fast-track procedures.  

5.1.2.  Taxation of Controlled Foreign Companies 

The ATAD provides for rules on the taxation of controlled foreign companies (CFCs) which aim to 
tackle  profit  shifting  towards  lower  tax  jurisdictions  within  a  multinational  group.  These  tax 
avoidance practices erode the tax base of the jurisdiction of origin of these flows, typically the one 
of  residence  of  the  parent  company,  through  the  transfer  of  profit  to  a  CFC,  i.e.  subsidiary  or  a 
permanent establishment in another jurisdiction. The CFC rules generally attribute certain income 
from a CFC to be included in the parent company’s taxable base when the tax imposed on the CFC 
is significantly lower, i.e., the tax paid in the entity jurisdiction is less than 50% of what would be 
paid in the parent jurisdictions.  

5.1.2.1. Implementation options 

When  transposing  the  CFC  rules,  Member  States  are  offered  different  options  to  mitigate  the 
differing  Member  State  views  and  legal  traditions  and  is  accommodated  due  to  the  Directive’s 
design  as  a  minimum  standard.  For  example,  Member  States  may  choose  between  two  different 
approaches to define what income of a CFC is subject to tax:  

Model A targets non-distributed passive income of a CFC, such as interest, royalties and dividends, 
if the CFC is in a low-tax jurisdiction. While relatively mechanical in its application, the CJEU has 
ruled that Model A includes a substance clause limiting the scope of application of the CFC rule to 
wholly artificial arrangements within the EU.57 

Model  B  targets  non-distributed  income  arising  from  non-genuine  arrangements  specifically 
designed to obtain a tax advantage to be calculated in accordance with the arm’s length principle. 
To reduce the compliance burden under Model B, Member States may adopt de minimis thresholds 
to exclude lower-risk entities with limited accounting profits and non-trading income from the rule.  

According to the ATAD evaluation, 17 Member States opted to implement Model A, while 8 chose 
Model B, including one or both de minimis thresholds. Additionally, 2 Member States decided to 
adopt a variant of the rule that encompasses both models.58  Consequently, the implementation of 
the  ATAD  varies  widely  across  Member  States.  If  not  addressed,  this  will  continue  to  result  in 
fragmentation and inconsistent compliance requirements. This would then continue to contribute to 
legal  uncertainty  for  businesses  operating  across  borders.  Retaining  differences  in  key  elements, 
such as the criteria for CFC status, would uphold the additional administrative burdens and related 
costs.  

57 Judgment of the Court (Grand Chamber) of 12 September 2006, Cadbury Schweppes plc and Cadbury Schweppes 
Overseas Ltd v Commissioners of Inland Revenue, Case C-196/04. ECLI:EU:C:2006:544. 
58  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 14-15. 

 
 
 
This is consistent with findings of the Draghi report59 and it was confirmed by stakeholders who, in 
the targeted consultations, expressed that the CFC rules generate a significant administrative burden 
in compliance, while their impact on Member States’ tax bases is considered to be rather modest.  

5.1.2.2. Interaction with Pillar 2 

Since the adoption of the ATAD, the legal environment at both the EU and international level has 
evolved significantly, particularly as a result of the OECD global minimum tax for MNEs (Pillar 2) 
which has been implemented in the EU through a Pillar 2 Directive.  

By using some of the same mechanisms as the CFC rules, i.e., attributing low-taxed income of a 
subsidiary to the taxable base of a parent company, Pillar 2 ensures that large MNEs pay at least a 
15%  tax  on  profits  in  each  jurisdiction  they  operate.  Member  States  agreed  at  the  OECD/G20 
Inclusive  Framework  to  the  Pillar  2  rules,  which  accommodate  CFC  legislation  by  taking  the 
relevant tax charges into account in the design of the global minimum tax. Yet, this does not change 
the fact that CFC rules share similar objectives to Pillar 2 and in practice, the interaction between 
the  two  sets  of  rules  leads  to  duplication.  It  is  now  clear  that  this  approach  may  create  a  risk  of 
over-taxation.  

As  Pillar  2  was  recently  transposed  by  the  Member  States,  the  actual  effects  of  the  interaction 
between  the  two  sets  of  rules  are  not  yet  possible  to  assess  in  a  reliable  manner.  However,  the 
theoretical  consequences  of  applying  Pillar  2  and  CFC  rules  in  parallel,  i.e.,  the  application  of  a 
Qualified Domestic Minimum Top-up Tax (QDMTT) at the level of a low-taxed CFC and the CFC 
tax imposed at the level of its shareholders, would be likely to result in economic double taxation, 
which is not in line with the intent of ATAD.  

On  this  basis,  businesses  generally  regard  the  two  sets  of  rules  as  overlapping,  causing  double 
taxation  and  creating  unnecessary  administrative  burden.  During  the  targeted  consultations, 
businesses overwhelmingly argued that the CFC rules have become redundant for MNEs in  scope 
of  Pillar  2.  These  views  find  support  in  the  ATAD  evaluation,  which  concludes  that  the 
implementation of the Pillar 2 Directive addresses similar risks through a global minimum tax and 
has weakened the rationale for maintaining the CFC rule for MNEs in scope of Pillar 2.60 As such, 
upholding  both  sets  of  rules  in  parallel  risks  entailing  future  compliance  costs  above  what  is 
needed. 

5.1.2.3. Application to SMEs 

The  CFC  rules  apply  to  all  taxpayers  that  are  subject  to  corporate  tax  in  one  or  more  Member 
State(s),  including  permanent  establishments  in  one  or  more  Member  State(s)  of  entities  resident 
for tax purposes in a third country, irrespective of their size. 

In  the  EU,  99.8%  of  businesses  are  SMEs.  However,  only  (i)  10%  of  them  have  cross-border 
activities, and (ii) 2% have subsidiaries outside of the EU. 42% of SMEs are standalone entities, i.e. 

– 

The 

Future 

Report 

Draghi 

59 
https://commission.europa.eu/document/download/ec1409c1-d4b4-4882-8bdd-
3519f86bbb92_en?filename=The%20future%20of%20European%20competitiveness_%20In-
depth%20analysis%20and%20recommendations_0.pdf#page=320 
60  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 36-38 and 47.  

Competitiveness, 

European 

320; 

Part 

B, 

of 

p. 

 
 
 
not part of a group and without associated enterprises.61 The ATAD evaluation finds that CFC rules 
are costly.62 Certain businesses may need to conduct an analysis or tick a box for internal control 
purposes even when they are effectively not affected by the rules. This may put a disproportionate 
administrative  burden  on  smaller  corporate  taxpayers,  as  they  need  to  rely  on  external  expertise, 
even  in  the  absence  of  risky  arrangements.  Consequently,  while  relatively  few  SMEs  are  in  a 
position to engage in cross-border aggressive tax planning, they nonetheless face an administrative 
burden associated with applying CFC rules. If not addressed, this will continue to act as a barrier on 
SME growth.  

5.1.3.  Expensing of assets related to research and development (R&D) 

As set out in Section 2.1.4, not all tax barriers have been removed for EU businesses operating in 
the internal market. One such issue, which has come into sharper focus in recent years as a result of 
the EU and global implementation of Pillar 2, is the treatment of R&D assets for tax depreciation 
purposes.  

While the UK and the United States generally allow the full cost of R&D assets to be deducted in 
the year an investment is made – so-called immediate expensing – this is not the general rule in EU 
Member  States.  This  is  regrettable,  because,  as  the  Commission  already  stated  in  its 
Recommendation of 2 July 2025 on tax incentives to support the Clean Industrial Deal, immediate 
expensing  carries  important  benefits  for  investment  decisions  by  allowing  taxpayers  to  recognise 
the full depreciable amount as a deduction in the tax year in which the investment is made. 

The introduction of Pillar 2 has emphasised the need for a harmonised EU tax policy in this area. 
While  the  global  minimum  tax  will  generally  improve  the  level  playing  field  for  EU  businesses 
globally,  it  does  not  address  differences  of  this  kind,  as  Pillar  2  does  not  take  into  account 
temporary  book–tax  timing  differences  that  arise  from  immediate  expensing.  As  a  result, 
divergences  in  the  timing  and  design  of  R&D  tax  incentives  remain  outside  its  scope.  These 
national distortions put EU businesses at a competitive disadvantage when performing an activity 
that  is  inherently  international  in  nature,  and  makes  the  internal  market  less  attractive  for 
investments, as opposed to, for instance, research carried out in bigger markets with more growth 
potential, such as the United States.   

5.1.4.  Interest Limitation Rule  

As a general rule, expenses incurred by a company in the context of its economic activity are tax-
deductible. However, certain expenses may be disallowed or have a partial deduction, particularly 
if they can be linked to risks of abuse. Article 4 of the ATAD introduces an Interest Limitation Rule 
in the EU which restricts the deductibility of a company’s interest expenses. The purpose of the rule 
is to limit the extent to which companies in high-tax jurisdictions with excessive debt can benefit 
from tax deductions for interest payments which can significantly erode their tax base. 

Under the Interest Limitation Rule, businesses are generally entitled to deduct net borrowing costs, 
i.e.,  net  interest  expenses,  up  to  30%  of  their  earnings  before  interest,  tax,  depreciation  and 
amortisation (‘EBITDA’). Nonetheless,  Member  States are permitted to  adopt  lower deductibility 
limits  when  transposing  the  rule.  The  ATAD  also  allows  Member  States  to  choose  from  several 

61 VVA/KPMG, Tax compliance costs for SMEs: An update and a complement Final Report KPMG/VVA 2022. 
62  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 47.  

 
 
 
options regarding safe harbours, carve-outs, and exceptions, thus allowing for significant flexibility 
in the implementation.  

According  to  the  ATAD  evaluation,  the  Interest  Limitation  Rule  is  widely  considered  to  be  the 
ATAD  provision  that  has  had  the  most  impact.  Not  only  is  it  affecting  the  largest  number  of 
companies, but  it  also  emerges  as the rule generating the strongest  effects  on taxpayer behaviour 
and on protecting Member States’ tax bases. At the same time, it is often viewed as insufficiently 
targeted  and  the  extensive  flexibility  afforded  to  Member  States  has  created  an  excessive 
fragmentation  in  the  implementation  of  the  rule.  While  the  minimum  standard  in  ATAD  leaves 
room  for  Member  States  to  choose  different  options  and  apply  supplementary  rules  to  support 
domestic  policy  goals,  such  practices  cause  additional  and  avoidable  regulatory  and  compliance 
cost.63 Moreover, in line with the findings of the evaluation, it appears that the Interest Limitation 
Rule may continue to disadvantage capital-intensive sectors such as real estate, infrastructure, and 
innovative start-ups that rely on long-term debt financing, as it fails to acknowledge changes in the 
economic environment, particularly in a context of increasing interest rates.64   

5.1.5.  Hybrid mismatches 

rules to neutralise hybrid  mismatches, 

The  ATAD  establishes 
the  
qualification  of  a  cross-border  transaction  between  associated  enterprises  differs  between  the 
relevant  jurisdictions,  resulting  in  a  tax  treatment  that  creates  double  non-taxation:  (i)  a  double 
deduction or (ii) a deduction without inclusion. In its current form, ATAD addresses different types 
of mismatches, including both intra-EU arrangements and structures involving third countries. 

i.e.,  situations  where 

According  to  the  ATAD  evaluation,  rules  on  hybrid  mismatches  reinforce  tax  base  protection, 
although they remain complex and highly technical, posing challenges for both tax authorities and 
smaller  companies.  The  rules  include  intricate  definitions,  e.g.,  imported  mismatches,  structured 
arrangements,  and  layered  compliance  requirements,  e.g.,  tracing  multi-tier  supply  chains,  that 
create excessive complexity and generate burdens for both taxpayers and tax authorities.65 This is 
particularly the case of imported mismatches.  

Standard  hybrid  mismatches  arise  from  a  direct  inconsistency  in  the  legal  treatment  of  a  certain 
transaction between two jurisdictions. An imported mismatch arises where an EU company makes 
a  regular  non-hybrid  payment  to  a  group  company,  or  under  a  structured  arrangement,  and  that 
payment funds a hybrid mismatch that occurs outside of the EU. In that case, double non-taxation is 
the result of the lack of hybrid rules in third states and takes place outside of the EU. As a result, 
the  EU  company  is  not  directly  implicated  in  the  mismatch.  Based  on  the  evidence  from  the 
extensive  stakeholder  consultations,  it  appears  that  these  arrangements  are  causing  severe 
difficulties for tax authorities, given that their EU footprint is a subsidiary that is normally deprived 
of  the  necessary  information  which  would  allow  identification  of  the  imported  mismatch.66 
Identifying imported hybrid mismatches thus requires information  and evidence of aggressive tax 

63 Draghi Report – The Future of European Competitiveness, Part B, p. 320; 
https://commission.europa.eu/document/download/ec1409c1-d4b4-4882-8bdd-
3519f86bbb92_en?filename=The%20future%20of%20European%20competitiveness_%20In-
depth%20analysis%20and%20recommendations_0.pdf#page=320 
64  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 46-47. 
65  Ibid., p. 48. 
66 Simplifying EU rules on direct taxation – omnibus; Annex 2: Stakeholder consultation synopsis report. 

 
 
 
schemes enacted in jurisdictions outside the EU to which national tax administrations do not have 
ready or easy access. This would continue to considerably limit effective enforcement in the future. 

5.1.6.  Tax mergers 

Under the TMD, companies engaging in cross-border mergers or reorganisations within the EU can 
defer taxation on capital gains resulting from restructuring transactions, until the actual disposal of 
the underlying assets. The TMD applies to companies listed in the annex to the TMD and covers a 
number of pre-defined restructuring transactions, such as mergers, divisions, partial divisions, and 
transfers of assets. 

In  addition,  the  Company  Law  Merger  Directive67  contains  a  section  on  cross-border  mergers  of 
limited  liability  companies.  The  scope  and  definitions  of  this  part  are  generally  aligned  (with 
possible slight wording differences) with  content of the TMD. However, since its update through 
the  so-called  ‘Mobility  Directive’  in  201968,  the  Company  Law  Merger  Directive  introduced 
additional transactions which are not covered by, or differ from, the TMD, namely: (i) simplified 
mergers, (ii) divisions by separation, and (iii) cross-border conversions. As simplified mergers and 
divisions  by  separation  are  not  mentioned  in  the  TMD,  the  tax  treatment  of  these  restructuring 
operations is not covered therein, leaving it to Member States to decide how they should be taxed. 
With respect to the cross-border conversion, the TMD only covers transfers of registered offices of 
a European Company (Societas Europaea) or European Cooperative Society (Societas Cooperativa 
Europaea). Consequently, the transfer of registered office following a conversion is not covered by 
the TMD, leaving it also to Member States to decide how they should be taxed.  

5.1.7.  Dispute resolution mechanisms 

Economic  double  taxation  constitutes  an  important  obstacle  to  the  proper  functioning  of  the  EU 
internal market, as it increases the tax burden on cross-border activities and creates uncertainty for 
businesses  operating  in  more  than  one  Member  State.  Economic  double  taxation  arises  when  the 
same  economic  profit  is  taxed  in  two  jurisdictions  without  a  corresponding  relief,  for  example 
where  a  transfer  pricing  adjustment  made  by  one  tax  administration  is  not  matched  by  a 
corresponding adjustment in the other jurisdiction. 

To  eliminate  double  taxation,  taxpayers  may  rely  on  the  Mutual  Agreement  Procedure  (MAP),  a 
dispute  resolution  mechanism  provided  for  in  bilateral  Double  Tax  Agreements  (DTAs)  on  the 
basis of Article 25 of the OECD Model Tax Convention69, under which the competent authorities 
of  the  countries  concerned  seek  to  resolve  the  dispute  by  mutual  agreement.  Within  the  EU, 
taxpayers also  have  access  to  two additional instruments: the EU Arbitration Convention and the 
DRM. 

The DRM  was introduced to  implement  OECD BEPS action 14 and to address  the limitations of 
the Arbitration Convention by expanding the scope of covered disputes and strengthening the role 
of  taxpayers  in  the  procedure.  In  particular,  it  allows  taxpayers  to  trigger  the  arbitration  phase 
where  tax  administrations  fail  to  reach  an  agreement  within  the  prescribed  timeframe,  thereby 

67 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to certain aspects 
of company law. 
68 Directive (EU) 2019/2121 of the European Parliament and of the Council of 27 November 2019 amending Directive 
(EU) 2017/1132 as regards cross-border conversions, mergers and divisions. 
69  OECD  (2025),  The  2025  Update 
https://doi.org/10.1787/5798080f-en. 

the  OECD  Model  Tax  Convention,  OECD  Publishing,  Paris, 

to 

 
 
 
helping  to  prevent  cases  of  double  taxation  from  remaining  unresolved  due  to  administrative 
inertia.  

Experience with the DRM remains relatively limited. This is partly because the DRM only applies 
to  complaints  submitted  from  1  July  2019  onwards  and  concerns  disputes  relating  to  income  or 
capital  earned  in  tax  years  starting  on  1  January  2018.  In  addition,  tax  disputes  typically  arise 
several  years  after  the  relevant  tax  year,  following  audits  and  the  completion  of  domestic 
administrative procedures. Nonetheless,  available figures suggest that the uptake of the DRM has 
been slower than initially expected. In 2024, for example, 761 new complaints were filed under the 
EU Arbitration Convention compared to 192 under the DRM, indicating that taxpayers still tend to 
rely more frequently on the Arbitration Convention than the DRM. 

A  targeted  public  consultation  conducted  in  2024,  together  with  extensive  consultations  with 
Member  States  and  private  stakeholders,  suggests  that  interpretative  divergences  may  be 
contributing  to  the  limited  use  of  the  mechanism.  For  example,  the  DRM  requires  taxpayers  to 
submit  the  complaint  simultaneously  to  all  relevant  competent  authorities,  but  the  text  does  not 
define  what  ‘simultaneously’  means.  As  a  result,  some  tax  administrations  interpret  this 
requirement  strictly,  i.e.,  requiring  submission  on  the  same  day,  while  others  accept  complaints 
submitted  within  a  shorter  time  span,  such  as  within  the  same  week  or  month.  This  divergence 
creates uncertainty for taxpayers that may discourage the use of the mechanism. 

5.2. Description of the policy options 

As the Omnibus on Taxation has a singular overarching objective – i.e., simplification – the options 
analysed below represent different means or ways of achieving the goal. Some of the policy options 
thus feature alternative  measures, i.e., where a choice can be made between two options. In other 
cases, there is only one option which serves to achieve simplification. In this case, the alternative 
would be to uphold the status quo as described in the baseline. 

5.2.1.  Withholding tax exemption for payments of interests, royalties and dividends 

To  address  the  issues  related  to  the  application  of  the  IRD  and  the  PSD,  particularly  as  regards 
eligible companies, the material scope, and the procedural aspects  as outlined in Section 5.1, two 
alternative options should be considered. Option  1A regarding procedural aspects would not only 
require amendments to the IRD and PSD, but also to the FASTER Directive, in order to facilitate 
the functioning of the IRD and PSD.   

Figure 3: Simplification options for IRD and PSD 

 
 
 
5.2.1.1. Option 1A: Full tax exemption accompanied by procedural adjustments 

This Option aims to extend the material scope of the IRD and PSD by providing an exemption from 
withholding tax for payments of interest, royalties and dividends, regardless of holding percentage, 
between companies within the EU.70 

In parallel, the Annexes to each Directive listing eligible companies would be updated and aligned. 
Ideally,  the  wording  should  accommodate  future  forms  and  make  it  easier  for  businesses  to 
determine whether they fall in or out of the scope of the Directives. This would be a direct response 
to  many  private  stakeholders  who  emphasised  the  need  for  consistency  on  entitlement  and 
explicitly  referred  to  certain  business  forms  which  are  currently  not  covered  by  all  Directives. 
Several Member States also agreed that additional forms should be included in the Annexes. 

In  this  way,  cross-border  payments  of  interest,  royalties  and  dividends  within  the  EU  would  be 
more attractive and the compliance burden for businesses would be reduced by eliminating some of 
the existing requirements, notably the holding percentage71.  

Option  1A  would be paired with  a protective measure  aimed  to  prevent  instances of double non-
taxation  on  interest  and  royalty  payments  made  outside  of  the  Union,  i.e.,  from  an  EU  Member 
State  to  a  third  country.  As  a  matter  of  principle,  Member  States  would  continue  to  apply  their 
national  rules,  including  those  resulting  from  applicable  tax  treaties,  to  interest  and  royalty 
payments made to third countries. However, the protective measure would be triggered where the 
third country in which the recipient is established does not levy corporate income tax or applies a 
zero corporate income tax rate (‘zero-tax jurisdiction’) and in addition, no withholding tax is levied 
in the EU Member State.  

The objective of this measure would be to ensure that interest and royalties are subject to taxation at 
least  once.  The  measure  would  take  the  form  of  either  a  mandatory  withholding  tax  on  such 
payments at a rate chosen by each Member State individually or the denial of deductibility for tax 
purposes at source. No similar measure would be necessary to address risks of double non-taxation 
as  regards  profit  distributions  (dividends),  as  these  are  already  taxed  within  the  EU.  A  more 
consistent  system  of  withholding  taxes  on  royalties  and  interest  payments  towards  low-tax 
jurisdictions will lower the likelihood of profit shifting by MNEs.  

Compliance  rules  would  also  be  put  in  place  to  ensure  that  the  exemption  does  not  require  any 
unnecessary  compliance.  Currently,  Member  States  often  impose  burdensome  upfront  procedures 
as a condition for accessing the benefits of the IRD and PSD. The extension of the scope of the IRD 
and the PSD should therefore be accompanied by a prohibition for Member States to impose any 
upfront  procedures.  The  paying  company  would  have  to  assess  whether  the  conditions  to  benefit 
from the exemption are fulfilled by the beneficiary, and tax authorities would control a posteriori 
whether  such  conditions  are  actually  met.  However,  for  publicly  traded  securities,  portfolio 
investors whose ownership of the paying company is below 5% are usually unknown to the paying 
company  because  shares  are  commonly  held  in  nominee-registered  accounts  (investors  are  only 
required to disclose ownership above 5%). As a result, the paying company  would not be able to 
assess  whether  the  conditions  of  the  PSD  and  IRD  are  met  by  the  investor,  and  the  exemption 

70 For these purposes, the concept of company should be interpreted in accordance with the definitions and scope set 
out in the Interest and Royalties Directive and the Parent and Subsidiary Directive. 
71 Today, 14 Member States already give exemption from  withholding tax on the basis of bilateral DTAs or national 
legislation for intra-EU interest payments, 8 for royalties, and 9 for dividends. 

 
 
 
cannot be applied upfront. In such cases, the FASTER Directive could bring simplification through 
its  standardised  fast-track  procedures.  (i.e.,  ‘relief  at  source’ procedure  or  ‘quick  refund’ 
procedure).  Yet,  in  its  current  wording,  the  FASTER  Directive  allows  Member  States  to  deny, 
completely  or  partially,  the  application  of  the  standardised  fast-track  procedures  where  an 
exemption  from withholding  tax is  claimed.  This wording  would, de facto,  prevent  the benefit of 
these fast-track procedures to eligible payments exempted under the IRD and PSD. Therefore, the 
changes  to  the  IRD  and  PSD  would  also  be  accompanied  by  an  extension  of  the  scope  of  the 
FASTER Directive to the latter. Otherwise, registered investors will not always be able to rely on 
the procedures provided under the FASTER Directive. The existing option in the PSD which allows 
Member States to limit the participation exemption to 95% would be limited to holdings exceeding 
10% of the capital. The reason for this 10% holding condition is that management costs related to 
the holding of shares would mostly be incurred in cases where the participation is substantive, not 
for  portfolio  investments.  It  follows  that  the  participation  exemption  would  be  full  (100%)  for 
holdings below 10%. 

All in all, this option would provide for a more facile treatment of interest, royalties and dividends 
in  the  internal  market,  supporting  investment  and  helping  advance  key  objectives  of  the  Savings 
and Investment Union.72  

5.2.1.2. Option 1B: Alignment of scope and procedures 

Under Option 1B, the corporate tax directives would maintain minimum holding requirements for 
the  benefit  of  withholding  tax  exemptions.  However,  to  improve  consistency,  the  holding 
requirement of the IRD would be aligned with that of the PSD, i.e., the holding percentages would 
be adjusted to 10% and the IRD would be extended to include indirect holdings. In addition, and 
similar to Option 1A, the Annexes of both directives listing eligible companies would be updated 
and aligned. In this way, corporate tax directives would have a common and consistent approach to 
companies that can benefit from the withholding tax exemption.  

Similarly  to  Option  1A,  the  procedural  rules  for  obtaining  the  tax  exemption  under  the  IRD  and 
PSD would be adjusted to  ensure that Member States do not  impose any upfront  procedures as a 
condition  for  accessing  the  exemption  from  withholding  taxes.  Here  again,  the  taxpayers  would 
self-assess that it is within the scope and meets the conditions of the PSD and IRD and would apply 
the  exemption  directly,  as  the  case  may  be.  Under  this  option,  however,  the  FASTER  Directive 
would not be amended, since the withholding tax exemptions set out in the IRD and PSD would not 
extend to investors holding less than 5% of publicly traded securities.  

5.2.2.  Taxation of Controlled Foreign Companies (CFCs) 

To address the issues related to the application of the CFC rules in the ATAD, which are outlined in 
Section 5.1, several options could be considered.  

72 Among those objectives is the breaking down of barriers  to integrated financial markets and supporting productive 
investments,  as  explained  here:  https://finance.ec.europa.eu/regulation-and-supervision/savings-and-investments-
union_en#what 

 
 
 
Figure 4: Simplification options for CFC rules in ATAD 

5.2.2.1. Option 1: Reduce implementation options 

In the transposition of the CFC rules in the ATAD, Member States can choose between Models A 
or  B,  or  a  combination  of  Models  A  and  B,  to  determine  what  type  of  low-taxed  CFC  income 
should be attributed to the parent company.  

Overall, Model  A is  generally more stringent and seen as providing greater legal  certainty, while 
Model  B  is  criticised  by  civil  society  organisations  for  being  easier  to  circumvent,  less  legally 
certain  and  more  complex.  In  addition,  Model  B,  by  and  large,  basically  applies  transfer  pricing 
adjustments.  It  therefore  has  little  added  value,  considering  that  Member  States  already  apply 
transfer pricing, and its effectiveness is highly dependent on the features of the (diverging) national 
transfer  pricing  norms  and  practices  of  application.  This  was  observed  in  Belgium  which  had 
implemented Model B in 2017 but found it inefficient as it did not add much to the transfer pricing 
rules. Belgium then switched over to Model A in 2019.73 

On this basis, Option 1 entails making CFC rules based on Model A mandatory, meaning Member 
States  will  no  longer  be  able  to  apply  Model  B  for  CFC  purposes.  This  option  would  provide 
simplification  in  the  application  of  CFC  rules  within  the  EU  while  still  ensuring  to  maintain  the 
highest level of protection for EU Member States.  

5.2.2.2. Option 2: Address overlap with Pillar 2 rules 

As  described  in  Box  2  and  Section  5.1.2.2,  CFC  rules  and  Pillar  2  use  similar  mechanisms  to 
capture and tax low-taxed profits within company group structures. Although their design differs in 
several  ways,  the parallel  application of the two sets  of rules  results in economic double taxation 
and duplicative administrative burdens. To address this, two options could be considered: 

2A. Carve-out of Pillar 2 companies 

Option  2A  introduces a  carve-out  from CFC legislation  only  for  MNEs  whose (low-taxed)  CFCs 
are  fully  subject  to  Pillar  2.  If  a  group  is  headquartered  in  a  Side-by-Side  (SbS)  jurisdiction 
(currently, only the United States), the Income Inclusion Rule (IIR) and  Under-Taxed Profit Rule 
(UTPR) which are used to reallocate taxable income from a low-taxed entity to another entity in the 
group,  will  not  apply  to  any  of  its  subsidiaries.  As  such,  the  policy  rationale  would  not  apply  to 
these structures in the same way, as it does for other entities in scope of the Pillar 2 Directive. To 
avoid jeopardising the level of protection imposed under ATAD, the CFC carveout would therefore 

73 Deloitte (2023), Belgium parliament adopts law introducing model A CFC rules. 

 
 
 
 
only be extended to entities that are part of SbS groups where the relevant low-taxed subsidiary is 
subject to QDMTT.  

2B. Inclusion of QDMTT in CFC calculation 

Under  Option  2B,  Member  States  would  take  into  account  the  QDMTT  liability,  in  conjunction 
with corporate income tax, to determine whether an entity is a low-taxed CFC and, consequently, 
whether the application of the CFC rules is triggered.  

Adding the QDMTT to the corporate tax liability would reduce the number of cases in which CFC 
rules are triggered. CFC rules would continue to apply where Member States operate a higher CFC 
effective tax rate. In those cases, credit would be granted for the QDMTT tax due, thereby ensuring 
that  the  simultaneous  application  of  QDMTT  and  CFC  legislation  does  not  result  in  double 
taxation. Such approach is also consistent with the OECD Guidance on this topic, which does not 
allow a pushdown of the CFC tax when computing the effective tax rate for the purpose of applying 
QDMTT.  

5.2.2.3. Option 3: Carve-out of SMEs 

CFC  taxation  is  justified  only  insofar  as  it  targets  arrangements  lacking  genuine  economic 
substance.  Subjecting  small  businesses  to  complex  foreign-income  imputations,  despite  low 
structural aggressive tax planning, risks overshooting that anti-abuse purpose. Compliance costs are 
especially heavy on SMEs. Therefore, in line with similar exemptions in this initiative and in other 
areas of taxation and EU law, this Option proposes to also carve out SMEs from the scope of CFC 
rules in the EU.  

5.2.3.  Expensing of assets related to research and development (R&D) 

To  address  issues  related  to  expensing  of  assets  related  to  R&D  as  set  out  in  Section  5.1.3,  two 
options could be considered: 

Figure 5: Simplification options for expensing of R&D assets 

5.2.3.1. Option 1A: Immediate expensing in the EU 

The diverging national tax depreciation treatments for assets related to R&D create an obstacle to 
cross-border  activity  in  the  internal  market  and  bring  unwelcome  compliance  costs  for  EU 
businesses. Taken together with the harmonised treatment of such measures under Pillar 2 and the 
more  beneficial  outcomes  in  key  partner  economies,  such  as  the  UK  and  the  United  States,  this 
fragmentation  also  undermines  the  EU’s  broader  competitiveness  objectives.  Yet,  despite  the 

 
 
 
 
 
clearly  cross-border  and  international  dimension  of  R&D  activity,  no  common  EU  framework 
currently exists to address it.  

Against this background, and in line with the objectives of simplification and competitiveness, the 
Option would establish a common minimum framework at EU level for the tax treatment of capital 
expenditure on tangible assets used for R&D. It would, allow EU businesses to fully deduct the cost 
of  qualifying  R&D-related  tangible  assets  in  the  year  the  expenditure  is  incurred,  rather  than 
depreciating the costs over time.   

In particular, while immediate expensing of R&D expenditure strengthens innovation incentives by 
allowing firms to deduct the full cost of research investments in the year they are incurred, standard 
depreciation  rules  that  spread  deductions  over  multiple  years  erode  the  present  value  of  those 
deductions  once  adjusted  for  inflation  and  the  opportunity  cost  of  capital.  The  Option  directly 
addresses this limitation. 

Furthermore, immediate expensing of R&D expenditure improves cash flow at precisely the stage 
when  firms  are  often  most  financially  constrained,  thereby  easing  financing  conditions  for  high-
risk,  long-gestation  research  projects.  This  effect  is  particularly  consequential  for  early-stage  and 
pre-revenue  companies,  whose  ability  to  sustain  investment  in  innovation  frequently  depends  on 
maintaining adequate liquidity throughout extended development periods prior to the generation of 
taxable income. 

The Option would define the scope of qualifying expenditure and set out harmonised rules on the 
timing  of  the  deduction,  including  the  possibility  to  claim  it  in  the  year  that  the  expenditure  is 
incurred or to carry it forward over a defined period. It would also introduce safeguards to prevent 
misuse of the allowance, including minimum use requirements for R&D purposes and a clawback 
mechanism where assets are disposed of.  

The Option would contribute to  simplification by  removing  a tax  obstacle in the internal  market, 
thereby  lowering  compliance  burdens,  increasing  predictability  for  investors,  and  facilitating  the 
scaling-up  of  R&D  activities  within  the  internal  market.  At  the  same  time,  the  measure  would 
strengthen  the  EU’s  competitiveness,  including  vis-à-vis  major  international  partners  such  as  the 
United States and the UK, by ensuring that all businesses benefit from a baseline tax environment 
supportive  of  innovation,  while  still  allowing  Member  States  to  maintain  or  introduce  more 
favourable regimes to attract and retain high-value R&D investment in an increasingly competitive 
international environment. 

The question of whether to cover both tangible and intangible assets was examined. But extending 
the  measure  to  intangibles  would  require  a  significantly  more  far-reaching  intervention  in  the 
current tax landscape, given the wide variety of instruments Member States currently apply in that 
area (in addition to the full deductibility of researchers’ salaries, there are measures such as lower 
tax  rates,  super-deductions,  or  tax  credits).  A  broader  measure  covering  both  tangible  and 
intangible  assets  would  also  entail  substantially  higher  revenue  implications  for  Member  States. 
The  targeted  approach,  limited  to  tangible  assets,  is  therefore  both  proportionate  and  more 

 
 
 
 
politically  feasible,  while  still  delivering  a  meaningful  simplification  and  improvement  in  the 
operating environment for EU businesses. 

Besides,  accelerated  depreciation  and  immediate  expensing  schemes  for  tangible  assets  are 
unaffected  by  Pillar  Two.  Against  this  background,  these  tax  incentives  could  then  help  sustain 
investment after Pillar Two is implemented.74 

Overall,  this  approach  would  ensure  a  coherent  common  baseline  for  the  tax  treatment  of  capital 
expenditure  on  tangible  R&D  assets  in  the  internal  market,  reducing  compliance  complexity  for 
businesses operating cross-border, strengthening the EU's competitiveness vis-à-vis its international 
partners.  It  would  also  allow  Member  States  to  maintain  or  further  develop  broader  innovation 
incentives within a coordinated framework, thereby respecting key messages, such as strengthening 
competitiveness  while keeping  flexibility  and simplicity,  expounded by  the Member States in  the 
Council Conclusions on tax incentives to support the Clean Industrial Deal.75 

5.2.3.2. Option 1B: Keep R&D expensing defined strictly at national level 

The alternative option would be to maintain the status quo – i.e., continue to allow Member States 
to  operate their own national  frameworks  for the tax treatment  of  capital expenditure on tangible 
R&D  assets.  This  would,  however,  retain  an  entirely  fragmented  approach  across  the  EU  and 
sustain  the  possible  disadvantage  that  currently  exists  when  compared  to  other  global  economies 
who enact a more unified jurisdictional approach to R&D incentives. As a result, such option would 
fall short of the objectives of simplification and competitiveness, as administrative complexity for 
cross-border  activities  would  remain  unchanged  and  divergences  in  the  tax  treatment  of  R&D 
investment within the internal market would be maintained.  

5.2.4.  Interest Limitation Rule  

To address the issues related to the application of the Interest Limitation Rule in the ATAD, which 
are outlined in Section 5.1, several options could be considered.  

74  Heckemeyer,  J.  H.,  Nicolay,  K.,  Spengel,  C.,  Steinbrenner,  D.,  and  Wickel,  S.,  2025,  Tax 
Incentives  and  Investments  in  the  EU:  Best  Practices  and  Ways  to  Stimulate  Private  Investments 
and  Prevent  Harmful  Tax  Practices,  Publication  for  the  Subcommittee  on  Tax  Matters,  Policy 
Department  of  the  Directorate  for  Economy  and  Growth)  ,  Directorate-General  for  Economy, 
Transformation and Industry, European Parliament, Luxembourg. 

75  Council  conclusions  on 
https://data.consilium.europa.eu/doc/document/ST-13501-2025-INIT/en/pdf  

incentives 

support 

the  Clean 

tax 

to 

Industrial  Deal,  ST  13501/25; 

 
 
 
 
 
 
 
 
Figure 6: Simplification options for the Interest Limitation Rule in ATAD 

5.2.4.1. Option 1: Carve-out of SMEs 

As most SMEs would tend to have borrowing costs below the EUR 3 million threshold annually, 
Option  1  could  propose  to  make  the  de  minimis  safe  harbour  mandatory  and,  thereby,  de  facto 
carve out most SMEs from the application of the Interest Limitation Rule. This would differ from 
the  status  quo,  which  allows  Member  States  a  more  stringent  application  of  this  rule,  and  would 
thus  allow  most  SMEs  to  fully  deduct  their  exceeding  borrowing  costs,  while  also  ensuring  a 
consistent approach across the Single Market. 

In  order  to  balance  the  simplification  objective  with  the  need  to  maintain  the  high  level  of 
protection  created  by  the  ATAD  rules,  the  carve-out  would  only  be  applicable  to  SMEs  as  they 
have few incentives and/or resources to engage in tax planning using interest payments. According 
to  the  ATAD  evaluation,  larger  businesses,  especially  MNEs,  are  more  likely  to  engage  in 
aggressive tax planning due to their scale and global operations, which provide more opportunities 
to  exploit  tax  arbitrage  opportunities. The data  gathered for the  ATAD  evaluation  shows that the 
largest MNEs are responsible for the majority of shifted profit. In particular, 60% of the total profit 
identified as shifted (EUR 159 billion out of EUR 270 billion) relates to the largest 10% of MNEs 
covered by this dataset.76 

Considering that inflation may increase future borrowing costs, the de minimis safe harbour could 
also include a mechanism to regularly update the threshold based on economic indexes, and a pre-
agreed  formula,  as  is  foreseen  by  the  OECD  BEPS  Action  4.  In  such  way,  the  de  minimis  safe 
harbour would be made dynamic and automatically adjusted.  

5.2.4.2. Option 2: Mandatory application of 30% EBITDA cap 

Under this option, the 30% EBITDA cap would be the only possible fixed ratio for deductibility of 
interest  expenses.  As  it  currently  stands,  business  may  deduct  up  to  30%  of  their  EBITDA.  By 
setting a fixed ratio for the maximum deductible interest expense, clarity and equal treatment would 
be improved with a common standard rather than different variations across the EU. 

The  current  interest  limitation  set  at  30%  of  a  company’s  EBITDA  is  designed  in  a  way  which 
ensures that most companies are able to fully deduct their third-party interest expenses. The fixed 

76  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market, p. 39. 

 
 
 
 
ratio rule stems from the OECD’s BEPS Action 4, where it is recommended to set a coordinated 
fixed ratio benchmark to reduce the risk that countries will be driven to apply a ratio which is too 
high  to  address  base  erosion  and  profit  shifting  risks.  On  this  basis,  in  2016,  the  OECD 
recommended  applying a net interest/EBITDA ratio set  at fixed ratio within a corridor of 10% to 
30%. Once a benchmark fixed ratio exceeds 30%, the rate at which more groups are able to deduct 
all of their net third party interest expense increases more slowly.77 

More recent data shows that a 30% threshold would allow most groups to fully deduct their third-
party interest expenses. As a result, the is no need to adjust the 30% threshold to retain its objective.  

5.2.4.3. Option 3: Reduce implementation options 

This  option  would  seek  to  limit  the  implementation  variations  of  the  Interest  Limitation  Rule  by 
making two or three of the current options mandatory.  

Firstly,  the  group  escape  rule  would  be  mandatory.  As  it  currently  stands,  Article  4(5)  of  the 
ATAD provides Member States with the option to introduce a group escape rule for taxpayers that 
are  members  of  a  consolidated  group  for  financial  accounting  purposes.  This  exclusion  can  take 
either  of  the  two  following  forms:  (i)  the  equity  escape  rule,  under  which  the  Interest  Limitation 
Rule does not apply if the company can demonstrate that its equity over total assets ratio is broadly 
equal  to,  or  higher  than,  the  equivalent  group  ratio,  or  (ii)  the  group  ratio  rule,  under  which  a 
taxpayer  can  deduct  higher  amounts  of  exceeding  borrowing  costs,  taking  into  account  the 
indebtedness of the overall group at worldwide level.  

Secondly,  the  carry-forward  mechanism  would  be  mandatory  to  ensure  that  the  rule 
accommodates fluctuations in taxpayer’s profitability and offers support to startups.   

Thirdly,  the  exclusion  for  long-term  public  infrastructure  projects  could  be  reconsidered.  It 
could, for instance, also be possible to exclude social housing activities. Some Member States have 
already introduced a similar exclusion. Providing legal clarity on this possibility would contribute 
to the Commission’s policy on addressing the housing crisis and ensure coherence of the approach 
across  Member  States,  which  would  significantly  facilitate  operations  on  a  cross-border  basis  for 
companies  supporting  this  critical  policy  area.  In  addition,  there  could  be  a  separate,  mandatory 
exclusion to cover the defence sector, which would also be in line with the Commission’s policies 
on addressing security and defence challenges, and be consistent with the European Council’s call 
to accelerate the work on all strands to decisively ramp up Europe’s defence readiness within the 
next five years78. In light of that very call, this particular exclusion would, however, be applied on a 
temporary basis, allowing for the EU to review whether targeted support of this policy remains of 
equal priority over the long-term.  

By making such rules mandatory, this option would make the application of the Interest Limitation 
Rule clearer and more streamlined across the EU, thus addressing some of the issues linked to the 
current  flexibility  of  the  overall  rule  which  were  identified  in  the  ATAD  evaluation  while 
preserving the anti-BEPS effect and well-functioning of the rule. 

77 OECD (2016), Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4  - 2016 
Update: Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, 
https://doi.org/10.1787/9789264268333-en.  
78 Council Conclusions of 20 March 2025 (document EUCO 1/25) 

 
 
 
5.2.4.4. Option 4: Carve-out of low-risk third-party loans  

The  current  interest  limitation  set  at  30%  of  a  company’s  EBITDA  is  determined  in  a  way  that 
should  ensure  that  most  third-party  debt  is  deductible  as  loans  between  independent  parties 
generally cause little to no risk of tax speculation. Under this option, the deductibility of third-party 
debt could be extended by a carve-out from the scope of the Interest Limitation Rule.  

To preserve the objective of the  Interest Limitation Rule, i.e., to limit the extent to which groups 
can use intragroup interest expense to claim total net interest deductions in excess of their net third 
party interest expense, a restrictive definition of third-party loans would be introduced. Under this 
definition, the creditor should not be an associated enterprise or an entity of the same consolidated 
group for financial accounting purposes of the debtor, and the debtor should use the debt to finance 
its own activities, with no possibility of on-lending within the group. 

Finally, an exclusion of third-party loans would also have automatic implications on the treatment 
of  standalone  entities,  since  these  entities,  by  definition,  exclusively  borrow  from  third  parties. 
Standalone  entities  would  thus  be  de  facto  out  of  scope  of  the  ATAD,  which  would  make  it 
redundant to maintain the optionality of the current exclusion.  

5.2.4.5. Option 5: Exemption in case of profitability shock  

To ensure that the Interest Limitation Rule does not impact taxpayers beyond its objective, notably 
by placing additional pressure on industries in situations of economic distress, a safety net could be 
introduced:  if  a  taxpayer’s  EBITDA  is  reduced  by  a  certain  percentage  (e.g.  50%)  in  a  year,  no 
Interest  Limitation  Rule  applies  to  this  taxpayer  in  that  year.  The  EBITDA  reduction  would  be 
assessed at entity level.  

5.2.5.  Hybrid mismatches 

To  address  the  issues  related  to  the  excessive  complexity  and  burden  arising  from  hybrid 
mismatches, which are described in Section 5.1.5, two options could be considered. 

Figure 7: Simplification options for rules on hybrid mismatches 

5.2.5.1. Option 1A: Remove imported mismatches 

The  ATAD  rules  on  imported  mismatches  are  rarely  applied  due  to  the  difficulties  that  tax 
authorities encounter in obtaining the necessary information to identify the actual mismatch. This is 
because  the  EU  footprint  of  these  arrangements  is  limited,  as  most  of  the  steps  take  place  in 
jurisdictions outside the EU. There is therefore minimal access to information to sustain findings. 
On  this  basis,  keeping  the  rule  on  imported  mismatches  would  maintain  an  administrative 

 
 
 
obligation in force for taxpayers without, in practice, contributing to sustaining the current level of 
protection against tax planning practices in the EU. 

5.2.5.2. Option 1B: Keep imported mismatches 

The  alternative  option  would  be  to  maintain  the  status  quo  –  i.e.,  continue  to  apply  the  rules  on 
imported  mismatches.  This  would,  however,  imply  a  compliance  burden  on  businesses  and  tax 
administrations  to  sustain  a  rule  that  is  rarely  applied,  given  the  challenges  already  explained 
above, and which is therefore ineffective in practice.  

5.2.6.  Tax mergers 

To  facilitate  the  functioning  of  the  tax  neutrality  for  mergers  etc.  within  the  EU,  two  alternative 
options could be proposed: 

Figure 8: Simplification options for TMD 

5.2.6.1. Option 1A: Dynamic Reference to the Mobility Directive  

Option 1A would introduce a dynamic link with the Company Law Merger Directive as amended 
by  the  Mobility  Directive  would  allow  for  a  full  alignment  of  the  Directives  and  prevent  any 
mismatches  should  the  Company  Law  Merger  Directive  be  further  amended  in  the  future. 
Concretely, the TMD would include a direct cross-reference the Company Law Merger Directive.  

On  the  one  hand,  the  option  would  ensure  that  there  is  no  immediate  taxation  when  the  new 
restricting  transactions,  i.e.,  simplified  mergers,  divisions  by  separation,  and  cross-border 
conversions, are carried out in the internal market. This would provide for a uniform tax treatment 
of  all  restructuring  transactions  that  are  allowed  under  the  Company  Law  Merger  Directive  as 
amended by the Mobility Directive. On the other hand, this option could lead to uncertainty in the 
future,  leaving  the  TMD  too  open  to  any  future  changes  to  the  Company  Law  Merger  Directive, 
including changes which may not always be adequate or necessary from a tax point of view. 

5.2.6.2. Option 1B: Addition of new restructuring transactions to the TMD  

Option 1B would extend the scope of the TMD by including the new restructuring transactions, i.e., 
simplified  mergers,  divisions  by  separation  and  cross-border  conversions,  which  can  be  found  in 
the Company Law Merger Directive as amended by the Mobility Directive.  

The  introduction  of  cross-border  conversions  would  effectively  broaden  the  scope  of  the  existing 
rules on transfers of office, ensuring that all transfers are governed by a uniform framework. This 
would apply regardless of the company’s legal form (where covered in the annex) and irrespective 
of whether a prior legal form conversion is required beforehand.  

 
 
 
 
Similar  to  Option  1A,  Option  1B  would  provide  for  a  uniform  tax  treatment  of  all  restructuring 
transactions  that  are  allowed  under  the  Company  Law  Merger  Directive  as  amended  by  the 
Mobility Directive. In addition, this option would cater for specific tax needs, while providing legal 
certainty to operators across the internal market. 

5.2.7.  Dispute resolution mechanisms 

As outlined in Section 5.1.7, the use of the DRM is affected by a number of divergent interpretative 
issues that create tax uncertainty. Two simplification options could therefore be considered: 

Figure 9: Simplification options for DRM 

5.2.7.1. Option 1: Targeted legislative amendments to clarify procedural rules   

This option would propose targeted legislative amendments to address the identified interpretative 
issues where amendments to the text of the DRM are needed to better clarify concepts and increase 
the tax certainty of the procedure. The targeted amendments would mainly focus on clarifying key 
procedural  aspects  of  the  complaint  phase,  including  the  meaning  of  the  requirement  to  submit 
complaints  “simultaneously”  (Art.  3(1)),  the  consequences  of  failing  to  do  so  (Art.  3(1)),  the 
possibility  for  taxpayers  to  remedy  or  resubmit  incomplete  complaints  (Art.  3(4)),  and  the 
identification of the “affected person” required to lodge a complaint in multi-entity situations (Art. 
3(1)).  Further  amendments  would  address  the  interaction  between  the  DRM  procedure  and  other 
ongoing dispute resolution procedures (Art. 16(5)), and procedural aspects of the dispute resolution 
stage,  such  as  objections  to  the  appointment  of  a  person  of  standing  (Art.  8(4–5)).  Overall,  these 
amendments  would  aim  to  remove  ambiguities  in  the  DRM  and  ensure  a  clearer  and  more 
predictable application of the procedure across Member States.  

5.2.7.2. Option 2: Use of Council implementing acts  

For  issues  that  are  inherently  more  complex  and  where  uniform  application  cannot  be  achieved 
without  binding  rules,  Council  implementing  acts  could  be  used  as  a  more  appropriate  tool.  This 
would  concern  cases  in  which  interpretative  difficulties  cannot  be  resolved  through  targeted 
legislative  amendments  alone  but  require  more  detailed  binding  provisions  to  ensure  consistent 
implementation across Member States.  

As  a  result,  this  option  would  include  a  provision  empowering  the  Council  to  adopt  Council 
implementing  acts  to  ensure  a  more  uniform  implementation  of  the  DRM  and    to  clarify  certain 
operational aspects of the procedure laid down in the DRM , including: (1) the communication flow 
between competent authorities;  (2) the application of the simplified procedure for SMEs; and (3) 
the interaction between procedures under the DRM and proceedings before national courts. 

 
 
 
5.3. Options discarded at an early stage 

5.3.1.  Abolish CFC rules 

According  to  the  ATAD  evaluation,  the  rationale  for  retaining  the  CFC  rules  in  a  post-Pillar  2 
environment is weakened. For groups within the scope of Pillar 2, the introduction of the Pillar 2 
global  minimum  tax  makes  CFC  rules  partially  redundant,  despite  differences  in  scope  and 
functioning  mechanisms.  For  smaller  groups,  outside  the  scope  of  Pillar  2,  i.e.,  with  a  global 
turnover  below  EUR  750,000,000,  academic  literature  suggests  that  tax  avoidance  is  primarily 
concentrated  among  the  largest  and  more  complex  structures,  thereby  calling  into  question  the 
proportionality and effectiveness of maintaining the CFC rules in ATAD. Therefore, the possibility 
of discontinuing the CFC rules in ATAD could be considered79.  

However,  this  option  has  been  discarded.  While  the  introduction  of  Pillar  2  global  minimum  tax 
rules and the concentration of tax avoidance among larger and more complex MNE groups call into 
question the current scope of CFC rules in ATAD, a complete abolition of such rules would create 
a significant gap in the EU anti-avoidance framework. While tax avoidance risk may be limited for 
SMEs, full abolition of CFC rules would remove a key safeguard for MNE groups not effectively 
covered  by  the  scope  of  Pillar  2  either  due  to  their  relatively  smaller  size,  i.e.,  with  a  global 
turnover  close  to  but  still  below  EUR  750,000,000,  or  specific  structure.  This  option  would, 
therefore,  not  be  fully  in  line  with  the  general  objective  of  maintaining  high  tax  standards  in  the 
EU. 

5.3.2.  Abolish hybrid mismatches for Pillar 2 companies 

During the stakeholder consultations, some businesses argued that the rules on hybrid mismatches 
in  the  ATAD  should  be  abolished  for  companies  within  the  scope  of  Pillar  2,  as  consistent 
treatment in accounting should ensure sufficient taxation at 15%. On this basis, the abolishment of 
the rules on hybrid mismatches for Pillar 2 companies could be considered. 

However,  this  option  has  been  discarded.  Pillar  2  may  ensure  that  the  companies  in  scope  pay  a 
minimum level of tax but does not rectify the underlying differences in how financial instruments, 
entities,  or  transfers  are  treated  under  national  tax  rules.  As  a  result,  without  the  rules  on  hybrid 
mismatches, some groups of companies in scope of Pillar 2 may still have an incentive to exploit 
these differences, in order to erode their tax base in Member States where they pay an effective tax 
at a level which is above the minimum or to reduce the income included in the computation of the 
top-up  tax  amount,  where  applicable.  This  option  would,  therefore,  lower  the  current  level  of 
protection  against  tax  planning  practices  in  the  EU,  which  goes  against  the  general  objective  of 
maintaining high tax standards in the EU. 

5.3.3.  Abolish the Interest Limitation Rule for Pillar 2 companies 

During the stakeholder consultations, some businesses argued that since Pillar 2 already neutralises 
incentives for profit shifting through intra-group financing by ensuring a minimum 15% effective 
tax  rate,  the  Interest  Limitation  Rule  in  the  ATAD  could  be  abolished  for  Pillar  2  companies. 
According to businesses, this would deliver important simplification and competitive gains without 
undermining anti-avoidance objectives.  

79  Commission  Staff  Working  Document:  Evaluation  of  Council  Directive  2016/1164  laying  down  rules  against  tax 
avoidance practices that directly affect the functioning of the internal market. 

 
 
 
Nonetheless,  this  option  has  been  discarded.  The  Interest  Limitation  Rule  protects  the  tax  base. 
While Pillar 2 sets a minimum global tax rate, the Interest Limitation Rule ensures that the base to 
which  the  minimum  effective  tax  rate  applies  is  not  eroded  through  excessive  interest  expenses. 
Consequently, the Interest Limitation Rule and Pillar 2 are not alternatives, and such option would 
lower the current level of protection against tax planning practices in the EU, which goes against 
the general objective of maintaining high tax standards in the EU. Moreover, removing the Interest 
Limitation Rule only for large companies would thus also provide those entities with an advantage 
over  smaller  competitors,  who  are  generally  already  in  less  competitive  financial  positions  and 
would  then  additionally  suffer  more  stringent  borrowing  conditions  than  larger  competitors. 
Accordingly, this would negatively impact the level playing field in the EU.  

5.3.4.  Carve Pillar 2 companies out of the ATAD 

During the stakeholder consultations, businesses argued that the introduction of Pillar 2 ensures that 
companies  worldwide  are  subject  to  a  baseline  level  of  taxation.  According  to  them,  this 
development  creates  redundancies  in  anti-abuse  regulations,  leads  to  unnecessary  duplication, 
heavier compliance burdens and competitive disadvantages for EU-based groups.  

However,  this  option  has  been  discarded.  Although  Pillar  2  and  the  ATAD  share  common 
objectives, they differ in scope and do not necessarily address the same issues. As illustrated above, 
even with the implementation of Pillar 2, certain ATAD measures remain necessary to ensure that 
BEPS risks are minimised. A full exemption for Pillar 2 companies from the whole of the ATAD 
would substantially lower the current level of protection against tax planning practices in the EU, 
which goes against the general objective of maintaining high tax standards in the EU. 

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

6.1. The initiative to be assessed 

As  set  out  in  the  above  chapters,  the  Omnibus  on  Taxation  will  cover  all  EU  corporate  tax 
Directives80 and aims to potentially eliminate, amend or harmonise a wide array of tax rules. It will 
bring simplification for EU taxpayers with the objective of significantly lowering compliance and 
administrative costs, boosting EU competitiveness, and facilitating investment, while ensuring that 
the EU’s high tax standards are maintained.  

This  Chapter  explores  the  impact  of  the  envisaged  measures,  which  constitute  responses  to  the 
baseline and have been individually outlined in Chapter 5. It first assesses the economic impact of 
the different policy options on the taxation of cross-border interest, royalty and dividend payments 
(Section 6.2.1 below), and the taxation of controlled foreign companies (CFC) belonging to groups 
subject to Pillar 2 (Section 6.2.2 below). The assessment is conducted both in terms of direct cost 
savings  and  broader,  long-term  economic  impact.  In  addition,  the  analysis  covers  the  aggregate 
impact  in  terms  of  compliance  costs  of  the  remaining  options  (Section  06.2.5  below)  and  the 
economic  impact  of  the  envisaged  immediate  expensing  of  R&D-related  assets  (Section  6.2.3  0 
below) as well as certain changes to the Interest Limitation Rule (Section 0 below). This analysis is 
supported  by  the  methodological  and  analytical  approaches  explained  in  Annex  4  to  this  report. 
Finally, this Chapter provides general remarks on the limits assessing the impact of the Omnibus on 

80 To recall, the Omnibus aims to amend the IRD, PSD, FASTER, ATAD (both directives), TMD, and DRM. The Pillar 
2 Directive plays a key role, and interacts in some instances with these rules, but will not be amended. 

 
 
 
tax  administrations,  and  briefly  explores  potential  environmental,  social  and  fundamental  rights 
impacts.  

In  this  way,  the  outcome  of  the  analysis  in  this  chapter  can  be  used  to  compare  the  options,  as 
designed  in  three  versions  (Chapter  7),  in  order  to  subsequently  determine  the  preferred  way 
forward for this initiative (Chapter 8).   

6.2. Economic impacts of policy options 

The impacts of the policy options are assessed based on the material (monetary) and administrative 
impact  for  businesses,  the  EU  and  its  Member  States,  in  addition  to,  where  possible,  macro-
economic impacts. Several methods were used to analyse the impact of the different policy options, 
namely  desk  research,  stakeholder  feedback  through  a  call  for  evidence  and  extensive 
individual/multilateral  meetings,  discussions  with  Member  States,  and  own  calculations.  The 
specific methodology and analysis used will either be explained directly in this Chapter or detailed 
in Annex 4. Among others, the analysis also uses CORTAX computable general equilibrium (CGE) 
modelling, provided by the JRC, to assess macro-economic impacts.  

In  brief,  there  are  two  types  of  data  available,  on  the  basis  of  which  assessments  of  the  policy 
options and related considerations are conducted: macro data derived from official statistics and  a 
large database on individual companies (micro data).  

However,  the  general  scarcity  of  available  data  is  a  central  problem  that  affects  the  ability  to 
accurately assess the impacts and revenues related to certain current policy options at a sufficiently 
granular level. This is demonstrated in the difficulties to identify companies’ specific financial and 
portfolio activities in a sufficiently segmented way – a way that would allow to assess the various 
options under the Interest Limitation Rule in more detail, or to know the exact number of taxpayers 
subject  to  CFC  rules,  and  how  often  the  CFC  rules  are  therefore  applied.  In  absence  of  such 
granular  data,  the  impact  of  the  exemption  from  CFC  rules  for  certain  companies  cannot  be 
estimated with greater precision.  

More generally, a higher level of granularity would be needed to accurately quantify each problem 
and its related impacts. Such data is, however, available only at the taxpayer level or, to a certain 
extent, in the hands of national tax administrations; given the proprietary and confidential nature of 
such  data  (e.g.,  to  whom  (how  many  companies),  at  what  rate  (in  which  jurisdiction),  and  how 
many times CFC is applied, or the interest on loans that companies actually face and size of these 
loans for the Interest Limitation Rule related analysis), it is not available to the Commission. The 
Commission has thus sought data input from certain companies in order to conduct a reality-check 
on  certain  assumptions,  and  in  order  to  extrapolate  this  information  to  a  broader  taxpayer  base 
where possible. But this approach has its limitations. All estimates provided in this chapter must, 
therefore,  be  interpreted  with  due  care.  As  stated,  details  on  the  methodology  used  in  various 
calculations are further elaborated in Annex 4. Section 6.3 also addresses the limits of quantifying 
the impact of the measures on tax authorities. 

6.2.1.  Withholding tax exemption for payments of interest, royalties and dividends  

More  detailed  information  on  the  methodology  used  and  analysis  for  the  measures  proposed  in 
relation to withholding taxes can be found in Annex 4, Section 2 and Section 5.1. 

 
 
6.2.1.1.Option  1A:  Full  exemption  from  withholding  tax  accompanied  by 

procedural adjustments 

Impact on companies 

In  a  first  instance,  the  impact  of  the  measure  has  been  assessed  from  a  micro-economic  point  of 
view,  taking  into  account  both  the  direct  compliance  and  administrative  cost  for  corporate 
taxpayers  themselves,  as  well  as  the  indirect  impact  in  terms  of  opportunity  costs  and  effects  of 
foregone  tax  payments.  Section  2  of  Annex 4  provides  an  overview  in  different  steps  of  the 
methodology used to calculate this81. 

In brief, one of the specific objectives of the Omnibus on Taxation is to eliminate unnecessary EU 
tax compliance burdens. To estimate the potential impact of this in relation to interest, royalties and 
dividend  flows  in  the  EU,  Annex  4  first  describes  the  cost  characteristics,  before  estimating  the 
importance of the respective flows. Next, the tax relief at stake and potential cost reduction from 
the measure is calculated: in doing so, the analysis estimates that the direct cost relief from a full 
exemption  on  interest,  royalties  and  dividends  would  amount  to  annual  savings  of  approximately 
EUR 0.7 billion. This stems from the direct compliance cost savings as businesses would no longer 
engage in  complex  refund procedures. Moreover, under the current WHT system,  investors incur 
opportunity  costs  because  long  procedures  delay  the  refund  of  withholding  taxes  –  money  that 
could have otherwise been invested in the interim. Introducing a full exemption from WHT would 
correspond  to  important  opportunity  cost  relief,  leading  to  an  estimated  additional  savings  of 
approximately EUR 0.7 billion per year for taxpayers.  

Lastly, stakeholder feedback has confirmed that the complexity associated with seeking refunds for 
withholding tax means that taxpayers often do not engage in these procedures, even in instances in 
which  they  are  entitled;  this  is  referred  to  as  foregone  tax  relief  that  would  also  no  longer  be 
incurred.  Introducing  the  exemption  would  correspond  to  additional  estimated  savings  of  about 
EUR 3.8 billion, funds that would consequently remain with taxpayers. The calculations for these 
respective  estimates  can  be  found  in  Section  2  of  Annex  4,  for  interests/dividends  and  royalties 
separately. 

Overall,  total  cost  reduction  from  the  corporate  taxpayer’s  perspective  (directly  incurred  costs, 
opportunity  costs,  and  savings  on  foregone  tax  relief)  from  the  introduction  of  this  option  would 
amount to an estimated  EUR 5.34 billion per year for  cross-border interest, dividend and royalty 
payments within the EU, subject to the caveats as provided at the end of Section 2 of Annex 4.  

Impact on tax administrations 

Reducing, to zero, withholding taxes on intra-EU payments would also alleviate the administrative 
burden  for  tax  administrations.  First  and  foremost,  tax  administrations  would  no  longer  need  to 
apply  and  manage  multiple  tax  refund  procedures  tailored  to  different  sets  of  international  rules. 
Today, refund procedures are cumbersome not only for companies to implement, but  also  for tax 
administrations to enforce as they include receiving applications (often paper-based), verifying the 
investor’s  tax  residence  and  his/her  eligibility  for  refund,  checking  anti-abuse  rules,  coordinating 
with  other  EU  countries’  tax  authorities,  performing  (re)payments  and,  possibly,  handling 
appeals/disputes. The introduction of this measure would thus significantly reduce the workload for 
tax  authorities,  and  substantially  decrease  their  administrative  costs  and  resource  burden/efforts. 
However,  no  quantitative  projection  is  possible,  given  that  costs  related  to  certain  administrative 

81 See section “Cost estimates for companies: Full exemption of interest, dividend and royalty payments (Option 1A)”. 

 
 
 
tasks/resource mobilisation inside the tax administrations are not publicly available, nor would they 
be delineated by enforcement per specific legislative measure. Further details can be found under 
Section 6.3 of this Chapter.   

Impact on the economy  

In addition to the above, the measure would have a long-term economic impact, which is simulated 
using  the  macroeconomic  model  CORTAX.  The  model  captures  the  long-run  responses  of 
economic  actors  to  changes  in  the  tax  environment  and,  therefore,  allows  the  broader 
macroeconomic effects of the reform to be taken into account. See Box 6 for a short description of 
how the model works. In addition, Section 5.1 of Annex 4 also provides further information on the 
use of CORTAX for modelling the tax exemption for interest, royalty and dividend payments and 
lowering of compliance costs. 

Box 66: Description of the CORTAX model 

CORTAX  is  used  for  the  macroeconomic  impact  analysis  of  various  measures  presented.  It  is  a 
computable  general  equilibrium  model  specifically  designed  to  evaluate  long-term  economic 
effects  of  corporate  tax  reforms  in  an  international  setting.82  Its  main  purpose  is  to  simulate  how 
changes  (policy  shocks)  in  corporate  taxation  influence  macroeconomic  outcomes  such  as  GDP, 
investment,  consumption,  employment,  as  well  as  tax  revenues.  The  model  shows  long-term 
effects. This means that an initial equilibrium is ‘shocked’ by a policy measure, and the effects then 
measured  against  the  expectation  that,  in  the  long-term,  the  economy  would  converge  towards  a 
new  equilibrium.  The  macroeconomic  outcome  variables  in  the  final  steady  state  equilibrium  are 
then  compared  to  the  values  in  the  initial  equilibrium,  i.e.,  before  the  policy  measure  was 
introduced.  

The  model  focuses  particularly  on  the  role  of  multinational  enterprises  and  cross-border  tax 
planning, allowing researchers and policymakers to assess both national and international corporate 
tax  policy  reforms.  As  such,  CORTAX  provides  a  comprehensive  framework  for  analysing  how 
corporate tax policies, and changes to them, affect economic activity in an internationally integrated 
economy.  Its  strength  lies  in  its  detailed  modelling  of  multinational  enterprises,  profit  shifting 
behaviour  and  cross-border  capital  flows,  which  captures  interactions  between  businesses, 
households, and governments across multiple countries. The model is calibrated for thirty countries, 
including the twenty-seven member states of the European Union, the United Kingdom, the United 
States and Japan. In addition to these countries, the model includes a stylized tax haven that serves 
as a destination for profit shifting. 

CORTAX  has  been  widely  used  in  policy  analysis,  including  by  the  European  Commission,  to 
assess various economic, financial, and corporate tax initiatives.  

Information on the use of CORTAX can also be found under Section 5.1 of Annex 4 to this report.  

The simulation projects the abolition of the withholding taxes on the one hand, and the lowering of 
compliance costs for companies, on the other. The lowering of withholding taxes could reduce CIT 
revenue by an equivalent of -0.02% of GDP. However, the impact on overall tax revenue is a lot 

82 For an overview see: CORTAX - Joint Research Centre - European Commission. 

 
 
 
 
milder  (-0.01%  of  GDP)  due  to  the  positive  macroeconomic  feedback  effects  of  the  measure.  In 
detail, this means that: 

The proposed measure will stimulate overall economic activity, leading to an increase in the capital 
stock (about +0.07%) and GDP (about +0.04%). Importantly, there will also be positive spillovers 
for  employment  (about  +0.02%).  As  economic  activity  expands,  additional  tax  revenues  are 
generated  from  other  sources,  such  as  corporate  income  taxes  and  capital  gains.  This  means  that 
any  immediate  revenue  decline  would  be  more  than  compensated  by  capital  gains,  investment, 
growth, and increased revenue streams over time. The ensuing lower tax burden will improve the 
EU’s competitiveness as investment is expected to increase, which will trigger higher growth and 
create more jobs. Figure 10 details the findings of the simulation for this measure in the first row 
(Option 1A). 

Figure 10: Long-term impact of the WHT exemption, simulation with CORTAX, % change relative to initial situation (EU-27) 

Source: European Commission, Joint Research Centre 

These  effects  could  be  interpreted  as  lower-bound  estimates.  The  positive  feedback  could  be 
stronger as new tax revenue could also be expected from the new ‘protective’ measure, namely the 
withholding tax levied upon outbound royalty and interest payments towards zero-tax third country 
jurisdictions as explained under Section 5.2.1.1 above. This effect is, however, not included in the 
simulation.  Today,  outbound  payments  to  Offshore  Financial  Centres  (OFC) 83  are  significant 
according  to  Eurostat’s  balance  of  payments  statistics.84  Much  of  it  is  likely  used  as  vehicles  for 
profit shifting to OFCs. This has direct implications for growth that go beyond the direct effect of 
resources shifted offshore. A more comprehensive system for the application of withholding taxes 
on outbound payments could therefore lead to more productive allocation of intangible assets, more 
innovation in the EU, and ultimately higher growth. 

6.2.1.2.Option 1B: Alignment of scope (holding requirement) and procedures 

Impact on companies 

This Option would seek to align the material scope of the IRD and the PSD, lowering the holding 
requirement of the IRD to 10%. It would also align the procedures for obtaining the withholding tax 
exemptions under the Directives. The effect of lowering of the holding requirements in the IRD to 
10% is simulated such that it would correspond to the 10% requirement stipulated in the PSD. As 
laid out in detail in Annex 4, Section 2 85, this option could affect about 7% of interest and royalty 
payments,  as  those  are  the  estimated  shares  of  companies  with  holdings  between  10%  and  25%. 
The  scope  of  Option  1B  is  therefore  significantly  smaller  than  Option  1A  because  it  applies  to 
fewer companies, therefore covering significantly fewer payments (see Figure 11).  

83  A  list  of  about  40  countries  that  provide  financial  services  at  disproportionate  scale,  relative  to  the  size  of  their 

economy. They are often characterised by very low or zero taxes on corporate profit.  

84  This  data  has  substantive  quality  issues  and  missing  data  points,  especially  when  it  comes  to  outflows  to  zero-tax 
jurisdictions. This renders an accurate quantification of the magnitude of the problem not possible. 
85 See Section “Cost estimates for companies: Alignment of scope and procedures (Option 1B)” 

OptionGDP Capital Employ- ment Wages CIT revenueOverall tax revenue1AFull exemption of WHT0.0430.0700.0240.016-0.750-0.0271BAlignment of holding requirements 0.0110.0200.0050.005-0.191-0.006 
 
 
 
Figure 11: EU located shareholders with EU subsidiaries (Orbis): different scope of Options 1A and 1B 

Taxud illustration 

Estimates  based  on  this  approach  indicate  that  lowering  the  holding  percentage  requirement  for 
entitlement to the IRD could result in cost savings of about EUR 1.5 billion per year for taxpayers 
across the EU (Annex 4, Section 2). That is, given a more muted impact on taxpayers than under 
full  exemption,  estimated  cost  savings  are  significantly  smaller  than  estimated  above  for 
Option 1A.  

Impact on tax administrations and the economy  

As this option does not remove the withholding tax, but simply aligns existent holding requirements 
and procedures, cumbersome refund procedures would remain applicable across the EU – despite 
the facilitated approach established as a result of the future introduction of the FASTER Directive. 
This  also  means  that  tax  administration  will  continue  to  have  to  administer  refund  procedures, 
conduct audits, etc. as is currently the case. This likely means little impact on administrations other 
than adjusting to the slightly altered rules.  

The results of the Cortax simulation are detailed in Figure 10 above for Option 1B (second row). 
The effect  is  significantly lower than for  Option  1A, given that Option  1B would not  expand the 
scope  of  IRD  and  PSD  as  widely  as  is  the  case  for  Option  1A  (Figure  11).  Consequently,  the 
positive  macro-economic  feedback  would  be  much  less  pronounced.  As  above  under  option  1A, 
Section 5.1 of Annex 4 provides further information. 

6.2.1.3. Why simplifying taxation of intra-EU payments matters 

Either  policy  option  considered  results  in  significant  annual  cost  savings  for  taxpayers:  of  about 
EUR  5.34  billion  per  year  under  Option  1A,  or  EUR  1.5  billion  per  year  under  Option  1B.  The 
capital  that  corporate  taxpayers  would  consequently  get  to  keep  can  then  be  engaged  in  new 
investment,  contributing  to  more  economic  growth  and  higher  employment,  and  boosting 
competitiveness  at  a  company  level  and  for  the  EU.  Analysis  demonstrates  that  removing 
withholding taxes on all cross-border payments of interest, royalties and dividends within the EU 
(Option  1A) leads to  tax  savings  that have significant positive  long-term  macro-economic effects 
on investment and growth.  

However, the overall economic impact of major simplifications that come with these measures go 
beyond  these  measurable  monetary  cost  savings.  They  include  the  long-term  positive  impact  of 
higher  legal  certainty  for  investors  and  companies  that  comes  with  a  more  uniform  approach  to 
withholding  taxes  (notwithstanding  the  level  of  these  uniform  taxes).  In  Option  1A,  cross-border 
payments within the EU would no longer be subject to a complex system of withholding taxes and 
refund applications  that comes with  it. While even domestic withholding  taxes  differ a lot across 
EU  Member  States,  bilateral  treaties  between  countries  make  the  system  even  more  difficult  to 
access  and  engage  with.  With  a  uniform  system  in  place,  investors  would  no  longer  need  to 
navigate through numerous sets of rules in bilateral tax treaties – and no longer engage in complex 
compliance  and  cost-heavy  refund  procedures.  This  leads  to  a  more  straightforward  compliance 
framework, fewer errors and, importantly, fewer legal concerns linked to investment decisions.  

.. Option 1A.. Option 1B.. Option 1A.. Option 1B… below 10%x… below 25%x… between 10% and 25%xIncresed coverage of IRD through…Increased coverage of PSD through..Shareholders with a share …10%17%7%% of all shareholders (Orbis) 
 
 
Studies  confirm  that  tax  complexity  has  a  negative  impact  on  FDI  and  investment  in  general.86 
Simplifying  cross-border  tax  rules  will,  therefore,  create  more  confidence  in  future  investment, 
inducing more potential investors to actually realise cross-border investment. Moreover, it has been 
shown that tax complexity has the potential to distort investment decisions.87 If the consequences of 
a  given  investment  become  less  predictable,  investors  may  not  only  decide  against  it.  They  may 
also  eventually  invest  in  projects  which,  from  the  point  of  view  of  expected  return  and  future 
productivity gains, may not be a first choice or first best. They may, for example, shy away from 
investing cross-border and instead limit themselves to the domestic context, not taking advantage of 
the  Internal  Market.  This  would  be  at  the  expense  of  economic  growth.  Studies  show  that 
investment within the EU Internal Market is usually more efficient than purely domestic investment 
because  market  integration  improves  capital  allocation,  increases  competition,  enables  economies 
of  scale,  and  facilitates  knowledge  spillovers,  thereby  raising  productivity  and  returns  on 
investment.88  These  circumstances  lead  to  inefficient  allocation  of  resources  across  investment 
projects which, in the long run, will be to the detriment of EU competitiveness and jobs.  

Likewise,  tax  complexity  reduces  the  effectiveness  of  tax  policy  measures  designed  to  promote 
investment. When it comes to investment, businesses react less sensitively to changes in corporate 
tax  rates  if  tax  complexity  is  high.  This  will  likely  ‘undermine  the  ability  of  tax  policy  to  affect 
economic  growth’.89  By  introducing  a  significant  simplification  and  harmonisation  in  the  tax 
framework  applicable  to  cross-border  operators,  it  could  thus  be  expected  that  investment  across 
the internal market would be positively affected boosting competitiveness of  EU businesses as well 
as  overall  economic  growth,  and  thus  the  EU  as  a  whole.  It  is  worth  reiterating,  however,  that 
equivalent positive effects would not ensue under Option 1B as under Option 1A, since the former 
would retain the complexities associated with the application of withholding tax across the EU. 

Impact on maintaining high tax standards 

Not only are both options fully in line with the original objectives of the IRD and the PSD, but they 
would  also  pursue  to  eliminate  double  taxation  and  facilitate  cross-border  investment  and  capital 
flows in the EU to a greater extent than the current rules. Further, both options would preserve the 
existing  safeguards  designed  to  mitigate  and  limit  tax  evasion  and  avoidance.  A  full  withholding 
tax  exemption  in  the  EU  would  be  coupled  with  a  protective  measure  to  ensure  that  interest  and 
royalty  payments  are  taxed  when  distributed  from  a  Member  State  to  a  zero-tax  jurisdiction.  In 
addition,  a  reduction  or  elimination  of  holding  requirements,  and  the  removal  of  any  upfront 
procedures  for  verifying  whether  the  conditions  for  the  exemptions  are  fulfilled  at  the  time  of 
payment of the interest, royalties or distribution of profits (dividends), should not affect the powers 
of  Member  States  to  carry  out  ex  post  controls  and  to  apply  national  anti-abuse  rules,  including 

86 Esteller-Moré et al (2021), The role of tax system complexity on foreign direct investment: Applied Economics: Vol 
53 , No 45, find that tax complexity in a country leads to FDI outflow, Euler et al (2024), Tax Complexity and Foreign 
Direct Investment  - WU Vienna University of Economics and Business, confirm that tax framework complexity is a 
deterrent  for  investment.  This  affects,  inter  alia,  complex  administrative  procedures.  Braun  et  al  (2025),  Tax 
Complexity and Firm Value - WU Vienna University of Economics and Business, find (for the US) that tax complexity 
reduces Tobin’s Q, a core indicator signalling investment incentive. 
87  For  example:  Euler  et  al  (2024),  Tax  Complexity  and  Foreign  Direct  Investment  -  WU  Vienna  University  of 
Economics  and  Business;  Heckemeyer  (2022),  Removal  of  taxation-based  obstacles  and  distortions  in  the  Single 
Market in order to encourage cross border investment. 
88 See the seminal Cecchini-Report (1988), Europe 1992, or more recently: IMF (2024), esp. on fragmented markets: 
Scaling up the single market to boost productivity; ECB (2025) on the untapped potential of the EU Single Market. 
89  Amberger  et  al  (2026),  Corporate  Tax  System  Complexity  and  Investment  Sensitivity  to  Tax  Policy  Changes  - 
University of Iowa. 

 
 
 
rules  on  beneficial  ownership.  Consequently,  the  anti-tax  avoidance  framework  should  remain 
effective and robust.  

6.2.2.  Simplification in the context of the CFC rules 

More detailed information can be found in Annex 4, Section 3, in particular as regards the potential 
economic double taxation resulting from the simultaneous application of the CFC rules and Pillar 2. 

6.2.2.1. Option 1: Reduce implementation options: Make “Model A” mandatory 

Impact on companies 

As explained in previous chapters, the ATAD allows for two CFC income definition models to be 
implemented  at  national  level,  or  a  combination  of  both.  Ten  Member  States  have  currently 
implemented  Model  B  or  some  hybrid  version  of  the  CFC  income  definition.90  If  Model  A  were 
mandatory, these Member States would also apply the same defined categories of passive income 
of  the  controlled  companies.  Model  A  is  simpler  than  Model  B  as  it  adds  legal  certainty  to 
taxpayers  (Section  5.2.2.1).  Moreover,  with  a  uniform  application  of  Model  A,  taxpayers  would 
face a consistent approach to CFC rules across all Member States. This harmonisation would lead 
to simplified administrative processes, as tax reporting and compliance would be streamlined under 
a  single  set  of  CFC  rules.  This  could  lead  to  lower  administrative  costs  and  a  reduced  need  for 
specialised tax advisory services. 

As  regards  the  number  of  companies  affected,  based  on  data  available  in  Orbis,  some  114,000 
companies in the EU would be subject to the ATAD rules, from which about 40,000 companies are 
located  in  the  ten  Member  States  that  so  far  have  not  yet  (fully)  implemented  Model  A.  These 
companies can be the owners of entire groups, but most of them are owners of fewer entities.  

As  regards  the  costs  involved,  it  is  assumed  that,  on  average,  ATAD-related  costs  for  MNEs  are 
EUR 33,000  per year. This is  because  compliance checks related to the  application of  CFC rules 
would constitute only  a  part of  the total  compliance  costs related to  the  ATAD rules as a whole. 
Next, as explained in detail in Section 1 of Annex 4 (given the lack of available empirical data to 
confirm the exact proportion), the current analysis uses an assumption that the CFC rules account 
for one third of these ATAD-related costs, specifically.  

As regards the compliance cost savings, there is no empirical data that would facilitate estimating 
the actual savings per company. Assuming, therefore, that these companies would generate at least 
10% compliance  related  savings  as a result of the  simplified and unified framework under which 
they would then operate,91 it is estimated that relevant controlling companies could save an amount 
of about EUR 45 million per year (≈33,000 EUR * 1/3 * 10% * 40,000 companies).  

Impact on tax administrations  

A  single  framework  for  CFC  rules  across  the  EU  provides  consistent  criteria  for  enforcement, 
eliminating  the  need  to  apply  different  models  in  different  jurisdictions.  Those  jurisdictions  not 
currently applying Model A, and thus their administrations, will incur initial implementation costs 
as  they  shift  from  the  use  of  one  or  a  hybrid  approach  to  implementation  of  only  Model  A. 

90 Eight Member States (Cyprus, Estonia, Hungary, Ireland, Latvia, Luxembourg, Malta, Slovakia) have adopted Model 
B  and  two  Member  States  (the  Netherlands,  Spain)  adopted  a  combination  of  the  two  models.  Source:  ATAD 
Evaluation. 
91  The  10%  possible  savings  is  a  hypothesis  made  on  the  basis  of  conservative  assumptions  following  stakeholder 
consultations that indicate this is one of the primary impediments when operating on a cross-border basis. 

 
 
 
However, as further explained in Section 6.2.5 of this Chapter, these costs to administrations cannot 
be quantified as there is no empirical data to assess the potential cost implications – whether strictly 
from an IT or human resource (adaptation, personnel) point of view. On the other hand, with one 
unified system of CFC rules, tax administrations across the EU can develop streamlined processes 
and procedures, enhancing operational efficiency. This reduces the time and effort required to adapt 
to  varied  frameworks  and  cuts  down  on  administrative  overhead.  The  efficiency  gained  from 
enabling companies operating on a cross-border basis to use only one system could also  result in 
fewer mistakes and thus fewer instances of oversight and audit. Finally, an EU-wide standardised 
system of training and guidance can be developed more easily.  

Impact on the economy 

Please refer to section 6.2.2.5. 

6.2.2.2. Option 2A: Carving out Pillar 2 companies from CFC rules 

Impact on companies 

Section  3  of  Annex  4  explains  how  this  option  would  operate  structurally  and  how  this  would 
impact Pillar 2 companies from a tax obligation point of view. 

As regards compliance cost savings, the following can then be deduced from this. According to the 
company-level database Orbis, the number of MNEs present in the EU and in scope of Pillar 2 (i.e., 
those with a consolidated turnover of at least EUR 750 million) is estimated at approximately 4,700 
companies. For those, the total cost related to ATAD is assumed to be EUR 100,000 based on what 
the ATAD study 92 finds for large, complex MNEs. As for Option 1 above, it is assumed that a third 
of  these  overall  ATAD  compliance  costs  are  related  to  compliance  with  CFC-rules  and  related 
activities (and likewise, the explanation for this assumption can be found in Section 1 of Annex to 
this  report).    Doing  away  with  CFC  rules  for  these  MNEs  could  save  compliance  costs  of  about 
EUR 160 million (≈100,000 compliance cost per company * 1/3 * 4,700 companies). This could be 
an upper-bound estimate because:  

•  Not all MNEs have subsidiaries in the EU of which they are shareholders, and not all MNEs 

would benefit or fully benefit from the carveout as explained in Annex 4. 

•  Overlaps in the administrative actions linked to CFC and Pillar 2 compliance would imply 

that savings would not amount to the full cost of CFC-related paperwork. 

Impact on tax administrations 

Excluding Pillar 2 companies from CFC rules would simplify the workload for tax administrations, 
resulting in likely important resource savings; however, it is impossible to provide a quantification 
of  said  savings  in  light  of  the  lack  of  empirical  evidence  related  to  the  internal  costs  of 
applying/enforcing  specific  rules.  By  eliminating  the  overlap  between  CFC  rules  and  Pillar  2 
regulations,  tax  administrations  will  face  a  less  complex  regulatory  environment  for  enforcement 
purposes.  The  reduction  in  complexity  could  lead  to  more  efficient  processing  of  tax  filings  and 
enquiries,  and  fewer  audits,  allowing  administrators  to  carry  out  a  narrower  scope  of  compliance 
checks.  Overall,  this  should  allow  easing  the  burden  on  resources,  personnel  and  technological 
resources  at  the  level  of  tax  administration.  These  arguments  also  hold  for  Option  2B,  below 

92 Study prepared for the European Commission to support an evaluation of the Anti-tax Avoidance Directive (ATAD) 
- Final Report (2025). Here: Volume 2, p. 38. 

 
 
 
(accounting for QDMTT for CFC), albeit to a lesser extent as fewer companies would be relieved 
from CFC. 

Impact on the economy 

Please refer to section 6.2.2.5.  

6.2.2.3. Option 2B: Inclusion of QDMTT in CFC calculation 

Impact on companies 

As for Option 2A, Section 3 of Annex 4 provides an analysis of how this option would affect Pillar 
2 companies from a tax point of view, which will be more targeted and technical. As a result, it is 
likely that compliance cost savings would not be as significant as in Option 2A because CFC rules 
would continue to apply where Member States operate a higher CFC effective tax rate. CFC rules 
would still apply if the effective tax rate of an MNE subgroup (the entities of a group in a certain 
country) was at least 15%. In all other cases, QDMTT would be triggered – and CFC would not be 
triggered in order to prevent double taxation.  

We analysed the option using an Orbis sample of about 88,000 subsidiaries of EU shareholders, all 
part  of  groups  whose  consolidated  turnover  is  EUR  750  million  or  above.  QDMTT  may  be 
triggered  for  about  46,000  of  these  entities  as  they  show  an  effective  tax  rate  below  15%.  These 
represent  53%  of  all  in-scope  entities.  Under  Option  2B,  CFC  rules  would  therefore  not  be 
triggered for these entities.  

It is thus assumed that the compliance cost savings under this option would amount to only about 
one half (53%) of those estimated for Option 2A. Consequently, estimates for Option 2B indicate a 
potential cost savings of about EUR 84 million (≈ EUR 160 million * 53%).  

Impact on tax administrations 

Please refer to similarities under section 6.2.2.2 above. 

Impact on the economy 

Please refer to section 6.2.2.5. 

6.2.2.4. Option 3: Carve-out of SMEs 

Impact on companies 

As  a  starting  basis,  this  option  would  carve  out  SMEs,  which  would  be  identified  based  on  the 
Eurostat  definition,  widely  used  across  EU  legislation,  taking  into  account  only  those  companies 
with  a  turnover  of  EUR  50  million  or  less.  A  micro-analysis  conducted  based  on  the  Orbis 
company  database  estimates  that  the  number  of  shareholders  with  foreign  subsidiaries  and  a 
turnover  below  EUR  50  million  is  estimated  at  55,000.  On  the  basis  of  a  recent  study,  estimates 
indicate  that  the  CIT-related  compliance  costs  of  ‘medium’-sized  enterprises  could  amount  to 
around EUR 4,700 per entity.93 Here too, one can assume that only a fraction of these compliance 
costs is devoted to CFC-compliance or related activities, considering that for an SME, the control 
of other entities is a burdensome task. However, given the lack of precise empirical evidence, the 
analysis uses the same assumption as under options 1 and 2 above, i.e., that CFC compliance costs 
would amount to approximately one third. The analysis estimates that this option would amount to 

93 VVA/KPMG, Tax compliance costs for SMEs: An update and a complement Final Report KPMG/VVA 2022. 

 
 
 
about  EUR  90  million  (≈  55,000  companies  *  4,700  compliance  cost  per  entity  *  1/3)  in  CFC-
related cost savings as a result of carving out SMEs. 

Impact on tax administrations 
SMEs  account  for  over  99%  of  businesses  in  the  EU.94  However,  only  around  10%  have  cross-
border activities,95  and only about 5% of SMEs are part of a group.96 It therefore follows that CFC 
legislation is relevant to an extremely small population out of the overall number of SMEs. Firstly, 
the vast majority of these SME groups do not operate on a cross-border basis and therefore do not 
have operating structures that would avail themselves of controlled foreign companies; or possess 
limited  resources  for  engaging  in  cross-border  aggressive  tax  planning.  On  this  basis,  it  appears 
inefficient for tax administrations to bear the responsibility for, and dedicate resources to, enforcing 
the CFC rules in this limited context, especially considering that anecdotal evidence from several 
EU Member States indicates that CFC rules are rarely in effect applied to SMEs.  

Impact on the economy 

Please refer to Section 6.2.2.5.  

6.2.2.5. Why simpler CFC rules matter 

Reduced costs for companies 

The above analyses demonstrate that under all circumstances, simplifying the application of CFC 
rules for the EU results in important cost savings, irrespective of the policy option or combination 
chosen. This is because any more unified and potentially simpler approach for implementing CFC 
rules  across  the  EU  would  result  in  an  easier  operating  environment,  with  savings  redirected 
towards  investment  in  new  projects,  expansion,  and  innovation.  To  that  end,  Option  1  would,  by 
making Model A mandatory, provide clearer EU-wide rules-based taxation of CFCs, as opposed to 
having  to  impose and  enact  an  always  case-by-case assessment. Under  the second set  of options, 
sub-Option  2A  (carveout  of  Pillar  2  companies  from  CFC)  would  significantly  reduce  the 
administrative  burden  for shareholding entities  of the 4,700 MNEs in scope of Pillar  2  present  in 
the  EU  as  it  would  eliminate  their  compliance  obligations  in  the  context  of  CFCs.  Whereas  for 
Option 2B, the reduction would be lower, as fewer companies would be relieved form CFC rules. 
Both options would thus reduce the regulatory fragmentation of CFC-rules, enabling companies to 
reduce  operational  costs  in  significant  ways.  The  associated  cost  savings  of,  for  example, 
combining option 1 with 2A could amount to approximately EUR 205 million (EUR 45 million and 
EUR  160  million,  respectively).  Whereas  combining  Option  1  with  2B  would  achieve  fewer 
savings of about EUR 129 million (EUR 45 million and EUR 84 million, respectively). 

Reduced costs for tax administrations 

Option 1 (harmonise implementation of Model A across the EU) could entail some potential costs 
as  a  result  of  the  change  in  the  administrative  approach.  However,  overall  cost  savings  for  tax 
administrations  from  the  proposed  changes  in  the  application  of  CFC  rules  would  likely  be 

94 Small and medium-sized enterprises | Fact Sheets on the European Union | European Parliament 
95  European  Commission  (2023),  Proposal  for  a  Council  Directive  on  Business  in  Europe:  Framework  for  Income 
Taxation  (BEFIT)  and  Proposal  for  a  Council  Directive  on  Transfer  Pricing  SWD(2023)  308  final  (p.  41).  This 
information is based on data from: VVA/KPMG (2022), Tax compliance costs for SMEs: An update and a complement 
Final Report KPMG/VVA 2022. 
96 Eurostat Statistics Explained: SMEs - independent and in enterprise groups - Eurostat 

 
 
 
 
important and stem from enacting simpler and less burdensome  enforcement obligations as fewer 
companies would have to be checked (see each option for details above). 

Positive impact on the economy  

The long-term macroeconomic effects will, on the other hand, go far beyond the primary savings of 
administrative  costs  from  both  a  corporate  taxpayer  and  tax  administration  point  of  view.  This 
conclusion  is  in  line  with  the  economic  rationale  outlined  in  the  context  of  tax  exemptions  for 
outbound payments (see Section 6.2.1.3): when businesses have clarity and predictability regarding 
tax obligations stemming from income of CFCs, they are more likely to invest abroad. Large MNEs 
would  feel  more  encouraged  to  invest  in  the  EU,  as  this  investment  would  not  trigger  additional 
CFC-related compliance obligations (Option A). Moreover, unified EU-wide CFC rules that apply 
in all Member States provide businesses with the certainty they need to make informed, long-term 
financial decisions and level the playing field for potential investment in an EU country (Option B). 
As a result, the EU would become a more attractive place to invest. 

Impact in terms of maintaining high tax standards 

At the same time, it is important to note that removing the CFC rules for either Pillar 2 companies 
or  SMEs  (options  2A  and  3  above)  would  not  compromise  the  standard  in  the  fight  against  tax 
avoidance and evasion, as objectively sought under the ATAD. As previously noted, information as 
to the number of times CFC rules are applied, across which EU jurisdictions and to which specific 
companies  is  not  available.  However,  when  it  comes  to  option  2A,  the  Pillar  2  Directive  enacts 
rules  that  ultimately  ensure  that  companies  pay  a  real  effective  tax  rate  as  well  as  introduces 
safeguards that limit risks associated to how that effective rate is achieved. When it comes to option 
that 
3,  exclusion  of  SMEs,  anecdotal  evidence  from  several  Member  States 
administrations have had almost no CFC cases related to SMEs in the nearly ten years since ATAD 
started  to  apply.  This  indicates  that  these  rules  are  rarely  triggered  for  SMEs,  possibly  because 
these companies’ operating structures are less apt to expand abroad and to engage in aggressive tax 
planning. CFCs and have no or little cross-border activity. Their exclusion would thus not hinder 
anti-avoidance  and  evasion  or  aggressive  tax  planning  efforts.  Rather,  it  would  bring  significant 
cost and resource savings, and thus benefits, to both companies and tax administrations 

indicates 

6.2.3. Immediate expensing of assets related to research and development (R&D) 

Impact on companies 

As  a  first  consideration,  the  possibility  to  immediately  expense  R&D  related  tangible  assets 
simplifies  the  accounting  and  tax  compliance  process.  Traditionally,  R&D  costs  may  need  to  be 
capitalised  and  depreciated  over  a  number  of  years,  which  involves  calculations  and  ongoing 
record-keeping.  Immediate  expensing  allows  taxpayers  to  deduct  these  costs  one-off,  in  the  year 
that these are incurred, streamlining the accounting process. This relief from recurrent compliance 
actions  can  result  in  lower  administrative  and  compliance  costs,  enabling  taxpayers  to  allocate 
resources  more  efficiently.  In  particular,  immediate  expensing  aligns  the  tax  treatment  of 
companies’ actual expenditure to the point in time where companies actually take the risk to invest. 
Immediate  expensing  thus  allows  more  efficient  sharing  of  risks  with  the  government.97  In  other 
words,  taxation  will  become  less  distortive  with  respect  to  companies’  decision  to  accept  risks 
when investing.  

97 This argument was put forward by Musgrave and Domar in their seminal work on taxing risky investment as early as 
1944. See Domar, E. D., and R. A. Musgrave. “Proportional Income Taxation and Risk-Taking.” The Quarterly Journal 
of Economics 58, no. 3 (1944): 388–422.  

 
 
 
The measure would benefit all companies in the EU, also SMEs. Commission analysis revealed that 
CIT-related compliance costs in the EU could amount to about EUR 53 billion, of which EUR 48 
billion could fall on SMEs.98 Total compliance costs are usually linked to different activities, and 
there  is  no  empirical  information  as  to  what  share  of  total  compliance  costs  could  fall  on 
calculations related to  tax depreciation, especially not  depreciation  in  the context of R&D.  In the 
absence  of  statistical  information,  a  conservative  informed  assumption  is  taken  (given  the  likely 
relative ease of a change in procedures) which is based on the relative importance of R&D-related 
in  total  costs  as  observed  in  the  firm-database  Orbis.99  It  is  assumed  that  0.5%  of  total  CIT 
compliance  costs  could  be  saved.  If  so,  savings  would  amount  to  around  EUR  265  million  (≈ 
EUR 53 billion * 0.5%). 

Impact on the economy and public finances  

Allowing businesses to fully deduct the cost of qualifying R&D-related tangible assets in the year 
that the investment is made, rather than depreciating the costs over time, is a matter of fairness as it 
allows deducting expenses when they actually happen. The measure will have significant positive 
impact on the capital costs of businesses.  

This  implies  a reduction  in  corporate income tax (CIT) revenues by about  1.9%.100 However, the 
impact on overall rax revenue is almost neutral due to significant positive macroeconomic feedback 
effects  that  trigger  tax  expenditure  other  than  CIT.  What  this  means  in  sum,  can  be  detailed  as 
follows: 

Although  the  compliance  cost  reduction  may  be  relatively  limited  (analysed  above),  the  positive 
impact  of  faster  R&D  depreciation  on  capital  formation  will  be  significant.  This  is  because  the 
policy change lowers the after-tax financing  constraints  and reduces  the  cost  of capital.  It  is  well 
documented that accelerated depreciation promotes innovation.101  

By  allowing  companies  to  immediately  deduct  expenditures  on  equipment,  machinery  and 
buildings  used  for  R&D,  the  reform  lowers  the  after-tax  cost  of  investment  and  therefore 
strengthens  incentives  to  invest.  To  best  capture  that  main  impact,  a  general  equilibrium  model 
simulation was performed (using CORTAX) that focuses on the long-term impact of lowering the 
cost of capital, taking account of allowances that may already be in place in Member States. The 
results are detailed in Figure 12, row 1.  

98  European  Commission  (2023),  Proposal  for  a  Council  Directive  on  Business  in  Europe:  Framework  for  Income 
Taxation (BEFIT) and Proposal for a Council Directive on Transfer Pricing  SWD(2023) 308 final (p. 41). This data is 
based on a study for the European Commission: VVA/KPMG (2022), Tax compliance costs for SMEs: An update and a 
complement Final Report KPMG/VVA 2022. 
99  The  assumption  is  compatible  with  the  cost-structure  of  EU  companies.  In  Orbis,  for  companies  with  information 
about  R&D  costs,  their  share  in  total  costs  is  about  2.5%.  Extrapolating  this  value  to  all  companies  (assuming  zero 
R&D costs for companies with no information) would result in average R&D costs  accounting for 0.5% of total costs 
on average for all companies in the EU.  
100 Comparable magnitudes of CIT revenue effects have been observed in other contexts. For example, the introduction 
of full expensing in the UK has been estimated by the Institute for Fiscal Studies (IFS) to reduce long-run CIT revenues 
by up to around 3.7%, illustrating that relatively pronounced impacts on CIT revenues are not uncommon in the context 
of investment tax incentives. Source: Institute for Fiscal Studies, Full expensing and the corporate tax base, IFS Green 
Budget, October 2023. 
101 For example: Huang and Liu (2024): Structural tax reduction, financing constraint relief and enterprise innovation 
efficiency - ScienceDirect.  

 
 
 
Figure 12: Immediate expensing of R&D assets, simulation with CORTAX, % change relative to initial situation (EU-27) 

Source: European Commission, Joint Research Centre 

In the simulation, this more generous tax treatment leads businesses to increase investment now and 
in  the  future,  as  they  anticipate  the  lowering  of  capital  cost  also  for  future  investment.  This  will 
raise  the  overall  capital  stock  in  the  economy  by  about  0.4%.  A  larger  capital  stock  increases 
workers’ productivity, which translates into higher wages (around +0.1%) and higher employment 
(about  +0.04%).  Through  these  channels,  the  reform  also  stimulates  economic  activity  more 
broadly, resulting in an increase in EU27 GDP of roughly 0.17% per annum in the long run. This 
would  imply  that,  after  implementing  immediate  R&D  expensing,  GDP  would  be  higher  by  an 
equivalent,  in  2025  values,  of  EUR  32  billion  per  annum  than  if  the  EU  continues  without  the 
measure. 

Therefore,  the  expansion  of  economic  activity  largely  compensates  for  the  short-term  CIT  loss. 
Higher  wages  and  employment  increase  revenues  from  labour  income  taxes,  while  higher 
consumption raises indirect tax revenues. As a result of these feedback effects, the overall impact 
on total tax revenues in the longer run is effectively neutral, with total revenues declining by only 
about 0.02%. 

The  simulation  was  also  run  for  an  option  that  would  expand  the  R&D  immediate  expensing  to 
include all fixed assets – i.e., also intangibles (results detailed in Figure 2, row 2).  As CORTAX, 
however,  does  not  distinguish  tangible  from  intangible  assets,  the  measure  was  scaled  by 
introducing  the  share  of  tangibles  in  all  R&D  expenditure  into  the  model  (about  50%.).  The 
analysis  shows  that  in  such  case,  all  macroeconomic  effects  could  be  expected  to  double  in  size. 
What this demonstrates is that an expansion of the scope of the measure to include also intangible 
assets  would  significantly  increase  the  revenue  impact,  rendering  the  measure  further  away  from 
budget neutrality. More technical details about the simulation can be found in Annex 4, Section 5.2. 

Impact on maintaining high tax standards 

The  measure  would  be  designed  in  accordance  with  international  tax  standards,  as  the  option 
includes a definition of qualifying R&D expenses, and the application would take inspiration from 
similar legislation adopted by other like-minded international partners. 

6.2.4. Simplification in the context of the Interest Limitation Rule 

The  following  subsections  assess  the  individual  impacts  of  certain  options  under  the  Interest 
Limitation  Rule  as  outlined  in  Chapter  5.  However,  given  the  interlinked  and  inter-dependent 
nature of some of the design options, several are assessed in aggregate (under ‘Options quantified 
in aggregate’ of Section 6.2.4.6). This section is based on a detailed analysis, the methodology and 
approach behind which is presented in Annex 4, Section 4. 

6.2.4.1.    Option  1:  Carve-out  of  SMEs  (making  the  de  mimimis  of  EUR  3 
million mandatory) 

Impact on companies 

Immediate expensing of…GDP Capital Employ- ment Wages CIT revenueOverall tax revenue1Tangible fixed assets0.170.430.040.10-1.94-0.022All fixed assets (incl. intangibles)0.310.790.070.20-3.77-0.04 
 
 
The  analysis  presented  in  detail  in  Annex  4,  Section  4.1,  shows  why  the  ATAD  de  minimis  rule 
agreed in 2016 ensures that small entities today rarely see any restriction on their ability to deduct 
their  interest  expenses.  This  is  specifically  intended,  and  the  measure  was  designed  with  this 
objective in mind, given that third-party loans is the most important source of funding investment 
for  SMEs.  The  analysis  in  Annex  4,  Section  4.1,  is  based  on  a  large  sample  of  unconsolidated 
accounts from the firm database Orbis. The vast majority from that sample stems from SMEs. It is 
estimated that about 96% of these companies in the EU are already de facto carved out by the de 
minimis  rules  currently  being  implemented.  In  reality,  this  percentage  is  likely  higher  as  small 
entities  are  underrepresented  in  the  sample.  Notwithstanding  these  uncertainties,  the  estimate  for 
the sample will increase to over 99% if the de minimis of EUR 3 million becomes mandatory in all 
EU Member States. This means that nearly all SMEs will be carved out with the revised de minimis 
threshold,  allowing  the  sample  to  save  about  EUR    900  million  per  year  on  corporate  tax 
expenditure.  

Due  to  the  underrepresentation  of  especially  small  entities  in  Orbis,  the  number  of  SMEs  so  far 
limited in their interest deduction that would be carved out with the mandatory de minimis cannot 
be estimated with exact precision. In the Orbis sample, this would affect an estimated 63,000 firms 
(3.4%  of  the  sample),  see  Annex  4,  Section  4.1.  These  companies  would  no  longer  have  to  bear 
compliance  costs  related  to  the  Interest  Limitation  Rule.  In  light  of  Orbis’  coverage  issues,  the 
number must also be seen as a lower-bound estimate.  

A  study  specifically  on  the  tax  compliance  costs  of  SMEs  in  the  EU  has  found  that  CIT-related 
costs could amount to EUR 3,300 per year on average.102 One third of these compliance costs could 
be related to the Interest Limitation Rule.103 With these assumptions, compliance cost savings for 
SMEs could amount to at least EUR 69 million (≈ 63,000  firms * 3,300 EUR * 1/3). 

Impact on tax administrations 

Please refer to section 6.2.4.8. and Annex 4, Section 4.3. 

Impact on the economy 

Please refer to section 6.2.4.7. 

6.2.4.2. Option 2: Mandatory 30% EBITDA threshold  

Impact on companies 

Implementing  a  unique  EBITDA  threshold  would  affect  Member  States  that  currently  apply  a 
threshold  lower  than  30%,  namely:  the  Netherlands  (24.5%)  and  Finland  (25%).  These  countries 
would  have  to  increase  their  respective  EBITDA  thresholds  by  5.5  and  5  percentage  points, 
respectively. There is no individual cost estimate for this measure. Its compliance cost savings are 
included under ‘Options quantified in aggregate’ below in Section 6.2.4.6.  

Impact on tax administrations 

Setting  the  threshold  to  30%  in  those  two  countries  will  result  in  no  or  very  little  impact  on  tax 
the 
administrations.  This 

tax  authorities  are  already  responsible  for 

is  because 

today, 

102 This information is based on the underlying data from: VVA/KPMG (2022), Tax compliance costs for SMEs: An 
update and a complement, Final Report. It is the average for cross-border working SMEs in EU-27. 
103 See Annex 4, Section 1 for this assumption. 

 
 
 
implementation  and  enforcement  of  these  measures  (e.g.,  in  case  of  audits,  etc.).  Establishing  a 
harmonised  threshold  would  require  no  change  in  how  the  measure  is  assessed  or  enforced  in  a 
national context.   

Impact on the economy 

Please refer to section 6.2.4.7. 

6.2.4.3. Option 3: Reducing implementation options 

The  proposed  reduction  of  implementation  measures  would  (1)  make  the  group-escape  rule,  (2) 
carry-forward  mechanisms  and  (3)  the  exclusion  of  defence  related  projects  mandatory,  further 
unifying  EU  tax  law.  There  is  no  individual  cost  estimate  for  this  measure.  Its  compliance  cost 
savings are included under ‘Options quantified in aggregate’ below in Section 6.2.4.6. At the same 
time,  these  changes  are  likely  to  result  in  no  or  very  little  impact  on  tax  administrations.  This  is 
because  tax  authorities  are  already  responsible  for  the  implementation  and  enforcement  of  these 
measures (e.g., in case of audits, etc.). A change in the rules themselves would not entail a change 
in resources to continue current practices; if anything, streamlining of the rules and limiting options 
could facilitate implementation and ease the audit burden on authorities. 

Impact on the economy 

Please refer to section 6.2.4.7. 

6.2.4.4. Option 4: Carve-out of low-risk third-party loans 

Impact on companies  

This option is analysed on a sample of companies, the details of which are also presented in Annex 
4, Section 4.2. The analysis shows that the share of groups that cannot (fully) deduct their low-risk 
third-party interest expenses from their tax base due to the Interest Limitation Rule could be 8.5% 
(of all groups). This non-deduction affect mainly large groups, which thus leads to an assumption 
that ATAD-related compliance costs could  amount  to  EUR  100,000 on average for these groups, 
and that one third of these ATAD-costs are related to the Interest Limitation Rule.104 Note that an 
estimated 151,000 groups currently operate in the EU (and EFTA).105 Under these assumptions, the 
overall  compliance  cost  savings  could  then  be  estimated  to  be  around  EUR  430  million  per  year 
(≈100,000 EUR * 1/3 * 8.5% * 151,000 groups).  

Impact on tax administrations and public finances 

Please refer to section 6.2.4.8. and Annex 4, Section 4.3. 

Impact on the economy 

Please refer to section 6.2.4.7. 

6.2.4.5. Option 5: Exemption in case of a profitability shock 

If a taxpayer’s EBITDA is reduced by a certain percentage (e.g. 50%) in a year, the measure would 
foresee that no Interest Limitation Rule applies to this taxpayer in that year. There is no individual 

104 See Annex 4, Section 1 for these assumptions. 
105 151 004 multinational enterprise groups in EU and EFTA - News articles - Eurostat. 

 
 
 
cost estimate for this measure. Its compliance cost savings are included under ‘Options quantified 
in aggregate’ below. 

6.2.4.6. Options quantified in aggregate 

Impact on companies  

There are several  other  simplifications  related  to  the Interest  Limitation  Rule  that  are considered, 
single options identified in Chapter 5, but which are analysed in aggregate. For example, an Option 
2:  mandatory  application  of  an  EU-wide  (30%)  EBITDA  threshold  (Section  6.2.4.2);  Option  3: 
Reducing implementation options (Section 6.2.4.3); Option 5: Exemption in case of a profitability 
shock  (Section  6.2.4.5).  All  these  measures  would  limit  the  currently  large  variation  of  the 
implementation of the Interest Limitation Rule across the EU. They would standardise the Interest 
Limitation Rule across Member States, thereby contributing to a more consistent interpretation of 
legal  terms.  Exemptions  in  the  case  of  profitability  shocks  from  one  year  to  another  would 
smoothen  the  impact  of  the  Interest  Limitation  Rule  on  interest  expense  deductibility,  also 
simplifying the Interest Limitation Rule and facilitating compliance.  

It is well established that, from the perspective of internationally active companies, standardisations 
and simplifications would directly reduce compliance costs.106 The measures proposed here would 
eliminate  the  need  for  businesses  to  navigate  varied  implementation  rules  across  the  Member 
States, such as different thresholds and escape rules. They could therefore reduce compliance cost 
of all MNE groups operating in the EU.  However, there is no empirical  precedent  or quantitative 
data that one could use to estimate the cost reduction a company could realise due to the measures. 
In the absence of any information in that context, we assume that the cost of complying with the 
Interest Limitation Rule could be reduced by 5% per group on average. The assumption could then 
result in savings of EUR 80 million per year (≈ 33,000 EUR * 1/3 * 5% * 151,000 groups). This 
would imply overall ATAD-related compliance costs per group of EUR 33,000, and that one third 
of these costs relate to the Interest Limitation Rule (see Annex 4, Section 1 for these assumptions).   

Impact on the economy 

Please refer to section 6.2.4.7. 

6.2.4.7. Why simplifying the Interest Limitation Rule matters 

The  estimates  on  the  direct  reduction  of  compliance  costs  presented  in  the  sections  above 
demonstrate that the reduction resulting from proposed measures to amend the Interest Limitation 
Rule can free up financial resources for companies to invest in growth, innovation, and expansion, 
benefiting overall economic activity. This is particularly relevant for SMEs as they are, relative to 
their size, disproportionally affected by the cost of tax compliance.107  

However, as stated earlier, the direct compliance cost reduction does not capture the full long-term 
potential  of  reducing  complexity,  especially  when  it  comes  to  the  deductibility  of  interest. 
Standardisation of international tax law will contribute to greater legal certainty (Section 6.2.1.3), 
making it easier to predict the future cost of investment, ultimately generating higher confidence in 
investment.  Reducing  implementation  options  (Option  2),  installing  a  unique  EU-wide  EBITDA 

106 For example: European Parliament, Overview on the tax compliance costs faced by European enterprises. 
107  VVA/KPMG  (2022),  Tax  compliance  costs  for  SMEs:  An  update  and  a  complement  Final  Report  KPMG/VVA 
2022. 

 
 
 
 
threshold  (Option  3),  and  better  absorption  of  economic  shocks  for  interest  deduction  (Option  5) 
would all serve that purpose. 

A  certain  positive  long-term  impact  can  be  expected  from  Option  4  (taking  out  the  current 
restriction  for  low-risk  third-party  interest  payments)  in  particular.  As  on-lending  of  third-party 
loans within the group would be excluded, such loans would not facilitate profit shifting as they are 
negotiated  at  arm’s  length  and  typically  used  to  finance  investment  projects  of  group  members. 
Exempting third-party interest payments from the Interest Limitation Rule would, therefore, leave 
more room for productive cross-border investment (FDI) today. It is well documented that FDI in 
the EU is one of the major drivers of innovation, mainly through the diffusion of knowledge across 
countries and across businesses.108 There would be more FDI after exempting interest expenses to 
third parties from the Interest Limitation Rule as businesses would have more confidence in higher 
net-returns  and  lower  compliance  costs  for  future  investment.  More  groups  would  then  invest 
abroad  in/across  the  internal  market,  fostering  innovation  and  competitiveness,  and  generating 
higher growth for EU citizens.     

Moreover, exempting certain volumes of third-party interest payments from the Interest Limitation 
Rule would also tackle one major deficiency of the Interest Limitation Rule: its strong pro-cyclical 
impact on company cash-flow. This effect can be very significant during economic downturns.109 
Especially during times of increasingly frequent and adverse macro-economic shocks, carving out 
third-party  loans  (Option  4)  would  protect  businesses  from  disproportionate  limitations  to  cost 
deduction  –  more  than  discretionary  year-by-year  exemptions  could  achieve  (Option  5).  Global 
economic crises since the Covid pandemic have revealed that shocks tend to persist for more than 
just  a  year.  During  that  period,  companies’  debt  obligations  may  remain  constant  –  or  may  even 
increase as interest rates tend to go up due to inflationary pressure. At the same time, deductibility 
shrinks as profits decline. This is exactly what happened since the onset of the global energy crisis 
in 2022 when the cost of borrowing for non-financial corporations went up from 1.4% (Q4, 2021) 
to  5.3%  (Q4,  2023).110  Non-deductibility  of  these  costs  could  reduce  a  company’s  cash-flow, 
thereby  causing  serious  financial  distress  to  otherwise  productive  companies.111  Removing  the 
Interest  Limitation  Rule  in  the  case  of  third-party  borrowing  will  thus  strengthen  companies’ 
confidence  in  future  investment  as  they  can  rely  on  the  tax  policy  framework  to  stabilise 
deductibility across the business cycle. Consequently, companies’ propensity to invest would likely 
increase, especially if businesses rely heavily on external debt.112  

Impact on maintaining high tax standards 

108 OECD (Foreign Direct Investment Qualities and Impact | OECD). 
109  For  example,  Finnish  companies  have  seen  their  effective  tax  burden  increase  by  up  to  19%  during  the  Great 
Recession in 2008 because of limitations in interest deduction. Ropponen (2021), Interest limitation rules and business 
cycles: Empirical evidence. 
110 ECB series: cost for non-financial corporations of newly agreed loans (annualised rate). 
111  Authors  argue  that  tight  deductibility  limits  would  improve  market  selection  as  it  lowers  the  likelihood  of 
unproductive  businesses  stay  alive.  See  Olbert  (2025),  The  impact  of  tax  shields  on  bankruptcy  risk  and  resource 
allocation | Review of Accounting Studies. This argument holds in the absence of strong cyclical fluctuation. If strong 
limitations  coincide  with  pronounced  downturns  the  effect  gets  amplified  and  may  thus  lead  to  the  selection  process 
overshooting in the sense that healthy businesses get wiped out due to reduced cash-flow.    
112  Fich  (2025),  M&A  Under  Pressure:  How  Interest  Limitation  Rules  Are  Shaping  Corporate  Dealmaking  |  ECGI, 
turns  the  argument  around:  the  introduction  of  interest  limitation  rules  disrupted  corporate  investment  significantly 
(here:  M&A).  Businesses  with  limited  cash reserves  would  be  most  affected  as  they  rely  heavily  on  third-party  debt 
funding. 

 
 
 
 
 
All potential changes to the Interest Limitation Rule (options) analysed in the sections above would 
retain  the  safeguards  and  rules  intended  to  mitigate  and  limit  tax  evasion  and  avoidance  and,  as 
such,  remain  in  line  with  the  objectives  originally  established  by  the  ATAD.  For  the  most  part, 
simplifications to be introduced would, as already analysed above, ensure legal certainty and enact 
more  facile  and  effective  rules  across  the  internal  market  for  cross-border  operations.  This  is 
particularly the case for measures aimed at reducing implementation options, which would ensure 
that  the  rule  continues  to  fulfil  its  core  function  of  preventing  tax  avoidance  while  minimising 
fragmentation, compliance costs and legal uncertainty. Furthermore, by eliminating on-lending and 
capital contributions or other equity contributions, for example, even the carve-out of low-risk third 
party loans would be designed in a way to ensure no new risks to BEPS standards. Moreover, a de 
facto carve out for SMEs maintains the objectives already established under ATAD, under the clear 
understanding  that  these  smaller  companies  should  be  able  to  deduct  their  interest  expenses  and 
would  not  possess  the  means  to  consistently  engage  in  aggressive  tax  planning,  avoidance  or 
evasion (through, for example, on lending) in a manner similar to MNEs.   

6.2.4.8. Impact on tax authorities and public finances 

Carving out certain companies from the Interest Limitation Rule as suggested in Options 1 (SMEs) 
and  4  (low-risk  third-party  loans)  would  also  reduce  administrative  costs  for  financial 
administrations as this would cut down on the numbers of compliance checks and enforcement and 
lead  to  fewer  transactions  that  would  require  monitoring  and  analysis.  Financial  administrations 
may  then  be  able  to  allocate  resources  more  effectively,  focusing  on  higher-risk  areas  or  more 
complex  cases,  potentially  improving  the  efficiency  of  tax  enforcement  overall.  As  for  the  other 
options considered, changes to existing provisions under the Interest Limitation Rule would likely 
result in no or little impact for tax administrations since tax authorities are already responsible for 
the implementation and enforcement of these measures (e.g., in case of audits, etc.).  

The economic analysis of these measures is also further elaborated on in Annex 4. As regards the 
de minimis threshold, for instance, Section 4.1 of Annex 4 contributes to showing that the impact of 
implementing  an  obligatory  de  minimis  threshold  of  EUR  3  million  everywhere  in  the  EU  could 
reduce the tax revenue of  some Member States.  As a result of the disparate application of the  de 
minimis threshold, the effect is expected to be felt in Member States where no formal de minimis 
rule or a lower than EUR 3 million threshold is implemented today. In the EU, the overall revenue 
impact could amount to around EUR  900 million per year. Regarding the carve-out of interest from 
low-risk loans from the ILR, on the other hand, the impact on public finances is hard to quantify 
but, as explained in Section 4.3 of Annex 4, it could be financially neutral.   

6.2.5.  Aligning  &  streamlining  legislation  in  the  context  of  tax  mergers,  dispute  resolution 

mechanisms and removal of imported hybrid mismatches 

Impact on companies and on the economy 

Streamlining legislation related to tax mergers and dispute resolution, and the removal of imported 
hybrid  mismatches  would  contribute  to  a  more  consistent  interpretation  of  legal  terms,  improve 
legal clarity and certainty of MNE groups and decluttering EU tax law. To that extent, the impact of 
this  measure  on  companies  will  be  very  similar  to  the  package  of  measures  outlined  above  in 
Section6.2.4.4  6.2.4.6.  in  the  context  of  the  Interest  Limitation  Rule  (in  particular:  reducing 
implementation  options  and  making  sure  that  all  Member  States  apply  the  same  30%  EBITDA 
threshold).  Both  pairs  of  measures  enhance  legal  certainty.  They  reduce  ambiguity  and 
inconsistencies in the application of tax rules across Member States. By harmonising provisions  – 
be it through a uniform EBITDA threshold under the Interest Limitation Rule or through aligning 
tax  merger  and  dispute  resolution  legislation  –  they  aim  to  create  a  more  predictable  and  stable 

 
 
legal  environment  for  businesses  operating  within  the  EU.  Given  these  similarities,  it  is  assumed 
that the effect of the streamlining and simplification measures discussed here would be the same as 
for  the  package  outlined  in  Section  6.2.4.6  in  relation  to  the  Interest  Limitation  Rule.  The 
compliance cost reduction could then amount to EUR 80 million per year. 

By  minimising  disparities  in  how  Member  States  apply  tax  rules,  the  measures  also  help  prevent 
distortions  in  the  Single  Market,  thereby  promoting  economic  growth:  Clear  and  viable  dispute 
resolution  mechanisms  reduce  the  risk  of  inconsistent  outcomes  in  cross-border  cases  and  allow 
disputes to be resolved in a faster manner. This promotes fair competition and prevents regulatory 
arbitrage. Likewise, reducing disparities in how Member States’ tax authorities handle restructuring 
events - mergers and separations - could foster a more level playing field across the EU, enhancing 
fairness and consistency in tax treatment. 

Impact on tax authorities and maintaining high tax standards  

Today, tax administrations already have the responsibility to enforce the rules of the TMD, engage 
in dispute resolution when this is requested under the DRM, and enforce the ATAD mismatch rules 
as they currently stand. Changes in these in line with the options assessed in this report would result 
in  a  minimal  impact  on  tax  authorities.  Increased  legal  certainty  and  more  efficient  procedures 
should facilitate the work of tax authorities by reducing procedural uncertainties and administrative 
complexity, thereby allowing resources to be used more effectively in the analysis and resolution of 
disputes. While the proposed changes under the DRM could potentially lead to a greater number of 
disputes being brought under the DRM, this would likely occur at the expense of disputes currently 
pursued under other legal frameworks, such as Article 25 OECD Model MAPs or the Arbitration 
Convention. As a result, the overall number of disputes handled by tax authorities and the related 
workload would likely remain broadly unchanged 

Meanwhile,  all  proposed  measures  under  the  TMD  and  DRM  would  retain  high  tax  standards  as 
they do not entail an undermining or lowering of standards in any way. When it comes to imported 
mismatches, as previously explained, the information to identify and assess relevant tax schemes in 
third country jurisdictions is not available or easily identifiable/checked. Anecdotal evidence from 
several EU Member States confirms that these rules are thus rarely, if ever, applied in practice.  

6.3.  General  remarks  on  the  limits  assessing  the  impact  of  the  Omnibus  on  tax 

administrations  

The  proposed  measures  will  often  times  simplify  administrative  procedures  also  for  tax 
administrations, partly through exempting companies from having to comply with certain rules. For 
example, by exempting SMEs from the Controlled Foreign Company (CFC) rules and the Interest 
Limitation  Rule,  tax  administrations  will  no  longer  need  to  allocate  resources  to  monitor,  assess, 
and  enforce  compliance  for  a  large  segment  of  smaller  businesses.  This  will  streamline  risk 
assessment  procedures,  reduce  the  volume  of  required  documentation  (e.g.,  CFC  reporting  and 
interest  deduction  calculations),  and  free  up  capacity  for  tax  authorities  to  focus  on  higher-risk 
cases,  such  as  large  multinationals  and  aggressive  tax  planning  structures.  Additionally, 
standardised  thresholds  and  clearer  definitions  will  minimise  disputes  and  requests  for  advance 
rulings, further cutting down on administrative workload.  

However,  the  administrative  savings  resulting  from  such  efficiency  gains  for  tax  authorities  are 
impossible  to  quantify.  This  is  not  only  because  the  current  burden  varies  significantly  between 
Member  States  due  to  differing  enforcement  practices,  but  also  because  indirect  efficiency  gains 
(e.g., faster case processing, reduced litigation, or reallocated staff resources) cannot be measured 

 
 
 
in  monetary  terms  without  precise  information  about  the  individual  cost  structures  of  tax 
administrations  particularly  in  the  context  of  ATAD-rules.  A  recent  study  on  the  impact  of  the 
ATAD  rules  has  consulted  Member  State  administrations  especially  on  the  tax-administrative 
costs.113  Despite  detailed  questions  and  engagement  with  tax  administrations  as  part  of  the 
methodological  approach,  the  study  could  not  provide  detailed,  broken-down  quantitative 
information about the recurrent costs these rules impose on tax administrations. This is because tax 
administrations  themselves  cannot  separate  costs  by provision  or  even  Directive, given that  these 
rules have been incorporated in national legislation and are not treated separately (from for overall 
CIT implementation and enforcement costs) by tax inspectors or administrators.  

The  study,  however,  found  that  ATAD  related  costs  appear  proportionate  to  the  number  of 
corporations  that  must  comply  with  them.  Clarifying  the  application  of  the  rules,  or  carving  out 
certain companies from specific rules, as some omnibus measures would seek to do, would imply 
that  the  cost  for  audits  and  controls  could  decline.  For  example,  the  analysis  of  Section  6.2.4.4 
estimates  that  8.5%  of  MNE  groups  present  in  the  EU  may  no  longer  have  to  deal  with  Interest 
Limitation Rules as low-risk loans would be carved out from these rules. This alone could affect an 
estimated  13,000  –  mostly  complex  –  MNE  groups.  While  Carve-outs  assessed  under  Sections 
6.2.4.1, 6.2.2.2 or 6.2.2.4 would also bring potential streamlining and lower administrative burdens 
for tax authorities. However, given the data limitations described, point estimates of potential cost 
savings for tax administrations cannot  be provided.  This contrasts with  the ability to analyse  the 
reduction  in  compliance  costs  for  businesses,  as  these  can  be  estimated  using  publicly  available 
company level information and, not least, because Orbis provides a large database of detailed and 
relevant accounting information at firm level. 

6.4.  Environmental impacts  

No  particular  and  direct  environmental  impact  is  expected.  The  initiative  is  a  horizontal 
simplification measure in the field of direct taxation, aimed at streamlining, clarifying and updating 
the existing corporate tax framework. Any environmental effects are therefore likely to be indirect 
and limited. To the extent that the simplifications free up resources, some businesses may choose to 
allocate  part  of  those  resources  to  more  environmentally  sustainable  investments.  However,  such 
effects would be contingent on subsequent business decisions and cannot be robustly quantified or 
directly attributed to the initiative.  

6.5. 

 Social impacts  

Regarding  employment  and  social  impacts,  the  policy  options  are  not  expected  to  produce  any 
material  direct  social  impacts,  as  it  does  not  concern  any  labour,  social  or  other  directly  related 
rights.  Yet,  the  tax  compliance  cost  savings  could  be  used  in  productive  activities.  For  instance, 
businesses could hire or train staff or increase salaries. In such cases, the impact could be positive. 
Nonetheless, the freed-up funding could also be used for other business purposes or distributed to 
shareholders.  Accordingly,  business-level  decisions  will  determine  to  what  extent  such  effects 
materialise. 

113 Study prepared for the European Commission to support an evaluation of the Anti-tax Avoidance Directive (ATAD) 
- Final Report (2025). Here: Volume 2, p. 35. 

 
 
 
6.6. 

 Impact on fundamental rights  

The initiative was also examined as regards its potential impact on fundamental rights, in particular 
the  Charter  of  Fundamental  Rights  of  the  EU.  No  significant  impact  is  expected.  By  reducing 
fragmentation  and unnecessary compliance requirements, improving predictability and facilitating 
cross-border business activity within the internal market, it may have a limited positive bearing on 
the  freedom  to  conduct  a  business  and  the  effective  exercise  of  the  right  of  establishment.  Such 
potential impacts cannot be interpreted as meaning that the problems outlined in Chapter 2 lead to 
any discrimination or unjustified restrictions.  

Finally,  where  the  implementation  of  the  initiative  entails  the  processing  of  personal  data,  such 
processing  would  have  to  comply  fully  with  the  applicable  Union  framework  on  data  protection. 
The initiative is therefore considered to be compatible with the Charter. 

7.  HOW DO THE OPTIONS COMPARE? 

The  initiative  has  two  general  objectives:  to  simplify  EU  tax  rules  in  order  to  boost  EU 
competitiveness,  while  maintaining  high  tax  standards  in  the  EU  (Chapter  4).  These  are  to  be 
achieved through four specific objectives: eliminating disproportionate EU tax compliance burdens, 
introducing clear and predictable EU tax rules and terms, improving consistency in the application 
of EU tax directives, reducing remaining tax obstacles to cross-border investment and commercial 
activity (Chapter 4).  

To achieve these objectives, the Omnibus on Taxation will amend up to seven Directives through a 
wide array of policy options. Due to the large number of measures under consideration, and as not 
every  single  option  can  be  assessed  individually,  it  is  necessary  to  assess  different  combinations. 
This  allows  a  comparison  between,  on  one  hand,  the  different  policy  options  for  the  main 
interventions  of  this  initiative  (i.e.  in  relation  to  the  taxation  of  cross-border  payments  and  the 
taxation of controlled foreign companies), and, on the other hand, the remaining policy options as 
opposed to retaining the status quo.  

Accordingly, this report compares three potential approaches for the Omnibus on Taxation proposal 
depending  on  different  levels  of  ambition:  (1)  The  Comprehensive  Omnibus  on  Taxation 
compiles  the  most  impactful  simplifications  for  all  envisaged  measures  which  have  alternative 
options, e.g., for the withholding tax relief under IRD and PSD, the overlap between CFC rules and 
Piller  2,  and  the  update  of  the  TMD.  Further,  to  keep  the  ambition  high,  it  also  entails  all  other 
simplifications where the only real choice is between a change or keeping the status quo, such as 
for  R&D  expensing  and  the  Interest  Limitation  Rule.  This  version  will  thus  assess  the  most 
extensive  potential  for  simplification.  (2)  The  Medium  Ambition  Omnibus  on  Taxation 
distinguishes itself from the comprehensive approach by offering the least impactful simplifications 
for  measures  which  have  alternative  options.  To  keep  the  ambition  to  a  moderate  level,  it  also 
entails all other simplifications where the choice is between a policy change or keeping the status 
quo,  though  leaving  out  the  introduction  of  a  new  measure  related  to  R&D  expensing.  (3)  The 
Limited Ambition Omnibus on Taxation entails a far more limited number of measures, but that 
nonetheless deliver on the overall simplification objectives of the omnibus. This option, therefore, 
includes  measures  such  as  reducing  implementation  options  for  the  Interest  Limitation  Rule  in 
ATAD and ensuring updates to the TMD and DRM, that are most likely to deliver quick results but 
requiring a more minimal effort. 

 
 
 
The tables below show a scale that indicates to what extent each of the approaches contributes to 
achieving the specific objectives, considering the different impacts of the policy options, which are 
discussed in Chapter 6. The scale is based on the following four steps: (0) irrelevant/no change, (+) 
limited  contribution,  (++)  partial  contribution,  and  (+++)  substantial  contribution.  In  addition,  it 
will  be  considered  to  what  extent  the  three  approaches  effectively  deliver  on  the  envisaged 
objectives, efficiently achieve the envisaged objectives at the lowest reasonable cost, and to what 
extent the approaches are coherent with the Tax Omnibus itself (internal coherence) and with other 
EU legislation, international obligations, and broader EU policy goals (external coherence). 

7.1. Comprehensive Omnibus on Taxation 

Policy option(s) 
Taxation of cross-border 
interest, royalty and dividend 
payments 

Eliminate 
disproportionate 
EU tax 
compliance 
burdens 

Option 1A: Tax exemption 
accompanied by procedural 
simplification 

Taxation of CFCs 

Option 1: Mandatory 
application of Model A 
Option 2A: Carveout of Pillar 2 
companies 
Option 3: Carveout of SMEs 
Research and development 
(R&D) 
Option 1: Immediate expensing 
for acquired tangible R&D 
assets 

Interest Limitation Rule 
Option 1: Carveout of SMEs 
Option 2: Mandatory 
application of 30% EBITDA 
cap 
Option 3: Reduce 
implementation options 
Option 4: Carveout of low-risk 
third-party loans 
Option 5: Exemption in case of 
profitability shock 

Hybrid mismatches 

Option 1A: Abolish imported 
mismatch rules 

Tax mergers 

Option 1B: Addition of new 
restructuring transactions to 
TMD 
Dispute resolution mechanism 
Option 1: Clarify operative rules 
Option 2: Use of Council 
implementing acts 

+++ 

+ 

+++ 

+++ 

+ 

+++ 
++ 

0 

+++ 

++ 

+++ 

0 

0 
0 

Introduce 
clear and 
predictable 
EU tax rules 
and terms 

Specific objectives 
Improve 
consistency in 
the 
application of 
EU tax 
directives 
+++ 

++ 

+ 

+ 

++ 

+ 

++ 
0 

+ 

++ 

++ 

+ 

+++ 

+++ 
+++ 

+++ 

+ 

0 

+++ 

+ 
++ 

+++ 

0 

++ 

0 

++ 

++ 
++ 

Reduce remaining tax 
obstacles to cross-
border investment 
and commercial 
activity 

+++ 

+++ 

+ 

0 

+++ 

+ 
++ 

++ 

0 

+ 

0 

++ 

++ 
++ 

 
 
 
 
 
 
 
 
Overall:  

+++ 

+++ 

+++ 

+++ 

Effectiveness:  The  comprehensive  approach  addresses  all  identified  problems  by  compiling  an 
Omnibus  on  Taxation  which  is  ambitious  and  holistic  in  its  simplification  measures  and  thus 
delivers  on  all  envisaged  specific  objectives  to  the  greatest  extent  possible.  In  this  way,  this 
approach  also  accommodates  various  calls  for  simplification  from  the  stakeholder  consultations, 
ranging from most frequent asks, which concentrated around the withholding tax relief under PSD 
and  IRD  and  the  overlap  between  CFC  rules  and  Pillar  2,  to  more  moderate  asks  relating  to  the 
TMD and the DRM. This approach is expected to have high-scale impacts as the aggregated cost 
savings for EU businesses are roughly estimated to reduce compliance and financial costs by about 
EUR  6-7  billion  (EUR  6.6  billion)114,  out  of  which  recurrent  costs  related  to  cutting  down  on 
administrative burden approximate to about EUR 2 billion per year. 

Efficiency: As one of the specific objectives is  to  eliminate  disproportionate compliance costs, it 
has  already  been  stated  that  the  expected  economic  benefits  of  the  comprehensive  approach  are 
significant. By making some of the existing rules mandatory, e.g., for the CFC rules and the Interest 
Limitation  Rule,  this  approach  would  entail  implementation  costs  for  Member  States  that  do  not 
already apply these options. Nonetheless, the enhanced uniformity in the rules would increase the 
operational efficiency in the internal market. In general, the one-off costs linked to the transition of 
the  new  rules  would  be  relatively  minor,  as  the  comprehensive  approach  focuses  on  reducing 
existing requirements, rather than introducing new ones and the carve-outs, e.g., related to the CFC 
rules and the Interest Limitation rules would entail resource savings for tax administrations. On this 
basis,  the  benefits  of  the  comprehensive  approach  outweigh  by  far  expected  costs,  and  the 
significant  savings  from  this  approach  would  be  redirected  towards  investments  in  new  projects, 
expansion and innovation contributing to growth and boosting competitiveness. 

Coherence:  the  comprehensive  approach  is  coherent  within  the  proposal  itself  as  it  offers  the 
broadest  possible  range  of  simplification  measures  across  the  existing  EU  tax  framework,  while 
maintaining all the original objectives of the respective tax Directives in place. As a matter of fact, 
it  strengthens  the  Commission’s  tax  policy  objectives  by  extending  the  progress  already  made 
under the IRD, PSD, FASTER and TMD, while addressing the overlapping CFC and Pillar 2 rules 
by  introducing  a  common  solution  at  EU  level.  It  will  also  contribute to  achieving other  ongoing 
Investments 
Commission 
priorities, such 
Union, encouraging cross-border 
the 
internal market, as  well  as facilitating business  restructurings.  The  introduction  of  a  new  measure 
for R&D expensing in this approach is also in line with the Commission Recommendation on tax 
incentives to support the Clean Industrial Deal and in light of the Clean Industrial Deal State  Aid 
Framework (115). Finally, it helps address security and defence challenges in the EU, particularly 
by excluding defence projects from the scope of the Interest Limitation Rule. 

a 
strong Savings 
activity and business 

and 
expansion in 

as building 
commercial 

In  conclusion,  this  approach  can  be  expected  to  deliver  on  all  the  specific  objectives  in  a  cost-
efficient  way,  and  thereby  significantly  simplify  tax  rules  across  the  EU  to  boost  the 
competitiveness  of  EU  business  and  stimulate  investment  and  economic  activity  in  the  EU. 
Although  the  simplification  measures  are  ambitious,  they  remain  coherent  with  the  existing  EU 

114 Financial costs included in this number stem from the exemption of all payments of interest, royalties and dividends 
from  withholding  tax  (Option  1A):  companies  save  EUR  4-5  billion  as  they  would  no  longer  forego  tax  reliefs  and 
would no longer bear opportunity costs due to delayed refund. See Section 6.2.1.1. and esp. Annex 4, Section 2. 
115 Commission Recommendation of 2.7.2025 on tax incentives to support the Clean Industrial Deal and in light of the 
Clean Industrial Deal State Aid Framework. C(2025) 4319 final. 

 
 
 
policies and international standards as they are accommodated by necessary safeguards, such as the 
protective measure for the withholding tax relief under the IRD and PSD, thereby ensuring that the 
current high tax standards in the EU are not compromised.    

7.2. Medium Ambition Omnibus on Taxation 

Policy option(s) 
Taxation of cross-
border interest, royalty 
and dividend 
payments 

Eliminate 
disproportionate EU tax 
compliance burdens 

Specific objectives 
Introduce clear 
and predictable 
EU tax rules and 
terms 

Improve 
consistency 
in the 
application 
of EU tax 
directives 

Reduce 
remaining tax 
obstacles to 
cross-border 
investment 
and 
commercial 
activity 
++ 

++ 

+++ 

+++ 

+ 

0 

0 

+ 

++ 

++ 

0 

++ 

+ 

+ 

0 

+ 

++ 

++ 

+ 

++ 

0 

0 

++ 

++ 

+ 

++ 

0 

+ 

0 

+ 

++ 

++ 

+ 

++ 

++ 

++ 

Option 1B: Alignment 
of scope and 
procedures 

Taxation of CFCs 
Option 1: Mandatory 
application of Model 
A 
Option 2B: Inclusion 
of QDMTT in CFC 
calculations 
Option 3: Carveout of 
SMEs 

Research and 
development (R&D) 
Option 1B: Keep 
status quo 

Interest Limitation 
Rule 
Option 1: Carveout of 
SMEs 
Option 2: Mandatory 
application of 30% 
EBITDA cap 
Option 3: Reduce 
implementation 
options 
Option 4: Carveout of 
low-risk third-party 
loans 
Option 5: Exemption 
in case of profitability 
shock 

Hybrid mismatches 

Option 1A: Abolish 
imported mismatch 
rules 

Tax mergers 
Option 1A: Dynamic 
reference to the 

++ 

+ 

0 

+++ 

0 

+++ 

++ 

0 

+++ 

++ 

+++ 

0 

 
 
 
 
 
 
 
Mobility Directive 

Dispute resolution 
mechanism 
Option 1: Clarify 
operative rules 
Option 2: Use of 
Council implementing 
acts 
Overall 

0 

0 

++ 

+++ 

+++ 

++ 

++ 

++ 

++ 

++ 

++ 

++ 

Effectiveness: The medium ambition approach entails a wide range of simplification measures that 
address all identified problems within existing Directives and responds to the need for action that 
was stressed by stakeholders in the stakeholder consultations. It does not go beyond the existing EU 
tax framework as requested by stakeholders in the Call for Evidence as it does not provide action 
related to R&D expensing. Nonetheless, it delivers well on all specific objectives. The approach is 
roughly estimated to reduce compliance and financial costs by around EUR 2-3 billion (EUR 2.4 
billion)116, out of which recurrent costs related to cutting down on administrative burden is around 
EUR  1  billion  per  year.  Although  these  estimations  are  significantly  lower  than  under  the 
comprehensive  approach,  mainly  due  to  the  alternative  options  chosen  to  address  the  problems 
related to the withholding tax relief under the IRD and PSD and the overlap between CFC rules and 
Pillar 2, this approach is still expected to provide high-scale impact.  

Efficiency: As one of the specific objectives is  to  eliminate disproportionate compliance costs, it 
has already been stated that the expected economic benefits of the medium ambition approach are 
high.  As  this  approach  does  not  include  a  new  measure  related  to  R&D  expensing  and  as  the 
alternative  options  chosen  to  address  the  problems  related  to  the  withholding  tax  relief  under  the 
IRD  and  PSD  and  the  overlap  between  CFC  rules  and  Pillar  2  are  less  thorough  than  in  the 
comprehensive approach, the implementation and transition costs are expected to be lower, without 
specific  impact  on  tax  administrations.  While  the  savings  would  allow  for  a  more  effective 
allocation  of  resources,  the  positive  economic  impact  would  be  more  limited  as  the  dynamic 
impacts on investment and growth would be marginal. 

Coherence:  The  medium  ambition  approach  is  coherent  within  the  proposal  itself  as  it  offers  a 
broad  range  of  simplification  measures  across  the  existing  EU  tax  framework,  building  on  the 
achievements  already  made  at  EU  level.  Like  for  the  comprehensive  approach,  all  measures  are 
designed to  preserve  the original  objectives of the existing  Directives. It  also  contributes to  other 
EU  policies,  like  addressing  security  and  defence  challenges  in  the  EU  and  the  Savings  and 
Investments Union, but to a much lesser extent than the comprehensive approach. 

In sum, while this outcome will fully ensure high tax standards and appears effective in achieving 
the envisaged objectives in a cost-efficient way, its interventions in two key areas, i.e., in relation to 
the withholding tax relief under the IRD and PSD and the overlap between CFC rules and Pillar 2, 
are less thorough and, consequently, prove less effective in achieving the objectives to simplifying 
EU tax rules with a view to boosting EU competitiveness.  

116 Financial costs included in this number stem from the exemption of all payments of interest, royalties and dividends 
from  withholding  tax  (Option  1B):  companies  save  EUR  1-2  billion  as  they  would  no  longer  forego  tax  reliefs  and 
would no longer bear opportunity costs due to delayed refund. See Section 6.2.1.2 and esp. Annex 4, Section 2. 

 
 
 
 
7.3. Limited Ambition Omnibus on Taxation 

Policy option(s) 
Taxation of cross-border interest, 
royalty and dividend payments 

Specific objectives 

Eliminate 
disproportionate 
EU tax 
compliance 
burdens 

Introduce 
clear and 
predictable 
EU tax rules 
and terms 

Improve 
consistency in 
the application 
of EU tax 
directives 

Status quo 

Taxation of CFCs  

Status quo 
Research and development (R&D) 
Status quo 

Interest Limitation Rule 
Option 2: Mandatory application of 
30% EBITDA cap 
Option 3: Reduce implementation 
options 

Hybrid mismatches 

Option 1A: Abolish imported 
mismatch rules 

Tax Merger Directive 
Option 1B: Addition of new 
restructuring transactions to TMD 
Dispute resolution mechanism 
Option 1: Clarify operative rules 
Option 2: Use of Council 
implementing acts 
Overall 

0 

0 

0 

++ 

0 

+++ 

0 

0 
0 

+ 

0 

0 

0 

0 

+ 

+ 

+++ 

+++ 
+++ 

++ 

0 

0 

0 

++ 

++ 

0 

++ 

++ 
++ 

++ 

Reduce 
remaining tax 
obstacles to 
cross-border 
investment and 
commercial 
activity 
0 

0 

0 

++ 

++ 

0 

++ 

++ 
++ 

+ 

Effectiveness:  The  limited  ambition  approach  targets  existing  measures  in  a  simpler  and  more 
straight forward way, such as reducing the implementation options for the Interest Limitation Rule 
and  extending  the  scope  of  the  TMD,  to  generate  simplification  results  thorough  the  easiest  and 
most accessible options. In this way, this approach delivers on all specific objectives, although it is 
to  a  far  lesser  extent  than  the  two  previous  approaches.  In  addition,  it  fails  to  address  identified 
problems related to the withholding tax relief under the IRD and the PSD and the overlap between 
CFC  and  Pillar  2  rules,  which  were  amongst  the  most  highlighted  needs  for  action  in  the 
stakeholder consultations. This approach is roughly estimated to reduce compliance costs (recurrent 
costs related to administrative burden) by around 0.1-0.2 billion.  

Efficiency: While this approach does not entail what could be considered the biggest simplification 
measures, it has some merit, as it would deliver on the objectives of the omnibus without entailing 
considerable implementation and transition costs. At the same time, it has already been stated that 
the expected economic benefits of the comprehensive approach are low, so it is an approach which 
neither entails economic benefits, nor costs, resulting in no considerable impact. 

Coherence: The limited ambition approach is coherent within the proposal itself as it offers a broad 
range  of  simplification  measures  across  the  existing  EU  tax  framework,  building  on  the 
achievements already made at EU level. However, it does not contribute significantly to other EU 
policies  and  it  falls  short  of  delivering  on  the  Commission’s  aim  to  cut  recurring  administrative 
costs by EUR 37.5 billion by the end of the 2024-2029 Commission mandate. 

 
 
 
 
 
 
 
 
 
In sum, simplification by the least extensive means has the advantage that the legislative proposal 
would be very targeted, focusing on the Interest Limitation Rule, the Hybrid Mismatch Rules, the 
TMD  and  the  DRM.  Although,  these  elements  would  contribute  to  achieving  the  specific  and 
general objectives, this version is expected to be less effective than the others as it misses out on the 
opportunity  to  simplify  the  rules  to  a  greater  extent  and  fails  to  meet  the  requests  from  the  vast 
majority of stakeholders in the stakeholder consultations to table an ambitious and holistic Omnibus 
on Taxation. Consequently, the assessment of the limited ambition approach demonstrates well the 
importance  of  proposing  a  reform  of  wide  scope,  since  various  specific  objectives  would  be  less 
supported if the status quo were to be retained in several areas. For this reason, focussing only on 
the two key measures appears less effective and efficient than proposing an Omnibus on Taxation 
with a broader and more ambitious scope. 

8.   PREFERRED OPTION 

Based on the outcome of the previous section, where the different simplification approaches were 
assessed and compared, the preferred approach is the comprehensive approach to the Omnibus on 
Taxation. Each of the options, which feature in the preferred approach, are analysed in more detail 
below. 

8.1. Comprehensive Omnibus on Taxation 

8.1.1.  Withholding tax exemption for payments of interest, royalties, and dividends 

Option A accounts for the preferred simplification measure. This is to facilitate the tax exemption 
of  cross-border  interest,  royalties,  and  dividends  within  the  EU,  i.e.,  a  tax  exemption  of  all  such 
payments without consideration of holding threshold and accompanied by reduced or no procedural 
requirements. 

Overall,  the  option  scores  high  in  terms  of  fulfilling  all  the  specific  objectives.  It  will,  inter  alia, 
provide  consistency  in  the  application  of  the  IRD  and  the  PSD  by  extending  the  scope  of  these 
Directives  to  all  interest,  royalty,  and  dividend  payments  within  the  EU,  while  removing  upfront 
procedural  requirements.  The  update  and  alignment  of  the  Annexes  will  contribute  to  having 
clearer  rules.  In  this  way,  unnecessary  tax  compliance  burdens  linked  to  the  application  of  these 
Directives  should be  significantly  reduced as  fewer requirements will have to  be met, in  order to 
benefit from the rules and as the option also provides for greater harmonisation of the procedures, 
thereby  also  delivering  on  reducing  remaining  tax  obstacles  to  cross-border  investment  and 
commercial activity.  

These results indicate not only a significant contribution to reaching the general objectives  of the 
Omnibus  on  Taxation  proposal  itself,  as  the  proposal  simplifies  EU  tax  rules  with  a  view  to 
boosting  EU  competitiveness,  but  also  to  other  EU  policies  such  as  the  Savings  and  Investment 
Union. At the same time, the option upholds the original objectives of the IRD and the PSD, i.e., 
eliminating  double  taxation  and  reducing  administrative  burdens  within  the  EU,  while  the 
accompanying protective measure targeting royalty and interest payments to zero-tax jurisdictions 
will  remove the risk of  unintended  consequences, such  as  leaving  the door open for tax planning 
practices. The  protective measure  will ensure that  the current  level  of  protection, and thereby the 
high tax standards, are maintained in the EU. 

 
 
8.1.2.  Taxation of Controlled Foreign Companies 

To  address  the  identified  issues  related  to  CFC  rules  in  the  ATAD,  the  preferred  simplification 
measures  constitute a combination of  Option 1, i.e., mandatory  application of  ‘Model  A’, Option 
2A, i.e., carveout of Pillar 2 companies, and Option 3, i.e., carveout of SMEs. 

The  mandatory  application  of  the  CFC  rules  based  on  ‘Model  A’  introduces  a  common  CFC 
standard in the EU. Compared to the current divergence in the application of the rules, the measure 
will  effectively  improve  the  consistent  application  of  the  CFC  rules  in  the  ATAD  and  replace 
national specificities related thereto, thereby making the rules clearer. While this will simplify the 
application  of  the  rules  for  businesses  across  the  EU,  the  mandatory  application  will  also  bring 
legislative approximation towards higher tax standards in the EU as ‘Model A’ provides for a more 
objective test than ‘Model B’ which is based on  Transfer Pricing  rules entailing a high degree of 
discretion.  

The carveouts ensure that two low-risk cases will not have to apply the CFC rules:  SMEs, which 
present a low risk for engaging in abusive cross-border tax practices, and large MNEs, which are 
subject  to  the  Pillar  2  global  minimum  tax.  Thereby,  these  measures  will  eliminate  unnecessary 
compliance burdens for these businesses and contribute to simplifying EU tax rules while keeping 
them fully in place where these are necessary for maintaining the current high tax standards in the 
EU.  The  original  objective  of  the  CFC  rules,  i.e.,  to  prevent  multinational  groups  from  shifting 
profits from a parent company in a high tax jurisdiction to subsidiaries in low or no tax jurisdictions 
to reduce the group’s tax liability, is thus well preserved in accordance with international standards 
laid down in the OECD BEPS Action 3. 

8.1.3.  Expensing of assets related to research and development (R&D) 

To  boost  EU  competitiveness,  this  option  introduces  a  simplified  and  consistent  rule  to  ensure 
immediate expensing for acquired tangible R&D assets, which is particularly important given the 
existing  favourable  treatment  of  R&D  expenses  in  key  partner  economies.  This  option  will 
introduce clearer and more predictable rules compared to the current national divergencies and will 
reduce an identified tax obstacle to cross-border investment and commercial activity in the internal 
market,  thereby  simplifying  tax  rules  across  the  EU  and  stimulating  economic  activity  with  an 
overall  stable  tax  collection.    To  ensure  that  the  measure  meets  both  general  objectives,  it  is 
designed  in  accordance  with  the  highest  tax  standards,  as  the  option  will  include  a  definition  of 
qualifying R&D expenses, and the application will take inspiration from similar legislation adopted 
by other like-minded international partners. 

8.1.4.  Interest Limitation Rule  

To simplify the functioning of the Interest Limitation Rule in ATAD, it is preferred to introduce all 
envisaged options, as  they will  make the rule more efficient and  effective  compared to  the status 
quo.  

In  particular,  Option  2,  i.e.,  mandatory  application  of  the  30%  fixed  ratio  of  the  EBITDA,  and 
Option  3,  i.e.,  reduction  of  implementation  options,  will  simplify  the  EU  tax  environment  by 
ensuring  a  more  consistent  application  of  the  Interest  Limitation  Rule  and  replacing  national 
specificities related thereto. These options respond directly to the simplifications that stakeholders 
were asking for in the consultations and to the findings of the ATAD evaluation, where it has been 
pointed  out  in  unison  that  the  flexibility  of  the  current  rule  creates  problems  in  practice.  These 
options  will,  therefore,  contribute  to  the  general  objectives  of  the  Omnibus  on  Taxation  by 
simplifying  the  Interest  Limitation  Rule  with  a  view  to  boosting  EU  competitiveness.  Enhancing 

 
 
the harmonisation of the rule will also contribute to maintaining high tax standards in the EU as it 
will provide for a more uniform  EU approach that still meets international standards as set out in 
the OECD BEPS Action 4. 

In turn, Option 1, i.e., a carveout for SMEs, and Option 4, i.e., carveout of third-party loans, will 
ensure  that  the  rule  is  more  targeted,  as  low-risk  cases  will  be  alleviated  from  the  associated 
compliance  burdens.  The  carveout  will  not  alter  the  original  objective  of  the  Interest  Limitation 
Rule,  i.e.,  to  prevent  using  high  debt  financing  to  artificially  reduce  taxable  profits  in  high-tax 
jurisdictions, as the rule is intended to align taxation with genuine financing needs and prevent base 
erosion by ensuring that interest deductions correspond to actual earnings. In the low-risk cases in 
question,  taking  out  a  loan  will  generally  reflect  the  company’s  financing  needs  and  the  current 
level  of  protection  will  not  be  adversely  affected  by  unintended  consequences  linked  to  these 
options. Hence, high tax standards remain within the EU. 

Finally, Option 5, i.e., exemption in case of profitability shock, addresses the specific case where 
the  Interest  Limitation  Rule  should  not  be  imposing  additional  compliance  or  tax  burden  on  a 
company  which  experiences  a  significant  drop  in  its  EBITDA.  This  option  will  facilitate  doing 
business in the EU in periods of general economic difficulty or when a company faces occasional 
economic  challenges  and, thereby,  it improves  the  competitiveness  of EU companies. The option 
does  not  lower  the  current  level  of  protection  as  it  will  only  apply  in  cases  where  a  company’s 
difficulties  reflect  its  economic  reality.  Tax  planning  opportunities  will,  therefore,  not  be  an 
unintended consequence of the option, and the high tax standards in the EU will continue to apply.  

8.1.5.  Hybrid mismatches 

To reduce the complexity related to the hybrid mismatch rules, the preferred simplification measure 
is to abolish the rules on imported mismatches, i.e., Option 1A, due to their limited use, practical 
difficulties  in  application,  and,  as  a  result,  little-to-no  practical  effect.  This  will  make  the  rules 
clearer  without  altering  the  original  objective  of  the  rules,  i.e.,  eliminating  hybrid  mismatch 
arrangements  that  exploit  differences  in  the  tax  treatment  of  instruments,  entities,  or  transfers 
between two or more countries to achieve double non-taxation, as it is only doing away with a rule 
which  does  not  offer  any  protection  in  practice.  The  hybrid  mismatch  rules  in  the  EU  would 
therefore remain in line with the primary rules of the international standards as set out in the OECD 
BEPS  Action  2.  The  option  will  thereby  contribute  to  simplifying  the  EU  tax  landscape  by 
eliminating compliance burdens in a certain field without lowering high tax standards.  

8.1.6.  Tax mergers 

As  for  the  TMD,  the  preferred  option  is  to  update  the  existing  definitions  to  include  the  new 
restructuring  transactions  in  the  Mobility  Directive  (Option  1B).  This  will  ensure  the  most 
consistent  application  and  remove  a  tax  obstacle  for  business  reorganisations  which  are  already 
acknowledged by EU law. The original objectives of the TMD, i.e., harmonising the tax treatment 
of  cross-border  corporate  reorganisations,  would  be  fully  pursued  and  extended  to  new 
restructurings, thereby ensuring a wider level of protection for EU companies and facilitating more 
types of restructurings to boost EU competitiveness. It would also run counter to the objectives of 
the  Omnibus  on  Taxation  if  these  cases  were  left  to  be  regulated  in  accordance  with  diverging 
national tax approaches.  

8.1.7.  Dispute resolution mechanisms 

Regarding the DRM, the preferred approach is a combination of targeted legislative amendments to 
the text of the DRM (Option 1) coupled with the possibility of adopting Council implementing acts 

 
 
(Option  2),  depending  on  the  nature  of  each  issue.  The  original  objective  of  the  DRM,  i.e., 
improving procedures for resolving double taxation disputes between Member States,  will not  be 
affected.  In  fact,  the  interpretative  issues  identified  in  the  application  of  the  DRM  cannot  be 
effectively  addressed  through  a  single  instrument;  instead  the  combination  of  the  options    will 
effectively eliminate interpretative divergences and deliver to the greatest extent on providing clear 
and predictable EU tax rules and terms, while also largely ensuring a uniform treatment of matters 
within  the  scope  of  the  DRM  by  replacing  national  rules  related  to  the  DRM  with  a  harmonised 
approach. These measures are complementary and expected to simplify the application of the DRM 
while the improved functioning of the DRM will offer a higher level of protection and enhance the 
tax standards in the EU. 

8.2. REFIT (simplification and improved efficiency) 

Under  this  programme,  the  Commission  ensures  that  EU  laws  deliver  their  intended  benefits  for 
individuals and businesses while achieving simplification and cutting red tape, whenever possible. 
This condition is fulfilled, given the very intention of the proposed package: to simplify and cut red 
tape.  As  noted  in  Section  8.1,  all  businesses  in  the  scope  of  the  EU  acquis  will  benefit  from  the 
simplifications  which  are  envisaged  under  the  Omnibus  on  Taxation  proposal.  The  Omnibus  on 
Taxation is therefore in accordance with REFIT. 

For further details, see Sections 4.1, 5.2, 6, and 0. 

8.3. Application of the ‘one in, one out’ approach 

According  to  the  ‘one  in,  one  out’  approach,  new  administrative  burdens  resulting  from  the 
Commission’s proposals should be offset by reducing existing burdens in the same policy area. As 
noted in Section 8.1, the preferred option has the potential to significantly reduce tax compliance 
costs for businesses in the EU. 

Proposals  are  designed  so  that  the  cost  of  implementation  is  minimal,  especially  if  expressed  as 
annualised present value (i.e., distributed over the entire period a company will exist). It is so low 
that they cannot be seriously estimated for both companies and financial administrations.  

As  a  result,  it  is  difficult  to  fully  apply  the  ‘one  in,  one  out’  approach  in  this  situation  as  the 
Omnibus  on  Taxation  is  meant  to  amend  the  existing  rules  to  make  them  simpler  and  more 
effective  rather  than  removing  or  adding  rules.  On  the  basis  of  the  Omnibus  on  Taxation,  the 
estimated administrative cost savings is about EUR 2 billion.117  

However, as mentioned in the context of model simulations presented in Chapter 6, the full macro-
economic benefits of the proposed simplification measures for businesses outweigh by far these 
direct cost savings and, all the more so, the cost of their implementation. This is because these cost 
savings will play a role each time that companies make a decision about whether or not to invest 
cross-border. This will create important second-round effects. 

Consider  that  withholding  taxes  at  zero  percent  across  the  EU  will  make  complex  refund 
procedures  unnecessary  (Section  6.2.1.1);  or  that  many  companies  having  to  comply  with  P2-

117 The latter amount includes savings from avoiding financial costs stemming from the exemption of all payments of 
interest, royalties and dividends from withholding tax (Option 1A): avoiding foregone refund and opportunity costs due 
to late tax refunds, a total of EUR 4.6 billion. See Chapter 6, Section 6.2.1.1 and Tables 1 and 2 of Annex 4. 

 
 
 
related rules will be relieved from having to also comply with CFC rules (Section 6.2.2.2); or that 
many companies now subject to interest limitation rules would no longer have to check compliance 
with these rules in the future (Sections 6.2.4.1 and 6.2.4.4). All these measures create more legal 
certainty  for  a  significant  number  of  companies  which,  in  turn,  will  foster  confidence  in  future 
investment.  It  will  motivate  more  of  those  companies  to  actually  decide  in  favour  of  a  given 
investment, which today still consider that their cost is no match to the potential return. As a result, 
more  companies  will  invest  in  other  EU  countries,  tapping  into  the  full  potential  of  the  internal 
market.     

9.   HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

Monitoring  and  evaluation  are  key  constituents  of  this  simplification  initiative,  regardless  of  the 
policy options to be finally selected. Progress towards achieving the objectives will be monitored 
and  evaluated  on  the  basis  of  the  data  already  collected  in  combination  with  potential  new 
information.  

9.1. Monitoring 

The  Commission  will  periodically  monitor  the  implementation  of  the  Omnibus  on  Taxation 
proposal  and  its  application  in  close  cooperation  with  the  Member  States.  Monitoring  in  a 
continuous and systematic way will allow the Commission to identify whether the policy proposal 
is  being  applied  as  expected  and  to  address  implementation  problems  in  a  timely  manner. 
Collection of factual data on the suggested monitoring indicators will also provide the basis for the 
future evaluation of the initiative (Section 9.2). 

Below,  indicators  are  suggested  to  measure  the  success  of  the  initiative  in  light  of  the  specific 
objectives (Tabel 1) and general objectives (Tabel 2):  

Table 1: Monitoring of specific objectives 

Target 

Indicators 

Eliminate disproportionate 
EU tax compliance burdens 

Predictable EU tax rules 
and terms  

•  Significant change in tax compliance costs for businesses, 
relative to their turnover (established through a dedicated 
survey). 

•  Share of companies for whom exceeding borrowing costs 

remain non-deductible for both groups and SMEs, established 
on the basis of a firm-level sample as done for this Impact 
Assessment (Chapter 6 and Annex 4, Section 4 for 2024). 

•  Change in R&D expenditure as percent of GDP 
•  Level of costs and cost savings borne by tax administrations 

(established through dedicated surveys) 

•  Stakeholder views on issues with the interpretation of specific 

provisions, the existence of operational and technical 
inconsistencies (e.g. different definitions, different reporting 
standards), and how different policy choices in implementation 
affect effectiveness 

•  Change in the number of cases resolved using the DRM 
• 

(Change in tax compliance costs for businesses, relative to their 

 
 
 
turnover) 

Consistent application of 
EU tax directive 

•  Stakeholders’ views on harmonisation and on the variation of 
options for transpositions and effects on business operations 

•  Existence of tax gaps and overlaps 
• 

(Change in tax compliance costs for businesses, relative to their 
turnover) 

Table 2: Monitoring of general objectives 

Target 

Indicators 

Simpler tax rules boosting 
EU competitiveness 

•  Change in FDI within the EU (Balance of Payment Statistics) 
•  Change in tax compliance costs for businesses, relative to their 

Maintaining high tax 
standard in the EU 

turnover 

•  Comparison  of  costs  and  benefits 

from  stakeholders’ 
perspective  (feedback  on  the  issues  addressed  by  the  Tax 
Omnibus)  

•  Evidence of issues in the design of the Tax Omnibus, e.g., gaps 
or loopholes that make the existing Directives prone to be 
circumvented (stakeholder views) 

•  Change in the use of aggressive tax planning as indicated by the 
amount of interest and royalty payments bound for jurisdictions 
outside the EU 

•  Stakeholders’ views of the extent to which the Tax Omnibus 
influenced business organisation and tax planning choices 

To  measure  the  indicators,  the  Commission  will  use  different  tools,  such  as  stakeholder 
surveys/questionnaires,  public  information,  e.g.,  from  Eurostat,  company  level  databases,  e.g., 
Orbis, external and internal research, and statistics, e.g., on the judicial activity of the CJEU. The 
Commission will also review the situation in the Member States regularly and publish a report. The 
monitoring framework will be subject to further adjustments in accordance with the final legal and 
implementation  requirements  and  timeline.  Given  the  current  lack  of  data,  it  will  be  difficult  to 
isolate  the  impacts  of  the  Omnibus.  Hence,  stakeholder  will  also  be  surveyed  on  the  basis  of 
generalised  questions  to  obtain  broad-ranging  qualitative  data.  Similarly, a  survey  specifically  on 
ATAD-related  compliance  costs  will  be  carried  out.  It  must  be  sufficiently  large  to  allow  for 
econometric techniques.118 Those will be used to analyse the effect of the Omnibus on compliance 
costs,  controlling  to  the  largest  possible  extent  for  other  observable  and  non-observable  cost 
drivers.  

118 The survey could update the analysis presented in  Tax compliance costs for SMEs: An update  and a complement 
Final Report KPMG/VVA 2022.  

 
 
 
 
 
9.2. Evaluation 

Considering  the  impact  of  the  initiative  on  several  existing  EU  direct  tax  Directives,  which  have 
been transposed by the Member States, it will be necessary to give Member States time to properly 
implement the adjustments which will be adopted in Council as part of the Omnibus on Taxation 
proposal. On this premise, the first evaluation should not take place earlier than five years after the 
new rules start to apply. 

In addition to the data outlined in Section 9.1, Member States will be asked to communicate to the 
Commission  any  relevant  information  that  is  necessary  for  the  monitoring  and  evaluation  of  the 
Omnibus on Taxation proposal. After giving a picture of the functioning of the new EU tax rules, 
the  evaluation  should  assess  whether  the  outlined  objectives  have  been  met,  including  to  what 
extent  the  expected  simplifications  have  materialised.  The  Commission  will  inform  about  the 
evaluation results in the form of an evaluation report, which will be submitted to the Council. 

 
 
 
 
 
ANNEX 1: PROCEDURAL INFORMATION 

Lead DG, Decide Planning/CWP references 

The lead Directorate General is the Directorate General for Taxation and the Customs Union (DG 
TAXUD). 

References:  

–  Agenda Planning: Omnibus on Tax Simplification (PLAN/2025/2875)  
–  Call for evidence on simplifying EU rules on direct taxation (Ref. Ares(2026)1712759)  
–  The initiative was announced in the Communication from the Commission to the European 
Parliament, the Council, the European Economic and Social Committee, and the Committee 
of the Regions on the Commission work programme 2026 (COM(2025) 870 final) 

Organisation and timing 

An  Inter-Service  Steering  Group  (ISSG)  was  set  up  to  steer  and  provide  input  to  this  impact 
assessment  report.  The  steering  group,  led  by  the  Secretariat-General,  met  on:  23  January,  25 
February and 20 March 2026. 

The  following  Directorates  General  were  invited  to  the  Steering  Group:  AGRI,  BUDG,  CNECT, 
COMM, COMP, ECFIN, EEAS, EMPL, ESTAT, FISMA, GROW, INPTA, JRC, JUST, REGIO, 
SJ, OLAF, TRADE. In addition to the meetings of the Inter-Service Steering Group, DG TAXUD 
met in bilateral meetings with representatives of the following Directorates General to discuss the 
analysis in the impact assessment, the design of options, and other policy issues: COMP, FISMA, 
JRC, and the Secretariat-General.  

Consultation of the RSB 

The preparation of the Impact Assessment report was discussed with the Regulatory Scrutiny Board 
in an upstream meeting on 9 March 2026.  

The report was submitted to the Regulatory Scrutiny Report on 8 April 2026. 

The Impact Assessment report was scrutinised by the Regulatory Scrutiny Board and discussed in 
the  relevant  meeting  on  29  April  2026.  In  the  opinion  dated  4  May  2026  and  in  line  with  the 
decision of the President of the Commission P(2026)1 of 28 April 2026, the Regulatory Scrutiny 
Board  provided  recommendations  on  how  the  quality  of  the  draft  report  submitted  should  be 
improved. 

On this basis, the Impact Assessment report has been revised. The main changes to the report are 
summarised in Table 3: 

Table 3: TAXUD revisions following the RSB recommendations 

Comments of the RSB 

(C) What to improve 

How and where comments have been addressed 

 
 
 
 
(1)  The  report  should  provide  more  robust 
evidence  including  quantitative  observational 
data,  to  demonstrate  the  extent  to  which  the 
identified  problems  impose  costs  and  burdens 
on  economic  operators.  It  should  explain  how 
this  constrains  economic  activity  and  impacts 
growth  and  competitiveness  and  also  their 
impacts  on  public  authorities.  To  the  extent 
possible, observational as well as more granular 
opinion data should be used to demonstrate the 
size of the problems and establish the dynamic 
baseline.  The  report  should  also  bring  forth 
relevant evidence from key sources, such as the 
ATAD evaluation and its support study.  

the 

robust  evidence  on 

More data, e.g., from the Call for Evidence, the 
ATAD  evaluation  and  other  publicly  available 
studies, has been added in Chapter 2 to provide 
more 
identified 
problems. It has also been clarified in Chapter 3 
(EU action) and 5 (baseline scenario) that not all 
problems  that are  identified, e.g., in  the ATAD 
evaluation and in the Call for Evidence, feature 
in  the report as  the report focuses on identified 
that  can  only  be  addressed  by 
problems 
legislative action. 

report 

should 

include 

strengthen 

analysis  of 

-  especially 

the 
(2)  The 
logic  by  providing  a  clearer 
intervention 
description  of  some  of  the  proposed  measures 
and  how  they  correspond  to  the  identified 
problems  and  objectives 
for 
measures  concerning  R&D  expensing  and 
imported  hybrid  mismatches.  It  should,  for 
example, 
legal 
an 
uncertainties  and  diverging  national  rules  on 
expensing  of  R&D,  and  also  clarify  that  the 
measure is a new initiative rather than a change 
of  existing  EU  rules  regarding  expensing.  As 
regards  imported  hybrid  mismatches,  it  should 
better describe the problems. The report should 
also  outline  the  underlying  logic  guiding  the 
combination  of  individual  measures  into  the 
further 
proposed 
clarification  on  the  main  differences  between 
the ‘comprehensive’ and ‘medium’ ambitions. 

options, 

provide 

and 

The  intervention  logic  has  been  revised  to 
ensure  that  there  is  a  clearer  link  between  the 
identified  problems  (Chapter  2)  and  envisaged 
objectives  (Chapter  4).  The  wording  of  the 
specific  objectives  has  also  been  slightly 
adjusted  to  make  it  less  prescriptive  and  more 
open  to  different  simplification  options.  More 
attention has been given to the SMART criteria 
in  the  Better  Regulation  Guidelines,  and  the 
measurability  of  the  envisaged  objectives  has 
been  improved,  e.g.,  by  the  use  of  qualitative 
metrics as indicators for success (Chapter 9). 

More explanations have been added concerning 
R&D expensing and Hybrid Mismatch Rules to 
the  explanations  concerning 
the  problems 
(Chapter 2), the baseline scenario and the policy 
options (Chapter 5). 

The  underlying  logic,  i.e.,  different  levels  of 
ambition,  for  the  composition  of  the  different 
approaches  to  the  Omnibus  on  Taxation  has 
been clarified (Chapter 7). In the same vein, the 
‘medium  ambition’  and  ‘limited  ambition’ 
approaches have been modified to provide three 
ways,  which  are  more  differentiated,  in  which 
the  different  policy  options  could  be  compiled 
in the Omnibus on Taxation. The assessments of 
the  three  approaches  have  been  improved  and 
adjusted accordingly. 

(3)  The  report  should  elaborate  on  the  impact 
on  public  administrations,  including  costs,  cost 
savings,  and  short-term  and  long-term  effects 
on  tax  bases  and  tax  revenues.  The  report 
should  analyse  potential  obstacles  that  could 

The  analysis  in  chapter  6  has  been  supplanted 
with additional elements on costs and impact on 
public revenues, where such analysis is possible 
taking  into  account  significant  data  limitations, 
as well as further elements of a macroeconomic 

 
 
hinder  the  effective  and  timely  implementation 
of the proposed options by Member States. 

to 

nature 
the  extent  growth,  employment, 
investment  impact  can  be  assessed  through 
existing economic models. Further explanations 
on  assumptions  underlying  points  of  analysis 
have  also  been  added  (either  in  the  text  or 
details in Annex to support conclusions). 

In addition to the points above, the analysis has 
been  better  delineated  by  stakeholder  group, 
clarifying  impacts  on  companies  (corporate 
taxpayers), 
in 
tax 
terms.  The  analysis  also 
macro/economic 
impact  of 
provides 
maintaining high tax standards in the Union for 
all relevant measures and policy options.  

assessment  on 

administrations, 

and 

the 

4)  The  report  should  enhance  its  analysis  of 
costs,  cost  savings,  and  risks,  including  an 
examination  of  potential  impacts  on  objectives 
such  as  removing  double  taxation,  eliminating 
unnecessary or disproportionate tax compliance 
cost,  ensuring  tax  neutrality,  and  tackling  tax 
avoidance  and  evasion.  The  analysis  should 
the  resulting  costs  and 
also  better  assess 
efficiency 
benefits 
applicable 
the 
perspectives, 
distributional  effects  on  various  stakeholders. 
The  report  should  further  assess  the  effects  on 
the  EU  business  environment  and  economic 
growth. 

consider 

from 

also 

and 

(5)  The  report  should  provide  more  empirical 
evidence to support the assumptions used in the 
analysis  and  provide  a  sensitivity  analysis 
where  appropriate.  It  should,  for  example, 
demonstrate the robustness of assumptions such 
as 0.5% CIT compliance cost savings for R&D, 
the  5%  ILR-related  cost  reduction,  and  the 
assumption on CFC and ILR related compliance 
costs.  Additional 
the 
assumptions and data sources used in the model 
should be included. 

explanations 

on 

(6)  The  report  should  be  written  using  non-
language  and  be  a  self-standing 
technical 
document 
to  non-expert 
that 
readers. 

is  accessible 

Detailed explanations of the empirical evidence 
used,  where  available,  has  been  added  and 
explanations provided for assumptions and data 
sources when those are necessary/used.   

report,  and  particularly  Chapter  2 
The 
(problems),  has  been  revised  to  give  a  simpler 
and clearer presentation of identified problems. 

To provide a better overview, a timeline for the 
adoption  of  the  existing  Directives  has  been 
added in Annex 7. 

The  use  of  abbreviations  has  been  limited,  and 
more  definitions  of  key  concepts  have  been 
added  to  make  the  report  more  accessible  to 
non-expert  readers.  The  baseline  scenario  has 
been moved from an Annex to the main body of 
the  report  to  ensure  that  the  report  is  self-
standing. 

 
 
 
Evidence, sources and quality 

The evidence base for this impact assessment report is based on various different sources, such as:  

–  Modelling  by  the  European  Commission’s  Joint  Research  Centre  using  the  CORTAX 

model.  

–  Feedback from the targeted stakeholder consultations and call for evidence, as summarised 

in the synopsis report in Annex 2. 

–  The ATAD evaluation. 
–  Exchanges  with  additional  stakeholders  through  the  Platform  for  Tax  Good  Governance 

and with Member States in Commission Working Party IV. 

–  Desk research and quantitative analysis. 

 
 
 
 
 
 
ANNEX 2: STAKEHOLDER CONSULTATION (SYNOPSIS REPORT) 

Stakeholders’ engagement strategy 

The consultation strategy for the Omnibus on Taxation encompasses the following activities: 

–  Feedback  to  the  Call  for  Evidence  published  on  the  Commission  website  on  16  February 

2026 

–  Targeted consultations with a wide range and large number of key stakeholders 

No public consultation has been conducted as extensive targeted consultations have been held with 
key stakeholders over the course of 15 months.  

Feedback on the Call for Evidence 

The consultation period through this feedback mechanism took place between 16 February and 30 
March  2026  via  the  Commission  website119.  117  contributions  were  submitted  during  this 
consultation period by the following categories of stakeholders: 

Figure 10: Respondents to the Call for Evidence by category 

Source: https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/16912-Simplifying-EU-rules-on-direct-taxation-
omnibus/feedback_en?p_id=22324  

Overall, stakeholders fully supported the initiative to simplify existing EU tax rules with a view to 
improving the functioning of the internal market and ensuring Europe’s attractiveness as a place to 
invest  and  to  do  business.  Nonetheless,  the  views  on  how  exactly  the  simplification  should  be 
conducted varied.  

119 Simplifying EU rules on direct taxation – omnibus. 

 
 
 
 
 
 
The  majority  of  stakeholders,  i.e.,  approximately  77%,  expressed  the  need  for  enhancing 
harmonisation  and  limiting  national  discretion  in  implementing  the  existing  Directives.  Other 
recurrent  askes  concerned,  e.g.,  rationalising  and  modernising  the  existing  Directives,  reducing 
overlaps,  inconsistencies,  and  administrative  burdens,  as  well  as  standardising  and  clarifying  the 
terms  and  rules.  Around  50%  of  the  stakeholders  found  that  the  procedures  following  from  the 
Directives  should  be  standardised,  including  through  the  use  of  digital  tools.  Around  60%  also 
pointed out the importance of making the rules and procedures simpler for SMEs. 

In terms of specific issues and possible simplifications to the existing Directives, for the IRD and 
the  PSD,  approximately  67%  of  the  stakeholders  expressed  the  need  to  simplify  the  current 
withholding tax relief framework. The main issues concentrated around the access to withholding 
tax  relief  which  was  considered  as  too  complex,  the  eligibility  requirements  too  strict  and  the 
application of the Directives too inconsistent. On this basis, it was inter alia suggested to remove 
upfront requirements, such as attestations, in order to benefit from the tax exemption, or to increase 
administrative  cooperation  between  the  Member  States  by  harmonising  the  procedural  rules, 
including  by  introducing  a  standardised  documentation  framework,  across  the  EU.  It  was  also 
suggested to remove withholding taxes within the EU entirely or to harmonise the withholding tax 
rates.  It  was  suggested  to  update  the  list  of  company  forms  in  annex  to  each  Directive  to 
incorporate changes seen during the last years or even make the list more flexible and to harmonise 
the  beneficial  ownership  requirements  and  the  participation  exemption  method.  The  need  for 
clarifying the scope of the specific anti-abuse rules was mentioned. Moreover, it was pointed out 
that the current requirement of a 25% direct holding requirement in the IRD is too restrictive and 
should  be  aligned  with  the  holding  requirements  under  the  PSD.  Also,  for  the  IRD,  it  was 
highlighted that the material scope is too narrow, e.g., excluding payments that, from an economic 
perspective, perform the same function as interest or royalties, such as remuneration arising from 
hybrid financial instruments, loans with variable or profit-linked components, redemption premia, 
and other financial returns, and that the concept of interest should be harmonised. For the PSD, it 
was  suggested  to  harmonise  the  concept  of  ‘profit  distribution’  across  the  EU,  to  ensure  that  all 
Member  States  interpret  the  holding  requirements  as  covering  indirect  ownership,  to  consider 
holding periods at group level, and to avoid distortive outcomes from the 5% exemption limitation. 

For the ATAD,  the main message from  stakeholders was to  address  the  complexity and keep the 
protection. More specifically, approximately 68% of the stakeholders found the parallel application 
of ATAD and Pillar 2 disproportionate. In this regard, it was inter alia suggested that: The Interest 
Limitation  Rule  could  be  abolished  if  the  lender  is  established  in  a  jurisdiction  which  has 
implemented  a  QDMTT,  and  CFC  rules  and  rules  on  hybrid  mismatches  could  be  abolished  for 
Pillar  2  companies.  Concerning  CFC  rules,  it  was  also  pointed  out  that  by  around  60%  of  the 
stakeholders that fragmentation and legal uncertainty should be reduced, e.g., by harmonising rules 
and reporting obligations (e.g., by allowing only the implementation of one Model). Concerning the 
Interest Limitation Rule, issues were pointed out by approximately 52% of the stakeholders. In this 
regard, it was stressed that the current economic conditions, such as inflation, financing needs, and 
income  volatility,  should  be  addressed.  In  addition,  it  was  suggested  to  enhance  the  target  and 
proportionality  of  the  rule,  e.g.,  by  excluding  third  party  loans,  introducing  more  coherent 
definitions  of  ‘EBITDA’,  ‘interest  expense’  and  ‘borrowing  costs’,  allowing  for  certain  sector 
specific requirements, making some of the safeguards mandatory, such as the group escape rule and 
the  infrastructure  project  exemption,  while  broadening  its  scope,  and  clarifying  the  treatment  in 
liquidation scenarios. Concerning the hybrid mismatches, concerns were raised by around 43% of 
the stakeholders. It was, e.g., mentioned that the applicability of the rules should be limited to intra-
group transactions, that the rule on imported mismatches should be: removed, limited to ‘back-to-
back  structures’,  or  clarified.  In  addition,  it  was  requested  that  the  definition  of  ‘acting  together’ 
should be clarified, and that a de minimis threshold should be introduced. Concerning the general 

 
 
anti-abuse rule (GAAR), approximately 44% of the stakeholders suggested to clarify and target its 
scope, e.g., by providing guidance on its interpretation and by refining the interaction with Pillar 2. 
Concerning exit taxation, it was suggested to introduce tax deferral upon exit or until realisation of 
gains,  instead  of  an  instalment,  and  to  standardise  the  method  for  determining  the  market  value. 
Lastly, on a general note, around 67% of the stakeholders stressed that the minimum standards in 
ATAD,  which  are  transposed  differently  in  the  Member  States,  create  fragmentation  and 
complexity  which  could  be  addressed  by  enhancing  harmonisation  in  this  area,  e.g.,  by  limiting 
implementation  options  as  much  as  possible  and  by  reducing  ‘gold  plating’,  i.e.,  unilateral 
introduction  of  additional  requirements  above  the  minimum  set  out  in  EU  legislation,  in  the 
Member States. It was also noted by approximately 45% of the stakeholders that the ATAD rules 
are disproportionate for SMEs and which could be solved by introducing carve-outs for SMEs.  

For the TMD, approximately 38% of the stakeholders found that the scope should be extended and 
updated. It was inter alia pointed out that it has not kept pace with developments in EU company 
law,  i.e.,  the  Company  Merger  Directive  as  amended  by  the  Mobility  Directive,  and  modern 
business practices. It was also stressed that there is a need for clarification of the specific anti-abuse 
rule,  the  treatment  of  losses  carried  forward,  the  effective  dates,  and  the  rules  concerning  partial 
divisions, including the rules for allocating shared or functionally important assets. Finally, it was 
noted that the scope and eligibility requirements should be aligned with the IRD and the PSD and 
extended to cover transparent entities and that it should be ensured that the benefits are not denied 
where the merger or division includes a tax transparent entity. 

For the DRM, around 38% of the stakeholders found that dispute resolution remains too slow and 
complex. It was inter alia pointed out that there is a need for a more meaningful participation of the 
taxpayer  and  more  timely  and  effective  resolution  of  double  taxation  disputes,  e.g.,  under  the 
supervision  of  the  Commission.  In  this  regard,  it  was  e.g.,  suggested  to  enhance  transparency,  to 
ensure  a  consistent  interpretation  of  the  admission  criteria,  to  enforce  timelines  more  strictly  and 
impose interest and penalties, where applicable, to clarify the interaction with MAP procedures, to 
establish a permanent arbitration body, to clarify the definition of affected person, and to extend the 
scope  to  disputes  arising  from  the  application  of  the  Pillar  2  Directive.  It  was  also  stressed  that 
there is a need for an EU framework for dispute prevention, e.g., in transfer pricing, which can be 
bilaterally or multilaterally adopted by Member States. 

The  feedback  showed  no  demand  for  modifying  the  original  policy  objectives  of  the  existing 
Directives. Conversely, a few stakeholders emphasised that simplification efforts should be done in 
a  way  that  does  not  undermine  the  important  policy  objectives  of  the  existing  Directives.  Some 
went further and noted that  the existing Directives should be reinforced, e.g., with new dedicated 
anti-abuse  rules  and  minimum  substance  requirements.  Others  also  suggested  that  new  tax 
initiatives should entail systematic reviews of existing measures, e.g., to ensure that simplification 
is continuous rather than a one-off matter and that the impact for SMEs is regularly evaluated.  

Finally, approximately 61% of the stakeholders expressed that the simplification should go beyond 
amending  the  existing  Directives,  e.g.,  to  further  support  innovation  and  growth  through  a  more 
ambitious and holistic tax agenda. Other asks in this area related: to taxation of unrealised capital 
gains,  to  introduce  a  common  distribution-based  tax  system  in  the  EU  and  a  centralised  EU 
reporting and one-stop-shop model, to  shift from taxing income to  taxing  pollution  and resource-
use,  to  have  more  incentives  for  SMEs,  to  improve  Transfer  Pricing  within  the  EU,  to  introduce 
mutual  recognition  of  tax-exempt  public  benefit  entities,  to  exclude  jurisdictions  with  a  QDMTT 
from the EU list of non-cooperative jurisdictions, to review the implementation of the OECD Pillar 
2, and to expand the scope of simplification to indirect taxation, cross-border workers, and existing 
proposals, such as BEFIT, and the Pillar 2 Directive. 

 
 
Targeted Consultations 

Over  the  course  of  the  policy  development  process,  a  number  of  interviews  and  meetings  were 
carried out with different private stakeholders, including businesses of different sizes operating in 
different  sectors.  The  consultations  mainly  covered  issues  related  to  the  IRD,  PSD,  TMD,  and 
DRM  as  a  separate  study  was  carried  out  for  the  ATAD  by  an  external  contractor  as  part  of  the 
evaluation of the ATAD.  

Overall,  it  can  be  said  that  the  stakeholders  favour  the  objectives  of  simplification  and  tax 
competitiveness  but  their  current  issues  and  needs  for  simplification  vary  relative  to  their  size, 
activities,  and  the  Member  States  in  which  they  are  operating.  The  key  take-aways  from  the 
discussions can be summarised as follows:  

Concerning the IRD and the PSD, most stakeholders face compliance burdens, particularly in some 
Member States where taxpayers have to either request a refund of paid withholding tax or undergo 
lengthy and costly upfront procedures to benefit from the tax exemption. Stakeholders suggested to 
align formalities and deadlines, and to introduce a digitalised and standardised procedure across the 
EU,  including  EU  digital  tax  resident  certificates,  building  on  the  FASTER  Directive.  Some 
stakeholders  also  highlighted  heavy compliance  burdens related to  beneficial ownership tests and 
noted that complex rules have a deterrent effect on distributing profits across borders – contrary to 
the  objectives  of  the  Directives.  Some  stakeholders  found  that  withholding  taxes  could  be  fully 
removed  within  the  EU,  or  at  least  procedures  with  upfront  compliance  requirements  should  be 
abolished. 

In addition, concerning the IRD and the PSD, many stakeholders stressed the need for a common 
definition of beneficial ownership and common beneficial ownership test within the EU to provide 
more certainty to taxpayers and tax authorities. It was also noted by some stakeholder that the PSD 
does  not  include  a  ‘beneficial  owner’  definition.  Nonetheless,  several  Member  States  limit  the 
application  of  the  PSD  in  situations  where  the  recipient  is  not  considered  the  beneficial  owner, 
which is clashing with the legal concept of a ‘shareholder’. Some stakeholders also highlighted the 
general need for common understanding and interpretation of terms in the Directives. Particularly 
concerning  the  ‘eligible  companies’,  it  was  pointed  out  that  the  annexes  should  be  updated  and 
aligned. With regard to the holding requirements, most stakeholders shared the view that the IRD 
and  the  PSD  should  be  aligned  on  the  use  of  indirect  holdings  and  percentages  as  the  they  are 
currently  treated  differently  across  the  EU  because  discretion  to  the  Member  States  led  to 
deviations in the conditions to benefit from the Directives. Some stakeholders found that the scope 
of the Directive should be broader and that the tax exemption should ideally apply irrespective of 
holding requirements within the EU. 

Regarding PSD, some stakeholders raised concerns in relation to the implementation of Article 4(3) 
which  allows  Members  States  to  exclude,  from  the  tax  base,  the  deduction  of  management  costs 
relating to the holding for a fixed amount corresponding to 5% of the profits distributed. According 
to stakeholders concerned, when the actual expenses are lower than the flat rate, this may result in a 
part  of  the  dividends  or  profit  distributions  not  being  exempt,  leading  to  inconsistencies  with  the 
aim of the PSD to eliminate double taxation.  

On the anti-abuse rules in the IRD and the PSD, many stakeholders experienced difficulties in the 
application  of  the  specific  anti-abuse  rules,  the  beneficial  ownership  tests,  and  the  general  anti-
abuse rule in the ATAD. It was highlighted that benefits should not be denied if the arrangement 
does  not  result  in  a  tax  advantage.  While  some  stakeholders  suggested  to  merge  the  anti-abuse 

 
 
 
 
 
 
 
 
provisions of the PSD and IRD, others found that they could be abolished as the general anti-abuse 
rule in ATAD was sufficient. It was also mentioned that a common understanding of key concepts, 
including clarifications on ‘tax advantage’ and timing of assessment for non-genuine arrangements, 
would be helpful. 

Concerning the TMD, not all stakeholders had experience with restructurings. Among the relevant 
stakeholders, some found a need for clarification on the type of operations that fall within the scope 
of the TMD. In this regard, it was also pointed out that TMD should be aligned with the Company 
Law  Merger  Directive  as  amended  by  the  Mobility  Directive  to  cover  more  restructuring  forms. 
Few stakeholders advocated for extending the scope of the TMD to all taxes, including real estate 
(transfer) taxes, stamp duties, local and regional taxes, to ensure full tax neutrality  and to make it 
easier for businesses re-organise within the EU. A few stakeholders also suggested to have common 
rules on tax losses and valuation methods.  

Stakeholders in-scope of Pillar 2 highlighted the need to review the EU tax legislation in view of 
the  implementation  of  Pillar  2.  They  pointed  out  that  certain  elements  of  the  EU  tax  legislation, 
particularly concerning ATAD, have been rendered obsolete, and should be withdrawn with a view 
to reducing administrative burden and boosting the EU’s competitiveness.  

Finally,  concerning  the  DRM,  most  stakeholders  found  the  procedures  too  lengthy,  time-
consuming, and that there was a lack of uniformity amongst existing mechanisms. In this regard, it 
was pointed out  that it is important  for tax certainty that the procedures are binding and have set 
deadlines.  Some  stakeholders  also  called  for  allowing  procedures  in  English,  or  one  or  two 
additional big EU languages, and more extensive involvement of taxpayers during the procedures. 
It  was stressed that the DRM should create an obligation for Member States to solve the issue in 
question and that Member States’ possibility to deny access should be limited. Several stakeholders 
also  expressed  the  view  that  the  scope  of  the  DRM  could  be  extended  and  that  more  dispute 
prevention initiatives, such a corporative compliance programmes, are needed in the EU.  

 
 
 
 
 
  
 
 
ANNEX 3: WHO IS AFFECTED AND HOW? 

1.  Practical implications of the initiative 

The initiative directly affects the companies that will be subject to and thus liable to domestic taxes 
on  companies  of  EU  Member  States,  as  well  as  their  respective  national  tax  administrations,  by 
simplifying EU tax rules to boost EU competitiveness, while maintaining high tax standards in the 
EU.  Citizens  will  indirectly  benefit  from  the  increase  in  GDP.  It  also  indirectly  affects  the  tax 
revenues of Member States. 

Companies  will bear minimal  initial  adjustment costs for training the personnel to  the new  rules. 
This is because the Omnibus on Taxation either eliminates, clarifies or updates existing EU rules, 
or,  where  the  initiative  introduces  new  harmonised  rules,  builds  on  existing  approaches,  e.g.  the 
FASTER  Directive  for  withholding  tax  procedures,  or  simpler  frameworks  (e.g.  the  tax 
depreciation  treatment  of  assets  related  to  research  and  development).  Accordingly,  it  is  also 
expected that recurrent costs will be very low. Because the new measures aim to simplify EU tax 
rules, there will be a significant cost reduction overall for EU businesses.  

Similarly, the impact for tax administrations should be positive, because, apart from the initial cost 
for training, they can be expected to free up human resources thanks to exemptions from existing 
administrative burdens (e.g. withholding tax), a more targeted scope for some of the EU rules (e.g. 
CFC, Interest Limitation Rule), and clearer mechanisms such as for dispute resolution. 

2.  Summary of costs and benefits 

As  explained  in  Chapter  6,  it  has  not  been  possible  to  estimate  costs  for  each  of  the  envisaged 
policy options. Also, input from stakeholders has been limited in terms of quantitative estimations 
of the relevant costs, which accordingly makes it difficult to provide robust estimates. In addition, 
depending on the business model of the different groups, the cost of applying the existing EU rules 
is  expected to  differ substantially. For instance,  a group which is  centrally  organised would have 
less  costs  than  a  group  which  mainly  operates  its  administrative  functions  at  the  level  of  its 
subsidiaries in different Member States. Below, an attempt is made to describe some of the possible 
costs,  noting  that  these  are  likely  to  be  relatively  very  small,  especially  when  compared  to  the 
potentially  large  cost  savings  derived  from  simplification.  No  recurrent  costs  are  expected,  given 
that the very nature of the Omnibus on Taxation is to reduce recurrent compliance costs. 

I. Overview of Benefits (total for all provisions) – Preferred Option 

Description 

Reduction of tax-related 
compliance costs for cross-
border operating companies. 

Amount 

Direct benefits 

Comments 

Chapter 6 provides explanation for 
estimates under different scenarios. 

For all companies: EUR 6.6 billion per year 
- Exemption from WHT on intra-EU cross-
border interest, royalty and dividend payments: 
EUR 5.34 billion per year (of which EUR 4.59 
billion accrue to lower foregone tax relief and 
lower opportunity costs; EUR 0.75 billion 
accrue to incurred costs, i.e., lower 
administrative burden). 
- Carveout of Pillar 2 companies and SMEs from 
CFC rules: EUR 160 million respectively EUR 
90 million per year 
- Mandatory application of CFC Model A: EUR 
45 million per year 

 
 
- Common tax depreciation treatment of R&D 
assets: EUR 265 million per year 
- De minimis exclusion (SMEs) and carve-out of 
qualifying third-party loans from the interest 
limitation rule: EUR 69 million and EUR 430 
million per year respectively 
- Other simplifications of the interest limitation 
rule: EUR 80 million per year 
- Other measures (hybrid mismatches, tax 
mergers, dispute resolution): EUR 80 million per 
year  

Cost savings in legal advice 
and litigation procedures 
concerning dispute 
resolution and business 
reorganisations. 

Difficult to estimate. Legal advice and litigation 
costs for complex tax matters can range from 
several thousands to a few millions per company 
per case. More tax certainty and common rules 
can lead to a substantial reduction of such costs. 

Chapter 6 provides explanation for 
estimates under different scenarios. 

In the long run: EU GDP could be higher by 
+0.04% relative to the status quo. 

Chapter 6 provides explanation for 
estimates under different scenarios. 

In the long run: EU GDP could be higher by 
+0.2% relative to the status quo. 

Chapter 6 provides explanation for 
estimates under different scenarios. 

Supporting EU 
competitiveness through 
exemption from WHT on 
intra-EU cross-border 
interest, royalty and 
dividend payments. 

Supporting EU 
competitiveness through 
simpler, common and more 
beneficial tax depreciation 
treatment for investments in 
the area of research and 
development (R&D). 

Indirect benefits 

(1) Estimates are gross values relative to the baseline for the preferred option as a whole (i.e. the impact of individual 
actions/obligations of the preferred option are aggregated together); (2) Please indicate in the comments column which 
stakeholder  group  is  the  main  recipient  of  the  benefit;(3)  For  reductions  in  regulatory  costs,  please  describe  in  the 
comments  column  the  details  as  to  how  the  saving  arises  (e.g.  reductions  in  adjustment  costs,  administrative  costs, 
regulatory charges, enforcement costs, etc.;);.  

II. Overview of costs – Preferred option 

Businesses 

Administrations 

One-off 

Recurrent 

One-off 

Recurrent 

intra-EU 

Exemption  from  WHT 
on 
cross-
border  interest,  royalty 
and dividend payments 

Direct adjustment 
costs 

None/very 
marginal 

Direct 
administrative 
costs 

None/very 
marginal 

Direct regulatory 
fees and charges 

none 

Direct 
enforcement costs 

none 

Indirect costs 

None/very 
marginal 

n/a 

n/a 

n/a 

n/a 

n/a 

None/very 
marginal 

None/very 
marginal 

none 

none 

None/very 
marginal 

n/a 

n/a 

n/a 

n/a 

n/a 

 
 
 
 
 
 
 
Taxation of CFCs 

Direct adjustment 
costs 

None/very 
marginal 

Direct 
administrative 
costs 

None/very 
marginal 

Direct regulatory 
fees and charges 

none 

Direct 
enforcement costs 

none 

Indirect costs 

Simpler,  common  and 
tax 
more  beneficial 
depreciation 
treatment 
for  investments  in  the 
area  of  research  and 
development (R&D) 

Direct adjustment 
costs 

Direct 
administrative 
costs 

None/very 
marginal 

Very marginal 

Very marginal 

Direct regulatory 
fees and charges 

none 

Direct 
enforcement costs 

none 

Indirect costs 

none 

Other simplifications  Direct adjustment 

Very marginal 

costs 

Direct 
administrative 
costs 

Very marginal 

Direct regulatory 
fees and charges 

none 

Direct 
enforcement costs 

none 

Indirect costs 

none 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

None/very 
marginal 

None/very 
marginal 

none 

none 

None/very 
marginal 

Very marginal 

Very marginal 

none 

none 

none 

Very marginal 

Very marginal 

none 

none 

none 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

n/a 

(1)  Estimates  (gross  values)  to  be  provided  with  respect  to  the  baseline;  (2)  costs  are  provided  for  each 
identifiable  action/obligation  of  the  preferred  option  otherwise  for  all  retained  options  when  no  preferred 
option  is  specified;  (3)  If  relevant  and  available,  please  present  information  on  costs  according  to  the 
standard  typology  of  costs  (adjustment  costs,  administrative  costs,  regulatory  charges,  enforcement  costs, 
indirect costs;).  

III. Contribution to the administrative burden reduction targets – Preferred option(s)  

Administrative 
costs  

 [M€]  

All businesses  

New recurrent 
costs (INs)  

Removed recurrent 
costs (OUTs)  

Net cost   (INs 
– OUTs)  

New one-off costs 
(INs)   

Removed one-off costs 
(OUTs)  

(nominal values 
per year)  

(nominal values per 
year)  

(annualised total net 
present value over the 
relevant period)  

(annualised total net 
present value over the 
relevant period)  

(nominal values 
per year)   

For all companies: 
~EUR 2 billion per 
year 
- Exemption from 

 
 
 
 
  
  
  
  
  
WHT on intra-EU 
cross-border interest, 
royalty and dividend 
payments: EUR 0.75 
billion per year of 
lower administrative 
burden. 
- Carveout of Pillar 2 
companies and SMEs 
from CFC rules: 
EUR 160 million, 
EUR 90 million per 
year respectively 
- Mandatory 
application of CFC 
Model A: EUR 45 
million per year 
- Common tax 
depreciation 
treatment of R&D 
assets: EUR 265 
million per year 
- De minimis 
exclusion (SMEs) 
and carve-out of 
qualifying third-party 
loans from the 
interest limitation 
rule: EUR 69 million  
EUR 430 million per 
year respectively 
- Other 
simplifications of the 
interest limitation 
rule: EUR 80 million 
per year 
- Other measures 
(hybrid mismatches, 
tax mergers, dispute 
resolution): EUR 80 
million per year 

• 

in which 
SMEs  

Public 
administrations  

Citizens  

3.  Relevant sustainable development goals 

The  below  table  provides  an  overview  of  the  Sustainable  Development  Goals  (SDGs)  that  are  at 
stake and the progress that is expected under the preferred option for the Omnibus on Taxation, as 
described in Chapter 8. 

IV. Overview of relevant Sustainable Development Goals – Preferred Option(s) 

 
 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
 
Relevant SDG 

Expected progress towards the Goal 

Comments 

inclusive 

e.g.  SDG  no.  8  –  Promote 
sustained, 
and 
sustainable 
economic 
growth,  full  and  productive 
decent 
employment 
work for all 

and 

e.g.  SDG  no.  9  -  Build 
infrastructure, 
resilient 
promote 
and 
sustainable  industrialisation 
and foster innovation 

inclusive 

The Omnibus on Taxation proposal contributes to 
SDG  8  by  reducing  tax  compliance  burdens, 
clarifying  tax  terminology,  replacing  uneven 
treatments  and  divergent  national  rules  with  a 
single  EU  approach,  while  maintaining  high  EU 
tax standards, thereby fostering a  more efficient, 
predictable,  and  growth-supportive  business 
environment across the EU. 

Through simpler and more coherent EU tax rules, 
as  well  as  a  more  beneficial  treatment  for 
investments  in  research  and  development,  the 
Omnibus  on  Taxation  will  support  EU  industry 
and 
infrastructure  and 
including 
digitalisation. 

innovation, 

The  Omnibus  on  Taxation  is  expected  to 
lead  – in the long term to a positive impact 
on GDP – see above.  

The  Omnibus  on  Taxation  is  expected  to 
stimulate  GDP  growth,  as  said  above,  in 
particular also thanks to the positive impact 
of the proposed immediate expensing for the 
acquisition of R&D-related tangible assets.  

 
 
 
 
 
ANNEX 4: ANALYTICAL METHODS 

1. General remarks about compliance costs per MNE group 

It  should  be  strongly  noted  that  there  is  a  general  absence  of  reliable  statistics  about  the  level  of 
ATAD-related  tax  compliance  costs  for  MNEs.  Therefore,  the  analysis  presented  in  this  impact 
assessment  and  the  methodological  approaches  explained  in  detail  in  this  Annex  rely  on 
information  received from  stakeholder interviews  in  the context of a related study carried out  for 
the European Commission in 2025. The study concludes that: 

“Costs for large and more complex companies for which rules are relevant can be higher, although 
often  hard  to  disaggregate  from  compliance  with  other  EU  provisions,  typically  managed  by  the 
same offices or teams. With the exception of one outlier, costs are in the order of EUR 100,000 per 
year at the level of an MNE group (corresponding to two-three full-time staff dedicated to ATAD 
compliance).” 120 

For the purposes of analysing the impact of several possible measures, it is thus assumed that, at the 
level  of  large  groups,  ATAD  related  activities  do  incur  compliance  costs  at  the  level  of  EUR 
100,000 per year if the respective measure affects large groups, especially those subject to Pillar 2. 
If  the  measure  is  broader,  or  affects  smaller  MNEs  in  particular,  one  third  of  this  amount  is 
assumed  (about  EUR  33,000).  As  the  study  confirms,  no  empirical  information  is  available 
concerning  how  these  costs  can  be  disaggregated  to  the  single  ATAD  components.  Given  these 
limitations, it is thus assumed that CFC and ILR rules make up one third of these costs each, given 
the importance and complexity of each of these rules.  

By-and-large, the ATAD consists of five rules. In principle it could thus be assumed that each rule 
accounts for one fifth of the compliance costs, in absence of further information. However, the ILR 
and  CFC  rules  both  have  been  brought  forward  predominantly  by  stakeholders  in  the  targeted 
consultations as presenting concerns and both have a wide scope of application, compared to other 
rules  of  the  ATAD  (e.g.  the  hybrid  mismatch  rules  concern  specific  cases  depending  on  the 
legislation gaps between different legal orders; exit taxation concerns specific transactions).  

In terms of volume and tax revenues at stake, the ILR would also appear as most significant, which 
can be an additional indication that firms may dedicate more attention and efforts to it. Similarly, 
the CFC rules require identifying ownership structures and analysis of the operations and balance 
sheet  of  each  relevant  entity,  differentiating  between  different  types  of  income  and  identifying 
relevant substance, in order to determine whether and to what extent income should be attributed to 
other entities.  

The other rules of the ATAD are less comprehensive. Moreover, both ILR and CFC rules impose 
ongoing  obligations  on  firms.  The  other  ATAD  rules  can  also  be  complex.  Yet,  on  average  they 
likely cause lower compliance costs because:  

•  Their likelihood of imposing an ongoing compliance burden is lower as they are triggered 

by events (transactions).  

120 Study prepared for the European Commission to support an evaluation of the Anti-tax Avoidance Directive (ATAD) 
- Final Report (2025). Here: Volume 2, p. 38. 

 
 
 
•  They are mostly relevant for MNE groups, rather than constituting a permanent compliance 

obligation to a large number of firms.  

•  GAAR,  in  particular,  are  based  on  broader  principles  (as  opposed  to  complex  formulaic 
rules). This is why they are less likely to trigger proactive restructuring and to impose a risk 
of disputes.   

In the absence of more accurate information we therefore apply the informed assumption that ILR 
and  CFC-rules  make  a  share  of  one  third  in  total  ATAD-related  compliance  costs  each,  with  the 
other ATAD-elements accounting for the remaining third.  

2. Analysis of options: tax exemptions for interest, royalty and dividend payments 

Step 1: Cost characteristics  

A  tax  exemption  of  cross-border  intra-EU  payments  of  interest,  royalties  and  dividends  from 
withholding tax would mean a significant cost reduction for investors. Investors currently have to 
incur  three  types  of  costs  when  seeking  a  refund  of  overpaid  withholding  taxes.  If  withholding 
taxes  are  set  at  zero  in  all  Member  States  (i.e.,  no  tax  difference  between  Member  States),  these 
costs  would  no  longer  be  incurred.  The  analysis  conducted  on  the  extension  of  this  exemption 
across all EU Member States addresses three different angles of potential impact. 

First,  incurred  costs  that  arise  directly  to  investors,  or  the  relevant  operations  department  of  the 
custodian  or  an  external  service  provider  as  they  engage  in  paperwork  required  to  comply  with 
current  refund  rules:  These  costs  are  assumed  to  account  for  an  average  of  2%  of  the  refundable 
amount. The calibration of the parameter is based on earlier Commission studies.121 It includes the 
cost  of  operations  departments  of  the  custodian  itself  or  of  an  external  service  provider,  but  also 
fees for the processing of late filings. Paperwork and a variety of source country requirements are 
amongst the cost drivers. 

Second, opportunity costs due to delayed claims and payments of tax refunds: Delays in refunding 
of withholding taxes paid currently entail a financial disadvantage for the investor. Studies confirm 
that  refund  procedures  usually  take  between  several  months  and  years.122  The  resulting  delayed 
cash-flow may keep investors from funnelling liquid means into interest-bearing investment during 
the period of delay. To assess the opportunity cost of this foregone cash-flow, the analysis uses a 
risk-free  investment  in  government  bonds  as  an  example  of  one  such  missed  opportunity  and 
assumes  that,  based  on  2024  numbers,  such  one-year  investment  would  bear  an  average  yield  of 
2.2%. We also assume an average refund period of one year (which is already relatively generous 
compared to the time it takes in many Member States), to assess then the possible financial impact.  

Third, foregone relief to investors: Due to complex and cumbersome refund procedures, taxpayers 
may be dissuaded  from  claiming back overpaid  withholding  tax.  This  may be the  case  especially 
for  smaller  investors  with  little  resources  to  deal  with  these  procedures.  Following  assumptions 

121 New EU system for the avoidance of double taxation and prevention of tax abuse in the field of withholding taxes 
(WHT)  Accompanying  the  document  Proposal  for  a  Council  Directive  on  Faster  and  Safer  Relief  of  Excess 
Withholding Taxes: SWD/2023/216 final; The Economic Impact of the Commission Recommendation on Withholding 
Tax Relief Procedures and the FISCO Proposals, Commission Staff Working Document, 24 June 2009. 
122 SWD/2023/216 final (p. 96). 

 
 
 
 
made in earlier Commission analyses, it is assumed that foregone relief affects 10% of the relevant 
cross-border flows.123  

Step 2: Estimating the underlying monetary flows for interest and dividend payments 

As a starting point, the analysis estimates the amounts that are currently flowing  from  the source 
country (the company) to the country where the investor is located. These amounts may be subject 
to  a  tax  at  source  which  may  be  refunded  to  the  investor.  While  information  about  cross-border 
income  (interest,  dividends)  and  royalty  flows  does  exist  in  Eurostat’s  Balance  of  Payment 
statistics, this information is patchy for certain country pairs. The analysis therefore uses this data 
only  for  royalty  payments  (Step  3).  For  interest  and  dividend  payments,  a  different  approach  is 
used,  which  follows  earlier  Commission  analysis.124  For  interest  and  dividends,  we  start  from 
information about the bilateral stock of the relevant investment, i.e., the investment position of an 
investor  located  in  Member  State  A  investing  in  Member  State  B.  This  information  is  available 
from the International Monetary Fund’s statistics on portfolio investment positions.  

We use the portfolio investment statistics (as opposed to FDI statistics) because these better capture 
the  investments  currently  not  covered  by  the  PSD  and  IRD.  Those  directives  foresee  no 
withholding taxes on cross-border dividend, interest and royalty payments, but this exemption does 
not  apply  if  the  association  between  payer  and  payee  involves  a  holding  below  10%  (PSD)  or 
below 25% (IRD). Thus, a withholding tax applies below these thresholds. As Member States often 
withhold  taxes  at  the  national  rate,  which  is  usually  higher  than  the  one  of  the  tax  treaty  that  is 
applicable  to  a  specific  (bilateral)  situation,  withholding  taxes  are  associated  with  refund 
procedures which differ substantially per Member State and lead to significant compliance costs. 

The statistics give the amount of portfolio investment in stock debt security assets and equity assets 
issued by a company in country B and held by the investor in country A (i.e., stocks of assets per 
country  pair  A/B).  Next,  these  stocks  are  multiplied  by  average  yields  to  obtain  an  estimate  for 
bilateral flows of income payments from country B (source) to country A (investor). For year 2024, 
interest flows are proxied by multiplying debt security assets by the 10-year government bond yield 
as given by the European Central Bank (2.4%), while dividend flows are obtained by multiplying 
equity stocks by the Eurostoxx 600 average yield (2.5%).   

Step 3: Estimating the underlying monetary flows for royalty payments 

Unlike interest and dividend payments, in the system of National Accounts, charges for the use of 
intellectual  property  are  not  considered  income  flows  stemming  from  direct  investment  but  a 
compensation for performing a service. We can therefore not rely on investment stocks as a starting 
point  for  flow  estimates  as  it  happened  in  Step  2  above  for  interest  and  dividends.  Rather,  the 
approach  for  royalties  looks  directly  at  Eurostat’s  Balance  of  Payments  statistics  which  measure 
international  royalty  flows.  The  assumptions  about  the  cost  components  (Step  1)  and  using  the 
bilateral levels of withholding taxes (Step 4) applied to royalties are the same as above.  

Step 4: Estimating the refundable tax relief withheld at source on these flows 

123 Ibidem. 
124 Ibidem. 

 
 
 
 
In order to estimate the potential current tax refund for each country pair, these payment flows have 
to  be  multiplied  by  the  corresponding  withholding  tax  rate,  or  rather,  the  overpaid  part  of  the 
withholding  tax  that  would  be  up  for  refund  if  there  were  a  positive  difference  between  the 
domestic  tax  withheld  at  source  (in  the  country  of  the  company)  and  the  tax  due  in  the  Member 
State  of  the  investor.  Domestic  withholding  tax  rates  in  the  country  of  the  investor  may  apply  if 
there  is  no  bilateral  agreement  about  the  level  of  withholding  taxes  on  flows  between  the  two 
countries. However, such agreements exist between almost all Member States, so that the relevant 
refundable tax difference is usually the one between the domestic withholding tax at source and the 
tax rate applicable for bilateral interest, dividend and royalty payments as stipulated in the treaty. 
Thus: 

(Equation 1) Refundable WHT = Domestic WHT (at source) – Treaty WHT 

Information about the level of bilateral withholding taxes applied to interest, dividend and royalty 
payments is given by the International Bureau of Fiscal Documentation (IBFD).  

Cost  estimates  for  companies:  Full  exemption  of  interest,  dividend  and  royalty  payments 
(Option 1A) 

Estimated interest and dividend payments 

The following flow estimates are obtained for interest and dividend payments:  

Estimated  cost  =  cost-factor  (Step  1)  times  estimated  flows  (Step  2)  times  withholding  tax 
difference between source and investor country (Step 4) 

Table 1: Assumptions and estimates for cross-border interest and dividend payments within the EU 

The three estimated cost measures then cumulate to annual tax savings from the perspective of the 
investor of EUR 3.6 billion for cross-country interest and dividend payments within the EU (rows 
8-10). This is higher than the estimation under the FASTER Impact Assessment.  

Estimated cost reduction: royalty payments 

Unlike interest and dividend payments, in the system of National Accounts, charges for the use of 
intellectual  property  are  not  considered  income  flows  stimming  from  direct  investment  but  a 
compensation  for  performing  a  service.  We  can  therefore  not  recur  on  investment  stocks  as  a 

    Interest and Dividends 1)Income flowsmillion EUR1   Interest (from Debt instr.)161,890      2   Dividends (from Equity)188,981      3Interest+Dividends350,871      Refundable tax relief4   Interest (from Debt instr.)13,483       5   Dividends (from Equity)12,241       6Interest+Dividends25,724       7Implicit rate of WHT relief, dividends and Interest:7.3%Cost relief estimateTotalInterestDivid.8   Foregone tax relief (investors not claiming)2,572         1,348          1,224     9   Opportunity costs of delayed claims and payments of tax refund (+1 year)561            294             267        10    Incurred costs (paperwork etc.)514            270             245         
 
 
starting point for flow estimates as it happened in (Step 2 above) above for interest and dividends. 
Rather, the approach for royalties looks directly at Eurostat’s Balance of Payments statistics which 
measure international royalty flows (Step 3). The assumptions about the cost components (Step 1) 
and  using  the  bilateral  levels  of  withholding  taxes  (Step  4)  applied  to  royalties  are  the  same  as 
above.  

For royalties, the total cost amounts to EUR 1.7 billion (rows 5-7 in Table 2). 

Table 2: Assumptions and estimates for cross-border royalty payments within the EU 

Total estimated cost reduction 

Overall,  total  cost  reduction  from  the  investor’s  perspective  (savings  on  foregone  tax  relief, 
opportunity costs and incurred costs) therefore amounts to an estimated EUR 5.34 billion per year 
for interest, dividend and royalty payments (rows 1-3 of Table 3). 

Table 3: Total estimates for cross-border payments within the EU and tax revenue losses, Option 
1A (million EUR) 

Cost relief estimates for companies: Alignment of scope and procedures (Option 1B) 

We estimate the impact of lowering the holding requirement of the Interest and Royalty Directive 
(IRD) from today’s 25% down to 10%. This lowering will bring more investors under the IRD, so 
that more investors would see their payments exempt form a WHT.  How many investors may be 
affected  by  that?  To  roughly  estimate  this,  one  should  first  estimate  the  share  of  investors  today 
holding shares between 10% and 25%.  

Table 4: Rough estimate of flows from shareholdings between 10% and 25%  

    Royalties 2)million EUR1Income flows (charge for use of intell. property)70,216        2Refundable tax relief11,951        3Implicit rate of WHT relief Royalties17.0%Cost estimate5   Foregone tax relief (investors not claiming)1,195          6   Opportunity costs of delayed claims and payments of tax refund (+1 year)261             7    Incurred costs (paperwork etc.)239             2) Estimation based on EStat Balance of Payment royalty flows (charges for the use of intell. property)    Total cost relief estimate (Interest, Dividends, Royalties)1Foregone tax relief (investors not claiming)3,767          2Opportunity costs of delayed claims and payments of tax refund (+1 year)821             3Incurred costs (paperwork etc.)753             1EU-located shareholders with subsidiaries in the EU (Orbis)100%2… with a share below 10%10%3… with a share below 25%17%4->… with a share between 10% and 25%7% 
 
 
 
 
 
 
A  query  run  on  the  company  level  database  Orbis  shows  that  the  percentage  of  EU-located 
shareholders holding less than 10% shares in EU-located subsidiaries is 10% (Table 4). For a share 
of  at  least  25%  the  percentage  is  17%.  Aligning  the  holding  requirement  for  interest  and  royalty 
payments to the one stipulated in the PSD for dividends would thus affect about 7% of interest and 
royalty payments, as those are the estimated shares of companies with holdings between 10% and 
25%.  In  other  words,  Option  1B  would  ‘free’  7%  of  royalty  and  interest  payments  from  a 
withholding  tax,  while  Option  1A  would  free  17%  of  royalty  and  interest  payments  from  a 
withholding tax. The ratio between savings for royalties and interest payments  between Option B 
and  Option  A  is  therefore  7%/17%.  With  this  assumption,  lowering  the  IRD  requirement  could 
result in cost savings of about EUR 1.5 billion per year. This is shown in Table 5.  

Table 5: Cost estimate Option 1B (million EUR) 

Caveat for estimates of both options 

As  an  outcome  of  the  approaches  explained  in  detail  above,  the  estimated  cost  savings  of 
exempting intra-EU interest, royalty and dividend payments from WHT amount to about EUR 5.34 
billion  per  year  (Option  1A)  and  EUR  1.5  billion  (Option  1B).  There  are,  however,  two 
uncertainties linked to these estimates that should be taken into consideration:  

•  Estimates  could  be  adjusted  downwards  because  they  are  based  on  statistics  about  portfolio 
investment  positions,  which  inevitably  include  individuals  as  investors.  It  is  not  possible  to 
estimate  with  exactitude  how  investment  by  individuals  compares  to  portfolio  investment  by 
companies.  Based  on  the  limited  statistics,  however,  it  may  be  around  40%.125  However,  the 
share  in  the  actual  investment  volumes  held  by  private  individuals,  as  opposed  to  other 
investors, is likely to be lower. On this basis, the statistics on portfolio investments are deemed 
to provide a reliable source of information for the purposes of this analysis. 

•  On  the  other  hand,  estimates  could  be  adjusted  upwards  because  they  do  not  include  the 
savings  of  compliance  costs  incurred  by  investors  that  hold  larger  shares  (non-portfolio 
investment)  today,  i.e.,  investment  that  already  falls  into  the  scope  of  the  IRD  and  PSD, 
respectively.  These  costs  chiefly  involve  compliance  with  the  procedures  for  proving 
entitlement to the benefits of the IRD and PSD. Albeit to a possibly a lesser extent, the measure 
leads  to  cost  savings  here  too.  This  is  because  the  measure  results  in  eliminating  upfront 
procedures ahead of payments of interest, royalties and dividends; and this simplification will 
apply  to  all  such  payments,  regardless  of  whether  they  are  linked  to  portfolio  or  direct 
investment. The paying company would thus no longer have to assess whether the conditions 
to benefit from the exemption are fulfilled by the beneficiary. 

125 Coordinated Portfolio Investment Survey (CPIS) Survey Guide, Second Edition (p. 96 for Belgium). 

1Tax relief from full exemption for interest and royalties (Option 1A without dividends) (Tables 1 and 2 without dividends)3,607          2Tax relief from aligning IRD with PSD holding requirement of 10% (Option 1B) (= row 1 x 7 / 17)1,489           
 
 
 
 
 
 
3. Analysis of options: CFC Rules 

The options for which the methodological and analytical approach is detailed herein are analysed in 
Section 6.2.2. The purpose is to estimate the reduction in compliance costs through better aligning 
CFC-rules for Pillar 2 companies. 

Today’s potential economic double taxation 

As  the  legal  framework  and  applicable  tax  rules  stand  today,  there  is  an  assessed  partial  overlap 
between CFC and Pillar 2 rules, which potentially leads to instances of economic double taxation. 
These overlaps are outlined in the table below (see row 1). A shareholder-subsidiary pair may be 
subject to Pillar 2 either because the subsidiary is located in a jurisdiction that applies top-up taxes 
to  companies  in  its  territory  (QDMTT,  first  column)  and/or  the  shareholder  in  a  jurisdiction  that 
includes  income  in  other  low-taxed  jurisdiction  when  calculating  the  minimum  tax  (i.e.,  Income 
Inclusion  Rule  -  IIR,  second  column).  Overlaps  with  CFC-rules  can  be  particularly  significant  in 
cases where subsidiaries fall under QDMTT while their shareholders need to apply CFC legislation, 
see  first  column.  Today,  as  QDMTT  does  not  account  for  CFC,  economic  double  taxation  may 
occur in the sense that the group pays both the CFC tax charge and QDMTT, considering that not 
all member States allow for crediting the latter against the former. By contrast, top-up taxes under 
IIR do take CFC taxes into account. That is, companies pay either the CFC or the Pillar  2 top-up, 
whatever  higher.  Note,  however,  that  US-headquartered  groups  are  taxed  only  domestically 
(QDMTT), but not under IIR, in the EU. 

Table 6: Impact on EU shareholding entities of today’s situation and after applying two options 

Tax relief = positive 

Two options are assessed accordingly, explained in detail as follows:  

On carving out Pillar 2 companies from CFC rules (Option A): MNEs whose CFCs are subject to 
Pillar 2 are carved out from CFC rules. Accordingly, for US-headquartered MNEs, this carve-out is 
only  granted to  shareholders whose CFC is  subject  to  QDMTT.  In other words, only  the Pillar  2 
QDMTT will be paid by all MNEs subject to Pillar 2, see row 2. Companies would namely save the 
CFC tax charges in case they are subject to QDMTT, see row 4, column 2.  

On including QDMTT in the CFC calculation (Option B): Rather than carving out Pillar 2 MNEs 
from CFC rules, Member States would take into account the QDMTT liability to determine whether 

Taxes paid…CFC, QDMTT (with or without IIR)CFC, IIR (no QDMTT) and Ultimate Parent is not located in the US1.. todayP2 topup + CFC-topupmax(P2-topup, CFC topup)2…under Opt AP2-topupP2-topup3…under Opt Bmax(P2 topup, CFC topup)max(P2 topup, CFC topup)Difference (=impact)4… Opt ACFC-topupmax(0, CFC topup -            P2-topup)  P2 topup + CFC-topup  - max(P2 topup, CFC topup)… Opt B05 
 
 
a  foreign  controlled  subsidiary  is  low-taxed,  therefore  a  CFC,  and,  consequently,  CFC  rules  are 
triggered. In case that the CFC tax rate in a Member State is higher than 15% (which is achieved 
through  the  QDMTT),  the  CFC  tax  charge  would  apply,  and  credit  would  be  provided  for  the 
QDMTT  (see  row  5  of  the  table  above).  The  outcome  indicates  that  tax  charges  saved  by 
companies under this scenario are lower than under Option A.  

4. Analysis of options: Interest Limitation Rule (ILR) 

The basis for the economic analysis and outcomes explained in Section 6.2 are set out in the sub-
sections below.  

To recall, Article 4 of the ATAD introduces an Interest Limitation Rule in the EU, which restricts 
the deductibility of a company’s interest expenses. Under the  Interest Limitation Rule, businesses 
are generally entitled to deduct net borrowing costs, i.e., net interest expenses, up to 30% of their 
earnings  before  interest,  tax,  depreciation  and  amortisation  (so-called  ‘EBITDA  threshold’).  Net 
borrowing  costs  below  an  optional  threshold  of  EUR  3  million  per  year  can  still  be  deducted 
without limit (de minimis). The safe harbour aims to exempt SMEs from the scope of the Interest 
Limitation Rule. This is important because equity-funding is less of an option for small enterprises, 
and they are therefore heavily reliant on loans to fund their activities. These parameters are to be 
seen  as  the  minimum  protection  against  profit  shifting  and  base  erosion.  Member  States  can 
implement  stricter  rules.  This  section  will  demonstrate  that  SMEs  are  currently  protected  very 
effectively  from  limitations  in  interest  deduction.  Yet  the  new  measures  will  improve  protection 
even more.  

4.1 Carving out SMEs (mandatory de minimis of EUR 3 million) 

Impact on companies 

20  Member  States  have  implemented  a  EUR  3  million  de  minimis  or  equivalent  rule.126  Six 
Member States have opted for a lower threshold of up to EUR 1 million so that the number of firms 
protected from the ILR may be lower. These include the Netherlands, Poland, Portugal, Romania, 
Spain and Sweden. Of those, some have other instruments in place, especially the possibility of an 
indefinite  carry-forward  of  interest  expenses  not  deductible  in  a  given  year  due  to  ILR.  Non-
allowed deductions can thus be indefinitely deferred to future years. This is notably the case in the 
Netherlands and Spain. Italy has no de minimis threshold. Yet it also has significant protective tools 
in place that alleviate the impact of ILR for small businesses or exclude them from ILR altogether. 
Non-realised  deductions  and  non-utilized  deduction  capacities127  can  be  carried  forward.  Most 
importantly,  sole  traders  and  partnerships  (società  di  persone)  are  explicitly  excluded  from  the 
scope of the ILR (Art. 96 of the Italian Income Tax Code - TUIR). This would exclude almost 80% 
of all companies in Italy.128  

We  estimate  the  share  of  SMEs  that  today  do  not  see  any  limitation  from  interest  deduction 
limitation, and how this share would change after implementing a de minimis of 3 EUR million in 
all  Member  States  taking  as  the  hypothesis  that  this  would  become  mandatory.  We  simulate  the 

126 Study prepared for the European Commission to support an evaluation of the Anti-tax Avoidance Directive (ATAD) 
- Final Report (2025). 
127 In a given year, interest expenses may stay below the 30% of EBITDA threshold, so that there is unused capacity for 
deduction (i.e., 30% of EBITDA – interest expense).  
128 ZEW (2023), Familienunternehmen in Deutschland und Italien Zur Bedeutung des Unternehmenstyps im Vergleich 
mit ausgewählten europäischen Staaten, Stiftung Familienunternehmen, München, 2023. See p. 38. 

 
 
 
current ILR rules in EU Member States on an Orbis sample of 1.8 million unconsolidated accounts 
from  2024  with  a  positive  taxable  profit.  The  vast  majority  of  these  accounts  are  from  SMEs.129 
The  following  information  and  assumptions  about  the  implementation  of  the  Interest  Limitation 
Rule in Member States is taken on board for the simulation: 

•  The  EBITDA-threshold  is  30%  for  all  EU  Member  States  but  Finland  (25%)  and  the 

Netherlands (24.5%). 

•  The  de  minimis  threshold  is  set  at  EUR  3  million  in  all  Member  States  but  the  following 
seven:  the  Netherlands,  Portugal,  Romania,  Spain (all  EUR  1  million),  Poland  (EUR  0.7 
million), Sweden (EUR 0.44 million) and Italy (nil). 

•  The stand-alone exemption of ATAD Article 4 (3) (b) is implemented in all Member States 
but  Bulgaria,  Czechia,  Denmark,  Greece,  Italy,  Latvia,  the  Netherlands,  Poland,  Portugal, 
Sweden and Croatia. 

•  A  company  is  considered  standalone  if  a  consolidated  account  does  not  exist  and  the 
company is its own global ultimate owner. If there is no global owner given in the data for a 
company it is also considered standalone.  

•  The initiative will abolish the stand-alone  exemption as it is  deemed no longer necessary, 
given  that  standalone  companies  will  be  effectively  protected  through  the  carve-out  of 
SMEs and of low-risk loans from the Interest Limitation Rule (Section 6.2.4.4). 

•  Not being able to deduct interest expenses due to the Interest Limitation Rule increases the 
amount of corporate taxes a company must pay. This effect is calculated by multiplying the 
non-deductible part of interest expenses by the national statutory Corporate Income Tax rate 
of the Member State where the respective company is resident.  

• 

• 

•  Our approach includes the group approach for taxpayer qualification following Art. 4(1) (b) 
of ATAD: Member States may allow to calculate interest expenses and EBITDA at the level 
of the group (i.e., for group members on their respective territory) rather than for each entity 
separately. This rule is currently implemented in all but the following nine Member States: 
Bulgaria, Croatia, Czechia, Cyprus, Finland, Greece, Latvia, Slovakia and Sweden.130  
Italy excludes sole traders and partnerships from the scope of the ILR. Those are taken out 
of the sample. 
Increasing  the  de  minimis  threshold  will  reduce  the  amount  of  corporate  tax  revenues  as 
more  companies  will  be  exempt.  However,  this  effect  is  significantly  reduced  by  existing 
loss carry-forward mechanisms: Interest expense deduction may be limited in a given year. 
Yet those mechanisms would allow deduction in a later year so that these costs are not ‘lost’ 
for deduction. As a result, the effect of a higher de minimis on the deductible amount would 
be  cushioned.  Based  on  the  Joint  Research  Centre’s  corporate  microsimulation  model 
DiRECT  131,  the  effect  of  implementing  a  mandatory  de  minimis  threshold  of  EUR  3 
million  in  all  Member  States  on  tax  revenue  losses  could  be  reduced  by  about  30%  if  we 
allow in the model that losses can be carried forward. 

129  95%  of  these  accounts  are  small  and  medium  sized  in  the  sense  that  their  net  turnover  has  been  below  EUR  50 
million that year. 
130 Deloitte (2023), Implementation of the EU Anti-Tax Avoidance Directive | Tax 
131 For an overview: Corporate tax microsimulation model (DiRECT) - Joint Research Centre. 

 
 
 
 
With  this  information,  for  the  EU  as  a  whole,  about  96%  of  the  unconsolidated  accounts  in  the 
sample do not see any limitation in interest deduction. In reality, that share is likely higher, given 
that small entities are underrepresented in Orbis. 132  

Implementing in all Member States a common and mandatory de minimis of EUR 3 million in the 
same  model  will  increase  that  share  of  companies  not  impacted  by  the  Interest  Limitation  Rule 
from  96%  to  above  99%.  The  number  of  unconsolidated  accounts  impacted  by  the  rule  in  the 
sample will decline considerably, from 75,000 before to only about 12,000 after implementing the 
new  de  minimis.  In  other  words,  about  63,000  companies  (mainly  SMEs)  so  far  dealing  with 
interest  deduction  limitations  will  in  the  future  be  carved  out.  This  information  will  be  used  to 
estimate compliance cost reductions for SMEs in Section 6.2.4.1.  

For  the  Orbis  sample,  EU  corporate  tax  savings  for  SMEs  could  amount  to  EUR    900  million. 
These effects affect those Member States where the current de minimis threshold is lower than the 
current ATAD-ceiling of EUR 3 million or where no de minimis is implemented. 

Orbis  does  not  cover  the  entire  firm  population.  That  is,  all  estimates  provided  here  are  lower 
bound.  This  holds  especially  for  the  63,000  companies  that  will  no  longer  be  limited  in  their 
interest  deduction  as  the  de  minimis  of  EUR  3  million  would  become  mandatory  in  all  Member 
States. Given the underrepresentation, especially of small entities in Orbis, the ‘true’ effect is likely 
higher than expressed through this number. However, the estimated impact on corporate tax savings 
of EUR  900 million is likely less biased through coverage issues in Orbis. This is because small 
entities  contribute  very  little  to  the  aggregate  volume  of  interest  expenses  and  earnings.  For 
example,  excluding  the  smallest  50%  of  observations  does  not  significantly  alter  the  estimated 
effect on corporate tax savings. 

Conclusion: While the current Interest Limitation Rules already protects EU SMEs very well from 
being  impacted  by  the  ILR,  making  the  de  minimis  of  EUR  3  million  mandatory  in  all  Member 
States   will further improve the level  of protection, while ensuring a level  playing and consistent 
approach towards companies across all EU Member States. 

Impact on public finances 

The previous analysis showed that companies will save corporate tax expenditure of around EUR  
900 million, which constitutes the impact on public finances. If the threshold were aligned across 
all Member States, that impact would be sustained in those Member States which do not currently 
implement the EUR 3 million de minimis.  

4.2 Carving out low-risk third-party interest payments 

Impact on companies 

The  prime  purpose  of  the  ATAD  Interest  Limitation  Rules  is  to  prevent  MNEs  from  exploiting 
interest  payments as  a  means of shifting profits.  While  ensuring this, the rationale  for setting  the 
EBITDA  threshold  to  30%  in  Council  Directive  2016/1164  was  to  ensure  that  most  businesses 
would not  be limited in  deducting their  third-party  interest  payments from  their tax base.  This  is 

132 See, for example, Kameli-Özcan et al (2024), How to Construct Nationally Representative Firm-Level Data from the 
Orbis  Global  Database:  New  Facts  on  SMEs  and  Aggregate  Implications  for  Industry  Concentration,  American 
Economic  Journal:  Macroeconomics  2024,  16(2):  353–374;  Bajgar  et  al  (2020),  Coverage  and  representativeness  of 
Orbis data, OECD Science, Technology and Industry Working Papers 2020/06. 

 
 
 
important in the context of MNE groups: these are payments from parties that have no association 
with  the  borrower,  either  as  members  of  the  same  MNE  group  or  because  of  common  control 
(without being part of the same consolidated financial accounts). An OECD study of 2015133 found 
that the share of publicly traded groups able to deduct all their net third-party interest expenses was 
87%  if  the  ratio  to  EBITDA  were  fixed  at  30%.  This  is  shown  in  the  chart  which  displays  the 
percentage of these groups who, as a matter of principle, are able to fully deduct their third-party 
interest  payments  for  alternative  EBITDA  thresholds.  This  percentage  obviously  depends  on  the 
level of the EBITDA threshold. The green-dotted line is the original 2015 OECD estimate.  

Figure  1:  Alternative  parameters.  Impact  on  the  share  of  groups  able  to  deduct  their  third-party 
interest payments 

The  OECD  analysis  at  the  time  used  publicly  traded  multinational  groups’  consolidated  financial 
accounts  from  years  2009-2013;  the  analysis  has  now  been  updated  for  the  purposes  of  this 
Omnibus  on  Taxation  for  the  year  2024,  using  the  firm  database  Orbis.  To  replicate  the  OECD 
analysis,  the  current  analysis  draws  on  a  sample  of  about  3,500  consolidated  accounts  for  listed 
groups for year 2024. These accounts contain information about EBITDA and the level of interest 
payments which – given that the analysis is based on consolidated accounts – should net out group-
internal interest payments and, in this way, include third-party payments only. Only accounts with 
positive EBITDA are considered.  

For an EBITDA-threshold of 15% or higher, findings closely match the original OECD estimate as 
can be seen in the Chart. The line shows the share of groups which today should be able to fully 
deduct their third-party interest expenses, assuming the de minimis at EUR 3 million (as in ATAD). 
It shows that at the ATAD-threshold of 30% of EBITDA, the share of groups who, as a matter of 
principal, are able to deduct their third-party interest payments without limitation is 86%.  

133 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report | 
OECD. 

Taxud calculations based on Orbis; Consolidated accounts with positive EBITDAPercent of listed groups in principle able to fully deduct their third-party interest payments 55%60%65%70%75%80%85%90%95%100%OECD (2015) for 2009-132024 with deminimis 3 mln (Orbis)Threshold (% of EBITDA) 
 
 
 
 
The reality is, however, that both the EUR 3 million de minimis threshold and the 30% EBITDA 
threshold are currently a minimum standard in the ATAD. The thresholds have been implemented 
more  stringently  in  some  Member  States  (see  previous  section).  Taking  into  account  how  the 
respective  de  minimis  and  EBITDA  thresholds  are  effectively  applied  in  Member  States,  the 
analysis  shows  that  currently  only  about  83%  of  groups  in  the  Orbis  sample  end  up  having  their 
interest fully deductible. This represents an important difference from the 86% that was originally 
targeted in the OECD analysis or the 86% if thresholds were applied as in ATAD across the EU-27.  

For  the  purposes  of  this  analysis,  we  assume  that  83%  is  the  share  of  groups  whose  third-party 
interest payments remain fully deductible today (as explained in the previous section), this means 
that 17% of groups in the sample are not able to (fully) deduct their interest expenses. However, not 
all of these 17% of groups are being carved out under the proposed measure because not all of the 
corresponding third-party interest expenses stem from low-risk loans.  

There is strong empirical evidence that group members often take third-party loans and then lend 
on  to  other  group  members.  More  generally,  group  members  may  engage  in  structured 
arrangements whereby the group in its entirety would gain an advantage, often in the form of tax 
savings.134  An  inter-company  loan  could,  for  example,  consist  of  “inflated”  interest  payments  to 
other  members  of  the  same  group  in  low-tax  jurisdictions,  with  the  effect  of  shifting  part  of  the 
group’s  tax  base  thereto.  Indeed,  it  was  found  that  inter-company  loans  actually  react  to  tax-rate 
differences within the MNE.135 To prevent this practice, a restrictive definition of third-party loans 
would be introduced under this option, to make sure that the entity taking out the loan will use the 
debt  to  finance its own  activities, with  no possibility of on-lending within  the group (see  Section 
5.2.4.4).  

Interest payments shown in the consolidated accounts from Orbis used to analyse the effect of this 
carve-out contain external loans from a third party, but would not accurately capture any on-lending 
to other group members. The consolidated account of the group illustrated in Figure 2 will show the 
interest payments from a third-party loan, irrespective of whether this loan is lent on into the group 
by Entity 2 (right chart) or directly channelled to the ultimate borrower, Entity 1 (left chart).  

Figure 2: Direct and on-lent third-party loans from an MNE perspective 

                        Direct loan (low-risk) 

            Loan lent on (‘risky’) 

Taxud illustration 

134 Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report | 
OECD (p. 74). 
135 For example: Buettner and Wamser (2007),  Intercompany loans and profit shifting: evidence from company-level 
data; Desai et al (2003), A Multinational Perspective on Capital Structure Choice and Internal Capital Markets | NBER. 

MNE groupThird partyloan: 100Entity1Entity 2MNE groupThird partyloan: 100Entity1Entity 2loan lent on:100 
 
 
 
           
    
 
 
Only the (‘risky’) on-lending scenario is problematic and would therefore be excluded in the future. 
The carve-out would affect only low-risk loans. In the absence of accurate statistics about the exact 
extent  of  on-lending  relative  to  the  entire  stock  of  third-party  loans,  the  analysis  assumes  an  on-
lending probability of 50% (i.e., a 50% share of ‘risky’ loans on average). 

The main motivation for MNEs to on-lend loans into the group may be to avoid taxes. In that case 
it is fair to assume that loans so far lent on via Entity 2 will, after the exclusion of on-lending, not 
be taken any longer in the future as the group would not be able to avoid taxes via on-lending any 
more. The other 50% of (low-risk) loans will be carved out through the initiative. We thus assume 
that the share of groups which see limitations in their interest deduction due to the ILR – today 17% 
–  will  be  half  that  share  (8.5%)  in  the  future  due  to  the  carve-out  of  low-risk  loans.  This 
information will be used to calculate compliance cost savings in Section 6.2.4.4.  

Impact on public finances 

We apply the assumption of a 50% on-lending probability for third party loans. 50% of loans taken 
by  MNEs  today  could  therefore  be  classified  as  ‘risky’  as  they  may  be  used  for  tax  avoidance 
purposes through on-lending into the group. It was further assumed that, due to the exclusion of on-
lending  in  the  future,  firms  would  not  have  an  incentive  to  lend  these  ‘risky’  loans  from  third 
parties and would thus not take the corresponding loans anymore. 

Under  these  assumptions  the  budgetary  effect  could  be  neutral:  interest  expenses  stemming  from 
half of MNEs’ third-party loans would no longer be deducted from the tax base, and no longer used 
for  tax  avoidance,  generating  additional  tax  revenue.  The  other  (low  risk)  half,  however,  will  be 
carved out from ILR and will therefore become immediately deductible from the tax base.  

5. Simulating the long-term economic impacts of the measures with CORTAX 

5.1 Modelling tax exemption for interest, royalty and dividend payments and lowering of 

compliance costs 

The tax exemption is  approximated by translating the estimated foregone tax revenue from  intra-
EU withholding taxes into an equivalent reduction in the tax rates that exist in the model. Since the 
model does not explicitly include withholding taxes on cross-border payments between companies, 
the  policy  reform  is  approximated  by  lowering  the  tax  rates  applied  to  interest  and  dividend 
income. 

To  do  this,  first  the  amount  of  tax  revenue  currently  associated  with  interest  and  dividend  flows 
received by corporations is approximated. National accounts data on these income flows are used, 
and it is assumed that most inter-corporate dividends are already exempt, so only a small share of 
dividends remains taxable (10%). Applying corporate income tax rates to interest and the remaining 
dividend income provides an estimate of the revenue generated from these capital income flows. 

This  revenue  is  then  compared  with  the  estimated  foregone  tax  revenue  resulting  from  the 
abolishment of intra-EU withholding taxes. Expressing the foregone withholding tax revenue as a 
share of the broader revenue from interest and dividend taxation yields a percentage that reflects the 
relative importance of withholding taxes within capital income taxation. 

 
 
 
Finally,  the  reform  is  approximated  as  a  proportional  cut  in  the  tax  rates  applied  to  interest  and 
dividend  income  equal  to  this  percentage,  so  that  the  reduction  in  tax  revenue  in  the  model 
corresponds  approximately  to  the  revenue  loss  that  would  occur  if  withholding  taxes  were 
abolished.  In  the  calibration,  this  corresponds  to  a  reduction  of  0.83%  in  the  tax  rate  on  interest 
income and 6.48% in the tax rate on dividend income. 

The  reduction  of  compliance  costs  is  introduced  via  targeted  savings  for  cross-border  businesses 
(from MNE headquarters to subsidiaries). 

5.2 Modelling of immediate expensing of acquired tangible R&D assets 

The reform introduces direct expensing for R&D-related tangible assets such as plant, machinery, 
and buildings used for R&D activities. Since CORTAX does not explicitly model R&D investment 
separately  or  allow  a  distinct  depreciation  regime  for  such  assets,  the  reform  is  approximated  by 
modifying the depreciation parameters applied to the corresponding share of the capital stock. 

First, the share of total assets corresponding to R&D-related tangible assets is estimated. This share 
is  constructed  by  combining  three  components:  the  proportion  of  R&D  expenditure  on  tangible 
assets relative to total capitalisable R&D expenditure (based on the JRC Dashboard of Innovative 
Companies), the ratio of R&D capital assets to total fixed assets (from Eurostat capital stock data), 
and  the  ratio  of  fixed  assets  to  total  assets  used  in  the  model  calibration.  Multiplying  these  three 
elements yields an estimate of the share of total assets that corresponds to tangible assets used for 
R&D. 

In the model, the tax treatment of investment is represented through two depreciation components: 
an  immediate  deduction  in  the  first  year  and  the  net  present  value  (NPV)  of  deductions  in 
subsequent years. To approximate direct expensing for the estimated share of R&D tangible assets, 
the  depreciation  structure  is  adjusted  by  shifting  part  of  the  depreciation  allowances  from  future 
years to the first year. Specifically, the NPV of depreciation allowances in later years is reduced in 
proportion  to  the  estimated  share  of  R&D  assets,  while  the  immediate  expensing  component  is 
increased accordingly. 

This adjustment preserves the overall magnitude of depreciation allowances while bringing forward 
part of the deductions to the first year, thereby generating accelerated depreciation for the relevant 
share of capital. The resulting country-specific depreciation parameters constitute the policy shock 
introduced into the model. 

 
 
ANNEX 5: COMPETITIVENESS CHECK  

Overview of the impacts on competitiveness  

Dimensions of 
Competitiveness 

Impact of the initiative 
(++ / + / 0 / - / -- / n.a.) 

References to sub-sections of the 
main report or annexes 

Cost and price competitiveness  ++ 

International competitiveness  

Capacity to innovate 

SME competitiveness 

+ 

+ 

++ 

Synthetic assessment  

Chapters 5, 6, 7 

Chapters 5, 6, 7 

Chapters 5, 6, 7 

Chapters 5, 6, 7 

The preferred option is expected to have an overall positive effect on competitiveness. By reducing 
unnecessary  tax  compliance  and  reporting  burdens,  clarifying  concepts  and  terminology,  and 
replacing overlapping or divergent national approaches with a more coherent EU framework while 
maintaining  high  tax  standards,  the  initiative  should  lower  compliance  and  administrative  costs, 
improve legal certainty and remove some continued tax barriers for cross-border business activity 
in  the  internal  market.  These  effects  are  expected  to  strengthen  cost  competitiveness,  support 
investment  decisions,  and foster a more innovation-friendly and resilient business  environment  in 
the Union.  

Competitive position of the most affected sectors 

In principle, the Omnibus on Taxation is not sector-specific in nature but horizontal, as it seeks to 
streamline and  clarify the EU framework for direct  taxation across the internal  market.  The most 
directly  affected  sectors  are  likely  to  be  those  with  the  greatest  exposure  to  cross-border  group 
structures and transactions covered by the Directives in scope, notably sectors featuring significant 
intra-group financing, royalty payments, reorganisations or frequency in tax disputes. Furthermore, 
large MNEs which are subject to the additional compliance burden and requirements related to the 
EU Pillar 2 Directive, will benefit in particular under the preferred options, e.g., the carveout from 
CFC rules in light of Pillar 2. In addition, some sectors benefit from targeted measures: the defence 
sector, for example, will be alleviated from the interest limitation rule, as well as, optionally, other 
sectors, such as social housing.  

 
 
 
 
ANNEX 6: SME CHECK  

Overview of impacts on SMEs 

Relevance for SMEs  

The initiative is relevant for SMEs because tax-compliance burdens fall proportionately more 
heavily  on  smaller  businesses  and  this  Omnibus  on  Taxation  aims  to  specifically  exempt 
SMEs  from  some  EU  tax  obligations  in  a  targeted  manner.  Also  more  generally,  greater 
clarity, fewer overlaps, and more coherent EU rules can materially reduce legal, advisory, and 
administrative costs, which often represent  a significant  for SMEs  to  engage in  cross-border 
activity.  The  direct  effects  are  expected  to  be  the  strongest  for  small  and  medium-sized 
enterprises  with  foreign  subsidiaries  or  high  reliance  on  debt  financing  The  Omnibus  on 
Taxation  is  designed  so  that  simplification  is  real  for  SMEs  in  practice,  especially  by 
providing  full  carveouts  where  possible,  but  also  through  clearer  EU  tax  terminology  and 
mechanisms, and the elimination of national processes for some cross-border payments.  

(1) 

IDENTIFICATION OF AFFECTED BUSINESSES AND ASSESSMENT OF RELEVANCE 

Are SMEs directly affected? (Yes/No) In which sectors? 

Yes, all sectors. 

Estimated number of directly affected SMEs 

In  the  Orbis  company  database,  the  number  of  SMEs  affected  by  the  EU  direct  tax  acquis 
under this Omnibus on Taxation (SMEs with cross-border subsidiaries) is estimated at 55 000. 

Estimated number of employees in directly affected SMEs 

n/a 

Are SMEs indirectly affected? (Yes/No) In which sectors? What is the estimated number 
of indirectly affected SMEs and employees? 

SMEs are directly affected.  

(2) CONSULTATION OF SME STAKEHOLDERS 

How has the input from the SME community been taken into consideration? 

 SME  interests  were  considered  mainly  through  engagement  with  representative  business 
associations,  which  aggregate  and  articulate  the  views  of  their  SME  constituencies.  This 
channel provided a pragmatic and proportionate means of integrating SME-relevant concerns 
and practical insights into the assessment, complemented by other available evidence. 

Are SMEs’ views different from those of large businesses? (Yes/No) 

 
 
 
 
 
Yes. As regards SMEs, business associations argue that tax compliance costs are a significant 
hurdle  for  smaller  businesses  to  enter  cross-border  markets,  while  in  any  case  they  are  less 
concerned by the EU tax protections, as they often do not even have sufficient size or the type 
of  structure  or  cross-border  footprint,  to  use  the  tax  planning  strategies,  compared  to  larger 
enterprises which are more internationally active. 

(3) ASSESSMENT OF IMPACTS ON SMES136 

What are the estimated direct costs for SMEs of the preferred policy option?  

Qualitative assessment 

The initiative should bring no or very limited direct costs for SMEs.  Like all companies, SMEs may 
need  to  acquaint  with  some  of  the  simplified  rules  and  clarifications,  but  the  Omnibus  on  Taxation 
mainly brings exemptions regarding SMEs. Thanks to the explicit carve-out in favour of SMEs from 
the CFC rules and de facto exclusion from the interest limitation rule, SMEs will not be concerned by 
the  mandatory  application  (and  therefore  legislative  change  with  a  one-off  cost)  of  Model  A  under 
CFC, nor by the mandatory application of the existing options for the interest limitation rule.  

Quantitative assessment 

What are the estimated direct benefits/cost savings for SMEs of the preferred policy option137? 

Qualitative assessment 

In principle, any impact of the policy options will not differ between large companies and  SMEs. In 
addition, the Omnibus on Taxation includes measures in favour of SMEs: a targeted carveout from the 
CFC rules and a de facto exclusion from the interest limitation rule of the ATAD.   

Quantitative assessment 

SMEs in line with the Commission objective to prioritise burden reduction for SMEs (35%, compared 
to 25% generally), the specific exemption of SMEs from CFC rules and the de facto carve-out from 
the interest limitation rule are estimated to bring additional cost savings of around EUR 90 million per 
year  respectively  EUR  33  million  per  year,  on  top  of  the  general  cost  savings  from  the  other 
simplification measures, which will benefit both SMEs and larger  businesses.    

What  are  the  indirect  impacts  of  this  initiative  on  SMEs?  (Fill  in  only  if  step  1  flags  indirect 
impacts) 

n/a 

(4) MINIMISING NEGATIVE IMPACTS ON SMES 

Are SMEs disproportionately affected compared to large companies? (Yes/No) 

136 The costs and benefits data in this annex are consistent with the data in annex 3. The preferred option includes the 
mitigating measures listed in Section 4.  
137 The direct benefits for SMEs can also be cost savings. 

 
 
 
 
 
 
If yes, are there any specific subgroups of SMEs more exposed than others? 

SMEs  are  disproportionately  affected  compared  to  large  companies  under  the  baseline 
scenario because SMEs currently bear higher tax compliance costs in proportion to their size. 
To  address  this  issue  in  the  area  of  EU  direct  tax  legislation,  the  Omnibus  on  Taxation 
proposes  explicit  and  de  facto  exclusions  in  favour  of  SMEs.  The  Omnibus  on  Taxation 
should  consequently  particularly  benefit  SMEs,  thereby  minimising  any  negative  impacts 
thereon.  

Have mitigating measures been included in the preferred option/proposal? (Yes/No)  

As mentioned, the proposal includes measures specifically to alleviate compliance burdens for 
SMEs.  

CONTRIBUTION TO THE 35% BURDEN REDUCTION TARGET FOR SMES 

Are there any administrative cost savings relevant for the 35% burden reduction target 
for SMEs? 

The  proposal  includes  specific  exemptions  for  SMEs  in  two  areas,  estimated  to  bring 
additional  cost  savings  for  SMEs  of  around  EUR  90  million  per  year  respectively  EUR  33 
million per year. This will contribute to the 35% burden reduction target for SMEs.  

 
 
 
 
 
ANNEX 7:  TIMELINE OF EU DIRECTIVES IN DIRECT TAXATION 

Over  the  last  35  years,  the  EU  has  adopted  a  relatively  limited  but  highly  influential  body  of 
legislation in the field of direct taxation, mainly targeting: 

• 

• 

• 

• 

corporate taxation,  

cross-border restructuring,  

anti-tax avoidance,  

administrative cooperation, and  

•  dispute resolution.  

Below is a chronological timeline of the principal directives (excluding administrative corporation) 
that has been adopted within the area of direct taxation. 

Figure 11: Timeline of EU direct taxation directives 

1990 — First Generation of Corporate Tax Directives 

Parent-Subsidiary Directive 

•  Directive 90/435/EEC  

•  Eliminated withholding taxes and double taxation on profit distributions between associated 

companies in different Member States.  

•  Later recast as Directive 2011/96/EU.  

Merger Directive 

•  Directive 90/434/EEC  

• 

Introduced  tax  neutrality  for  cross-border  mergers,  divisions,  transfers  of  assets,  and 
exchanges of shares.  

•  Later recast as Directive 2009/133/EC.  

 
 
 
 
2003 — Taxation of Savings and Interest 

Interest and Royalties Directive 

•  Directive 2003/49/EC  

•  Abolished  withholding  taxes  on  cross-border  interest  and  royalty  payments  between 

associated companies.  

2011 — Recast 

Recast Parent-Subsidiary Directive 

•  Directive 2011/96/EU  

•  Consolidated and modernized the 1990 directive.  

2014–2015 — Anti-Abuse Measures 

Amendment to Parent-Subsidiary Directive 

•  Directive 2014/86/EU  

•  Addressed hybrid loan mismatches.  

•  Directive 2015/121/EU  

•  Added a mandatory anti-abuse rule to the Parent-Subsidiary Directive.  

2016 — Anti-Tax Avoidance Package 

Anti-Tax Avoidance Directive (ATAD I) 

•  Directive (EU) 2016/1164  

• 

Introduced:  

o 

interest limitation rules,  

o  exit taxation,  

o  GAAR,  

o  controlled foreign company (CFC) rules,  

o  hybrid mismatch rules.  

 
 
 
 
 
 
ATAD II 

•  Directive (EU) 2017/952  

•  Extended hybrid mismatch rules to third countries.  

2017 — Tax Dispute Resolution 

Tax Dispute Resolution Directive 

•  Directive (EU) 2017/1852  

• 

Improved mechanisms for resolving double taxation disputes within the EU.  

2022 — Global Minimum Tax  

Pillar 2 / Minimum Tax Directive 

•  Directive (EU) 2022/2523  

• 

Implemented the OECD global minimum effective tax rate of 15% for large multinational 
groups.