The European Commission has put forward certain amendments to key EU corporate tax legislation, in order to significantly reduce tax avoidance in Europe.
The proposal will address deficiencies in the Parent-Subsidiary Directive, which may allow the operation of structures that will benefit from reduced taxation. Companies, including Cyprus companies, will no longer be able to exploit differences in the way intra-group payments are taxed across the EU to avoid paying any tax at all. The result will be that the Parent-Subsidiary Directive can continue to ensure a level-playing field for honest businesses in the Single Market without opening opportunities for aggressive tax planning.
The Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different Member States, from being taxed twice on the same income (double taxation). However, this gives room for mismatches between national tax rules and potential opportunities to avoid being taxed in any Member State at all (double non-taxation). The new proposal updates the anti-abuse provision in the Parent Subsidiary Directive i.e. the safeguard against abusive tax practices and obliges Member States to adopt a common anti-abuse rule.
This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance. At the same time, it will ensure that the Directive is tightened up so that specific tax planning arrangements (hybrid loan arrangements) cannot benefit from tax exemptions. Currently, the Parent Subsidiary Directive obliges Member States to give parent companies a tax exemption for the dividends they receive from subsidiaries in other Member States. However, in some cases, the Member States where the subsidiaries are based classify these payments as tax deductible "debt" repayments.
The result is that the payments from the subsidiary to the parent company is not taxed anywhere. Exploiting such mismatches is the basis for a specific type of tax planning arrangement (hybrid loan arrangements) which today's proposal will clamp down on. Under the proposal, if a hybrid loan payment is tax deductible in the subsidiary's Member State, then it must be taxed by the Member State where the parent company is established. This will stop cross-border companies from planning their intra-group payments to enjoy double non-taxation.
Member States are expected to implement the amended Directive by 31 December 2014.