The European Commission has been working for a long time on eliminating or at least substantially curbing the possibility of aggressive tax planning based on the evasion of the Directive. The first specific proposal in this regard was submitted by the European Commission in November 2013.
The proposal for the amendment of the Parent-Subsidiary Directive has (had) two main objectives. Firstly, it aimed specifically to eliminate “hybrid mismatch” agreements (on which we reported in this post) and secondly, it aimed to generally prevent abuse. This effort was raised at the November meeting of ECOFIN as a proposal for a “de minimis” regulation the purpose of which was for the Member States to step up in a standardized and strict manner against the agreements/transactions aimed solely at benefiting from the advantages deriving from the Directive without any actual economic substance.
The accepted proposal includes the following major changes:
- One of the most important modifications, substantial in itself (and appearing in this form for the first time in the Directive) is the general principle that transactions should be judged according to their actual economic content. According to a new provision added to the Directive Member States shall not grant the benefits of the Directive to an arrangement (or a series of arrangements) that, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage, is not genuine having regard to all relevant facts and circumstances.
- An arrangement (or a series of arrangements) shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. The “to the extent approach” can be effective in cases where the entities concerned as such are genuine (were established for genuine economic purposes) but the features of the transaction do not reflect economic reality.
- The amended Directive provides that, when assessing whether an arrangement/transaction is abusive or not, Member States’ tax administrations should undertake an objective analysis of all relevant facts and circumstances.
- While Member States should use the anti-abuse clause to tackle arrangements which are, in their entirety, not genuine, there may be cases where single steps or parts of an arrangement are, on a stand-alone basis, not genuine. Member States should be able to use the anti-abuse clause also to tackle these specific steps or parts, without prejudice to the remaining genuine steps or parts of the arrangement. According to the amendment proposal, a specific arrangement/transaction may, in its have genuine economic content, despite containing parts/elements, which are, in the given case, problematic. Tax authorities must proceed objectively in this regard and must qualify legal transactions in their entirety.
- An important objective is for the amended Directive not to affect in any way Member States’ ability to apply their domestic or agreement-based provisions aimed at preventing tax evasion, tax fraud or abuse.
- When Member States adopt the amended Directive in their domestic tax regulations, they shall contain a reference to the Directive and Member States shall communicate to the Commission the amended text of their domestic regulations (amended due to the adoption of the new provisions of the Directive).
- A further provision is that Member States shall communicate to the Commission the text of the main provisions of national law which they adopt in the field covered by the Directive.
In its statement prepared in relation to the amendment of the Directive, the Economic and Financial Affairs Council (ECOFIN) of the finance ministers of the Member States of the European Union discusses the possibility of integrating the present anti-abuse clause of the Parent-Subsidiary Directive in the Interest and Royalties Directive 2003/49/EC.
An amendment of the Directive has already been accepted in July 2014 regarding “hybrid loan mismatches” and on 9 December 2014, ECOFIN also approved the general anti-abuse amendments based on which the amendment of the Parent-Subsidiary Directive was now officially accepted (in a consolidated structure including anti-hybrid financing amendments).
The target date did not change. Member States have to integrate the provisions of the amended Directive in their national law by 31 December 2015.
We have to note that OECD is also involved deeply in general anti-abuse measures on which it prepared a special action plan (Action No. 6). I will report on this action in my upcoming blog post soon.
Although the final OECD material is only expected in September 2015, it is obvious that the EU is the leader in this area as it has already integrated some of the measures formulated in Action No. 6 in a directive. This is a clear sign that the measures proposed in the OECD BEPS actions will appear in the regulations of EU Member States in the next few years.