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Parent-Subsidiary Directive: EC proposes anti-avoidance reform

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Loopholes in the Parent-Subsidiary Directive (Council Directive 2011/96/EU) exploited by companies avoiding corporation tax are to be closed as part of a European Commission’s action plan to tackle tax evasion. The proposed reforms to the directive include:

  • new restrictions to prevent double non-taxation in relation to hybrid loan arrangements; and
  • updating the anti-abuse provision to require member states to adopt a common anti-abuse rule. As Deloitte observed: ‘This proposal would [allow member states] to tax on the basis of real economic substance. [It] is targeted at groups that interpose an intermediate holding company in the EU to act as a “letterbox” company to take advantage of lower withholding tax rates’.

Member states must implement the amended directive by 31 December 2014. Read the text of the EC proposal and a related Q&A.

The Financial Times reported (25 November) EU tax commissioner Algirdas Semeta as saying that the resulting revenues raised would be ‘in the magnitude of billions of euros’. The newspaper noted that ‘like any EU tax proposal, the initiative requires unanimous support from all EU member states and is likely to hit a wall of objections from a minority of countries that could hold up the reforms. Diplomats involved expect Luxembourg, and perhaps the Netherlands, to raise concerns’.

Michael Izza, ICAEW chief executive, commented: ‘There is immense political momentum behind the drive to improve the international tax system ... [but] the international tax system cannot be improved overnight. It can also not be fixed by making changes in only one part of the world as corporations of the 21st century are global and mobile. It requires international collaboration at the highest level. Businesses and governments must work together to find a solution that works and is fair for all, and we are supportive of the project led by the OECD.’

However, David Ingall, past president of the UK200Group, said: ‘This is a good example of an EU Commissioner jumping on the bandwagon to justify their existence. Frankly, we would be better off in drawing our own legislation a little tighter as then we are at least nominally in control of the situation.’