The Anti Tax Avoidance Directive includes six anti-abuse measures to address tax avoidance: interest deductibility, exit taxes, a switch-over clause, general anti-abuse rule (GAAR), controlled foreign company (CFC) rules and a hybrid mismatch framework. The Directive prescribes a minimum protection for Member States’ corporate tax systems.
A summary of the anti-abuse measures is provided, based upon the European Commission’s presumption and related summary of actions to address such abuses.
Presumption: Corporate taxpayers incur interest in high-tax jurisdictions, with income reported in low/nil tax jurisdictions, thereby shifting profits.
Summary: Net (of interest income) interest expense is limited to a 10-30% EBITDA basis.
Presumption: Tax residence is moved solely to benefit from a low-tax jurisdiction.
Summary: Tax on transferring assets cross-border to capture unrealized profits.
Presumption: Low-taxed income is moved within the EU to shift profits.
Summary: Foreign income is subject to a tax, with foreign tax credits, vs. an exemption.
General Anti-Abuse Rule (GAAR)
Presumption: Tax planning schemes are abusive.
Summary: Backstop defense rule for “abusive tax arrangements.”
Controlled foreign company (CFC) rules
Presumption: Income is passive and is shifted to low-tax jurisdictions.
Summary: Reattributes income to a parent company that is taxed at a higher rate.
Hybrid mismatch framework:
Presumption: Double deduction situations due to legal mismatches are being sought.
Summary: Legal characteristics of payment country carries over to recipient country.
The detailed rules, which require a unanimity of approval by the Member States, are complex and far-reaching. The breadth of the rules captures the perceived presumptions stated for each measure, notwithstanding the fact that such measures may also produce economically disadvantageous tax situations (i.e. paying interest from a low-tax to a high-tax jurisdiction), and the possibility of a Member State to legislate rules that move beyond the minimum threshold set forth.
These rules are also being legislated unilaterally outside of the EU Market, such that there may be very broad anti-abuse themes globally with each country having deviations from a general rule that will provide complexity and areas of disagreement for many years.