EU Finance Ministers Approve Anti-abuse Clause in Parent-Subsidiary Directive

by: Smith and Howard

January 7, 2015

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European Union finance ministers approved changes to the bloc’s Parent-Subsidiary Directive, which introduces a new general anti-abuse rule to reduce tax avoidance by corporate groups.

The Directive was designed to eliminate tax obstacles for profit distributions between parent companies and subsidiaries based in different Member States. The Directive gives a tax exemption for dividends and other profit distributions paid by subsidiary companies to their parent companies. This eliminates the risk of double taxation — in other words, the same income being taxed in the Member State of the subsidiary and in the Member State of the parent company.

The anti-abuse rule is a de minimis standard; countries may adopt stricter national laws provided they meet minimum EU requirements.

Under the common standard, tax exemptions for profit distributions will not be granted if an arrangement is not “genuine” and has been put in place to obtain a tax advantage that defeats the purpose of the Parent-Subsidiary Directive.

An arrangement is “genuine” if it is put into place for valid commercial reasons that reflect economic reality.

The Member States also agreed to take into consideration the new anti-abuse provision when drafting possible anti-abuse provisions to be included in the Interest and Royalties Directive. They also said they would try to inform each other when they apply the provision.

Automatic information exchange

The ministers also agreed to expand the scope of legislation requiring tax authorities from each Member State to automatically exchange information regarding financial assets, including interest, dividends and capital gains.

The legislation also incorporates the global standard for automatic exchange of information of financial account information drawn up by the Organization for Economic Co-operation and Development, approved in September by the Group of 20.

Officials note that the automatic exchange of information is an important means for strengthening the efficiency and effectiveness of tax collection.

More disputes ahead?

Since there is no clear guidance on the terms used in the general anti-abuse rule, it allows EU Member States to interpret the terms in their own way. This may, some believe, create uncertainty for many European holding companies with EU subsidiaries and lead to an increasing number of tax disputes. International groups may need to improve the business rationale and economic substance of their holding companies in order to benefit from the Directive.

Member States must bring into force the laws, regulations and administrative provisions necessary to comply with the amended Directive by Dec. 31, 2015, at the latest.

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