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Tackling Tax Avoidance: Commission tightens key EU corporate tax rules

Today the Commission proposed amendments to key EU corporate tax legislation, in order to significantly reduce tax avoidance in Europe. The proposal will close loopholes in the Parent-Subsidiary Directive, which some companies have been using to escape taxation. In particular, 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. Today's proposal was foreseen in the Commission's Action Plan against tax evasion last year (IP/12/1325) and will be an important contribution to the on-going battle against corporate tax avoidance at both EU and global level.

Algirdas Šemeta, Commissioner for Taxation said: "EU tax policy is heavily focussed on creating a better environment for businesses in the EU. This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them. Today's proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."

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, certain companies have exploited provisions in the Directive and mismatches between national tax rules to avoid being taxed in any Member State at all (double non-taxation). Today's proposal aims to close these loopholes.

First, it updates the anti-abuse provision in the Parent Subsidiary Directive i.e. the safeguard against abusive tax practices. In line with the Commission's Recommendation on Aggressive Tax Planning (IP/12/1325), the proposal 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.

Second, 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.

Background
The issue of corporate tax avoidance is very high in the political agenda of many EU and non-EU countries, and the need for action to combat was highlighted at recent G20 and G8 meetings.

On 6 December 2012 the Commission presented an Action Plan for a more effective EU response to tax evasion and avoidance. This action set out a comprehensive set of measures, to help Member States protect their tax bases and recapture billions of euros legitimately due. The revision of the Parent Subsidiary Directive is one of the measures announced in the action plan.

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