Directive 2016/1164 of 12 July 2016 of the Council of the EU laying down rules against tax avoidance practices that directly affect the functioning of the internal market
One of the key objectives of this Directive is to improve the resilience of the internal market as a whole against cross-border tax avoidance practices. It establishes rules against the shrinking of tax bases in the internal market and the shifting of profits out of the internal market. The following rules are adopted: limitations to deductibility of interest, exit taxation, a general anti-abuse rule, controlled foreign company rules and rules to tackle hybrid mismatches. Where the application of those rules gives rise to double taxation, taxpayers should receive relief through a deduction for the tax paid in another Member State or third country, as the case may be.
I. Limitations to deductibility of interest
In an effort to reduce their global tax liability, groups of companies have increasingly engaged in shrinking of tax bases and shifting of profits through excessive interest payments. The interest limitation rule is necessary to discourage such practices by limiting the deductibility of taxpayers' exceeding borrowing costs. It is therefore fixed a ratio for deductibility which refers to a taxpayer's taxable earnings before interest, tax, depreciation and amortisation (EBITDA).
II. Exit taxation
Exit taxes have the function of ensuring that where a taxpayer moves assets or its tax residence out of the tax jurisdiction of a State, that State taxes the economic value of any capital gain created in its territory even though that gain has not yet been realised at the time of the exit. Transfers of assets, including cash, between a parent company and its subsidiaries fall outside the scope of the provided rule on exit taxation. Exit tax should not be charged when the transfer of assets is of a temporary nature and the assets are set to revert to the Member State of the transferor, where the transfer takes place in order to meet prudential capital requirements or for the purpose of liquidity management or when it comes to securities' financing transactions or assets posted as collateral.
III. General anti-abuse rule
General anti-abuse rules (GAARs) feature in tax systems to tackle abusive tax practices that have not yet been dealt with through specifically targeted provisions. GAARs should be applied to arrangements that are not genuine; otherwise, the taxpayer should have the right to choose the most tax efficient structure for its commercial affairs.
IV. Controlled foreign company rules
Controlled foreign company (CFC) rules have the effect of re-attributing the income of a low-taxed controlled subsidiary to its parent company. Then, the parent company becomes taxable on this attributed income in the State where it is resident for tax purposes. Depending on the policy priorities of the respective State, CFC rules may target an entire low-taxed subsidiary, specific categories of income or be limited to income which has artificially been diverted to the subsidiary.
V. Rules to tackle hybrid mismatches
Hybrid mismatches are the consequence of differences in the legal characterisation of payments (financial instruments) or entities and those differences surface in the interaction between the legal systems of two jurisdictions. The effect of such mismatches is often a double deduction (i.e. deduction in both states) or a deduction of the income in one state without inclusion in the tax base of the other. To neutralise the effects of hybrid mismatch arrangements, there are established rules whereby one of the two jurisdictions in a mismatch should deny the deduction of a payment leading to such an outcome.
Member States shall, by 31 December 2018, adopt and publish the laws, regulations and administrative provisions necessary for transposition of this Directive.
