Brussels, 17/03/2016 (Agence Europe) - The provisions of the proposed anti-tax evasion directive (ATAD) with regard to the treatment of hybrid mismatches and the switchover clause may end up applying only if no other safety net exists, according to the second proposed compromise, of which EUROPE has had sight. This will be the basis for a discussion between the member states at expert level this Friday 18 March 2016.
The switchover clause provides that a member state may not exempt certain foreign income (distribution of profits, proceeds from selling shares) originating in third countries with, in return, the granting of a tax credit, if the corporate legal taxation rate in the third country is less than 40% of the legal rate of the member state. The proposed compromise of the Dutch Presidency of the Council states that this clause “shall not apply where a convention for the avoidance of double taxation is in place between the member state of the taxpayer and the third country where the entity or permanent establishment is subject to corporate taxation”. It is hard to say whether this proposal will be enough to win over the many member states which have misgivings over including this clause in the text at all.
As regards the treatment of hybrid mismatches, which aims to prevent different assessments of the legal nature of a financial product or of an entity between two national systems from leading to double taxation, the Presidency is proposing to transform this article into a safety net for intra-EU situations. The Commission's proposal does not yet cover situations with third countries. The proposed compromise therefore states that the article regarding hybrid mismatches will apply only if the hybrid mismatch is not already solved by other means.
At this stage, the Presidency is not including any exemptions to the rule on limiting the tax deduction of loans for projects of public interest, as Ireland and the United Kingdom are reported to be calling for, as is the insurance sector, speaking through Insurance Europe. This is expected to be included in the next compromise proposal.
While the Commission is proposing that companies may postpone tax deductions to which it is not entitled in a given year to future financial years (carryforward), the Presidency is proposing to limit this postponement to five years and is including the possibility to carry back, which it has set at three years. Ireland, in particular, is calling for more time to implement this provision.
Some changes have also been made to the rules on controlled foreign companies (CFC). These rules reallocate the revenue of a controlled subsidiary subject to low taxation to the parent company. In this scenario, the parent company therefore has to pay tax on this revenue in the state in which it has its headquarters, which is usually a high-taxation country. Amongst other things, the discussions examined the transaction-based or entity-based approach. As regards situations with third countries, both approaches will be possible and it will be up to the member states to decide. For intra-EU situations, the case-law of the Court of Justice of the EU has drawn its lines in the sand (Cadbury-Schweppes judgment of 2006). This judgment stated that the British legislation on CFC was applicable only to artificial tax arrangements. The Presidency's proposal therefore aims to give the member states the latitude to apply the same approach to both intra-EU and third-country situations; in other words, an entity-based approach and covering only wholly artificial entities in the EU, or a transaction-based approach which may also cover entities to the extent that they are covered by non-genuine arrangements. (Original version in French by Elodie Lamer)