Amsterdam, 22/04/2016 (Agence Europe) - Germany is insisting on the application within the EU of the rules on 'controlled foreign companies' ('CFC') discussed in the framework of the proposed anti-tax avoidance directive (ATAD).
Readers may recall that these rules reallocate the income of low-taxed controlled subsidiaries to the parent company. In this scenario, therefore, the parent company has to pay tax on this income in the state in which it has its headquarters, generally high-tax countries.
In its proposal, the Commission saw its options limited by the case-law of the Court of Justice of the EU (Cadbury-Schweppes judgement of 2006). This judgement stated that the British legislation on CFC was applicable only to artificial tax entities for situations inside the EU.
In a session document prepared by the German delegation ahead of the technical meeting of 25 April and of which EUROPE has had sight, Berlin stresses that its concerns, which the recommendations of the OECD ('BEPS' action plan) address “are not limited to jurisdictions outside the EU”. “It is far from being clear where the lines are to be drawn between a wholly artificial arrangements and the actual pursuit of an economic activity”, the German delegation writes. Furthermore, “when reference to an already 10-year-old Court jurisprudence is made, we are not prevented from considering also the BEPS project and further new developments. It should be mentioned that the CJEU is principally prepared to revise its jurisprudence (…)”. The German delegation therefore proposes wording to the effect that the CFC rules would not apply “where the taxpayer can establish that the controlled foreign company has actually been established for valid commercial reasons which reflect adequate economic activity and the controlled foreign company's income is attributable to this activity”.
In a fifth proposed compromise prepared for 25 April, these rules were once again tightened up slightly, particularly in that the switchover clause (which has similar aims to the CFC rules, but is not concluded in the OECD's BEPS plan) is still in the hot seat. As things stand, the implementation of this clause has been limited to situations in which there is no bilateral tax agreement in place, but there is still the risk that it could be cut altogether, according to Council sources. Ireland, Slovenia and Estonia are reported still to be opposing any provision on CFCs in the directive, Slovenia's reservations on the grounds of administrative capacity rather than political reasons.
Various types of income that had disappeared from the scope of application of the previous proposed compromise, in order to come into line with the OECD (see EUROPE 11531), have made a reappearance. The British approach, whereby member states may only include in its tax base the non-distributed income of the CFC “generated from non-genuine arrangements set in place with the principal aim of obtaining a tax advantage” for situations concerning third countries (see EUROPE 11528), is still in brackets.
There are also suggestions that the scope of the CFC rules could be extended to cover permanent establishments located in third countries, but this also remains within brackets at this stage.
France has also prepared comments on the limitation of the tax deduction of loan interest and the United Kingdom is prepared some on hybrid mismatches. EUROPE will return to this. (Original version in French by Elodie Lamer)