Brussels 17/05/2016 (Agence Europe) - It is looking extremely likely that the EU finance ministers will themselves have to deal with the question of the application, within the EU, of certain provisions to fight tax optimisation by multinational companies, more specifically the rules on controlled foreign companies ('CFC').
These rules reallocate the revenue of a low-taxed controlled subsidiary to its 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. As no solution could be found by the working group, the ministers will probably have the job of determining whether these rules should apply within the EU and, if so, under what circumstances. The first solution would be to apply these rules unless the taxpayer is able to establish that a CFC has been set up for valid commercial reasons and that it has genuine activities (the 'carve-out'). This solution is not much to the liking of Luxembourg, Malta or Hungary. Another alternative would be an approach based purely on the Cadbury-Schweppes judgement of the Court of Justice of the EU, which states that the intra-EU application of these rules should be limited to purely artificial entities.
Ahead of the Ecofin Council of 25 May, the Dutch Presidency of the Council hopes to have eliminated the issue of the two approaches to CFCs, one based on the type of revenue to be included in the tax base of the taxpayer, the other - the British approach - based on including revenue from 'wholly artificial' arrangements in the tax base. In a document prepared on Friday 13 May, the states have a choice between these two approaches, as the British approach is no longer in brackets. France, Italy, Germany and Denmark are reported to oppose the British approach. One source referred to bilateral contacts between London and Berlin to resolve the issue.
Ireland, furthermore, is reported to have tabled a political reservation regarding the CFC rules. First of all, Dublin does not approve of the attempt to undermine the Cadbury-Schweppes judgement and secondly, it does not like the fact that a rate would be able to trigger the application of the CFC rules. These rules, indeed, would apply once the profits of the controlled company are subject to an effective rate of less than 50% of the rate applicable in the member state in question. At the Council, it was pointed out that the OECD's BEPS project, to which Dublin has subscribed, contains CFC provisions.
The 'switchover' clause (moving over from exoneration to tax credit), which the Commission wanted to see in addition to the CFC rules and which is not in BEPS, is now in brackets. It will probably be deleted, as there is considerable opposition to keeping it in the text.
On hybrid mismatches, it would appear that the Council has finally decided not to cover more situations (regarding third countries, in particular) at this stage. The text is therefore expected to stay minimalist, even though Ireland, the UK and Germany wanted to go further. If there is an agreement at Ecofin, the Council could undertake to continue its work on this point.
As regards the general anti-abuse rule, it is no longer stated clearly in the text that this should cover withholding tax if this is part of the fiscal regime of the companies of a state, even though Denmark explicitly called for this. The Presidency's explanation is that this extra bit of text created more confusion than anything else and leaves the issue open to the interpretation of the states.
Finally, regarding the limitation of the tax deduction of loan interest, the 'grandfather clause' has been tweaked. This will now stipulate that loans entered into before 20 January 2016 and which have not been modified will not be covered by this provision. This was particularly important to Belgium.
The Dutch Presidency is absolutely determined to seal an agreement at this Ecofin Council, even if this means continuing the work over the entire weekend. Expert-level meetings are scheduled for the end of the week. The meeting of the Committee of Permanent Representatives, on Wednesday 18 May, is expected to shed more light on whether or not it will be possible to reach an agreement. Readers may recall that the text was negotiated in just four months with no fewer than ten draft compromises. If the Presidency gets the agreement in the bag, it will be completely unprecedented. However, some delegations are criticising the Netherlands for seeking a fiscal success under its Presidency at any price, which may mean that some of the delegations' concerns have been left behind. (Original version in French by Elodie Lamer)