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On the 28 January 2016, the European Commission (the “Commission”) released a proposal for a Council Directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market. The Commission’s proposal is a key part of its consolidated Anti- Tax Avoidance Package, which seeks to address global concerns as well as demands from the European Parliament, several European Union Member States (the “Member States”), businesses and civil societies. This is, in turn supported by a range of international initiatives to combat corporate tax avoidance such as the OECD’s Base Erosion and Profit Shifting (the “BEPS”) project.


The Anti-Tax Avoidance Directive (the “Directive”), known also as the anti-BEPS directive, details extensive and comprehensive rules against identified tax avoidance practices that impact the functioning of the internal market. The intended outcome of the Directive is to prevent situations where taxpayers act against the actual purpose of the law by taking advantage of disparities between national tax systems, for instance by benefiting from double deductions, or by ensuring that income remains untaxed by making it deductible in one jurisdiction while also not including it in the tax base in another jurisdiction. Furthermore, the Directive shall be applicable to all subjects of corporate tax within Member States.


The key rules contained in the Directive lay down rules in five (5) specific fields, being:

  1. Interest limitation;
  2. Exit taxation;
  3. General anti-abuse rule (the “GAAR”);
  4. Controlled foreign company (the “CFC”) rules; and
  5. Framework to tackle hybrid mismatches.


The interest limitation rule limits the borrowing costs to thirty percent (30%) of earnings before interest, taxes, depreciation and amortization (the “EBIDTA”). However, by way of derogation, a taxpayer may be given the right to deduct exceeding borrowing costs up to a threshold of three million euro (EUR 3,000,000) or to fully deduct exceeding borrowing costs if the taxpayer is a standalone entity.

Under this rule, Member States also have the following options:

  1. New loans or those loans used to fund long term public infrastructure within the EU may be excluded from this rule;
  2. To allow taxpayers to deduct in full or in part exceeding borrowing costs subject to the satisfaction of group gearing ratio conditions;
  3. To carry forward or backwards exceeding borrowing costs; and
  4. To exclude financial undertakings from the scope of this rule.

The interest limitation rule contains two (2) (optional) group escapes:

  1. Equity escape rule: if the ratio between equity and total assets of a taxpayer is equal to or higher than the equivalent ratio of the group, the taxpayer may fully deduct the net borrowing costs. A ratio of up to two (2) percentage points below the group’s will be deemed equivalent to the group’s ratio for purposes of the equity escape rule.
  2. Group ratio rule: a group ratio is determined by dividing the exceeding third party borrowing costs of the group by the EBITDA of the group. That ratio is multiplied by the EBITDA of the taxpayer to determine the amount of deductible exceeding borrowing costs.


Under the exit taxation rule, a taxpayer, at the time of exit of the assets from a particular Member State, will be subject to tax at an amount equal to the market value of the transferred assets less their value for tax purposes. These rules would apply when:

  1. Assets are transferred from the taxpayer’s head office to its permanent establishment in another Member State or third country in so far as the Member State of the head office no longer has the right to tax the transferred assets due to the transfer;
  2. Assets are transferred from a permanent establishment in a Member State to the head office or another permanent establishment in another Member State or in a third country in so far as the Member State of the permanent establishment no longer has the right to tax the transferred assets due to the transfer;
  3. The tax residence is transferred to another Member State or to a third country, but not with respect to assets that remain effectively connected with a permanent establishment in the first Member State;
  4. A business carried out by a permanent establishment is transferred out of a Member State to another Member State or third country in so far as the Member State of the permanent establishment no longer has the right to tax the transferred assets due to the transfer.If assets are transferred to another Member State (or in certain cases to an EEA state), those Member States are obliged to allow taxpayers to value the assets at market value. In such cases taxpayers also have the right to defer tax claims arising from exit taxation by paying in installments for five (5) years. If a taxpayer chooses to defer a tax claim, interest may be charged and, if there is an actual risk of non-recovery, securities may be demanded by the Member State involved. The deferral ends if:
  5. The taxable base is formed by the difference between market value and value for tax purposes at the time of exit of the assets concerned.
  6. the transferred assets or the business carried on by the permanent establishment are disposed of;
  7. the transferred assets are subsequently transferred to a (non-EEA) third country;
  8. the taxpayer’s tax residence or the business carried on by its permanent establishment is transferred to a (non-EEA) third country;
  9. the taxpayer goes bankrupt or is wound up; or
  10. the taxpayer fails to honor its obligations in relation to the installments and does not correct its situation over a reasonable period of time (12 months maximum).
  11. If the transferred assets are set to revert to the Member State of the transferor within twelve (12) months, this rule does not apply to asset transfers related to the financing of securities, assets posted as collateral or where the asset transfer takes place in order to meet prudential capital requirements or for purposes of liquidity management.


Through a GAAR, tax authorities are given the authority to ignore an arrangement or series of arrangements where the essential purpose is to obtain a tax advantage that defeats the object or purpose of the Directive, and where the arrangements are regarded as non-genuine, being arrangements not put into place for valid commercial reasons which reflect economic reality.

The tax liability would then be ‘calculated in accordance with national law’.


Through a controlled foreign company rule, Member States can treat an entity or a permanent establishment as a controlled foreign company, and thus have the right to tax such profits as per domestic tax rules. The rules aim at eradicating the incentive of shifting income to low or no tax jurisdictions. This would be achieved by re- attributing non-distributed income of a low-taxed CFC, which is not a publicly listed company, to its parent company.

These rules apply where the following conditions are met:

  1. The tax payer or together with their associated enterprises hold a direct or indirect participation of more than fifty percent (50%) of the voting rights, capital, or right to profit distribution;
  2. The actual corporate tax paid on the profits of an entity or a permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the domestic tax system and the actual tax paid on its profits by the permanent establishment or entity;
  3. The entity being involved in non-genuine tax arrangements, and the parent State does not exclude it as being below a de minimissize (with accounting profits of no more than seven hundred and fifty thousand euro (EUR 750,000) and non-trading income of no more than seventy five thousand euro (EUR 75,000); or of which the accounting profits amount to no more than ten percent (10%) of its operating costs for the tax period); and
  4. The entity not being excluded by the parent State as having specified passive income that is no more than one third of its total income or, in relation to an entity which is a financial undertaking, no more than one third of its specified passive income is from transactions with the parent or its twenty five percent (25%) associated enterprises.
  5. Member states may apply certain carve outs, such as cases of substantive economic activity and certain de minimis


Rules addressing hybrid mismatches have also been included, whereby it is stated that deduction shall be given only in the Member State where such payment has its source. The rule aims at preventing outcomes where there is a double deduction or a deduction with no income inclusion. It seeks to address mismatches between Member States’ tax systems arising due to the use of hybrid entities or hybrid instruments.

Under the Directive, a situation that would result in:

  1. A double deduction is to be deductible only in the Member State where the payment has its source, and
  2. A deduction and non-inclusion is to be treated as non-deductible in the State of the payer.


Member States will be required to adopt the measures within the Directive in their domestic law by 31 December 2018, such that they apply no later than 1 January 2019. However, there are a limited number of exceptions. One exception applies to exit taxation where new rules must enter into law by 31 December 2019 and apply from 1 January 2020. For interest limitation where Member States have targeted rules that are equally effective to the rules within the Directive, those Member States have until the earlier of:

  1. The end of the first full fiscal year following the date of publication of an agreement between the OECD members on a minimum standard regarding BEPS; and
  2. 1 January 2024.

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