OUR INSIGHTS AT A GLANCE

  • Following the adoption of the Council Directive on ensuring a global minimum level of taxation for multinational and large-scale domestic groups ("Pillar 2"), the European Commission still has a lot of ongoing direct tax projects in the pipeline.
  • While some of these projects are moving forward, such as the Proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes (the "Unshell" Proposal) and the initiative aiming to tackle the role of so called "enablers" (Securing the Activity Framework of Enablers – "SAFE"), some others have been put on hold (like the Directive Proposal to address Debt-Equity bias, "DEBRA") given the many interconnections with other corporate tax projects, including those announced by the Commission in its Communication on business taxation for the 21st century (e.g. "BEFIT").
  • We provide an overview of the state of play of these various EU direct tax initiatives and asses their chances to succeed in the near future.

On 15 December 2022, the EU Member States finally reached an agreement concerning the Directive on ensuring a global minimum level of taxation for multinational and large-scale domestic groups in the Union ("Pillar 2"). The implementation of the rules introduced by Pillar 2 will be challenging for both the tax authorities and the multinational groups concerned, given the very short delay to implement the rules as well as their complexities. Still, taxpayers should be ready to face additional tax changes to come, given the numerous direct tax projects which the EU still has in the pipeline.

While some of these projects are moving forward, such as the Proposal for a Directive laying down rules to prevent the misuse of shell entities for tax purposes (the "Unshell" proposal) and the initiative aiming to tackle the role of so-called "enablers" (Securing the Activity Framework of Enablers – "SAFE"), others have been put on hold (like the Directive Proposal to address Debt-Equity bias, "DEBRA") given the many interconnections with other corporate tax projects, including those announced by the Commission in its Communication on business taxation for the 21st century (e.g. "BEFIT").

We provide an overview of the state of play of the most important of these various EU direct tax initiatives and asses their chances to succeed in the near future.

The Unshell Directive Proposal

On 22 December 2021, the European Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU. The objective of the proposal is to prevent tax avoidance and evasion through actions by undertakings without minimal substance. The proposal aims to fight against the misuse of shell entities for improper tax purposes and to ensure that shell companies within the EU that have no or minimal economic activity are unable to benefit from certain tax advantages (for a presentation of the Unshell proposal, please read the article "The new Directive proposal to fight against the misuse of shell entities" in our April 2022 ATOZ Insights).

On 6 January 2022, the French Presidency of the Council announced its intention to launch the discussions of the Council on this file. The technical analysis of the proposal was carried out during various meetings in the first half of 2022 and the first round of article-by-article analysis of the proposal was completed on 23 May 2022.

Under the Czech Presidency of the Council, the technical analysis of the proposal continued, and progress was made on exploring the way forward as regards tax consequences and (unreleased) compromise texts were submitted on parts of the proposal, such as the identification of entities not having minimum substance as well as on exchange of information. While most delegations supported the objectives of the proposal, they were of the view that further important technical work would still be necessary before an agreement could be feasible.

In January 2023, Sweden took over the Presidency of the EU Council. On 17 January 2023, the plenary of the European Parliament adopted its non-binding opinion, which was supportive of the Unshell proposal but recommended several amendments notably on the scope, penalties and reporting obligations. Technical meetings took place in January, February and March and a second (unreleased) compromise text was drafted by the Swedish Presidency.

Even though technical discussions are ongoing and taking place on a regular basis, the proposal has been evolving in opposite directions over time: it has been reported that the Swedish Presidency reintroduced some of the substance requirements that were removed by the Czech Presidency, namely having premises in the Member State, an active bank account in the EU, and a majority of employees performing most of their tasks in the Member State of the entity. As regards the tax consequences for companies considered as shell entities, there are concerns at the level of some EU Member States about the consequences of the Unshell Directive on double tax treaties.

The Unshell proposal is currently on the draft agenda of the ECOFIN meeting of 16 May 2023 for technical analysis and further exchanges of views. Therefore, it can be anticipated that the proposal will probably not become a directive before the end of the Swedish Presidency on 30 June 2023. Given the absence of consensus at the level of the EU Member States on some of the key provisions of the proposal, and the continuing uncertainty regarding the final version of the compromise text, which has not been published yet and is still under discussion at the level of the Member States, taxpayers should rather adopt a "wait and see" strategy before taking any action.

The Debt-Equity Bias Reduction Allowance (DEBRA) Directive Proposal

On 11 May 2022, the European Commission released a Directive Proposal to address Debt-Equity bias. The proposal is one of the targeted measures announced by the European Commission in May 2021 in its Communication to promote productive investment and entrepreneurship and ensure effective taxation in the EU. The proposal lays down rules on the deduction, for corporate income tax purposes, of an allowance on increases in equity and additional rules on the limitation of the tax deductibility of exceeding borrowing costs (for a presentation of the DEBRA proposal, please read the article "European Commission releases DEBRA Directive Proposal" in our July 2022 ATOZ Insights).

Under the Czech Presidency of the Council, three meetings took place for an article-by-article examination of the proposal, giving the delegations the opportunity to ask the Commission questions on the functioning of the mechanism provided for in the Directive proposal. The examination was completed on 15 November 2022.

At the 6 December 2022 ECOFIN meeting, while the DEBRA Directive proposal was not discussed, the Council approved its report to the European Council on tax issues, which indicated that "in light of the many interlinkages with other corporate tax files, both those currently under discussion in the Council and those announced by the Commission in the near future in its Communication on business taxation for the 21st century, the examination of the DEBRA proposal will be suspended and, if appropriate, it would be reassessed within a broader context only after other proposals in the area of corporate income taxation announced by the Commission have been put forward." Here, the Council most probably refers to the Business in Europe: Framework for Income Taxation ("BEFIT") initiative of the European Commission, an initiative which would introduce a common set of rules for EU companies to calculate their taxable base and an allocation of profits between EU countries, based on a formula. Since BEFIT will very likely take a lot of time before it becomes a Directive, if ever, the future of the DEBRA proposal is very uncertain at this stage. Thus, taxpayers potentially impacted should, for the time being, also adopt a "wait and see" strategy on this proposal before starting to assess its impact as it may, in the end, even be completely abandoned.

The BEFIT initiative of the European Commission

On 17 October 2022, the European Commission announced the launch of a public consultation on Business in Europe: Framework for Income Taxation ("BEFIT"), a new framework for EU corporate taxation. BEFIT is one of the initiatives announced by the European Commission in its May 2021 communication on Business Taxation for the 21st Century. The initiative would, according to the Commission, "introduce a common set of rules for EU companies to calculate their taxable base while ensuring a more effective allocation of profits between EU countries, based on a formula."

BEFIT strongly resembles the previous Common Consolidated Corporate Tax Base ("CCCTB") proposal, which was withdrawn at the time the BEFIT initiative was announced. According to the Commission, the initiative aims at addressing the complexity and high costs that businesses, notably those with crossborder activities, face as a result of having to comply with 27 different corporate tax systems when doing business across the EU.

At the time of writing this article, the feedback on the consultation has not been released yet. However, a draft Directive is expected to be released during the third quarter of 2023. While it is quite clear that a Directive proposal will be released this year, a number of factors speak against the subsequent rapid adoption of the BEFIT proposal, including the fact that the project looks very much like a remake of the CCCTB which was initially released in 2011 and was relaunched in 2016, but which EU Member States never managed to agree on during these past twelve years. In addition, the BEFIT initiative is controversial on many aspects, including the fact that it would largely remove the Member State's sovereignty in tax matters, which was one of the main factors for the CCCTB proposal to fail. To find out more on the BEFIT initiative, you can read the article "BEFIT - EU Commission wants to introduce a common set of tax rules for EU companies" in our December 2022 ATOZ Insights.

SAFE initiative on "enablers" of tax evasion and aggressive tax planning

When the Unshell proposal was initiated, the Commission announced that it would propose a follow-up initiative to respond to the challenges linked to non-EU shell entities. This follow-up initiative was started on 6 July 2022, when the EU Commission launched a public consultation regarding a proposal for a Council Directive to tackle tax advisers and other professionals rendering tax advice (collectively referred to as "enablers") that facilitate tax evasion and aggressive tax planning.

  • Interested parties had until 12 October 2022 to provide their feedback in a questionnaire referred to as "EU Survey: Proposal for a Council Directive to tackle the role of enablers that facilitate tax evasion and aggressive tax planning in the European Union (Securing the Activity Framework of Enablers - SAFE)". To tackle the role of enablers involved in facilitating tax evasion and/or aggressive tax planning in the European Union, the Commission presented three options:
  • Option 2: Prohibition to facilitate tax evasion and aggressive tax planning combined with due diligence procedures and a requirement for enablers to register in the EU. Under this option, enablers would be required to carry out dedicated due diligence procedures as outlined under Option 1 and would have to register in an EU Member State. Moreover, only registered enablers could provide tax advisory services to EU taxpayers or residents.
  • Option 3: Code of conduct for all enablers. This option involves the requirement for all enablers to follow a code of conduct that obliges enablers to ensure that they do not facilitate tax evasion or aggressive tax planning.

In addition, EU taxpayers, including both individuals and legal persons, would be required to declare in their annual tax returns any participation above 25% of shares, voting rights, ownership interest, bearer shareholdings or control via other means held in a non-listed company located outside of the EU.

On 31 January 2023, the European Commission published the report "Public consultation on the 'Tax evasion & aggressive tax planning in the EU – tackling the role of enablers' initiative" (Securing the Activity Framework of Enablers - SAFE). The report summarises the online contributions made by stakeholders during the public consultation period. In this respect, less than half of the public consultation survey respondents agree or strongly agree that tax evasion and aggressive tax planning continue to be a substantial problem in the European Union. Most of the respondents who disagree or strongly disagree with the problem consider the existing regulation sufficient. Several stakeholders request a clear definition of aggressive tax planning to ensure legal certainty. Moreover, many respondents do not believe that the issue of tax evasion or aggressive tax planning has continued to increase recently and a significant part of them responded that they did not know whether the issue of tax evasion or aggressive tax planning has continued to increase recently, mainly citing the lack of available data. Some business associations raised the issue that the term "enabler" could have a negative impact on the reputation of intermediaries, some of them and other stakeholders also asking for a clear definition of the term "enabler". Interestingly, according to the survey respondents, the three most "indicative" factors in determining aggressive tax planning are:

  • the main business rationale or the purpose behind the company structure;
  • the use of preferential tax regimes, tax treaties, or mismatches in national legislations across countries in a company structure;
  • the minimum economic substance of the entities used in the structure.

All three factors have already been tackled in different legislative acts, including the Multilateral Instrument ("MLI"), which resulted in the implementation of various anti-abuse provisions such as the Principal Purposes Test ("PPT") in covered bilateral tax treaties, the anti-hybrid mismatch rules introduced by the two Anti-Tax Avoidance Directives ("ATAD" and "ATAD II") and the Unshell Directive proposal.

As regards the three policy options presented by the Commission, many respondents to the survey do not believe that due diligence procedures are an effective measure to tackle the problem. The second option, the mandatory registration procedure for enablers, also received mixed support. Finally, several respondents consider that a code of conduct for enablers would not be sufficient and effective at tackling the role of enablers in tax evasion and aggressive tax planning.

According to the summary report, the European Commission will "integrate a broad range of views expressed by stakeholders in the draft legislative proposal and its impact assessment". The European Commission is currently planning to adopt the SAFE Directive proposal on 7 June 2023. At this stage, given that it is unclear which of the options the European Commission will decide to choose to tackle the role of enablers, it is too early to assess its chances to succeed. However, it can be expected that this initiative will give rise to controversial discussions amongst the EU Members States, considering that Member States already have a very comprehensive toolbox to tackle tax evasion and aggressive tax planning. To find out more on the SAFE initiative, you can read the article "SAFE - The new EU initiative targeting tax advisers" in our December 2022 ATOZ Insights.

Other upcoming measures

In addition to these ongoing initiatives in direct tax matters, the European Commission has launched another initiative, indirectly linked to direct taxation, which is called "FASTER". Originally recommended by the European Parliament, it aims at introducing a new common EU-wide system for withholding tax on dividend and interest payments, preventing both the avoidance of double taxation and tax abuse.

The problem this initiative aims to tackle is the particularly burdensome withholding tax relief procedures for cross-border investors in the securities market. According to the Commission, such withholding tax relief mechanisms for cross-border payments have proved to be lengthy, resource-intensive and costly for both investors and tax administrations due to the lack of digitalised procedures and the existence of complex and divergent forms across Member States. The Commission also noticed that these current procedures could be abused and referred to the "Cum/Ex" scheme and subsequent "Cum/Cum" Schemes in its inception impact assessment.

To tackle these issues, the Commission envisages three different options, which could be combined:

  • Option 1: Improving withholding tax refund procedures to make them more efficient. This option would provide for the implementation of several measures to simplify and streamline withholding tax refund procedures by making them quicker and more transparent, such as the establishment of common EU standardised forms and procedures for withholding tax refund claims irrespective of the Member States concerned and the obligation to digitalise current paper-based relief processes.
  • Option 2: Establishment of a fully-fledged common EU relief at source system. Under this option a standardised EU-wide system for withholding tax relief at source would be implemented whereby the correct withholding tax rate, as provided in the double tax treaty, is applied at the time of payment by the issuer of the security to the non-resident investor thereby not incurring double taxation.
  • Option 3: Enhancing the existing administrative cooperation framework to verify entitlement to double tax treaty benefits. This option would provide for reporting and subsequent mandatory exchange of beneficial owner-related information on an automated basis to reassure both the residence and source country that the correct level of taxation has been applied to the non-resident investor.

A consultation period was launched in April 2022 and a Directive proposal, originally planned for the first quarter of 2023, is now expected to be released at the same time as the draft "SAFE" Directive as a taxation package in June 2023. As opposed to the BEFIT initiative, presented as a project which would lead to simplification, but which may in reality rather add another layer of complexity to the compliance obligations of taxpayers, the FASTER initiative has the potential to actually simplify withholding tax relief procedures.

Outlook

Over the last decade, the international tax environment has undergone a comprehensive transformation following the OECD Base and Erosion and Profit Shifting ("BEPS") project. With the Anti-Tax Avoidance Directives ATAD1 and ATAD2, which introduced an extensive number of anti-abuse measures, the 5th amendment of the Directive on Administrative Cooperation ("DAC6") to introduce a mandatory disclosure regime that requires reporting on potentially aggressive tax planning schemes, the EU introduced a significant number of tax reforms, which all EU Member States had to implement into their national law within a very short time frame.

By the end of 2022, the Pillar Two Directive was adopted, which, despite its complexity, will also have to be adopted within an extremely short time frame. Both the tax authorities and taxpayers have very little time to adapt to the set of highly complex rules introduced by the Pillar Two Directive. Despite this fact, and even though it is still too early to assess the impact of all the recently introduced anti-avoidance measures, as statistical data measuring their impact is not available yet, the European Commission keeps on introducing additional measures, justifying its action by claiming (with the Unshell proposal) that the anti-avoidance measures taken so far are not sufficient or that the tax system needs to be simplified (with the BEFIT initiative). It is hard to believe that the accumulation of new initiatives and measures will simplify the tax system and make the life of taxpayers easier. Instead, taxpayers are facing the highest level of tax uncertainty they have ever had, given the speed at which tax changes are introduced and the lack of interpretative guidelines on many of these measures. The fact that the DEBRA proposal has now been put on hold given its various interlinkages with other ongoing tax initiatives shows that the European Commission is probably acting too quickly on some of these initiatives.

Still, taxpayers need to make sure that they are well prepared, should closely follow the current direct tax developments, both at global level (e.g. developments on Pillar One) and EU level, and seek advice from their tax advisers in order to assess the potential impact of these additional measures on their situation and investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.