European Union finance ministers, on June 20, announced an agreement to revise the Parent-Subsidiary Directive to stop multinational entities from using hybrid instruments to achieve double nontaxation.
All 28 member states gave their full backing to the proposal at an Economic and Financial Affairs Council (ECOFIN) meeting in Luxembourg. Member states have until December 31, 2015, to add the amended provision into their laws.
The Parent-Subsidiary Directive, adopted July 1990, requires EU states to exempt from taxation dividends and other profit distributions received by parent companies from subsidiaries located in other member states.
This scheme, designed to prevent double taxation, unintentionally permitted double nontaxation as companies exploited differences in laws that allowed instruments – known as hybrid instruments – to be treated for tax purposes as debt in one county but as equity in another. Because of this difference in treatment, hybrid instrument payments are treated as a tax deducible loan by a subsidiary and a tax free dividend to its parent.
The agreed amendment will provide that the member state of the parent company will not tax profits received by parent companies from subsidiaries in other member states only to the extent that that the profits were not tax deductible to the subsidiary.
Taxation Commissioner Algirdas Šemeta hailed the agreement as “good news for public budgets, good news for honest businesses and good news for those who seek fair taxation in the EU.” He also expressed confidence that the EU will reach agreement on the adoption of a general anti abuse rule.
The revised Parent-Subsidiary Directive originally proposed a general anti-abuse rule, but the Counsel decided to put off that more contentious issue so that double nontaxation of hybrid loans could be addressed more quickly.
Agreement was also reached at the ECOFIN meeting to allow the European Commission to begin an assessment of patent boxes in the EU.
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