Leaked EU anti-tax avoidance directive includes interest deduction limits, GAAR, exit tax

by Julie Martin

A proposed EU anti-tax avoidance directive, to be presented this month by the European Commission, will include rules limiting interest deductibility, a general antiabuse rule (GAAR), controlled foreign company rules, hybrid mismatch provisions, an exit tax, and a switch-over clause, according to a leaked copy obtained by the Financial Times and placed on its website today.

The leaked EU proposal would put limits on corporate interest deductions that are in-line with the OECD/G20 base erosion profit shifting (BEPS) project recommendations.

EU states would be required to restrict corporate interest deductions to 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA), or €1 million annually, whichever is lower. If they choose, though, states may adopt a stricter fixed ratio rule.

The proposed hybrid mismatch rules provide that the legal characterization given to a hybrid instrument or entity by the member state where a payment, expense, or loss originates must be followed by the other member state involved in the mismatch. The rules are limited to hybrid mismatches between EU member states; mismatches between EU states and third countries need more study, the document explains.

The GAAR rule calls for ignoring “non-genuine arrangements or series thereof carried out for the essential purpose of obtaining a tax advantage that defeats the object or purpose of otherwise applicable tax provisions.” An arrangement may comprise more than one step or part.

The exit tax provision sets out rules for taxing unrealized gains in assets when the asset is transferred to a low tax jurisdiction or the taxpayer moves its residence there. The proposal allows for payment of the tax over a number of years.

The switch over clause requires taxation of foreign income entering the EU, with a credit given for foreign tax paid, in cases where the income was subject to a rate of tax less than 40 percent of the corporate rate of the member state.

Pierre Moscovici the EU Commissioner for Economic and Financial Affairs, Taxation and Customs said last week that the purpose of the proposed anti-tax avoidance rules is not only to implement the BEPS plan in Europe, but to go further, offering proposals that are more specific and ambitious than BEPS.

According to Moscovici, the EU plan will be formally unveiled sometime this month.

Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.

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