On 20 June 2014 the Council of the EU (ECOFIN) reached political agreement on a revised version of the European Commission’s proposed amendments to the EU Parent-Subsidiary Directive (“Directive”). The revised text contains measures to combat the use of hybrid loans. Political discussions will continue on the proposal to introduce a general anti-avoidance rule in the Directive.
In December 2012, the European Commission published an action plan on tax fraud and evasion, which included proposals to address perceived loopholes in the EU Parent-Subsidiary Directive 2011/96/EU. A draft directive was issued in November 2013, containing a comprehensive anti-avoidance rule and proposed changes to exclude payments on cross-border hybrid loans from a tax exemption. While there was broad support for the hybrid loan aspect of the proposals, there was disagreement on the anti-avoidance rule. A compromise text, limited to the hybrid loan issue failed to get the required unanimous approval during a May 2014 ECOFIN meeting as a result of reservations from Sweden regarding the impact on certain domestic investment companies and Malta as regards the formulation of the hybrid rule.
The approved anti-hybrid rule
The primary aim of the Directive is to prevent double taxation of the same income across members of a corporate group that are based in different Member States.
This is realized by providing for a withholding tax exemption on distributed profits and an exemption or credit for the recipient. The adopted proposal is specifically aimed at preventing the Directive from facilitating double non-taxation arising from the exploitation of hybrid loan structures, for example, where a loan is treated as debt in the Member State of the debtor/subsidiary and as equity in the Member State of the lender/parent, whereby payments on the loan are deductible in the former and exempt in the latter Member State. The amendment is intended to ensure that the payments would no longer be exempt in the latter Member State, which would then be required to tax the portion of the payments which is deductible in the Member State of the paying subsidiary.
According to the approved text, all Member States will have to implement the new anti-hybrid rules in their domestic legislation by 31 December 2015 at the latest. Discussions on the proposed general anti-abuse rule are expected to continue.
KPMG Luxembourg comment
This amendment to the Parent-Subsidiary Directive should be seen as part of the increased efforts at international level to combat aggressive tax planning. As such, the changes aimed at hybrid loan arrangements could impact certain group financing arrangements, where such arrangements are not already limited under domestic rules.
As it is also the case for base erosion and profit shifting (“BEPS”) at the level of the OECD, the EU actions in this area are at the highest on the political agenda of many countries and most international organizations. There is no doubt that the ongoing work will significantly modernize the international tax system within the coming years.
In such a constantly evolving tax environment, it is therefore crucial for businesses not only to fully understand the current tax debate, but also to consider and anticipate any potential impact on existing structures or on future transactions.
In order to help you answering your questions in this respect, KPMG has put together a dedicated team (both in Luxembourg and at a global level) in order to help you address this challenge in the most timely and efficient way:
For further information, please do not hesitate to contact us.
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