On June 20th, 2016 the EU Member States adopted the Anti Tax Avoidance Directive. This Directive consist of five points which should counter harmful tax practices, but will definitely also affect all genuine business industry wide.
The five points of the ATA Directive are:
- General Anti Abuse Rule
This rule will give EU Member States the ability to disregard an arrangement or a series of arrangements which have been put in place for the main purpose of obtaining a tax benefit.
- Controlled Foreign Company rule
This rule will counter the possibility to shelter ‘passive income’ like interest, royalties, dividend and leasing income in subsidiaries situated in low taxed jurisdictions. Under circumstances the passive income of the subsidiary will be included in the EU parents tax base.
- Hybrid mismatch rule
This rule will allow EU Member States to deny deduction of a payment (for example interest) if the payment is also deducted in another jurisdiction (double deduction), or if the income in another jurisdiction is not included in the respective tax base (deductible/ non included).
- Interest limitation rule
The interest limitation rule will limit the deductibility of borrowing cost (mainly interest) in a year to 30% of the companies EBITDA. As a main rule any borrowing cost above 30% of the companies EBITDA will be non deductible.
- Exit tax
The Anti Tax Avoidance Directive will force EU Member States to adopt an ‘exit tax’. An exit tax taxes the hidden reserves of assets when the assets are moved abroad.
The majority of the rules above have to be implemented by the EU Member States before January 1th, 2019. The ATA Directive provides minimum requirements for EU Member States to implement in their national law. Consequently EU Member States will have a certain freedom while implementing the ATA Directive. For example an EU member state could choose to limit the deductibility of borrowing cost to say 20%.
The new Directive does not only affect companies that implemented tax (optimization) strategies but also affects companies that are not focusing on tax planning at all. Although implementation could be as far away as 2019, companies will need to anticipate on implementation of this new Directive when taking decisions on for example the (re)structuring and/or (re)financing of activities. Also existing structuring and financing of activities may need to be revised considering the implementation of the ATA directive.