Commission proposes anti-avoidance crackdown on use of 'hybrid' intra-group company loans

Its revised Parent-Subsidiary Directive (10-page /125KB PDF) would "significantly reduce" tax avoidance in Europe, as set out in last year's Action Plan against tax evasion, according to Tax Commissioner Algirdas Šemeta.

"EU tax policy is heavily focussed on creating a better environment for businesses in the EU," he said. "This means breaking down tax barriers and tackling cross-border problems such as double taxation."

"But when our rules are abused to avoid paying any tax at all, then we need to adjust them. Today's proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses," he said.

The proposals build on the Commission's Action Plan on tax evasion and avoidance of 6 December 2012, as well as international work against corporate tax avoidance by the Organisation for Economic Cooperation and Development (OECD). As part of its work on base erosion and profit shifting (BEPS), the OECD has proposed new global standards to prevent 'hybrid mismatches' in cross-border tax deductions.

The Parent-Subsidiary Directive was designed to prevent companies within the same corporate group, but based in different member states, from being taxed twice on the same income. It obliges member states to give parent companies a tax exemption on dividends and other payments that they receive from subsidiaries in other member states.

However, some member states classify these payments as tax- deductible 'debt' repayments rather than dividends. According to the European Commission, this has allowed some companies to exploit the rules with the result that payments from the subsidiary to the parent company are not taxed anywhere.

One of the Commission's proposals would prevent the use of these so-called hybrid loan arrangements for tax planning purposes, by ensuring that the payment is taxed in the parent company's member state if it is tax  deductible in the state where the subsidiary is based. It also plans to introduce a general anti-abuse rule (GAAR) to prevent the rules being used for tax avoidance.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the proposals would likely be of limited impact in the UK where similar provisions were already in place. However, the announcement showed the EU's "clear willingness to put pressure on member states to ensure artificial arrangements no longer work", she said.

"The proposed anti-hybrid rule would appear to be more effective than the proposed anti-abuse rule," she said. "The anti-hybrid rule would have a relatively simple test: dividend exemption would not apply if the company in the paying state has been given a deduction. The anti-abuse rule would only apply where the intermediate company is a 'wholly artificial' arrangement; so groups would still be able to choose to use, for example, Luxembourg for genuine group treasury activities."

If agreed by the European Parliament and member states, national governments would be expected to have implemented the amended rules into national laws by 31 December 2014, according to the Commission.