ECOFIN Agrees on Substantial Amendment to the EU Parent-Subsidiary Directive Regarding Hybrid Mismatch Arrangements

In Luxembourg the Economic and Financial Affairs Council (ECOFIN) has achieved a political agreement on proposed amendments to the EU Parent-Subsidiary Directive (Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different EU Member States, "Directive"). The amendments had already been proposed earlier this year by the European Commission after several multinational entities had been utilizing loopholes in the Directive to avoid corporate taxation. With the introduction of the proposed changes, companies shall no longer be able to exploit differences in the way intra-group payments of hybrid structures are taxed across the EU.


The EU Parent-Subsidiary Directive was originally adopted in 1990 and amended from time to time. It was designed to eliminate disadvantageous tax implications for dividends between a parent company and a subsidiary which are located in different EU Member States. As a consequence, the Directive abolished withholding taxes on dividend payments between group companies residing in different EU Member States, and through this, a double taxation of the parent company on the profit of the subsidiary is prevented.

A number of corporate taxpayers have used these rules by facilitating so called hybrid arrangements. Divergences between the rules in the parent and the subsidiary EU Member State then lead to non-taxation in either one of the two EU Member States. This double non-taxation occurs primarily when the EU Member State where the subsidiary is seated treats the payment as a tax deductible interest payment, whereas the payment is treated as a tax exempted dividend payment in the respective EU Member State where the parent company is located.


In light of such avoidance schemes, the EU commission had already announced plans to amend the directive in November 2013. The plans which the ECOFIN has agreed upon now prevent double non-taxation by forcing the parent company's EU Member State to refrain from taxing the dividend payment only to the extent that it is not tax deductible in the subsidiary's EU-Member State. With the presently proposed changes, even the overall character of the directive and the EU policy in the field of direct taxation would be slightly modified. Whereas the directive was originally designed to prevent double-taxation by a requirement for tax exemptions, it would now, in fact, force EU Member States to tax certain income.


The wording of the current ECOFIN draft is not yet final and may still be subject to changes. However, it is not likely that the essence of the planned regulation will be changed. It is currently proposed that EU Member States be obliged to implement the amendment into domestic law by 31 December 2015. The envisaged timetable gives sufficient time to review existing cross-border structures with respect to potential tax effects and to consider reorganizations if necessary and helpful. We are happy to assist you in this respect.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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