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Council closes a double non-taxation loophole

At the Economic and Financial Affairs Council meeting on 20 June the ministers agreed an amendment to EU tax rules that will close a loophole which had allowed cross-border corporations to profit from double non-taxation.

The agreed amendment to the parent-subsidiary directive (2011/96/EU) will put an end to the situation whereby cross-border corporate groups could exploit differences between national tax laws and profit from double non-taxation by means of hybrid loan arrangements. 

According to the agreed text the member state of the parent company would only refrain from taxing profits from the subsidiary to the extent that such profits are not deductible by the latter. 

The amendment is part of the EU's wider effort and international commitment to fight tax evasion and aggressive tax planning. 

Next steps

Member states would have to transpose the amending provision into national law by 31 December 2015.


Parent-subsidiary directive - why the amendment was needed?

The amendment particularly tackles hybrid loan arrangements used by cross-border corporate groups. 

The hybrid loan arrangements are financial instruments that have characteristics of both debt and equity. 

For this reason, in some member states they are considered to be a simple loan, while in others they are classed as equity, and are therefore treated as tax-deductible or tax-exempt depending on the country's tax law. 

This allowed cross-border companies to distribute their profits accordingly and thereby avoid taxation on profits received from hybrid loan arrangements in any of the member states. 

Such tax planning was not ruled out before, as the provisions of the original parent-subsidiary directive required member states to exempt from taxation the profits that parent companies received from their subsidiaries operating in other member states.

Other main items on the agenda 

Enlargement of the euro area – Lithuania

The euro area countries (meeting within the Council) adopted a recommendation to the Council of the EU that favours the decision which would enable Lithuania to join the euro area, following the convergence reports issued by the Commission and the European Central Bank. 

The proposal will be referred to the European Council for discussion and to the European Parliament for its opinion before the final decision is taken. If so agreed, Lithuania would adopt the euro as its currency on 1 January 2015. 

EU draft budget for 2015 

The Council exchanged views on the presentation by the Commission of its draft proposal for the EU's general budget for 2015. The Commission's draft provides for payments totalling €142.1 (+4.9% compared with 2014) billion and commitments amounting to €145.6 (+2.1%) billion. 

The Council is expected to agree its position on the draft budget by the end of July. 

European Semester: country-specific recommendations on economic and fiscal policies 

The Council approved draft country-specific recommendations to the member states on their economic and the fiscal policies that are set out in the national programmes. A specific recommendation is issued for the euro area as a whole. 

The European Council is expected to endorse these recommendations on 27 June. The final version of the texts will be adopted by the Council of the EU in July. 

Closure of the excessive deficit procedure 

The Council adopted decisions closing the excessive deficit procedure for Belgium, the Czech Republic, Denmark, the Netherlands, Austria and Slovakia. The decisions confirm that these countries have reduced their deficits below 3% of GDP, the EU's reference value for government deficits.

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