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European Union: New Rules Proposed to Fight Tax Evasion

(Dec. 13, 2013) Tax evasion is a serious issue across the European Union; the European Commission estimates that the EU Member States lose close to one trillion euros in revenues annually due to tax evasion and tax avoidance. On November 25, 2013, in an effort to combat this problem, the Commission adopted a proposal to amend existinglegislation and help the EU Members recapture lost revenue. The amended legislation is expected to be implemented by December 31, 2014. (Press Release, European Commission, Tackling Tax Avoidance: Commission Tightens Key EU Corporate Tax Rules (Nov. 25, 2013).)

The proposal’s main objective is to close two loopholes in the Parent-Subsidiary Directive that have been abused by companies to avoid paying taxes. Two key provisions of the proposal are directed at achieving this objective. One revises the existing provision on safeguards against abusive tax practices by requiring EU Members to adopt a common anti-abuse rule. The other requires thatspecific tax planning arrangements, notably hybrid loan arrangements, not be subject to tax exemptions. (Id.) Hybrid loan arrangements are financial instruments that have elements of both debt and equity and are deemed an effective tax planning tool that can specifically exploit provisions of the Parent-Subsidiary Directive to minimize or avoid taxes. (Press Release, European Commission, Memo: Questions and Answers on the Parent Subsidiary Directive (Nov. 25, 2013).)

Under the Parent Subsidiary Directive, Member States are required to give parent companies a tax exemption for the dividends received from subsidiaries in other Member States. As the Commission clarified, quite often the Member States where the subsidiaries are based deem these payments as tax deductible “debt” repayments. Therefore, such payments from the subsidiary to the parent company are not taxed in any EU Member State. (Id.)

Algirdas Šemeta, EU Commissioner for Taxation, stated:

EU tax policy is heavily focussed [sic] on creating a better environment for businesses in the EU. 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. (Id.)


The above proposal was envisioned initially in the Commission’s 2012 Action Plan and two Recommendations, for a more effective EU response to tax evasion and avoidance. (Press Release, European Commission, Clamping Down on Tax Evasion and Avoidance: Commission Presents the Way Forward (Dec. 6, 2012).)

The Action Plan made a number of concrete suggestions aimed at enabling EU Member States to protect their tax bases and avoid large losses of revenue. (Id.)

The first recommendation called upon the EU Members to take a firm stand against tax havens and to register them on national black lists. (Id.) It also establishes common criteria to facilitate the identification of states that match the profile of a tax haven. (Id.) The second Recommendation is on aggressive tax planning. It endorses a number of methods to ensure that companies do not abuse loopholes to avoid paying taxes, including the effective implementation of ratified Double Tax Conventions. (Id.) To oversee the implementation of the Recommendations by the EU Members, the Commission established a Platform for Tax Good Governance. (Id.)