The EU Council made a significant step towards preventing the double non-taxation of corporate groups in late June, by taking a unanimous stand on the tax treatment of hybrid loan arrangements.
The long awaited decision over the tax treatment of hybrid loan arrangements (meaning financial instruments having both the characteristics of debt and equity), aims at preventing corporate groups from exploiting discrepancies between national tax rules with a view to avoid paying taxes on profits distributed within the group.
This political decision will be implemented by an amendment to the EU parent-subsidiary directive (the “Directive”) expected to pass during the forthcoming meeting of the EU Council.
This said amendment is expected to improve member states’ tax revenues. Furthermore, it will reportedly establish fair rules between groups with parent companies and subsidiaries located in different countries in contrast to those that have all entities based in one member state.
The aim of the Directive, as reflected in its current wording, was to ensure that profits made by cross-border groups were not taxed twice, and that such groups were kept on an equal footing with domestic groups. The Directive requires member states to exempt from taxation profits received by parent companies from their subsidiaries in other member states.
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The amendment was triggered by the fact that the abovementioned tax treatment applies even if a distribution is treated as a tax-deductible payment in the country where the paying subsidiary is based. It is important to note that some member states classify payments from hybrid loan arrangements as tax deductible ‘debt’.
The proposed wording of the amendment to the Directive will allow tax deductions for the parent company only “to the extent that such profits are not deductible by the subsidiary” and tax profits only “to the extent that such profits are deductible by the subsidiary”.
While this is an important step towards combating double non-taxation, tax practitioners consider the possibility of this amendment being challenged on the ground of discrimination. It is worth noting that Malta and Sweden had originally opposed casting a positive vote on this amendment, for which a unanimous vote by all member states was required.
Member states are expected to transpose the amendment to the Directive into national law by the 31st December 2015.