Last week, the EU Commission proposed to extend the scope of the EU hybrid mismatch rules by way of an amendment to the EU Anti Tax Avoidance Directive (the "ATAD"). Under the proposed amendments to the EU hybrid mismatch rules, in contrast to the current scope, they will also apply to hybrid mismatches with third countries. Furthermore, the rules will apply to inter alia permanent establishment mismatches, dual resident mismatches and imported mismatches.
Provided that the EU Member States unanimously approve these amendments, the (amended) EU hybrid mismatch rules will have to be implemented by the EU Member States no later than 31 December 2018 (thus becoming effective as from 1 January 2019).
In addition, the EU Commission last week proposed to introduce a common corporation tax base that is mandatory for taxpayers with an annual consolidated group revenue of at least EUR 750 million through the proposed Common Corporate Tax Base ("CCTB") and Common Consolidated Corporate Tax Base ("CCCTB") Directives. The CCTB and CCCTB will be optional for taxpayers that do not meet the EUR 750 million threshold. The CCTB and CCCTB are essentially a reintroduction of the optional CCCTB proposed in 2011. Provided that the EU Member States unanimously approve the CCTB and the CCCTB, the common corporation tax base will have to be implemented in two stages by the EU Member States: the CCTB no later than 31 December 2018 (thus becoming effective as from 1 January 2019) and the CCCTB no later than 31 December 2020 (thus becoming effective as from 1 January 2021).
Below, we will discuss these proposed amendments. For sake of completeness, we also briefly address the proposal for the EU Dispute Resolution Directive, that was also published last week.
Amendment to EU hybrid mismatch rules
The ATAD currently already includes rules that target hybrid mismatches between Member States (i.e., EU situations). The proposed Directive amends the ATAD by extending the scope of the EU hybrid mismatch rules to both a wider variety of mismatches and to mismatches between Member States and third countries. These proposals tie in with OECD BEPS Action 2 (neutralizing the effects of hybrid mismatches). The new EU hybrid mismatch rules should become effective as of 1 January 2019. This is the same implementation date as the agreed hybrid mismatch rules in EU situations of the ATAD.
Hybrid mismatches are the result of two (or more) jurisdictions qualifying an entity or financial instrument differently for tax purposes. These mismatches can e.g. lead to situations in which the same payment is deductible in more than one jurisdiction or to a situation where a payment is deducted from the tax base in one jurisdiction without a corresponding inclusion of that payment in the tax base of a taxpayer in another jurisdiction. As to the broadening of the scope, the proposed rules would apply to the following type of mismatches:
- Hybrid entity mismatch
- Hybrid financial instrument mismatch
- Hybrid (asset) transfer mismatch
- Hybrid permanent establishment mismatch
- Imported hybrid mismatch
- Dual resident mismatch
Although the first two mismatches are already included in the ATAD, these will under the proposed amendments to EU hybrid mismatch rules now also regard hybrid mismatch situations involving a Member State and a third country. According to the proposal, Member States would be required to neutralize the hybrid mismatch involving third countries through the denial of deduction of the relevant payment, the inclusion of the payment in the taxable base or the denial of relief from double taxation.
As the proposal needs to be approved unanimously by all Member States, it cannot be excluded – like with the ATAD – that certain adjustments will be made. Although the impact of the proposal will depend on the ultimate adoption and implementation, in its present form, it could have substantial impact on current structures involving hybrid entities an instruments. In addition, Dutch structures involving a permanent establishment and so-called "CV-BV structures" may fall within the scope of the proposed rules.
EU corporation tax: the CCTB and the CCCTB
The CCTB proposal is the first step towards the introduction of an EU wide common corporation tax base, under which all revenue and losses of taxpayers within an EU group will be consolidated. The CCTB proposal for the determination of the common EU corporation tax base, is to a large extent in line with the ones included in the ATAD, but then tailored for the harmonization of the corporation tax base. In addition, the CCTB provides for an equity/notional interest deduction and a super-deduction in respect of research and development ("R&D") costs, as discussed in more detail below.
The CCCTB proposal is the second step towards the introduction of an EU wide harmonized corporation tax. It will only become relevant if the EU Member States unanimously agree on the CCTB proposal. The CCCTB addresses the conditions for companies to be consolidated in a tax consolidated group. It also includes a proposal for allocating the consolidated tax base of the group to the Member States in which the group is located.
Under the CCTB, all revenues will be taxable for corporation tax purposes, unless these are expressly exempt from tax. Income (dividends and capital gains) from qualifying participations of at least 10% in a subsidiary will in principle be exempt from corporation tax, unless the switch-over clause applies (see below). Furthermore, income derived from permanent establishments will also be exempt from corporation tax in the Member State of the taxpayer's head office.
Taxable revenues will be reduced by business expenses, unless these expenses are listed as non-deductible. Depreciation terms are provided for per (category of) business asset. Furthermore, a super-deduction for R&D costs is provided for pursuant to which these costs will be fully deductible in the tax year in which they are incurred. In addition, for R&D costs up to EUR 20 million an annual additional super-deduction of 50% will apply. For R&D costs exceeding EUR 20 million, the annual additional super-deduction is 25%. Finally, the CCTB provides for an equity/notional interest deduction through the introduction of the so-called allowance for growth and investment. The introduction of this allowance aims to neutralize the difference in the tax treatment of debt (in respect of which the interest is in principle deductible) and equity (in respect of which the profit distributions are not deductible).
Under the CCTB, losses can be carried forward indefinitely, but not carried back. In addition, under certain conditions and subject to detailed recapture rules, the taxpayer would be allowed to use tax losses incurred by a subsidiary or a permanent establishment located in another Member State to offset its taxable revenues. This cross-border tax relief is the first step towards the full consolidation of entities within a group that is contemplated to be introduced under the CCCTB (see below for further details): within such group all taxable revenues and losses of the group will be consolidated and as a result be offset against each other.
An EBITDA interest limitation rule will be provided for that is in line with the ATAD EBITDA rule as well as specific anti-tax avoidance measures. The latter include a general anti-abuse rule ("GAAR") and Controlled foreign company legislation ("CFC") rules. The GAAR and CFC rules are to a large extent in line with the ATAD GAAR and CFC rules. In addition to the GAAR and CFC rules, a switch-over clause will be provided for pursuant to which income derived from participations in subsidiaries is not exempt in case these subsidiaries are considered low-taxed, but taxable with a credit for the foreign tax paid by the subsidiary. This switch-over clause was previously also included in draft versions of the ATAD, but ultimately it was not included in the adopted version of the ATAD. Finally, hybrid mismatch rules will be provided for that are in line with the EU hybrid mismatch rules included in the (amended) ATAD (see above for further background).
The CCCTB proposal is the second step towards the introduction of an EU wide harmonized corporation tax (albeit that each EU Member State remains free to set is own corporation tax rates). Therefore, the CCCTB will only become relevant if the EU Member States unanimously agree on the CCTB proposal. The CCCTB addresses the conditions in order for companies to be consolidated in a tax consolidated group. This proposal will be mandatory for groups of companies beyond a consolidated revenue of EUR 750m annually. In addition, the common rules will be available, as an option, to groups not meeting the size threshold. The tax base of the tax consolidated group will be calculated along the same lines as the CCTB rules. It also provides for rules regarding business reorganisations within the EU corporation tax consolidated group, treatment of withholding taxes and credits for double taxation at the level of the group. Finally, the CCCTB include a proposal for the so-called formulary apportionment: the mechanism of weights used for allocating the consolidated tax base of the group to the EU Member States in which the group is located. Following such allocation it is up to the EU Member States to tax the allocated base at the local tax rates. If adopted, Member States need to transpose the Directive by 31 December 2020 into domestic law (thus becoming effective as from 1 January 2021).
EU Dispute Resolution Directive
The EU Commission has also proposed a binding system to resolve double taxation disputes in the EU by way of a Directive. In particular, a wider range of cases will be covered and Member States will have clear deadlines to agree on a binding solution to double taxation. The company subject to double taxation can initiate a procedure whereby the Member States in question must try to solve the dispute amicably within two years. If at the end of this period, no solution has been found, the Member States should set up an Advisory Commission to arbitrate on the case. It will have 6 months to deliver a final, binding decision. This decision will be immediately enforceable and must eliminate the double taxation. If adopted, Member States need to transpose the Directive by 31 December 2017 into domestic law (thus becoming effective as from 1 January 2018).
As a result of the extension of the scope of the hybrid mismatch rules, virtually all structures in which hybrid mismatches arise may be caught by these rules, including potentially Dutch CV-BV structures involving the US. Although the impact of the proposed extension of the scope will depend on their ultimate adoption and implementation in the Netherlands, it seems prudent to review their impact on existing structures.
The CCTB would provide for a separate mandatory EU wide common corporation tax base for multinational enterprises that are doing business in one or more EU Member States. If and when enacted/implemented in the Netherlands, the tax system for multinational enterprises will be entirely overhauled. At this stage, it is difficult to establish the impact of such overhaul, if only because the CCTB still has be agreed by the EU Member States and may likely be subject to substantial change as a result of discussions among the EU Member States, and the CCCTB can only be enacted if the CCTB is enacted. With this in mind, it seems that the current dates set for their contemplated implementation are ambitious.