On 25 October, the European Commission has launched proposals on various tax subject, including the Common Consolidated Corporate Tax Base (CCCTB), the combat on hybrid mismatches and measures to improve dispute resolution regarding double taxation within the EU. We would like to inform you as follows.
Common (Consolidated) Corporate Tax Base
In the past, the European Commission (EC) has already launched proposals to achieve a CCCTB in 2011. However, various member states indicated at that time that they couldn’t agree to these proposals. At this time, the EC relaunches a CCCTB proposal, but in a two step approach. In the first step a Common Corporate Tax Base (CCTB) will be introduced, without the consolidated part. The CCTB would be introduced as of 2019, while the CCCTB should come into force as of 2021.
As this proposal is in the early stages, we will not go into much detail at this point. However, we would like to note that the proposal includes the following aspects:
- Temporary loss relief for direct EU subsidiaries and permanent establishments: the CCTB will provide for cross border loss relief.
- Allowance for Growth and Investment: taxpayers will be granted a deduction in respect of a defined yield on specified increases in their equity.
- Enhanced deductions for R&D costs: taxpayers will receive an extra deduction for qualifying R&D expenses.
- Participation exemption and switch-over clause: a participation exemption is includes in the proposal, which also includes a swith-over clause for low-taxed income. We note that a similar swith-over clause was dropped in the Anti-Tax Avoidance Directive (ATAD) that was agreed upon in July. Please see our article on the ATAD.
- General Anti-Abuse Rule: a general anti-abuse rule is included as is the case with other EU tax proposals recently.
- Interest limitation rule: the interest limitation rule is similar to the ATAD.
- Controlled foreign companies (CFC) rules: similar to the ATAD, although with slide amendments for passive income.
- Hybrid mismatch rules: similar to the ATAD. Please note that with a CCTB no mismatches would occur within the EU.
- Exit taxation: similar to the ATAD.
- Losses: indefinite carry forward, but no carry back.
The CCCTB proposal includes the definition of a group. Consolidation would only be mandatory for large groups and would be effectively limited to EU-resident companies and permanent establishments within in the EU. Group subsidiaries (direct or indirect) are defined by reference to control (50% voting, and 75% capital or profit).
The proposal includes provisions to combat mismatches regarding not only hybrid instruments or entities (as covered by the Parent-Subsidiary Directive and ATAD), but also mismatches involving permanent establishments, imported mismatches, hybrid transfers and dual resident mismatches. Moreover, these provisions are not only applicable within the EU but on a world wide scale.
Resolution of double taxation
Lastly, the package includes proposals to improve the resolution of double taxation within the EU. The current EU Arbitration Convention on the elimination of double taxation has – according to the EC – substantial shortcomings regarding access for taxpayers to those mechanisms, coverage, timeliness and conclusiveness. Moreover, the traditional methods of resolving disputes no longer fully fit with the complexity and risks of the current global tax environment. The current proposals therefore include a draft directive to improve these mechanisms within the EU. The intention is that the new rules will have a wider scope, be more effective, work quicker and be less costly.
At this point the EC has only launched a proposal. As mentioned, the proposal on the CCCTB in 2011 was not approved by the member states. Therefore, we will need to see how the member states respond to these proposals. We will keep you informed on the progress.
Should you have any questions regarding the above, please do not hesitate to contact us.