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Implementation of the EU Anti-Tax Avoidance Directive

Status of the directive

Are you ready for ATAD? The anti-tax-avoidance directive will have an impact on companies in the EU, so those potentially affected should analyze the impact of new measures on their business.

What is ATAD 1?

The European Anti-Tax Avoidance Directive (ATAD 1) aims to provide a minimum level of protection for the EU market and ensure a harmonized and coordinated approach in the EU to the implementation of some of the recommendations under the OECD BEPS project.

The ATAD 1 provides for the minimum harmonization of rules relating to interest expense deductions, controlled foreign companies (CFCs) and hybrid mismatches, and requires the introduction of a corporate general anti-abuse rule (GAAR) and an exit tax (the latter two measures are not part of the BEPS project).

The ATAD 1 grants EU member states certain options in the implementing the directive into their domestic laws.

Deloitte’s ATAD surveys focus on the impact and implementation of the interest expense limitation rule and the controlled foreign companies (CFC) rules in the member states.

Interest expense limitation rule

To discourage companies from artificially shifting debt, member states are required to implement measures limiting the tax deductibility of interest on debt. Various options are available in implementing the limitation rule, such as including a de minimis threshold, an “escape clause” and a grandfathering provision.

EU Anti-Tax Avoidance Directive: Implementation of interest expense limitation rule

CFC regime

The CFC rules in the ATAD 1 aim to target artificially diverted low-taxed, non-distributed (passive) income. The rules will allow the member state of the resident parent company to tax certain profits that the resident company shifts to a country that imposes low or no tax. Member states have several approaches available when implementing a CFC regime, such as providing a stricter definition of a CFC, defining the income on which a CFC charge can be imposed, including exemptions from the rules, etc.

The interest expense limitation rule and CFC regimes were required to be implemented into the domestic law of the EU member states by 31 December 2018, with the new measures applying as from 1 January 2019.

However, not all member states fully transposed the ATAD 1 into their domestic law by the deadline. (If a member state fails to comply with EU law, the European Commission may open an infringement procedure, and if necessary, it may bring the case before the Court of Justice of the European Union.)

EU Anti-Tax Avoidance Directive: Implementation of controlled foreign company rules

Key provisions of ATAD 2

The ATAD 2 introduces more detailed rules to neutralize hybrid mismatches, which address a wider range of arrangements and broaden the scope of the simplified anti-hybrid rules included in ATAD 1. The more extensive anti-hybrid rules in the ATAD 2 replace the initial rules to counter hybrid mismatch arrangements set out in the ATAD 1.

EU member states have until 31 December 2019 to transpose the ATAD 2 provisions into their national law and regulations so that the rules apply no later than 1 January 2020 (the exception being reverse hybrid rules that should be transposed by 31 December 2021 and applicable by 1 January 2022).

The solution

The rapidly changing cross-border tax environment poses many challenges and opportunities for multinationals and their tax functions. The ATAD 1 and ATAD 2 will have a wide-ranging impact on companies in the EU, so potentially affected taxpayers should begin analyzing the potential effects of the ATAD on their business operations as soon as possible to ensure operations are compliant and sustainable.

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