Anyone who thought the EU’s anti-tax avoidance directive was going to streamline 28 Member States’ different rules into a single harmonious EU whole is either a supreme optimist, doesn’t work in tax, or does work for the European Commission.
At least that’s my conclusion from some research I’ve been doing into how EU Member States are implementing the directive’s controlled foreign company (CFC) provisions into their domestic laws.
So what’s the cause of the problem? Well, the ATAD is not just one fixed set of rules that have to be copy-pasted into each country’s statute book.
Member States are free (up to a point) to choose their own words, adapt their existing rules, impose even stricter – i.e. taxpayer unfriendly – rules, or not do anything at all if their existing rules are already compliant. This had to have happened by January 1, 2019. In many cases it hadn’t.
On top of that, the directive gives Member States various options from which they can pick and choose. To give an example. There are two types of CFC income that can be taxed. Simplifying a bit, that means either passive income, or income that was really earned by the local parent. Member States can choose one or the other, or both of these. And so they have.
To make matters worse, there is a whole range of detail that the directive leaves open. Some of this has been addressed by Member States, albeit not necessarily in the same way, and some has simply been passed over. Maybe not majorly significant from a macro-EU perspective but jolly confusing if you are the regional tax director trying to make sense out of all this.
There are also cases where a Member State has not enacted something, but where the directive didn’t give them the option not to.
Take permanent establishments. Despite the name ‘controlled foreign company’, the CFC rules are also supposed to apply to ‘exempt’ foreign permanent establishments of a local company. That is, where the local company is not taxed on the profits made by permanent establishment. Hungary has apparently decided to exclude from its CFC rules exempt permanent establishments in non-EU tax treaty countries. The only plausible reason for this is because of a concern that this would otherwise conflict with Hungary’s international tax treaty obligations. If they’re right, why haven’t other Member States followed suit?
Another example. The ATAD tells us that the rules on passive income should not be applied to EU/EEA CFCs if they have sufficient ‘economic substance’. Denmark has apparently decided not to exclude such CFCs. Why?
Talking of exempt permanent establishments, the ATAD says you have to ignore an exempt permanent establishment of the CFC when working out whether the CFC is ‘low taxed’. Leaving aside the dubious basis for this rule (presumably to prevent ‘blending’ of high with low tax, but of course this can work both ways!), Belgium appears only to have half-implemented this. Their rules only ignore a CFC’s permanent establishment if this is exempt in the CFC jurisdiction under a tax treaty. But they don’t mention the possibility of it being exempt under the CFC jurisdiction’s domestic law.
There are also cases where not implementing a particular provision seems to make sense, even where the directive doesn’t actually allow this. A good example is the way a CFC’s income is attributed to its shareholders.
The directive says that Member States can tax CFC income that’s attributable to functions carried out by the parent. It also says that the parent should be taxed according to its proportionate interest in the CFC. So if a CFC’s income is actually due entirely to functions carried out by a 75% parent, how much can be taxed: all of the income, or just 75%? Could that be why Belgium hasn’t implemented the proportionate interest bit?
The one thing that’s generally not allowed is for Member States to be nicer to taxpayers than what the directive allows.
But it’s questionable whether this applies to relieving double taxation that results from the rules. At any rate, the Netherlands has dodged this question by sticking to just the relief provided under the directive. Why? - to underscore the fact that CFC’s are a ‘bad thing’ - and maybe at the same time help their ‘The Netherlands is Not a Tax Haven’ campaign. Other countries with perhaps more of a social conscience, such as Austria and Ireland, do provide for more relief. One can’t help wondering why the directive didn’t address this in the first place.
Getting back to permanent establishments, Belgium apparently ‘forgot’ to include these in its first attempt at implementing the directive’s CFC rules. I rest my case.
These are just some of my initial findings. An article is being worked on. In the meantime, if you need a link to the directive, you can find it here.