The European Commission proposed on 25 November 2013 to amend the Parent Subsidiary Directive (2011/96/EU). With this proposal an anti-hybrid loans rule and a renewed general anti-abuse rule are introduced. The issuance of the proposal has been fuelled by the global initiatives to prevent corporate base erosion and tax evasion.
Hybrid loans are by definition concluded between parties in two different jurisdictions whereby the loan is being considered as debt in one jurisdiction and as equity in the other with the aim to result into interest deduction and tax exempt dividend distribution. The anti-hybrid loans rule links the tax treatment in one jurisdiction to the tax treatment in the other. Hereby the Member State where the parent company is located should only refrain from taxing profits to the extent no interest deduction has been allowed by the Member state of the subsidiary.
The existing general anti-abuse rule is replaced with a more extensive version. Under this rule a transaction is considered to be artificial if it does not reflect economic reality. The benefits under the Parent Subsidiary Directive will not apply if “an artificial arrangement or an artificial series of arrangements which have been put into place for the essential purpose of obtaining an improper tax advantage under the Directive and which defeats the object, spirit and purpose of the tax provisions invoked”. For this purpose five situations that qualify transactions as artificial have been included in the rule.
The proposal shall become effective by means of a unanimous consent of all EU Member States. If adopted unchanged, the Member States need to implement the amendments into their domestic law by 31 December 2014.