Czech Business Today

The issue of corporate base erosion is very high in the political agenda of many EU and non-EU countries and has been on the agenda of recent G20 and G8 meetings. Double non-taxation deprives Member States of significant revenues, creates unfair competition between businesses in the Single Market and is one of the key EU areas for urgent and coordinated action. 

Both the European Council and the European Parliament have stressed the need to develop specific ways to improve the fight against tax fraud and tax evasion via hybrid financial instruments in the EU. The PSD was originally conceived to prevent same-group companies, based in different Member States, from being taxed twice on the same income (double taxation). However, certain companies have exploited the provisions of the Directive and mismatches between national tax rules in order to avoid being taxed in any Member State at all (double non-taxation). The proposal aims to close these loopholes. First, it updates the anti-abuse provision in the Parent Subsidiary Directive to allow for ignorance of artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance. Second, it will ensure that the Directive is tightened up so that specific tax planning arrangements cannot benefit from tax exemptions. Currently, the PSD obliges Member States to give parent companies a tax exemption for the dividends they receive from subsidiaries in other Member States. However, in some cases, the Member States where the subsidiaries are based classify these payments as tax deductible “debt” repayments. That results in the payments from the subsidiary to the parent company not being taxed anywhere. Exploiting such mismatches is the basis for a specific type of tax planning arrangement (hybrid loan arrangements). Under the proposal, if a hybrid loan payment is tax deductible in the subsidiary’s Member State, it must be taxed by the Member State where the parent company is established. This will stop cross-border companies from planning their intra-group payments in order to enjoy double non-taxation. 

The EESC welcomes the proposal for a review of the Parent-Subsidiary Directive, and considers that it is a major step forward in implementing the action plan to strengthen the fight against tax fraud and tax evasion. Considering that every year the Member States lose billions of euros as a result of tax fraud and tax evasion, as well as aggressive tax planning, the Committee can only endorse the Commission proposal aiming on implementation of the general anti-abuse rule.

Marie Zvolská
EESC Member, Group I – Employers