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What is the Omnibus?
The European Commission published its Tax Simplification Package on 24 June, containing the Direct Taxation Omnibus Directive (the Omnibus), which aims to simplify tax reporting, reduce compliance costs and promote EU competitiveness, and proposals for the codification and simplification of various directives on administrative cooperation on tax matters (the Recast Directive) (discussed in a separate insight).
While both measures remain subject to member state approval, the Omnibus has a proposed transposition date of 31 December 2028, with most of its provisions due to come into effect on 1 January 2029.
Key measures are discussed below.
Key measures
A. Withholding taxes
Withholding taxes (WHT) represent a barrier to intra-EU trade.We welcome the Omnibus proposals to remove WHT on intra-EU payments of dividends (and other income distributions), interest and royalties between companies. This will be achieved by amending the Parent Subsidiary Directive (PSD) and Interest and Royalty Directive (IRD) to remove minimum participation thresholds currently required for those directives to apply.
However, the Omnibus proposes delaying the effective date of the changes to the PSD/IRD until 2037, to allow member states that levy WHT an opportunity to adjust to lost revenues. This is unfortunate as it means that the impact of the changes on EU competitiveness will not be felt for many years.
In addition, the Omnibus proposes that:
While the simplifications are welcome, removing upfront authorisation and administrative procedures may place additional burdens on paying companies, who must assess the payee’s entitlement to PSD/IRD relief before making payment and bear the risk where that assessment is incorrect.
Ireland does not apply advance clearance procedures for dividends falling within the PSD. However, where a non-resident recipient relies on a domestic exemption from dividend withholding tax (DWT), they must provide a declaration to the payer confirming that they are beneficially entitled to the payment and resident in a ‘relevant territory’ before the payment is made. The declaration provides the payor with comfort that the conditions for the exemption are met. It remains to be seen how the removal of this upfront verification process for EU corporate recipients will impact on Irish businesses.
B. Mandatory R&D allowance
To encourage innovation, the Omnibus requires member states to introduce an R&D allowance, allowing taxpayers to deduct qualifying expenditure on tangible R&D assets, including R&D facilities. The deduction can be claimed in full in the year that expenditure is incurred or spread over four subsequent tax periods. A clawback applies if assets cease to be used for qualifying R&D activities within three years.
The Omnibus only sets a minimum bar for R&D incentives; member states may maintain more favourable treatment for R&D. On that basis, we do not foresee the Omnibus requiring any significant change to Ireland’s existing R&D tax credit system.
C. Interest limitation rule (ILR)
Certain aspects to become mandatory
The Anti-Tax Avoidance Directive (ATAD) allowed member states discretion on certain aspects of implementation of the ILR. On review, the Commission determined that this led to fragmentation, increased compliance costs and legal uncertainty, and so the Omnibus will make the following provisions mandatory:
Ireland has already adopted the rules in the manner prescribed above. However, the uniform application of these rules across the EU should reduce compliance costs for Irish businesses operating across Europe with borrowings subject to the ILR.
Uniform rules for the carry forward of non-deductible interest
ATAD allowed member states to allow for the carry forward of exceeding borrowing costs in several different ways. The Omnibus will remove this discretion and require that exceeding borrowing costs be available for carry forward indefinitely.
Exclusion of low-risk third party loans
The Omnibus introduces a new exclusion to the ILR for low-risk third-party loans, provided the borrower uses the proceeds for its ‘own activities’ and does not on-lend to group companies.
CFE Tax Advisers Europe (CFE), a representative body for tax professionals across the EU, published an opinion on the draft Omnibus on 27 July 2026 (Opinion Statement (FC 4/2026)). In it, they urged EU legislatures to define ‘own activities’, warning that without a formal definition, divergent interpretations could emerge across member states. They also query the basis for restricting companies from on-lending within their group, giving the example of a group with a treasury function, where on-lending is done on an arm’s length basis, arguing that the base-erosion risk which the ILR targets does not arise, since the group's overall interest expense remains anchored in genuine third-party borrowing.
Removing the standalone entity exclusion
Considering the new exclusion for low-risk third party loans, the existing ILR exclusion for standalone entities will be removed. The decision to remove this exclusion may impact on Ireland’s securitisation regime.
Most orphan securitisation vehicles in Ireland (SPVs) do not qualify as standalone entities because they have associated entities. Instead, they are treated as a ‘single company worldwide group’ (SCWG) under the Irish ILR rules. While a SCWG remains within scope of the ILR, it is treated as a single entity ‘group’ when applying the rule, meaning it may face little or no restriction on interest deductibility after applying the group ratio and equity ratio provisions.
The SCWG is a compromise position for entities, such as SPVs, which are neither standalone nor part of a consolidated group. The concept was developed as part of Ireland’s implementation of the ILR and was subsequently adopted by Luxembourg. If the standalone entity concept is removed from the ILR, it may become more difficult for Ireland to justify a domestic rule which was introduced to bridge a gap between two concepts where that gap no longer exists.
In addition, as the overarching aim of the Omnibus is simplification and harmonisation, differences in domestic implementation of the ILR, such as Ireland’s SCWG concept, may be more susceptible to challenge.
SPVs could, in principle, benefit from the new low-risk third-party loans exemption if they borrow exclusively from unrelated third parties. The Omnibus indicates that this exclusion will extend to funding raised through regulated bond issuances, which it describes as generally presenting limited risk. However, it remains to be seen how the requirement for borrowed funds to be used for the borrower’s ‘own activities’ would be interpreted in the context of an SPV. The application by an SPV of borrowed funds to acquire and hold qualifying assets for the purposes of section 110 of the Taxes Consolidation Act 1997 may be viewed as being for its ‘own activities’. More complex SPV structures involving back-to-back or on-lending arrangements where, for example, where an SPV acquires intercompany receivables or provides financing to related entities may be excluded due to the restrictions on on-lending in the new exemption.
New exclusion for financial hardship
To mitigate against any financial hardship caused by the ILR after a sudden significant drop in profitability, the ILR will not apply to a tax period where EBITDA has decreased by 50% or more compared to the immediately preceding tax period.
Expanded definition of ‘financial undertaking’
Under ATAD, certain ‘financial undertakings' are excluded from the ILR- the Omnibus proposes updating and expanding this definition.
In an ongoing case, Commission v Luxembourg (Case C-138/24), Luxembourg’s decision to include an additional category of entity (a securitisation special purpose entity within the meaning of Article 2(2) of Regulation (EU) 2017/2402 (the EU Securitisation Regulation) (SSPE)) within the exclusion for financial undertakings when implementing the ILR under ATAD was challenged.
Advocate General Kokott delivered an opinion in the case only days before the Omnibus was published, where she concluded that Luxembourg had not failed in its obligations in transposing ATAD by including the additional category. Notably, SSPEs have not been included in the expanded list of financial undertakings proposed by the Omnibus. The types of financial undertakings which benefit from exclusion from the ILR may be an area where we see member state debate on the Omnibus.
D. Controlled Foreign Company (CFC) Rules
New carve-out for Pillar Two and SMEs
Companies within scope of Pillar Two will no longer be subject to ATAD CFC rules. The carve-out will not apply where the MNE is headquartered in a jurisdiction with a qualified side-by-side regime and the low-taxed subsidiary is not subject to a QDTT or benefits from a refund or other financial incentive in respect of that tax.
CFC rules will also no longer apply to SMEs. In deciding to exclude SMEs, the Commission noted there have been almost no CFC cases related to SMEs in the decade since the rules were introduced, so their exclusion should not significantly hinder ATAD’s objectives of combating tax avoidance.
Model A to become mandatory
ATAD provided two options for implementing CFC rules: (I) Model A, the ‘entity approach’, applies to CFC income from certain classes of passive income streams or (II) Model B, the ‘transactional approach’, targeting undistributed CFC income from non-genuine arrangements designed to obtain a tax advantage.
In their opinion, CFE note that replacing Model B with Model A is not simply a simplification exercise – Model B was an agreed ATAD option deliberately adopted by several member states, moving to Model A may require substantive changes to domestic CFC rules and an adjustment period for taxpayers and tax authorities.
Ireland is one of a number of member states, including Malta and the Netherlands, to adopt Model B rules. At the time of adoption, the Department of Finance opted for Model B on the basis that it aligned with Ireland’s existing transfer pricing rules and the arm's-length principle. It remains to be seen whether there will be significant push back from member states against the mandatory move to Model A – however, the Commission may argue that the exclusion of Pillar Two groups and SMEs may mean that the number of affected taxpayers in these member states should be significantly reduced.
E. Other changes
Hybrid Mismatch Rules
The imported mismatch rule will be removed from ATAD entirely - the Commission has described it as being ‘overly complex while delivering no or limited results’.
Extension of EU general anti-abuse rules
ATAD’s general anti-abuse (GAAR) rules will be extended to ensure it covers all direct taxes, including withholding taxes and Pillar Two top-up tax. It remains to be seen how an EU wide GAAR would interact with the Pillar Two framework, particularly in light of the fact that the Pillar Two framework already contains targeted anti-abuse rules.
We would have some concern that extending ATAD GAAR will create parallel regimes, risking double adjustments and inconsistencies both across member states, and also as between member states and non-EU members of the inclusive framework.
Tax Merger Directive (TMD)
The TMD provides for the deferral of capital gains tax on cross-border reorganisations within the EU. The Omnibus will update it to incorporate newer types of reorganisations included in the recent EU Mobility Directive, including cross-border migrations and company conversions.
Dispute Resolution Mechanism Directive (DRM)
The DRM establishes a framework for resolving tax treaty disputes and double taxation issues. The Omnibus includes targeted amendments to improve DRM mechanisms and clarify procedural requirements.
If you have any questions on the decision or would like to discuss its implications for your business please reach out to James Somerville, Partner, or your usual Tax contact.
Date published: 10 September 2026
