New Year, New EU

Tax policy remains a hot topic at EU level and there is a lot on the agenda for 2024. While the elections to the EU Parliament in June of this year may come with a pause in activity, it is likely to be short lived and we expect to see progress on a number of proposals over the coming months.

Belgium will hold the Council presidency for the next six months and has said its taxation priorities are to curb tax avoidance and aggressive tax planning, further work on the Business in Europe: Framework for Income Taxation (BEFIT) proposals, the implementation of the Unshell Directive, and continued review of the Energy Taxation Directive.

Here are some of the key projects underway in the EU which we will be closely watching this year.

Pillar 1 & Pillar 2

The OECD’s landmark Two Pillar Solution, aimed at reallocating taxing rights and ensuring a global minimum rate of corporation tax will be the most significant change to the international tax landscape in the coming years. Pillar 2 has now come into effect in many jurisdictions, including for most EU Member States as a result of the Minimum Tax Directive. This Directive imposes a 15% minimum effective tax rate on groups with revenues exceeding €750m. The Directive came into effect for accounting periods beginning on or after 31 December 2023.

Five Member States – Malta, Estonia, Lithuania, Latvia, and Slovakia - have opted to delay implementation, as permitted by the Directive where there are fewer than 12 Ultimate Parent Entities (UPE) of affected groups located in each of those jurisdictions. However, those UPEs may still be subject to Pillar 2 taxes in other EU Member States under the UTPR mechanism from this year (the UTPR will not apply otherwise until 2025).

EU Member States have committed to implementing Pillar 1, which reallocates taxation rights, by 1 January 2025. It is understood that the EU will not propose a directive to implement Pillar 1 on the basis that the OECD’s Pillar 1 multilateral convention should be sufficient.

Business in Europe: Framework for Income Taxation

This proposal was first announced in May 2021 and is the successor to the EU’s failed common consolidated corporate tax base (CCCTB) project.

However, the initial BEFIT proposal also failed to garner significant support and a new draft directive was published on 12 September 2023, with a public consultation on this new proposal launched at the same time.

The BEFIT proposal stated aims are to simplify and reduce tax compliance costs for large, cross-border businesses in the EU. It purports to do so by introducing a single set of rules that will apply in each Member State to determine the tax liability of companies in groups with revenues of at least €750m annually. The affected group’s EU tax liabilities will then be aggregated and re-apportioned across the Member States based on the group’s EU tax liabilities over the previous three years. The EU Commission estimates that the new rules could reduce tax compliance costs by up to 65%, and smaller groups have the option of opting into it as long as they prepare consolidated financial statements.

However, the latest proposal, while addressing some of the concerns raised on the earlier draft, still leaves much to be desired and it is difficult to see any significant benefits for taxpayers in these proposals.

The proposal will now go to the Council and the European Parliament for consideration. It is proposed that the Directive will come into force by 1 July 2028.

An EU Transfer Pricing Directive

In tandem with the BEFIT initiative, the European Commission has proposed harmonising transfer pricing rules across the EU by integrating key transfer pricing principles into EU law, such as the arm's length principle, clarifying the role and status of the OECD Transfer Pricing Guidelines, and aiming to establish common binding rules on specific aspects of the transfer pricing within the Union. The proposal seeks to increase tax certainty for cross border business and mitigate the risk of litigation and double taxation, as well as reduce the opportunities for companies to use transfer pricing for aggressive tax planning purposes.

It is intended that the rules will apply from 1 January 2026. However, there has been some pushback from Member States on this proposal, with suggestions for a Joint Transfer Pricing Forum to be revived. Many Member States seem reluctant to codify the OECD guidelines and the consequent loss in flexibility, especially as OECD guidelines will continue to evolve.

A public consultation on this proposed directive ran until 3 January 2024.

ATAD3 – the Unshell Directive

On 17 January 2023, the European Parliament approved the European Commission’s draft ATAD3 Directive. The proposal received unprecedented levels of support in the European Parliament, with a majority of 99.7% voting in favour (only seven votes short of unanimity) and the Committee on Economic and Monetary Affairs adopted the amended proposal in January 2023. You can read our update on the Unshell Directive as approved by the European Parliament. The draft Directive is now with the European Council for further consideration, following which it would require unanimous approval from all EU Member States before it could be adopted.

Despite these high levels of support at the beginning of last year, progress seems to have stalled.

The Spanish presidency proposed splitting the directive into two steps – one to define a common set of ‘substance’ criteria to judge an entity a ‘shell’ entity, and another to detail what tax benefits these entities would lose. A proposal to set a minimum standard for substance requirements, which would allow individual member states to improve stricter standards if they wished, failed to get support as it would not allow for a harmonized definition of a shell entity – one of the initial drivers for this project.

To progress the process, the Commission will now have to withdraw the proposal and draft a new proposal based on this two-step approach. While the Belgian presidency has signalled that it will support the implementation of the Unshell Directive, it remains to be seen if it will be agreed and if so, when it might be adopted.

Faster and Safer Relief of Excess Withholding Taxes (FASTER)

The EU Commission has proposed a new Directive to address withholding taxes on cross border payments. The initiative includes a proposal for a common EU digital tax residence certificate, two fast-track procedures - a “relief at source” procedure and a “quick refund” system, which will complement the existing standard refund procedure - and standardised reporting obligations. The Spanish presidency proposed exempting countries with a “comprehensive relief-at-source system” from certain provisions of this proposal. MEPs are largely in support of the provision, but many have requested more time to consider the proposal and there is some criticism that it does not go far enough.

Comprehensive exemptions for payments to EU corporates mean that Irish payors rarely have to operate withholding tax on outbound payments. However, those who have had to rely on advance treaty relief applications to receive payments from other EU jurisdictions free of withholding tax will welcome efforts to simplify and speed up this process.

The EU Parliament’s proposed amendments are scheduled for a vote in the ECON Committee of the European Parliament on 23 January 2024.

Code of Conduct on Business Taxation

The revised Code of Conduct on Business Taxation came into force in January 2023, with certain aspects due to come into force from 1 January 2024. It has played an important role in tackling harmful regimes for over two decades within Europe and beyond. From 2024, the Code will have a renewed mandate and extended scope of action to make it more effective in the clampdown on unfair competition. This includes commitments to review tax measures for compliance with the Code.

The Code of Conduct Group screens Member States’ and third countries’ tax regimes for the purposes of determining the EU list of non-cooperative jurisdiction for tax purposes.

DAC 8

On 8 December 2022, the European Commission proposed a reporting framework which would require crypto-asset service providers to report transactions made by EU clients, by amending the Directive on Administrative Cooperation (DAC 8). It requires the reporting and automatic exchange of information on revenues from crypto-assets transactions and information on advance tax rulings for the wealthiest (high-net-worth) individuals.

The Council agreed its general approach on the proposal during the meeting of the Economic and Financial Affairs Council of May 2023. The European Parliament adopted its opinion on the directive on 13 September 2023 under the consultation procedure and DAC8 entered into force on 13 November 2023.

It will come into effect from 1 January 2026, with transposition into national domestic law due by 31 December 2025. 

For more information, please contact Dearbhla O’Gorman, Senior Associate, Dharitri Datar, Solicitor or any member of the ALG Tax team.

Date published: 16 January 2024