The EU Parent-Subsidiary Directive (2011/96/EU) was implemented to prevent double taxation of intra-group companies based in different EU Member States. Many multinational companies took advantage of the tax benefits made available by the Directive, employing hybrid loan instruments to take advantage of the differences between national tax rules thereby avoiding tax in any Member State.
The issue of the use of strategic and aggressive tax planning was first raised in December 2012, when the European Commission set out an action plan to combat such aggressive tax planning and tax evasion. The amendment to the Parent-Subsidiary Directive was one of the proposals included in the action plan.
The proposal updates the anti-abuse provisions, by requiring Member States to adopt a common anti-abuse rule. Thus artificial intra-group structures designed solely to avoid taxes can be ignored, and subject to tax on the basis of de facto economic substance.
In addition, hybrid loan instruments will no longer benefit from differing national tax laws. Currently, intra-group hybrid loans receive an exemption for the dividends received from subsidiaries in other Member States. In some Member States such dividend payments are deductible as debt repayment. The result is that the dividend payment/loan is not taxed in any Member State. Under the proposal, if payment of a hybrid loan benefits from a tax deduction in the distributing Member State then it will be subject to tax where the parent is located.
If the Proposal is approved by the Council of the European Union, Member States will be required to implement it no later than December 31, 2014.