OUR INSIGHTS AT A GLANCE
- Ongoing direct tax initiatives of the European Commission have not really evolved over the past 4 months and why we see more and more EU national Parliaments taking a very critical stand on the reforms proposed by the European Commission.
- On 1 January 2024, Belgium took over the Presidency of the Council of the EU for the next six months. Belgium defined the adoption of the Faster and Safer Relief of Excess Withholding Taxes directive proposal, called “FASTER”, as a top priority and the chances of having this directive proposal formally adopted are rather high.
- The proposal laying down rules to prevent the misuse of shell entities for tax purposes, called “Unshell”, is still ongoing 2.5 years after its release and there is still a big question mark on its chances to succeed. The related initiative on “enablers” of tax evasion and aggressive tax planning, called “SAFE”, is on hold as it cannot be launched as long as the future of the Unshell project remains uncertain.
- The examination of the Debt-Equity Bias Reduction Allowance directive proposal, called “DEBRA” is also still on hold, and it is expected that this situation will remain unchanged in the coming months.
-
Finally, the 3 most recent directive proposals - (1) called
“BEFIT”, (2) the Head Office Tax
System for SMEs and (3) on transfer pricing - are only at the very
early stage of the legislative procedure. However, the EU Council
has been working actively on the
transfer pricing proposal so far, illustrating its willingness to have this project move forward quickly. - We provide hereafter an overview of the state of play of the most recent European direct tax initiatives of the European Commission.
Over the few past months, with a rhythm never seen before, a series of significant tax directive proposals were adopted by the European Commission in the name of the transparency, the fight against tax fraud and tax evasion and “fair” taxation but also, more recently with the purported aim to simplify and harmonise the corporate tax systems and reduce compliance costs.
Many of the ongoing direct tax initiatives of the European Commission have however not evolved over the past months and we see more and more national Parliaments taking a very critical stand on the reforms proposed by the European Commission. Various European Member States seem not eager to have additional tax changes adopted quickly and introduced in the short term anymore because a sheer amount of tax reforms, whose effects cannot all be evaluated yet, are still in their implementation phase. The adoption of additional new rules would create an even more challenging context of constantly evolving tax rules, especially in the current economical context.
Nevertheless, the adoption of the Faster and Safer Relief of Excess Withholding Taxes directive proposal was set as a top priority by the EU institutions and the chances of having this directive proposal formally adopted are rather high. Indeed, the Council reached an agreement (general approach) on new rules for withholding tax procedures.
In this article, we provide an overview of the state of play of the most recent European direct tax initiatives of the European Commission, from the ones that are the most likely to be adopted in the short term to the ones that have, currently, the least chances to succeed in the near future.
The FASTER Proposal
On 19 June 2023, the European Commission published the proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes, the “FASTER Proposal”. With this new initiative, the Commission aims to tackle the current particularly burdensome withholding tax (“WHT”) fund procedures - which differ between Member States - for cross-border investors in the EU and, at the same time, the risks of tax abuse related to refund procedures revealed notably by the Cum/Ex and Cum/Cum scandals. For a presentation of the FASTER Proposal, please read our ATOZ Alert of 21 June 2023 “European Commission releases FASTER Directive Proposal”.
In the same way as the Spanish Presidency did since the release of the FASTER Proposal, the Belgian Presidency of the EU Council, which started on 1 January 2024, has been giving this legislative proposal a high level of priority and the EU Council has been very active on discussing and analysing the FASTER Proposal during the first part of 2024.
On 14 May 2024, the European and Financial Affairs Council (ECOFIN) met to discussed about the FASTER directive proposal through a compromise text which presents substantial differences compared to the original text of the proposal published in June 2023. The Council reached an agreement (general approach) on this compromise text providing for new rules for withholding tax procedures.
The compromise text of the FASTER Proposal, compared to the suggestion made by the Spanish Presidency, extends notably the scope of jurisdictions which could be exempted from applying the WHT relief procedures under FASTER to avoid additional administrative burden on them without any real added value (given their already well-functioning system): only small stock markets with comprehensive withholding tax relief-at-source systems could be exempt from the related provisions of the FASTER Proposal.
Under the Belgian compromise text, EU Member States with comprehensive relief-at-source systems that have, during four preceding consecutive years, a market capitalisation ratio equal to or more than 1,5% (instead of 1% under the suggestion made by the Spanish Presidency) shall irrevocably apply the WHT relief procedures of the FASTER Proposal. The Presidency defined market capitalisation ratio as “the ratio expressed as a percentage of the market capitalisation of a Member State on [31 December] to the overall market capitalisation of the European Union” on the same day. The compromise text says that countries without a comprehensive relief-at-source system would also be required to apply the WHT relief procedures regardless of whether their market capitalisation is below, equal to, or above the 1,5% threshold.
On Wednesday 28 February, the European Parliament adopted its non-binding opinion on the initial FASTER Proposal. While supportive of the FASTER Proposal, the European Parliament suggests some amendments and clarifications. It notably recommends to identify the beneficial owner of the dividend/interest income by applying the rules of the source Member State or those of the applicable tax treaty, to continue the fight against illegal WHT reclaim procedures by introducing cooperation and mutual assistance on the exchange of information amongst the relevant parties (e.g. tax authorities, law enforcement bodies), and examine possible measures to facilitate self-processed WHT claims for small investors (without the intermediation of certified financial intermediaries). However, due to the changes the Council made in the FASTER Proposal during the negotiations, the European Parliament will be consulted again on the compromise text agreed upon on 14 May 2024 by the Council.
Following this re-consultation with the European Parliament, the FASTER Proposal will need to be formally adopted by the Council (unanimity required) before being published in the EU's Official Journal and entering into force. In this respect, the Council is currently expected to adopt the FASTER Proposal in early 2025.
Member States will then have to transpose the directive into national legislation by 31 December 2028, but the national rules will, in principle, become applicable only as from 1 January 2030.
For more information about the compromise text agreed upon by the EU Council, please read our ATOZ Alert of 21 May 2024 “The Council reached an agreement (general approach) on new rules for withholding tax procedures (FASTER)”
The Unshell Proposal
On 22 December 2021, the European Commission submitted a proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes and amending Directive 2011/16/EU, the “Unshell Proposal”.
The objective of the Unshell Proposal is to prevent tax avoidance and evasion through actions by undertakings without minimal substance. The Unshell Proposal aims to fight against the misuse of shell entities for improper tax purposes and to ensure that shell companies in the European Union that have no or minimal economic activity are unable to benefit from certain tax advantages (for a presentation of the Unshell Proposal, please read the article “The new Directive proposal to fight against the misuse of shell entities” in our April 2023 ATOZ Insights).
By the end of 2023, European Member States had not managed to reach an agreement on various technical aspects of the directive proposal. When taking over the Presidency, Belgium expressed its support to an adoption of the Unshell Proposal. However, since the priority was finally given to other files, for the first time since the release of the Unshell Proposal by the European Commission, the proposal is currently stalled at the Council as it was not discussed, at least officially in a dedicated forum such as a meeting of Working party on Tax Questions, during the first five months of this year.
On 22 January 2024, MEPs of the ECON Committee held an Economic Dialogue and exchange of views with Vincent Van Peteghem, President of the ECOFIN during the Belgian Presidency. MEP Paul Tang notably questioned a possible adoption of the Unshell Proposal. Although the Belgian Presidency has made the fight against tax evasion and avoidance a priority, the President of the ECOFIN noted that the adoption of this proposal requires unanimity at the Council and some Member States have expressed concerns about the excessive administrative burden for tax administrations and businesses it involves. According to the current President of the ECOFIN, this issue is, therefore, under analysis by the Presidency, before embarking on further work.
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