The European Parliament elections took place from June 6 to June 9, 2024. A day after the elections concluded, the overall picture became clear. While radical-right parties experienced some growth, the balance of power in the European Parliament remained largely unchanged.
Hungary took over the rotating presidency of the European Union from Belgium, on 1 July 2023 serving until 31 December 2024. The Hungarian agenda aims to include combating tax evasion, ensuring legal certainty for taxpayers, and supporting the EU’s international engagement. Additionally, Hungary sees an opportunity to enhance European business competitiveness through digitalization, efficient use of information, and simplification. What exactly this entails is not yet clear. We expect more details in the coming weeks and months.
Against this backdrop there have also been negotiations at a UN level on Terms of Reference (ToR) for a UN Framework Convention on International Tax Cooperation. All EU Member States abstained from the recent vote, over concerns about duplication of other international work and are unwilling to support the Framework where it overrides tax work agreed at the OECD. However, the EU has fully engaged with discussions and changed it vote on the ToR from an outright no to abstention.
Pillar Two
Overview
Following the publication of the G20/OECD inclusive framework on BEPS' Global Anti-Base Erosion Model Rules (Pillar Two) which is aimed at establishing a global minimum level of taxation for multinational groups (with a minimum effective tax rate of 15%), the European Commission (EU Commission) introduced a draft directive on December 22, 2021.
This directive aims to implement the OECD inclusive framework model rules across European Union (EU) member states. The EU Commission's proposal aligns with the EU's commitment to rapid action, positioning itself among the first to adopt the political consensus arising from the OECD/G20 inclusive framework on Pillar Two.
138 countries worldwide have agreed to implement Pillar 2 rules in their national legislation, with a significant number having introduced domestic legislation enacting Pillar 2. As of June 2024, the US has yet to implement Pillar 2 legislation.
Current State of Play
EU rules came into effect on 1 January 2024 introducing a minimum effective rate of tax rate of 15%. Groups with a turnover of more than €750 million will be subject to new regulations.
The multilateral instrument concerning the Subject to Tax Rule has been open for signature since 2 October 2023. A signing ceremony of the STTR will be held on 19 September 2024. During the signing ceremony, there is also the opportunity for countries that do tax the payments in question, at a rate of at least 9%, to express their support for the STTR.
It has also been agreed within the Inclusive Framework that countries that subject the relevant payments to a rate of less than 9%, include the STTR in their tax treaties with developing countries if they request it.
Several countries have introduced registration and notification requirements. On 29 May 2024, Belgium published a Royal Decree including details about the registration and notification requirements for Pillar 2. This requirement entails that in-scope groups with a presence in Belgium must submit an extensive notification form to obtain a registration number from the Belgian Trade Register. This notification form must be filed by 13 July 2024 (or within 30 days after the start of the first Pillar 2 reporting year).
On 20 May 2024, HMRC published practical guidance on Pillar 2, including a notification requirement. In-scope groups with a presence in the UK must register for Pillar 2 with the HMRC. This registration must be submitted within six months from the end of the first accounting period that started on or after 31 December 2023.
Grant Thornton is an international network with global Pillar 2 specialists available to assist you with both the implementation of Pillar 2 and all your Pillar 2 compliance obligations.
Unshell Directive (ATAD 3)
Overview
On 21 December 2021, the Commission submitted a proposal for a Council Directive (the “Unshell” proposal) aimed at preventing the misuse of shell entities for tax purposes and amending Directive 2011/16/EU. Also known as ATAD3, the proposal aims to combat 'shell companies' and includes a 'filtering' system for EU companies, which will have to pass three gateways. These gateways relate to passive income, cross-border activities, and outsourced management and administration. This proposal aims to get sufficient 'substance' at the level of the EU company. Certain types of entities are carved out, including listed entities, insurance companies, and pension funds.
EU companies deemed to be lacking in substance are presumed to be 'shell companies'. Consequently, if the presumed shell is unable to rebut this presumption or cannot obtain an exemption, it will lose certain tax advantages granted through bilateral tax treaties or EU directives.
Current state of play
In October 2023, after months of discussion on the various compromise texts, member states seemed to favour a suggested approach to initially limit the directive to the exchange of information on shell companies, despite the commission’s strong advocacy for including tax consequences in the directive. This approach would remove the economic substance test and restrict reporting obligations to entities at high risk of being used in abusive tax schemes.
The new approach proposed by the commission no longer includes common tax consequences. Instead, it obliges Member States to use exchange of information to take administrative measures, such as tax audits, to identify potential abuse schemes and apply their national anti-abuse rules accordingly.
As of June 2024, no agreement is expected in the short term, and it is thought that the proposal will not be adopted in its original form. Some member states are concerned that the proposed measures will lead to a disproportionate increase in administrative burdens and are pushing for the directive's simplification. However, the negotiations are not yet at a standstill.
The Hungarian presidency has stated their intention to progress the taxation files currently on the agenda with one of their high priority areas being fighting tax evasion, which suggests that Unshell is still very much on the agenda.
The ECOFIN Report to the European Council on Tax Issues published on 24 June 2024 includes a section on Unshell stating that whilst most delegations supported the proposal, further technical work was required before an agreement could be feasible.
Securing the Activity Framework of Enablers (SAFE)
Overview
The SAFE proposal aims to combat the role that enablers can play in facilitating schemes that can lead to tax evasion or aggressive tax planning within the EU. The objective of the SAFE proposal will be to prevent enablers from setting up such structures in non-EU countries when used to erode the tax bases of the EU Member States.
The Policy options considered are:
- Due diligence to be undertaken by all enablers;
- Prohibition on facilitation of tax evasion and aggressive tax planning plus due diligence to be undertaken and a requirement for EU registration;
- Code of conduct for all enablers.
Current state of play
The Commission has stated that an agreement needs to be reached on the Unshell Directive before progressing with a proposal on the SAFE initiative. To date, there has been no formal wording for this SAFE proposal. The timeline therefore remains unclear as the Commission has not announced when the SAFE initiative will be tabled for further discussion.
Business in Europe: Framework for Income Taxation (BEFIT)
Overview
The European Commission launched the BEFIT proposal on 12 September 2023. The proposal introduces a single set of rules to determine the tax base for large businesses that operate out of more than one Member State. The new rules will be mandatory for groups with a combined global annual revenue of at least €750m and the ultimate parent holding at least 75% of ownership rights. BEFIT groups would comprise the same group as Pillar Two but would be limited to EU entities.
For groups headquartered outside the EU, their Union subgroup will only apply BEFIT rules where they achieve €50m combined revenues in at least 2 out of four previous fiscal years or 5% of the total group revenues.
The rules are discretionary for smaller groups, provided they prepare consolidated financial statements.
Current state of play
Following an in-depth analysis instigated by the Belgian Presidency, a detailed discussion took place mainly looking at potentially aligning the first 20 articles of the commission proposal with Pillar Two rules.
The broad aims of the proposal (simplifying corporate taxation rules and reducing the administrative burden to businesses and tax authorities) are supported by Member States. Concerns have been raised that the proposal in its current form will not achieve these desired outcomes, as well as issues concerning operation with Pillar Two rules, national corporate tax rules, and other existing areas of EU taxation (anti-abuse measures for example).
There have been calls by some Member States for a political discussion, whilst the technical analysis of the proposal continues.
Therefore, it will likely take some time to negotiate the BEFIT proposal. Unanimous approval from all Member States will be required before adoption.
An implementation date of 1 July 2028 has been proposed.
Video - BEFIT, One Stop Shop?: Sasha Kerins, International Tax Partner at Grant Thornton Ireland, and Monique Pisters, Head of Tax at Grant Thornton Netherlands, discuss BEFIT, the proposed directive that was issued by the EU Commission.
Head Office Tax (HOT) System
Overview
As part of the BEFIT proposal issued in September, a proposal for a Head Office Tax (HOT) system for SMEs was also published.
This proposal would allow certain SMEs to calculate their tax liability based on the tax rules of the Member State where their head office is located and file a single tax return in that Member State. The tax return and tax revenues will be shared with the Member States in which the permanent establishments are located.
Current state of play
The proposal was assigned to the Economic and Monetary Affairs Committee in the European Parliament. It was adopted by ECOFIN on 22 February 2024, strongly supporting the overall proposal. To ensure that more companies would be able to benefit from the simplifications, the report proposes to extend HOT's scope to companies that operate in other Member States through no more than two subsidiaries (next to companies that operate through PEs). The European Parliament adopted its (non-binding) report with the amendments on 10 April 2024.
Whilst Member States support the general objective to facilitate cross-border activities for SMEs, concerns expressed relate to the possibilities for aggressive tax planning, administration issues, potential effects on tax revenues for Member States, and risks linked to the competitiveness of domestic markets, as well as concerns about tax sovereignty. It has been suggested that more general discussions take place before further technical progress can be made.
Further work on this proposal could continue with the objective of preparing a high-level discussion on the policy choices that would need to be made.
The Commission proposed that Member States would implement the directive by 31 December 2025 with the provisions applying from 1 January 2026.
Video - A new Head Office tax system: Monique Pisters discusses the HOT-proposal, the new EU directive for micro, small, and medium-sized enterprises.
Transfer Pricing
Overview
A proposal for a directive on Transfer pricing is also now part of the BEFIT Package to harmonise transfer pricing rules across the EU. Currently, the EC considers that the operation of OECD guidelines differs between Member States, and whilst there is a common approach to basic principles, this is not fully aligned. The Directive essentially incorporates the arm’s-length principle and its interpretation in the OECD Transfer Pricing Guidelines (2022) into the legislation of all EU Member States.
The proposal contains anti-abuse rules and aims to increase tax certainty and reduce the risk of litigation and double taxation. The directive will reduce opportunities for aggressive tax planning using transfer pricing.
Current state of play
Member States have criticised the proposal and raised the question as to why OECD transfer pricing rules need to be codified at an EU level when transfer pricing legislation already exists in Member States.
It has been suggested that the proposal appears to remove flexibility for Member States and may result in binding rules for certain transactions at an EU level.
Feedback submitted to date outlines the fact that the proposal of the 25% ownership threshold for associated enterprises is stricter than the current threshold of most Member States, increasing the number of transactions falling within transfer pricing rules.
The directive includes a standardised definition of a controlled company. Moreover, the TP Directive mandates that Member States adhere to the most recent version of the OECD Guidelines, making them legally enforceable.
The Belgian Presidency invited Member States to exchange views on the following topics:
- the status of the OECD Transfer Pricing Guidelines;
- the question to what extent the Directive could apply to cross-border transactions in relation to non-EU entities and tax authorities;
- further alignment of the Commission proposal with the OECD Model Tax Convention;
- functioning of the proposed rules on transfer pricing for permanent establishments and for associated enterprises, including possible way forward as regards the definition of the associated enterprises;
- possible scope of procedural rules on transfer pricing that could be harmonised at the EU level, and potential merits thereof;
- the possibility of creating a discussion and coordination platform between Member States for transfer pricing issues.
Discussions have indicated that the proposal is unlikely to be supported by Member States in its current form, further work will be needed to make progress.
Faster and Safer Tax Excess Refund for Withholding Taxes (FASTER)
Overview
FASTER is an initiative that aims to simplify the EU-wide system for withholding tax (WHT) on dividend and interest payments. It will also assist tax authorities in identifying and targeting the abuse of rights under tax treaties.
Current state of play
On May 14, 2024, Council ministers reached a general consensus on the proposal. Member States acknowledged the significance of FASTER, especially considering the EU's renewed focus on the Capital Markets Union, and fully supported the directive's objectives. However, the Council's text differed significantly from the Commission's original proposal in several areas.
The Council decided that Member States must implement either the relief at source or quick refund mechanisms for withholding tax relief on dividends paid for publicly traded shares. However, Member States with an existing comprehensive relief at-source system and a market capitalization ratio below a certain threshold are allowed to maintain their own national system if they prefer.
Regarding the European Tax Residency Certificate, the Council fully endorsed its implementation across all EU Member States, closely following the Commission's initial blueprint. However, the Council extended the deadline for issuing such certificates from one working day to fourteen calendar days. Besides, Member States shall process a refund request within sixty calendar days.
Because the Council has changed the original Commission proposal, the European Parliament will need to be consulted again before the Council can formally adopt it.
Member states must transpose the directive into national legislation by 31 December 2028, but the national rules must become applicable on 1 January 2030. The previous entry into force date of 1 January 2027 would be very difficult to achieve, so 1 January 2030 is a more realistic timeline.
Video - Faster directive revises the withholding tax regime in the EU: Monique Pisters outlines FASTER, a new directive to create a faster and simpler process for investors, financial intermediaries, and tax authorities.
Video - Update Faster Directive Adopted by Council of the EU: Monique Pisters provides an update on the FASTER directive following its adoption by the European Council on May 14, 2024. She will discuss the key updates of the FASTER Directive.
The DACs
The European Commission launched a ‘Call for Evidence’ regarding the functioning of the DAC in the period 2018-2022 (DAC7 and DAC8 are therefore excluded). This call for evidence includes an assessment of the relevance of the scope and the purpose of the directive, the effectiveness in achieving the objectives, and an efficiency/cost-benefit analysis. This Call for Evidence also includes a survey for Member States on the relevant hallmarks in DAC6. A public consultation was open from 7 May 2024 - 30 July 2024.
The main concerns of the respondents regarding the DAC(6) evaluation are the following:
- No alignment across EU Member States of the interpretation of the different DACs definitions;
- No harmonization of penalties across EU Member States;
- Limited information shared by tax authorities, including, for example, statistical filing information and the contents of the filings;
- Trigger dates for reporting under DAC6 are not practical and unclear in most cases;
- The application of the main benefit test should not be limited to a few hallmarks. Most respondents argue that the main benefit test should be extended to other hallmarks (like E3).
Reporting Obligation for Digital Platforms (DAC7)
Overview
DAC7 introduced a requirement for Digital Platform Operators to collect information on reportable sellers utilising their platforms for Relevant Activities, and to report annually such information to the competent tax authority, who will share this with other relevant Member States.
Platform operators allow sellers to provide for the sale of goods and services and the rental of property through the platform (websites, mobile apps etc.). In addition, platform operators must disclose to their sellers – that are active on their platform – what data they disclose to the local tax authorities.
Current state of play
The first reporting obligation for Platform Operators was due on 31 January 2024.
Sellers who were already active on the platform before 1 January 2023 (so-called 'existing sellers') do not have to be reported for the first time until January 2025.
Certain Member States have opted to provide short extensions to the reporting deadline under the domestic transposition of DAC 7; to date, these are Ireland, Cyprus, Italy, Luxembourg, Germany, Spain, and Greece.
Directive on Exchange of Information for Crypto-Assets and E-money (DAC8)
Overview
DAC8 implements new rules on reporting and exchange of information for tax purposes on e-money and crypto-assets and on the exchange of information on cross-border rulings concerning high-net-worth individuals (HNWI). It also introduces penalties and compliance measures for the various reporting obligations under the DAC framework. This DAC8 Directive is based on the OECD publication of 10 October 2022, which contained the OECD Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standards (CRS).
Current state of play
The Council opposed the Commission's proposal to establish a standardized minimum financial penalty for late or incorrect filings under the DAC.
DAC8 entered into force on 13 November 2023 and, for the most part, will come into effect for all EU Member States from 1 January 2026. Member States have until 31 December 2025 to transpose DAC8 into national domestic law.
Video - DAC8: EU reporting requirements for crypto and digital asset service providers. Monique Pisters (Head of Tax) explains a bit more about the scope and key measures of DAC8.
Markets in Crypto-Assets Regulation (MiCA)
Overview
MiCA will introduce a new regulatory framework for European crypto-assets and will cover crypto-assets not already regulated by existing financial services legislation. The aim is to ensure that consumers are informed of the risks, costs, and charges linked to crypto assets. It will also aim to provide measures against market manipulation, money laundering, terrorist financing, and other criminal activities.
Current state of play
The new reporting requirements on crypto-assets, e-money, and central bank digital currencies (MICA) were published in the Official Journal of the European Union on 9 June and entered into force on 29 June 2023. The regulation will apply from 30 December 2024.
Under the regulation, Crypto Asset Service Providers (CASP) will require authorization from a Competent Authority to operate within the EU. This includes individuals or companies located outside the EU that promote or advertise their services to clients within the EU.
Transfer of Funds Regulation (TFR)
Overview
The TFR requires crypto companies (crypto asset service providers and financial institutions providing crypto asset services) to collect information from buyers and sellers in transactions and submit this information to local tax authorities. Thus, the TFR introduces traceability of transactions in crypto assets.
The TFR introduces new rules on the information on originators and beneficiaries on transfers of crypto assets. The new rules are to prevent, detect, and investigate money laundering and terrorist financing where at least one of the crypto-asset service providers involved in the transfer of crypto-assets is established in the EU. The TFR obliges crypto asset service providers to accompany transfers of crypto assets with information on the originator and the beneficiary to the local tax authorities.
Moreover, enhanced traceability of crypto asset transfers will make it more challenging for individuals and entities under restrictive measures to circumvent them. Additionally, crypto asset service providers must adopt internal policies, procedures, and controls to effectively mitigate the risks of tax evasion. Bovenkant formulier
Current state of play
Transfer of Funds Regulation (TFR) was adopted on 16 May 2024 and will apply from 30 December 2024.
How Can Grant Thornton Help?
Given the wide range of tax policy initiatives proposed and the complexity levels involved, we recommend that entities begin assessing their current corporate structures to understand the potential consequences of any relevant EU initiative that may affect their business.
Grant Thornton’s international tax specialists can collaborate with you to review your group’s current EU structures. We can provide you with the latest information and insights and offer clear guidance on how best to address newly adopted and proposed EU legislation.
Video update EU proposals: Sasha Kerins, International Tax Partner at Grant Thornton Ireland, and Monique Pisters, Head of Tax at Grant Thornton Netherlands, discuss the latest update regarding the EU direct tax proposals.
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