The Council of the European Union formally adopted the Anti-Tax Avoidance Directive last Tuesday 12 July. According to the press release from the European Council, the directive is in response to the perception of many taxpayers and SMEs that some multinationals do not pay their fair share of tax, thereby distorting tax competition within the EU’s single market.

Member States will have until 31 December 2018 to transpose it into their national laws and regulations, except for the exit taxation rules, for which they will have until 31 December 2019. Member States that have targeted rules for interest limitation can continue to apply them until the OECD reaches agreement on a minimum standard, or until 1 January 2024 at the latest.

The Anti-Tax Avoidance Directive lays down anti-tax-avoidance rules for situations that may arise in five specific fields:

• Interest limitation rules. Multinational groups may artificially shift their debt to jurisdictions with more generous deductibility rules. The directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year.
• Exit taxation rules, to prevent tax base erosion in the state of origin. Corporate taxpayers may try to reduce their tax bills by moving their tax residence and/or assets, merely for aggressive tax planning purposes.
• General anti-abuse rule. This rule is intended to cover gaps that may exist in a country’s specific anti-abuse rules, and thereby enable tax authorities to deny taxpayers the benefit of any abusive tax arrangements that may occur.
• Controlled foreign company (CFC) rules. In order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its – usually more highly taxed – parent company.
• Rules on hybrid mismatches. Corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deductions.