European Commission Proposes Simplifications to EU Direct Taxation Framework

Under the IRD, intra-EU interest and royalty payments currently are exempt from withholding tax where the beneficial owner is an associated company of another member state or a permanent establishment (PE) in another member state.  

Key proposals:  

• Removal of the minimum holding requirement, allowing all intra-EU interest and royalty payments to qualify for an exemption regardless of the participation level.  
• Introduction of a safeguard against double nontaxation for payments to no-tax/zero-tax jurisdictions, with exceptions tied to Pillar Two. 
• Shift to taxpayer self-assessment, supported by ex-post controls and anti-abuse rules in place of prior authorisation or certification procedures. 
• FASTER-aligned relief/refund procedures where eligibility cannot be verified at time of payment and clarification of the treatment of payments attributable to PEs. 
• Update the Annex of eligible legal forms, with power granted to the European Commission for future updates through delegated acts. 

The PSD eliminates withholding tax on cross-border dividends and other profit distributions paid by subsidiaries to parent companies in different member states and prevents the double taxation of such income at the parent company level (participation exemption or relief by credit). 

Key proposals: 

• Removal of the minimum holding requirement for EU parent companies. This extends the withholding tax exemption for dividends and other profit distributions, irrespective of the level of participation, while continuing to limit deductions for related charges or losses to cases involving a relevant 10% holding. 
• Extension to pension funds, regardless of legal form, by introducing a derogation from the subject-to-tax requirement. 
• Shift to self-assessment, supported by ex-post controls and anti-abuse rules, with access to FASTER or domestic refund procedures where needed. 
• Update the Annex of eligible legal forms, with power given to the European Commission for future updates through delegated acts

The TMD provides tax neutrality for qualifying cross-border reorganisations. Specifically, the taxation of capital gains resulting from certain reorganisations involving companies of different member states is deferred until the actual disposal of the underlying assets.  

Key proposals: 

• Alignment with recent EU company law developments on cross-border reorganisations. 
• Expand the scope of the directive to encompass simplified mergers, divisions by separation and cross-border conversions. 
• Broader tax neutrality for qualifying cross-border restructuring operations. 
• Update the Annex with eligible legal forms, with power granted to the European Commission for future updates through delegated acts. 

The ATAD establishes a common framework of anti-avoidance rules aimed at protecting member states’ corporate tax base against aggressive base erosion and profit shifting practices.  

Key proposals:  

• Introduce a new EU-wide R&D allowance, ensuring full deductibility of qualifying R&D expenditure (i.e., capital expenditure on plant, machinery and tangible assets used directly for R&D or to support R&D facilities). Taxpayers can either deduct qualifying expenditure immediately in the tax period incurred or over the four subsequent tax periods. 
• Revise the interest limitation rule (earnings stripping rule) by making both the 30% EBITDA threshold and the EUR 3 million safe harbor mandatory, preventing member states from applying a lower threshold or lower safe-harbor amount. It also introduces an indexing possibility for the safe harbor, excludes certain third-party loans, adds safeguards for public-benefit, defense and downturn situations, simplifies the framework by removing the standalone entity exclusion and makes both the group escape rule and carryforward mechanism mandatory. 
• Update the ATAD general anti-avoidance rule (GAAR) to cover all relevant direct taxes, including withholding taxes and certain Pillar Two top-up taxes. The stipulation now refers to the “tax liability” rather than the “corporate tax liability.” The GAAR is designed to tackle abusive tax practices that are not addressed by specific provisions. 
• Simplify CFC rules through carve-outs for Pillar Two taxpayers and SME groups. It also makes Model A—the approach whereby specific sources of passive income are targeted—mandatory. 
• Remove the imported hybrid mismatch rule. 

The DRM governs dispute resolution for tax treaty interpretation and double taxation.  

Key proposals: 

• Clarify the definition of “affected person” and introduce more flexible filing rules for cases involving multiple parties, including a 30-day submission window. 
• Earlier access to arbitration where competent authorities are unable to reach agreement and allowing deficiencies in complaints to be rectified before they are rejected. 
• Clearer procedural rules on complaint admissibility, objections, alternative dispute resolution commissions and simplified filing for individuals/SMEs. 
• Clarify the interaction between DRM procedures and other dispute resolution procedures to avoid overlap while preserving taxpayer protection. 
• Implementing powers and harmonized statistical reporting for more uniform application and monitoring of the directive. 

FASTER streamlines EU withholding tax relief procedures to make them more efficient and secure for investors, financial intermediaries and national tax administrations.  

Key proposals:  

• Align the scope of FASTER with the amended PSD and IRD. 
• Fast-track relief/refund procedures for publicly traded securities held through intermediaries or nominee accounts. 
• Prevent member states from denying access to FASTER procedures solely because a full withholding tax exemption is claimed under the amended PSD or IRD. 

If adopted as proposed, the EU Tax Omnibus Directive will have a significant impact on the Dutch tax system. Most notable aspects are: 

• Participation exemption: The proposal eliminates the minimum ownership for the participation exemption in relation to dividends derived from EU subsidiaries, raising the question whether the Netherlands will also abolish the minimum ownership threshold for capital gains. This may also influence ongoing debates about the taxation of income from savings and investments in the Personal Income Tax Act. The proposal does allow member states to introduce anti-abuse rules against avoidance of Personal Income Tax. 
• Interest limitation rule: The Dutch implementation of the interest limitation rule is strict so the mandatory safe harbour and harmonisation will be welcomed by many taxpayers. 
• Budgetary impact: The changes to the taxation of EU dividends and the interest limitation rule may materially reduce  Dutch tax revenues, potentially prompting compensatory reforms. 
• GAAR alignment: The broadened GAAR could bring the Dutch abuse of law doctrine (fraus legis) under EU influence beyond corporate tax.