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European firms may no longer be able to exploit tax loopholes in the Parent-Subsidiary Directive (Reuters) Reuters

The European Commission is moving to close corporate tax loopholes that allow firms to exploit a system to prevent double taxation, but it needs the backing of all European Union member states first.

Under the 2003 Parent-Subsidiary Directive, same-group companies based in different EU member states are not taxed more than once on the same income by the different tax authorities.

The EC said some firms were using differences in national tax laws and the Directive's provisions to escape any taxation at all. Some companies use simply a post box address in a country to benefit from lower taxation, despite having little or no operations or sales based there.

"EU tax policy is heavily focused on creating a better environment for businesses in the EU," said Algirdas Šemeta, commissioner for taxation.

"This means breaking down tax barriers and tackling cross-border problems such as double taxation. But when our rules are abused to avoid paying any tax at all, then we need to adjust them.

"Today's proposal will ensure that the spirit, as well as the letter, of our law is respected. As such, it will ensure greater revenues for national budgets and fairer competition for our businesses."

Under the EC's proposed changes, all member states will be required to adopt a common anti-abuse rule for the Directive.

"This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance," said the EC.

There is also a proposal to crack down on "hybrid loan arrangements". The Directive allows for tax exemption of the transfer of dividends from subsidiaries to the parent group across borders in the EU. However, some firms have been classifying these as debt repayments instead, making them tax deductible and so reducing the group's overall tax bill.

"If a hybrid loan payment is tax deductible in the subsidiary's member state, then it must be taxed by the member state where the parent company is established," said the EC.

"This will stop cross-border companies from planning their intra-group payments to enjoy double non-taxation."

The UK government backed the proposals.

"We welcome the European Commission's proposal to close off opportunities for corporate tax avoidance and will be considering further the proposal to amend the Parent-Subsidiary Directive," said a spokesperson for the UK Treasury.

"In the meantime, the UK continues to engage with the wider G20 and OECD work to address corporate tax avoidance and the issues of base erosion and profit shifting. Working through the OECD will ensure the participation of a broad range of countries, resulting in coordinated action to address these issues effectively."


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