an overview of the measures proposed in atad 1 &...

An Overview of the Measures Proposed in ATAD 1 & 2

14 May 2017

Table of Contents

2

1. Glossary

2. Introduction

3. Interest Limitation

4. Exit Taxation

5. General- Anti- Abuse Rules

6. Controlled Foreign Corporations

7. Hybrid Mismatches

8. Presenter

9. Contact Details

14 May 2017

1. Glossary

EU = European Union

MS = Member State

EBITDA = Earnings before interest, tax, depreciation and amortization

EEA = European Economic Area

GAAR = General anti- abuse rule

CFC = Controlled Foreign Corporations

PE = Permanent Establishment

ATAD = Anti tax avoidance directive

HO = Head Office

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2. Introduction

Why do we have ATAD?

The Directive is part of the EU initiative which counters tax avoidance in order to ensure a coherentand coordinated implementation of the anti-BEPS measures at EU level (minimum level ofprotection). The common approach should:

• Lead to optimization of positive effects of anti-BEPS initiative;

• Prevent fragmentation of the market and end mismatched between EU member states;

• Provide legal certainty for EU based tax payers (measure are compatible with EU law andapplicable throughout Europe)

ATAD 1 and ADAT 2

ATAD 1: The current text of ATAD which was proposed on 17 June 2016 and agreed on 21 June 2016and should apply on 1 January 2019. It includes minimum standards for (3) interest deductionlimitations [may be applied as of 1 January 2024] , (4) exit taxation [may be applied as of 1 January2020], (5) general anti- avoidance rules (6) controlled foreign subsidiary rules and (7) rules againsthybrid mismatches [refer to ATAD 2]

ATAD 2: Only covers mismatches (financial instruments and hybrid entities) MS should apply theprovisions 1 January 2020, and as of 1 January 2022, in relation to specific provision on reversehybrid mismatches (Article 9a).

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14 May 2017

2. Introduction

The focus of this presentation is:

• To give an outline of the mechanisms implemented in ATAD 1

• To introduce the amendments proposed by ATAD 2

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3. Interest Limitation

6

Article 4 ATAD

Mechanics, aim and implementation deadline• Aim: Prevent base erosion through artificial debt arrangements;

• Implementation deadline: 1 January 2024

• Mechanics: Earning stripping limitation that limits interest deduction (net borrowingcosts) to 30% of the taxpayer’s earnings before interest, tax, depreciation andamortization (EBITDA);• Net borrowing costs: costs exceeding taxable interest income, revenues and the

like;• Tax- exempt income is excluded from EBITDA;• Exemption if stand alone ratio is equal or higher than the group ratio;• Consolidated financial statements either in IFRS or other/local accounting

standards

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3.1 Interest Limitation cont’d

MS discretion• € 3 million threshold; if interest costs are below the threshold, they are fully deductible;• Also, member states can choose to introduce a group test on either an “equity/total

assets”-ratio or a group EBITDA-test;• Option to:

• (1) grandfather loans existing on 17 June 2016;• (2) exclude loans which fund certain infrastructure projects;• (3) exclude financial undertakings;• (3) allow- stand alone taxpayers [not part of a group for accounting purposes and no

associated enterprise or PE] exemption of the regulation in full;• Various carry forward and carry back possibilities

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4. Exit Transaction

8

Article 5 ATAD

Mechanics, aim and implementation deadline• Aim: Prevent transfer of tax residence or assets aiming at avoiding taxation;


• Mechanics: the cross- border transfer of assets, the taxpayers residence or business willtrigger a taxation on the difference between the fair market value and the book value ofthe transferred assets at the date of transfer. Following transfers will fall in the scope ofthis regulation if:

1. transfers of assets from the head office (HO) to its foreign permanentestablishment (PE);

2. transfers assets from a PE to its HO;3. transfer of a tax residence to another MS or a third country;4. transfer of business carried on by its PE to a MS or to another country;

• A deferral of payment is provided over 5 years in case the transfer takes place betweenMS or EEA (in case risk of non recovery a guarantee may be required in order toeffectuate the deferral);

• Deferral is ended in case a.o. a sell or transfer to a third country takes place;• Exemption applies for certain temporary transfers not exceeding 12 months

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4. Exit Transaction cont’d

9

Head Office

PE

MS 2 or third country

MS 1Assets

Article 5 (1) (a)• A taxpayer shall be subjected to exit tax the

amount of which should be equal to the marketvalue of the transferred assets at the time of exit ofthe assets, less their value for tax purposes if:

(a) a taxpayer transfers assets from HO to its PEin another MS or in a third country, in so far asthe MS of the HO no longer has the right totax the transferred assets due to the transfer;

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10

Head Office

PEPE

Assets

Assets



MS 1

Article 5 (1) (b)

• A taxpayer shall be subjected to exit taxthe amount of which should be equalto the market value of the transferredassets at the time of exit of the assets,less their value for tax purposes if:

(b) a taxpayer transfers assets fromits PE in a MS to its HO or another PEin another MS or in a third country inso far as the Member State of thepermanent establishment no longerhas the right to tax the transferredassets due to the transfer;

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11

Before After

Head Office

PE A


MS 1

Company A


MS 1

Article 5 (1) (c)• A taxpayer shall be subjected to

exit tax the amount of whichshould be equal to the marketvalue of the transferred assets atthe time of exit of the assets, lesstheir value for tax purposes if:

(c) a taxpayer transfers its taxresidence to another MS or to athird country, except for thoseassets which remain effectivelyconnected with a PE in the firstMS ;

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12

Head Office

PE


MS 1

Before

Head Office

PE


MS 1

After Article 5 (1) (d)

• A taxpayer shall be subjected to exittax the amount of which should beequal to the market value of thetransferred assets at the time of exitof the assets, less their value for taxpurposes if:

(d) a taxpayer transfers thebusiness carried on by its PE froma MS to anotherMS or to a third country in so faras the MS of the PE no longer hasthe right to tax the transferredassets due to the transfer

14 May 2017

5. General Anti- Abuse Rule

13

Article 6 -ATAD

Mechanics, aim and implementation deadline• Aim: It tries to tackle the anti-abusive practices not addressed through other specific

anti- avoidance rules.

• Implementation deadline: 1 January 2019.

• Mechanics: The provision allows MS to ignore/look through artificial arrangements. Thedefinition of “artificial arrangements” is quite broad and is put forward as anarrangement (or a series of arrangements) which are put in place with the main purposeto avoid taxation or obtain a tax advantage that defeats the purpose of the respectivelaw/laws;

• Commercial reasons are key/ substance over form approach applies;• National law will apply in case GAAR is activated;

14 May 2017

6. Controlled Foreign Corporations

14

Article 7 ATAD

Mechanics, aim and implementation deadline• Aim: To put an end to the incentive of shifting income to no or low-tax jurisdictions

where the transferring company does not have genuine economic activities. This isachieved by reattributing non-distributed income of a low-taxed CFC to its parentcompany


• Mechanics: In case of a qualifying CFC the income of the low taxed CFC company shouldbe reattributed to the parent company in that year pro rata parte its ownership in theCFC entity. A CFC is defined as an entity or an EP:• (1) In which the taxpayer [by its self or together with an associated enterprise]

owns [direct or indirect]:• more than 50% of the voting rights, or• more than 50% of the capital, or• entitled to receive more than 50% of the profitsAND

• (2) The effective corporate tax in that entity is less than 50% of what would havebeen charged at the tax payer’s jurisdiction

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6.1 Controlled Foreign Corporations Cont’d

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MS discretion

The method of attribution is left at the discretion of the MS states. The following twomethods may be applied:

First method: income to be included in the tax base of the taxpayer is income from thefollowing categories:• (1) interest/income generated by financials assets, (2) royalties/income generated by IP,

(3) dividends/capital gains, (4) leasing, (5) income from financials activities such asinsurance, (6) income from invoicing companies / sell and purchase of goods betweenassociated companies (25%), with no or little economic value

• Exceptions from the CFC rules: the above would not apply in case:• the CFC carries on a substantive economic activity supported by staff, equipment,

assets, and premises, as evidenced by relevant facts and circumstances• 1/3 or less of the income is attributable to the above categories or 1/3 or less of

the income generated by the above categories is resulting from transactions withthe taxpayers or its associated enterprises

• Above exceptions may not apply if: the CFC is resident or situated in a thirdcountry that is not party to the EEA Agreement

14 May 2017

6.2 Controlled Foreign Corporations Cont’d

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MS discretion

Second method: income to be included in the tax base is income from “non genuinearrangements which have been put in place for the main purpose of obtaining a taxadvantage”:• Non genuine arrangement: significant people functions (relevant to the CFC-run

operations) are carried out at taxpayer level allowing the CFC company to take the riskor own the assets enabling it to generate all or part of the income;

• Exceptions from the CFC rules: the above would not apply in case:• The CFC reports accounting profits of EUR 750k or less and non-trading income of

EUR 75k or less, or• The CFC reports accounting profits amounting to no more than 10% of its operating

costs for the tax period [cost of goods sold outside the CFC country do not count]

14 May 2017

7. Hybrid Mismatches

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Article 9 ATAD

Mechanics, aim and implementation deadline• Aim: The main goal is to prevent double deductions or deductions without

corresponding income inclusions due to mismatches in e.g. treatment of financialinstruments, treatment of tax transparency of entities, treatment of PEs, etc. betweenMS or MS and Third states (ATAD 2).

• Implementation deadline: 1 January 2020, except for the regulations covering ReverseHybrids (article 9a) which should be implemented 1 January 2022.

• Mechanics (ATAD 1):• In case of double deduction between associated enterprises: deduction is only allowed

at the source of payment• In case of deduction without inclusion between associated enterprises: MS payer to

deny deduction of payment• Associated enterprise:

• direct/indirect ownership of 25% or more of capital/voting rights or entitled torreceive 25% or more of the profits;

• In case of hybrid entities, ownership should be 50% or more.

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7.2 Hybrid Mismatches ATAD 2 Amendments

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Amendment provides for a better arrangement between states:• when an entity or instrument is classified differently in different member states, the

treatment in the state in which the first deduction is claimed should be followed by thesecond state where either income is received or a second deduction is claimed.

• the primary rule under BEPS action 2 is that the deduction should be disallowed, with asecondary rule requiring that income be taxed (or a second deduction disallowed)where the primary rule is not adopted.

Associated enterprise definition is broadened:ATAD 1 + an entity that is part of the same consolidated group and in which the taxpayerhas a significant influence on the management / the enterprise has a significant influencein the management of the taxpayer

The amendment broadens the scope of the mismatches and it would apply to:• (1) Financial instrument mismatch• (2) Hybrid entity mismatch / Reverse hybrid mismatches• (3) Hybrid permanent establishment mismatch• (4) Imported hybrid mismatch• (5) Tax residency mismatch

14 May 2017

7.2 Hybrid Mismatches ATAD 2(1. Example Financial Instrument Mismatch)

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B (resident in Country B) issues a hybridfinancial instrument to its parent A (resident inCountry A).

Country B treats the instrument as debt so thatpayments under the instrument are treated asdeductible interest to B.

Country A treats the instrument as equity sothat payments under the instrument aretreated as exempt dividends (or otherwise taxrelieved) to A. The tax outcome is D/NI.

A

A

B

State I

State II

+

_

Non- assessable

Deductible

14 May 2017

7.2 Hybrid Mismatches ATAD 2(2. Example Hybrid Entity Mismatch Leading to a Double Deduction)

20

A

A

B

C

State I

State II

_

_

+

Interest payment

A, B and C are associated enterprises.Hybrid entity B is non-transparent in State II but transparentfor State I.

B pays interest to a third party. The interest payment isdeducted both by A Co and by hybrid entity B. The paymentby B is set-off against C Co’s income under a group tax regimein State II.

ATAD rule:If State I is a MS and State II is a 3rd state, State I (the MS)should deny the deduction of the interest payment.

If State I is a 3rd state and State II is a MS, State II (the MS)should deny the deduction of the interest payment.

There can only be a double deduction to the extent that thepayment exceeds income from the same source. So, if B hasan income of 4 and makes a payment of 10, the doublededuction amounts to 6

14 May 2017

7.2 Hybrid Mismatches ATAD (2. Example Hybrid Entity Mismatch Leading to a Deduction Without Inclusion)

21

A

A

B

C

State I

State II

0

_

+

Royalty Payment

A, B and C are associated enterprises.Hybrid entity B is non-transparent in State II buttransparent for State I.

Royalty payment from B to A is deducted by hybrid entityB, but not included by A C. The payment by B is set-offagainst C’s income under a group tax regime in State II.

ATAD rule:If State I is a MS and State II is a 3rd state, State I (the MS)should require A to include the royalty payment in itsincome.

If State I is a 3rd state and State II is a MS, State II (theMS) should deny the deduction of the royalty payment.

There can only be a double deduction to the extent thatthe payment exceeds income from the same source. So, ifB has an income of 4 and makes a payment of 10, thedouble deduction amounts to 6.

14 May 201722

A

A

B

C

State I

State II

0

0

_

InterestPayment

7.2 Hybrid Mismatches ATAD 2 (2. Example Hybrid Entity Mismatch Leading to a Deduction Without Inclusion)

A, B and C are associated enterprises.Hybrid entity B is transparent in State II but non-transparent for State I (reverse hybrid entity).

Interest payment from C to B is deducted by C, butneither included by reverse hybrid entity B nor by A.

ATAD rule:If State I is a MS and State II is a 3rd state, State I (theMS) should require A include the interest payment inits income.

If State I is a 3rd state and State II is a MS, State II(the MS) should deny the deduction of the interestpayment by C.

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A

A

B

C

State I

State II

0

0

_State III

Interest Payment

A, B and C are associated enterprises.Hybrid entity B is transparent in State II and for StateIII, but non-transparent for State I (reverse hybridentity). There is a mismatch between State I and StateIII with respect to an entity in another state: ReverseHE B in State II.

As a result interest payment from C to B is deductedby C, but neither included by reverse hybrid entity Bnor by A.

ATAD rule:If State I is a MS and State III is a 3rd state, State I (theMS) should require A to include the interest paymentin its income.

If State I is a 3rd state and State III is a MS, State III(the MS) should deny the deduction of the interestpayment by C.

7.2 Hybrid Mismatches ATAD(2. Example Hybrid Entity Mismatch Leading to a Deduction Without Inclusion)

14 May 2017

7.2 Hybrid Mismatches ATAD 2(3. Hybrid Permanent Establishment Mismatch Leading to Non-Taxation Without Inclusion)

24

B is recognized as a permanent establishment in State IIby State I but is not recognized as a PE in State II(reverse hybrid PE). As a result, there is no taxation instate II, profits attributed to reverse hybrid PE areexempt in state I.

ATAD rule:If State I is a MS, State I should tax and not exempt theprofits attributed to hybrid PE B.

AState I

State II

0

0

B

14 May 2017

7.2 Hybrid Mismatches ATAD 2(4. Imported Hybrid Mismatch that Involves the Import of a Double Deduction)

25

A, B, C, and D are associated enterprises.D Co is a taxpayer in MS. Interest payment 1 from Dto C is deducted by D. Interest payment 1 receivedby C is in principle taxable in 3rd Country I, but isset-off (under group tax regime) against interestpayment 2, made by hybrid entity B. Interestpayment 2 is also deducted in 3rd Country II by A.

The result: double deduction of interest payment 2.

ATAD rule:The hybrid mismatch between 3rd Country I and3rd Country II is imported by D Co through the loanconnected with interest payment 1.

MS should deny the deduction of interest to theextent of the double deduction

A

B

C

_

_

+

Interest payment 2

D

Interest payment 1

MS 3d C I

3d C II

_

14 May 2017

7.2 Hybrid Mismatches ATAD 2(4. Imported Hybrid Mismatch that Involves the Import of a Deduction Without an Inclusion)

26

A

A

B

C

Payment3d C II

+

_ MS

3d C I

Interest payment

_

0

A, B and C are associated enterprises.Interest payment by C to B is deducted in MS.

B includes interest payment as income, but thisinterest income is set-off by B against a paymentto A under a PPL. Payment on the PPL isdeducted in 3rd Country I as interest, but exemptfor A Co as a dividend. The result being:deduction without inclusion.

ATAD rule:The hybrid mismatch between 3rd Country I and3rd Country II is imported in MS through theinterest payment by C.

MS should deny the deduction of interest to theextent of the deduction without inclusion.

14 May 2017

7.2 Hybrid Mismatches ATAD 2(5. Dual Resident Mismatches)

27

A

A

B

C

State I

+

_

State II

Interest payment

A, B and C are associated enterprises.B is a dual resident of State I and State II.

Interest payment by B is deducted and set-off inState I against A's income under a group tax regime.

C is a reverse hybrid entity in State II.Interest payment by B is set-off against C's income inState II.Result: a double deduction of the interest paymentby B in both State I and State II.

ATAD rule:If State I or State II is a MS, this MS should deny thededuction to the extent of the mismatch.

+

_

C

14 May 2017

7.3 ATAD 2 Arrangement Between States a Brief Overview

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Outcome type Solution (EU only) Solution (3rd country situations)

Art. 9.1: DD (hybrid entity and financial instrument)

Deduction only in source Member State (“MS”)

MS to deny deduction unless already denied by 3rd country

Art. 9.2: D/NI (hybrid entity and financial instrument)

MS of payer to deny deductioni) MS to deny deduction if MS is source state of payment; or ii) MS to include payment in tax base if 3rd country is source

state unless 3rd country already denied deduction

Art. 9.3: NT/NI (permanent establishment)

MS of taxpayer’s residency to include income attributed to PE in tax base

MS to include income attributed to 3rd country PE in tax base

Art. 9.4: DD (imported mismatch)

N/A, as Art. 9.1 should prevent mismatch to result in DD

MS to deny deduction unless already denied by one of the third countries

Art. 9.5: D/NI (imported mismatch)

N/A, as Art. 9.2 should prevent mismatch to result in D/NI

MS to deny deduction unless already denied by one of the third countries

Art. 9.6: DTR (hybrid transfer)

MS to limit benefit of relief in proportion to net taxable income

MS to limit benefit of relief in proportion to net taxable income

Art. 9a: DD (dual resident) N/A MS to deny deduction unless already denied by 3rd country

E: [email protected] | D: + 31 20 782 00 71|Mob: +31 644389128 | Mob: +359 887529866 |

Boian is an all-round adviser in the Dutch international tax practice with an extensive experience in internationaltaxation respectively the coordination and implementation of various global projects.

Before joining Taxture as a tax partner in 2009, he worked for more than eight years for KPMG and Ernst & Young,where he primarily advised multinational corporate clients. During his Ernst & Young period he worked for theDutch Desk of Ernst & Young in London providing advice to American corporate clients, as well as America basedprivate equity and real property funds on the tax aspects of European investments.

At the Amsterdam practice of Ernst & Young he was a member of Multinational Tax Department focusing on thedevelopment and implementation of tax efficient structures involving the Netherlands. He became a manager inthe Ernst & Young Multinational Tax Department in 2009.

Boian also specializes in Eastern Europe and Russia related international restructuring projects. Boian is a nativeBulgarian and Dutch speaker and fluent in English. He holds a Master Degree in Tax Law from the University ofLeiden.

More information? Mail Boian: [email protected] or call on his direct number: +31 20 782 00 71.

8. Presenter

9. Contact Details

Visiting addressFrederik Roeskestraat 1131076 EE AmsterdamThe Netherlands

Postal addressP.O. Box 107341001 ES AmsterdamThe Netherlands

ContactOffice: +31 20 782 00 00Fax: +31 20 782 00 80E-mail: [email protected]

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