Subsidiaries say goodbye to EU’s tax loophole

Malta was the only member state stopping the tax loophole costing billions of euros being closed. Taxation Commissioner Algirdas Šemeta met with Malta’s minister Edward Scicluna twice yesterday to convince him the agreement, which EU tax law needed unanimous support to be passed, did not infringe the country’s tax sovereignty.

Now, countries have until 31^st December 2015 to incorporate changes to their national legislation. The reform of the so-called Parent-Subsidiary Directive intends to cover the tax loophole that multinationals are currently exploiting. Some member states classify profits from hybrid loan arrangements (which are a combination of debt and equity) as tax-deductible debt, instead of a tax-planning tool.

Others don’t, thus creating a mismatch in national laws, which are being exploited by multinational companies to open subsidiaries in other member states so that they pay little or no tax.

The tightening of this rule will allow member states to grant to the parent company a tax exemption for dividends received from subsidiaries in other member states so as to avoid double taxation.

Nonetheless, in some countries the subsidiaries consider such payments as tax-deductible reimbursement of loans. According to Brussels, the result is that the payments between the subsidiary and the parent company are not taxed anywhere.

With the reform approved by the Ecofin, the tax will be paid in the country where the parent company is located if the payment is tax-deductible in the country where the subsidiary operates. Thus, multinationals won’t be able to plan their intragroup payments so as to benefit from the double taxation.