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All 28 EU Member States are called to implement into their national legislation enhanced measures against tax avoidance practices until 31 December 2018, according to the new EU Directive adopted earlier this month. Provisions of the Directive are based on OECD Base Erosion and Profits Shifting (BEPS) Action Plan, endorsed by G20 leaders in November 2015.

New rules concern all taxpayers subject to corporate tax in one or more Member States, including permanent establishments (PEs) in one or more Member States of entities – residents for tax purposes in a third country.

Continuing the crackdown on excessive interest deductions, the Directive determines the maximum percentage of the borrowing costs which may be deducted from the tax payer`s EBITDA at the rate of 30%, or EUR 3 million for the entire group.

Moreover, new rules establish the so-called “exit tax”, with a purpose to tax economic value of capital gain created before the actual transfer of assets (business, residence) from one Member State to another or to a third country.

Eurofast is ready to advise clients on tax implications of moving tax residency, assist in a restructuring process, consult on substance requirements (if applicable) and other relevant issues and requirements arising out of the exit taxation novelties of the Directive.

Treaty abuse, particularly treaty shopping, is also in focus. The Directive sets out a general rule allowing tax authorities to ignore non-genuine arrangements to the extent that they are not put into place for valid commercial reasons which reflect the economic reality.
As expected, provisions on controlled foreign companies (CFC) are also in place. The Directive stipulates principles of income computation of CFCs for taxation purposes, with certain exception.

The last, but not least significant provision of the Directive regulates hybrid mismatches. Hybrid mismatches are cases when – as a result of differences in the legal qualification of payments or entities for tax purposes in two jurisdictions – a double deduction arises or there is deduction of income in one state without inclusion in the tax base of the other. The new provision offers a way to neutralise this effect.

With the above in mind, we advise all corporates and multinationals which are holding structures in the EU, doing business with the EU, or moving their tax residence, to be prepared for such changes and carefully consider any transaction or restructuring in order to avoid future issues.

Alena Malaya
Tax and Legal Advisor
Eurofast Ukraine
alena.malaya@eurofast.eu

Anna Pushkaryova
Senior Associate
Eurofast Georgia
anna.pushkaryova@eurofast.eu