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New EU rules to eliminate the main loopholes used in corporate tax avoidance come into force
As of 1 January 2019, all Member States shall apply new legally binding anti-abuse measures that target the main forms of tax avoidance practiced by large multinationals. The rules build on global standards developed by the OECD in 2015 and should help to prevent profits being siphoned out of the EU where they go untaxed.
The new rules focus on several main elements.
All member states will now tax profits moved to low-tax countries where the company does not have any genuine economic activity (controlled foreign company rules). To discourage companies from using excessive interest payments to minimise taxes, member states will limit the amount of net interest expenses that a company can deduct from its taxable income (interest limitation rules). Member states will be able to tackle tax avoidance schemes in cases where other anti-avoidance provisions cannot be applied (general anti-abuse rule).
Further rules governing hybrid mismatches to prevent companies from exploiting mismatches in the tax laws of two different EU countries in order to avoid taxation, as well as measures to ensure that gains on assets such as intellectual property moved from a member state’s territory become taxable in that country (exit taxation rules) will come into force one year later, as of 1 January 2020.
First proposed by the Commission in 2016, the legally binding rules were agreed swiftly to spur global efforts to clamp down on aggressive tax planning. The agreement followed the agreement among OECD countries on recommendations to limit tax base erosion and profit shifting (BEPS).
New transparency rules have gradually been coming into force to make sure that member states have the information they need to crack down on companies that are not paying their fair share of tax. The EU is also acting to ensure that its international partners implement global anti-tax avoidance standards through its ongoing work on a list of non-cooperative tax jurisdictions. Finally, the Commission has also proposed far-reaching corporate tax reforms which would overhaul how multinationals are taxed in the EU while ensuring a business environment which makes life easier for companies doing business across borders.