Hybrid loans tax loophole worth billions of euros closed

Maltese finance minister Edward Scicluna at the ECOFIN with Andris Vilks, Latvia's finance minister. [Council of European Union]

EU finance ministers meeting today (20 June) have closed loophole exploited by multinationals to pay little or no tax worth billions of euros, after Malta dropped its objections to a compromise deal on hybrid loan arrangements.

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 (here).

Malta was the last member state to block the Greek Presidency of the EU-brokered compromise to revise parts of the Parent-Subsidiary Directive. It was sealed by national ministers last night in Luxembourg, ahead of theEU finance ministers meeting (ECOFIN), the last before Italy takes on the rotating presidency.

Sweden had earlier told the Greeks they could accept the deal after being reassured it would not prevent foreign investment in a model of investment company used by national champions such as Volvo and Eriksson.

“I am delighted that finance ministers have agreed on a crucial revision to the Parent-Subsidiary Directive, which will block a prevalent form of aggressive tax planning, known as hybrid loan arrangements. No longer will companies be able to exploit this loophole in our legislation to minimise their tax bills,” Šemeta said.

“That is good news for public budgets, good news for honest businesses and good news for those who seek fair taxation in the EU.”

The agreement splits the revised Parent-Subsidiary Directive in two; allowing member states to slam shut a loophole on hybrid loan arrangements without agreeing to a hotly debated general anti-tax abuse rule, which would need unanimous support. 

After today’s political agreement, the legislation will be formally adopted at a later session. Member states will have until 31 December 2015 to transpose it into national law.

“Following my meeting this morning with Italian finance minister, Pier Carlo Padoan, I have every confidence that the upcoming Italian Presidency will be able to secure agreement on a general anti-abuse rule, which is the other amendment we have proposed to this directive,” Šemeta added.

The European Commission has identified hybrid loan arrangements, a combination of debt and equity, as a tax planning tool.

The original parent-subsidiary directive, currently in force, was intended to ensure that profits made by cross-border groups are not taxed twice, and that such groups are thereby not put at a disadvantage compared to domestic groups. It requires member states to exempt from taxation profits received by parent companies from their subsidiaries in other member states.

Some countries classify profits from hybrid loan arrangements as tax-deductible debt. Others don’t, creating a mismatch in national legislation that is being exploited by multinational companies. They plan their cross-border intergroup payments to pay little or no tax.

Malta has come under increasing pressure from the European Commission over aggressive tax planning. It was one of five member states named and shamed by European Tax Commissioner Algirdas Šemeta, who said they needed to do more address aggressive tax planning.

NGOs had also called on Malta, which has a reputation as a tax haven, to break the deadlock.

Tove Maria Ryding, tax coordinator at the European Network on Debt and Development (Eurodad), a network of 48 non-governmental organisations, said, “We mustn’t forget that corporate tax dodging is costing our societies billions of euros, and therefore this is too serious an issue for governments to start playing political games. The Parent Subsidiary Directive is a small but important step in the right direction, and will close some of the most obvious loopholes in the EU tax legislation.”

Malta had argued that the wording of the compromise will compel member states to levy taxation on the basis of the revised Parent-Subsidiary Directive, which infringes on its sovereignty over tax decisions.  

The Greek compromise, which is not public, states that countries should tax certain profits. The Commission’s original proposal said member states should not tax profits if they were not deductible by a subsidiary company.  

The ECOFIN’s euro area countries also adopted a recommendation approving a proposal tto make Lithuania the 19th eurozone country on 1 January 2015.

The finance ministers also approved draft recommendations and opinions on economic and fiscal policies planned by the member states, which will be referred for endorsement to the European Council on 26 and 27 June.

The Parent–Subsidiary Directive was designed to eliminate tax obstacles for profit distributions between parent companies and subsidiaries based in different member states. It gives a tax exemption for dividends and other profit distributions paid by subsidiary companies to their parent companies.

By using a financial instrument called a hybrid loan arrangement, some cross-border companies have managed to avoid paying tax on the profits of these instruments by taking advantage of mismatches between different national laws.  

An amending directive was proposed to close the loophole and introduce a general anti-abuse law to ensure companies respected the spirit of the law. 

26-27 June: European Council meeting.

31 December 2015: Deadline for transposition of political agreement on Parent-Subsidiary Directive.

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