|  26.07.2016

Tax alert, No. 24, July 2016

The Directive, developed based on the OECD recommendations of 2015 regarding the fight against base erosion and profit shifting (BEPS), will apply to all taxpayers subject to corporate income tax in one or more Member States, including permanent establishments located in the EU of certain entities which are tax resident outside EU.

EY Romania




The Directive lays down norms on 5 tax areas:

 Interest limitation rule

Exceeding borrowing costs (i.e. the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest revenues and other economically equivalent taxable revenues that the taxpayer receives according to national law) are deductible in the tax period in which they are incurred only up to 30 percent of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA).

The Directive also sets out certain derogations from the general rule mentioned above, as for example, depending on the value of the exceeding borrowing costs at group level, on whether the taxpayer is part of a consolidated group for financial accounting purposes, for loans which were concluded before 17 June 2016 or used to fund a long-term public infrastructure project, etc.

The possibility of carrying forward / backward the exceeding borrowing costs is left to the discretion of each Member State.


 Exit taxation rule

The exit taxation rules included in the Directive provide for the obligation of paying tax (computed on the difference between the market value of the transferred assets, at the time of exit of the assets, and their tax value), in certain situations, such as cross-border transfers of assets, transfer of tax residence, transfer of business. This tax will be due insofar as, further to the respective transfer, the Member State from which the transfer is carried out would no longer have the right to tax the transferred assets.

Furthermore, the Directive includes the possibility to defer the payment of the exit tax, by paying it in instalments over five years, in certain conditions.

 General anti-abuse rule (GAAR)

The Directive provides that, for the purposes of computing the corporate tax liability, the tax authorities of the Member States will not take into consideration an arrangement or a series of arrangements which, having regard to all relevant facts and circumstances, are not genuine and have been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law.

 Controlled foreign company (CFC) rule

The norms regarding the taxation of CFCs provide for the reattribution to the parent company of the non-distributed income of a controlled foreign subsidiary or permanent establishment which are subject to lower or no taxes. As such, the parent company will become taxable for this income attributed in the Member State in which it is tax resident.


The Directive provides that the Member State of the taxpayer shall include in the tax base:

I. certain categories of non-distributed income, such as dividends, royalties, interest, income from disposal of shares, income from financial leasing, from insurance, banking and other financial activities or income from invoicing companies which add no or little economic value; or

II. the non-distributed income of the entity or permanent establishment arising from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.

 Treatment of hybrid mismatch arrangements

To neutralise the effects of hybrid mismatch arrangements, the Directive introduces two rules governing the hybrid arrangement, depending on their results:

I. to the extent that a hybrid mismatch results in a double deduction, the deduction shall be given only in the Member State where such payment has its source;

II. to the extent that a hybrid mismatch results in a deduction without inclusion in the tax base, the Member State of the payer shall deny the deduction of such payment.


Member States will have until 31 December 2018 to transpose the Directive into their national laws and regulations, except for the exit taxation rules, for which they will have until 31 December 2019.


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