Omnibus: simplification of direct tax rules on the horizon

The “Omnibus” package, bringing changes in the area of direct taxes, is a response to the gradual development of the EU tax legislation and its different implementation by individual Member States. According to the European Commission, this has led to increased regulatory complexity and administrative burden. The proposed changes concern several key directives, including the Parent-Subsidiary Directive, the Interest and Royalties Directive and ATAD.

The proposed changes to the DAC directives are discussed in a separate article here.
 

Withholding tax

The Commission proposes to abolish the minimum holding period and minimum shareholding amount (for dividends), as well as the minimum time and level of capital relation (for interest and royalties). This would broaden the possibility of withholding tax exemptions for dividends, interest and royalties paid between companies within the EU. At the same time, a prior exemption decision would no longer be required before these payments are made: the exemption would be applied based on the payer’s assessment. For publicly traded securities where the payer does not know the investor (the beneficial owner), fast-track procedures under the FASTER directive would apply for tax refunds.

The changes to the Interest and Royalties Directive should also apply expressly to payments attributable to permanent establishments.

The proposal also extends the applicability of both directives to Czech cooperatives and, in the case of the Parent-Subsidiary Directive, also to pension funds.

Proposed effective date: 1 January 2037.
 

Cross-border company conversions

The proposed amendment to the Merger Directive (2009/133/EC) broadens the range of company reorganisations to which the principle of tax neutrality applies. The definitions are being aligned with the Company Law Directive ((EU) 2017/1132), extending the Merger Directive’s scope to simplified mergers without issuing new shares and to divisions by separation, which are not expressly covered by the current wording of the Merger Directive.

The proposal also adds a new chapter on cross-border reorganisations that involve at least a transfer of a company’s registered office. These would be subject to the principle of tax neutrality in a similar manner as currently applies to transfers of the registered office of a European company (SE) or European cooperative society (SCE). Under certain conditions, a permanent establishment in the state from which the registered office is being transferred may also be able to utilise tax losses incurred by the company transferring its registered office. For the Czech Republic, the directive’s scope is also extended to Czech cooperatives.

Proposed effective date: 1 January 2029.
 

R&D support

It is proposed to introduce a unified European framework for R&D tax incentives. Under the new rules, companies would be able to deduct the full amount of expenditure on the acquisition of machinery, equipment and other tangible assets used for research and development activities (or for creating the necessary background for such activities), immediately – i.e. in the period in which the expenditure was incurred – or in any of the following four taxable periods.

Proposed effective date: 1 January 2029.
 

Exceeding borrowing costs

The Commission proposes to harmonise the rules limiting the tax deductibility of exceeding borrowing costs. The limit should be set in all Member States at 30% of tax EBITDA or at a fixed amount of EUR 3 million, which would be automatically indexed, on an annual basis, in line with inflation.

External loans used exclusively to finance the debtor’s own economic activity would be excluded from the scope of these rules. For this reason, the option to exclude standalone entities from the scope of these rules would be abolished, as such entities typically, by their nature, rely solely on external financing.

It will also be possible to voluntarily introduce an exemption for long-term projects in the public interest, (under the original rules, the exemption was limited exclusively to long-term infrastructure projects). A mandatory temporary exemption is also introduced for investments in the defence sector launched during the first five years of the application of the new rules.

Furthermore, a mechanism is being introduced to limit the procyclical effects of these rules. The limitation on the tax deductibility of exceeding borrowing costs would not apply where a company’s EBITDA in the relevant tax period decreases by at least 50% compared to the preceding period. The proposal also adjusts the rules for carrying forward, and potentially back, unused exceeding borrowing costs and unused interest.

Proposed effective date: 1 January 2029.
 

CFC rules

In view of the existence of Pillar Two rules, which partly fulfil the function of a CFC regime, it is proposed to exclude companies covered by Pillar Two from CFC rules, subject to certain specific rules for the Side-by-Side regime. At the same time, it is proposed to abolish the application of CFC rules to small and medium-sized enterprises due to their minimal practical relevance.

Proposed effective date: 1 January 2032.
 

Hybrid mismatches

For the purpose of simplification, the Commission proposes to abolish the rules on imported hybrid mismatches. 

Proposed effective date: 1 January 2029.


The legislative proposals will now be discussed by the European Parliament and the Council of the EU. The proposals are subject to unanimous approval by all EU Member States. The proposal package is available here.