Mandatory for MNEs
The proposed system will be mandatory for all qualifying group entities of multinationals with an annual consolidated turnover above €750 million that have a taxable presence in any of the EU Member States. Any presence, whether subsidiary or permanent establishment will suffice. Smaller groups could opt-in and, if such election is made, it is for a period of at least five years.
Under the Consolidation Rules, tax consolidation applies between qualifying group entities that are under common control and ownership. Control is expressed by reference to a voting rights test of more than 50 per cent. Ownership is expressed by reference to either an equity holding test or a profit rights test, both of more than seven per cent. The Consolidation Rules prescribe an aggregation of group entities’ tax bases and an elimination of intra-group transactions.
The tax base is the on balance amount of all revenues as reduced by all business expenses (the latter to the extent not explicitly listed as non-deductible). Fixed assets are individually depreciable on a straight-line basis over their useful lives. Other eligible assets are categorised per asset class and by reference to depreciation terms of 40, 25, 15 and 8 years respectively.
A full participation exemption would apply to dividend receipts and capital gains from shareholdings of at least 10 per cent. A 12-months minimum holding period requirement has been put into place. Profits derived through business operations carried on through permanent establishments in other Member States and third countries would be exempt.
Loss carry forward
The Tax Base Rules allow for an indefinite loss carry forward without any restrictions on annually tax-deductible amounts. No loss carry forward is available, where there is a transfer of ownership where the acquiring entity obtains a shareholding that meets the control/ownership test under the group definition (more than 50 per cent voting rights, more than 75 per cent capital or profits) in combination with a major change in the activities of the acquired taxpayer. No loss-carry back mechanism has been put in place.
Super-deduction for R&D costs
The Tax Base Rules include a ‘super-deduction’ and an ‘enhanced super-deduction’ for research and development (R&D) costs. The deduction would apply on top of the immediate R&D costs expensing feature in the proposal. Under the proposed ‘super deduction’ taxpayers are eligible to deduct additionally an amount equal to 50 per cent of R&D expenditure, up to €20 million annually. For R&D expenses in excess of that amount the tax-deduction is 25 per cent of the R&D expenditures. An enhanced ‘super-deduction’ applies to start-ups to facilitate innovation. Qualifying start-up companies may deduct an additional amount equal to 100 per cent of R&D expenditure up to €20 million.
Deduction for equity – AGI
In order to stimulating equity rather than debt financing, the Tax Base Rules allow a so-called Allowance for Growth and Investment (AGI). The AGI introduces a tax deduction calculated by reference to a notional yield on equity increases. The notional amount equals the yield of the euro area ten-year government benchmark bond as published by the European Central Bank. Equity decreases are taxable to an amount equal to the notional yield on the decrease.
Both proposed directives contain a range of anti-tax avoidance provisions. The proposed provisions constitute refurbished equivalents of the anti-abuse provisions already found in the original CCCTB-proposal. In addition the new provisions also take into account developments with a view to implement the OECD/G20’s BEPS project and the ATAD, including an EBITDA-based interest deduction limitation, an exit taxation provision, a general anti abuse rule (GAAR), controlled foreign company (CFC) legislation, a hybrid mismatches provision, the arm’s length standard and a switch-over clause.
While this is intended to be a single initiative, the Commission proposes that the Member States first secure political agreement on the Tax Base Rules and subsequently proceed with negotiations with regard to the Consolidation Rules. This means that the Tax Base Rules could be adopted also without a later approval of the Consolidation Rules. Interim rules may allow for temporary cross-border loss offset.