European Commission publishes proposals for directives to simplify direct tax rules and cooperation between tax authorities

The European Commission has presented two closely interconnected proposals aimed at simplifying the EU tax system: the Omnibus Directive concerning direct taxes and the proposal for the recast of the Directive on Administrative Cooperation (DAC). Both initiatives are currently undergoing the legislative process and have not yet been passed. The Omnibus Directive is intended to generally take effect from 1 January 2029, with certain areas being implemented by 2037, while the DAC recast is set to replace the existing directive as of 1 January 2030.

The following overview summarizes the main substantive updates of both proposals.

Omnibus Directive on Direct Taxes

The Omnibus Directive aims to maintain and promote coherence, proportionality and effectiveness within the EU legal framework regarding direct taxation. At the same time, it seeks to simplify EU legal requirements, reduce unnecessary compliance burdens and improve legal certainty. This is to be achieved through amendments to various EU directives:

Parent-Subsidiary Directive

• The substantive and procedural requirements for claiming the withholding tax exemption are to be simplified.
• Prior authorisation procedures by Member States are to be largely abolished. In future, greater reliance will be placed on self-assessment by the taxpayer, subject to ex post controls.
• The previously required minimum holding requirement of 10% is to be removed. This would allow distributions between EU companies to benefit from the directive regardless of the size of the shareholding.
• Member States’ ability to exclude expenses and losses related to profit distributions from deduction shall be limited to significant shareholdings (i.e. shareholdings of at least 10%).
• Furthermore, the directive is to be extended to pension funds regardless of their legal form.

Interest and Royalties Directive

• The existing 25% minimum holding requirement is to be removed. This means that companies would be able to benefit from a withholding tax exemption on interest and royalty payments within the EU regardless of the size of their shareholding.
• Furthermore, a safeguard clause against double non-taxation is planned for cases where recipients of interest or royalties are resident in zero-tax jurisdictions. Exceptions are specifically foreseen for Pillar Two cases and qualified domestic top-up taxes.
• Prior authorisation or certification procedures are to be largely abolished. The requirements for exemption will henceforth be assessed by the taxpayers themselves.
• It will be ensured that refund or fast-track procedures apply even when withholding tax is levied.
• Clarifications are to be made regarding the treatment of payments related to activities of permanent establishments.

Merger Directive

• The scope of the directive is to be expanded to cover newer types of cross-border reorganizations. In the future, simplified mergers and divisions by separation are to be included.
• Furthermore, the directive is to be extended with regulations for tax neutral cross-border conversions of companies.
• The envisaged changes aim to bring tax regulations closer in line with company law again.

Anti-Tax Avoidance Directive – ATAD

• A new EU-wide research and development (R&D) incentive is to be introduced, allowing a full deduction of qualified R&D expenses.
• The interest limitation rules are to be adjusted. The 30% EBITDA threshold is to become mandatory without national customisation options and the 3 million Euro safe-harbour amount will also be compulsory. Furthermore, the allowance is to be indexed, and an exemption for certain loans from third-parties is to be introduced.
• The General Anti-Avoidance Rule (GAAR) is to be amended so that it will cover all relevant direct taxes, including withholding taxes and top-up taxes related to Pillar Two.
• The controlled foreign company (CFC) rules are also to be simplified. For taxpayers subject to the Pillar Two Directive, a general exemption from the CFC rules is to be provided to avoid overlaps and double taxation.
• The rules on imported hybrid mismatches are to be abolished.

Directive on the Mechanism for Resolving Tax Disputes

• The draft includes clarification regarding who is considered an affected person in disputes involving multiple legal entities.
• Complaint procedures are also to be simplified. Simultaneous filing of complaints with all competent authorities will no longer be required. Instead, the introduction of a 30-day submission window is planned.
• If the authorities see no possibility for agreement, the transition to arbitration is to be facilitated sooner.
• Furthermore, taxpayers will be given the opportunity to remedy procedural deficiencies before the complaint is rejected.
• Various clarifications are to be incorporated, covering, among other things, deadlines, admissibility requirements, and the interaction with other dispute resolution procedures.
• Other ongoing proceedings shall be suspended to protect against double taxation.
• The Council and the Commission will be granted powers to issue implementing measures and a harmonised statistical reporting framework.

FASTER Directive

The planned fast-track refund procedures are to apply even when exemptions under the extended Interest and Royalties Directive and the Parent-Subsidiary Directive cannot be granted in advance. This applies in particular to publicly traded securities held through intermediaries.

Directive on Administrative Cooperation (DAC)

The planned amendment aims to consolidate the existing DAC 1-9 directives into a recast of the EU Administrative Cooperation Directive. The following key adaptations to the current framework are particularly envisaged: 

DAC 1 (Income and Wealth)

• The category of life insurance will be removed.
• The completeness of information and data in the remaining categories will be improved.

DAC 4 & DAC 9 (CbCR / Pillar Two Reporting)

• Until now, groups had to submit separate reports with different deadlines for both Country-by-Country Reporting and Pillar Two purposes. The proposal introduces an option for a single, joint notification obligation covering both purposes.
• There will be a unified filing deadline and central filing. 

DAC 6 (Cross-Border Arrangements)

• The scope of the directive will be restricted to relevant cases. Less conclusive hallmarks will be eliminated.
• A harmonised application of the “Main Benefit Test” is planned.
• For corporate groups subject to the Pillar Two Directive, an exemption from the DAC 6 reporting obligation is to be introduced.
• The reporting period will start with the first concrete implementation step (e.g. signing of a binding contract) and will be extended from 30 to 90 days. 

DAC 7 (Digital Platforms)

• The existing dual reporting thresholds for the sale of goods via digital platforms (activity and monetary threshold) will be simplified: the activity threshold will be omitted, and the monetary threshold will be increased from 2,000 Euro to 3,000 Euro per year.
• Transactions between related entities of a platform operator that pose a low risk to tax transparency will be exempted from the reporting obligation.

Tax Identification Number (TIN)

• A centralised TIN verification system to be developed by the Commission will be introduced, enabling automated verification of reported tax identification numbers.
• The use of the verification tool will be mandatory for tax administrations, but optional for reporting entities.