The European Commission’s Tax Omnibus proposal would amend six EU directives on direct taxation, with the stated aim of simplifying tax rules, reducing administrative burdens, and improving competitiveness across the Single Market. The proposal targets overlapping and unevenly applied rules that increase compliance costs for businesses operating across EU Member States.
Broader relief for dividends, interest, and royalties
Current EU rules are intended to prevent cross-border dividend, interest, and royalty income from being taxed twice. In practice, access to relief depends on multiple conditions, including:
- Company form
- Corporate income tax liability
- Tax residence
- Participation thresholds
- Beneficial ownership
- Directive-specific requirements
The Tax Omnibus proposal would go beyond aligning the Parent-Subsidiary Directive and the Interest and Royalties Directive. It would remove participation requirements and expand flexibility around eligible company forms.
The proposal would also limit administrative barriers to relief. Member States would no longer be able to require ex-ante attestations of eligibility, addressing concerns about complex national exemption and refund procedures.
According to the European Commission’s impact assessment, eliminating minimum participation requirements and ex-ante administrative procedures could generate annual savings of up to €5.34 billion.
The expected savings would come from:
- Lower direct compliance costs
- Reduced opportunity costs when businesses wait for withholding tax refunds
- Tax relief that eligible taxpayers may currently forgo because claiming it is too burdensome
The Commission also estimates broader economic effects, including:
- A 0.07% increase in the capital stock
- Positive spillovers for employment and wages
- A 0.04% increase in GDP
Targeted anti-abuse changes
EU tax rules already contain several layers of anti-abuse measures. Since 2022, these rules have operated alongside the Pillar Two Directive, which implements a global minimum tax by applying a 15% minimum effective tax rate to the largest corporate groups.
Two relevant measures under the Anti-Tax Avoidance Directive are:
- Controlled foreign company rules
- The interest limitation rule
Both are designed to address base erosion and profit shifting.
Controlled foreign company rules
Under current controlled foreign company rules, Member States must tax certain undistributed income of foreign subsidiaries when control and low-taxation thresholds are met.
Member States can currently choose between two models:
- Model A: attributes a foreign subsidiary’s passive income to the parent company
- Model B: attributes income arising from non-genuine arrangements designed to obtain a tax advantage to the parent company
The Tax Omnibus proposal would remove Model B and make Model A the only approach.
It would also make the exclusion for companies whose passive income is less than one-third of total income mandatory. Additional mandatory exclusions would apply to:
- Companies in small and medium-sized groups
- Small or medium-sized undertakings
- Companies that are part of a group subject to Pillar Two
The Pillar Two exclusion is important because it reduces overlap between rules aimed at similar risks. Without it, businesses could face double compliance burdens and, in some cases, double taxation if a qualified domestic minimum top-up tax is not creditable under a Member State’s controlled foreign company rules.
A legal caveat remains. The Anti-Tax Avoidance Directive is a minimum-harmonization directive, meaning Member States can generally adopt stricter tax-base protection rules. The Tax Omnibus proposal appears to require some new controlled foreign company exclusions to be implemented by Member States, but it is unclear whether all changes, including the one-third passive income exclusion and Model A-only approach, would be fully binding. That uncertainty could weaken the proposal’s simplification and uniformity goals.
Interest limitation rule
The Anti-Tax Avoidance Directive’s interest limitation rule restricts deductions for net borrowing costs. Under the current framework, Member States should cap deductions at 30% of EBITDA, but they may impose stricter limits.
Examples cited include:
- The Netherlands: 24.5%
- Finland: 25%
The Tax Omnibus proposal would make the 30% EBITDA threshold a mandatory standard, preventing Member States from applying lower limits. It would also make most existing options mandatory and add three exclusions.
This would make the rule more consistent across Member States while reducing compliance costs for cross-border businesses. Unlike some of the controlled foreign company amendments, the interest limitation changes appear to be binding because the proposal states that Member States should not maintain or introduce conflicting rules.
R&D full expensing
The Tax Omnibus proposal would introduce a minimum research and development incentive by allowing full expensing for certain tangible assets used for R&D.
Under full expensing, a company can deduct the full cost of an investment in the year it is incurred. The proposal would allow taxpayers to deduct the full amount of qualifying R&D-related tangible capital expenses either in the year of purchase or within four years.
Because this would be a minimum level of harmonization, Member States could still offer more generous allowances.
The European Commission estimates that the measure would reduce corporate income tax revenues by 1.9%, but that this would be almost fully offset over the longer run because the economy would be larger than without the policy change.
Estimated broader effects include:
- A 0.43% increase in the capital stock
- A 0.17% increase in GDP
The main caveat is that limiting full expensing to certain assets can distort investment decisions. A broader full-expensing rule applying to all capital expenditure would be more neutral, but the design must also account for Pillar Two. A broad rule could expose some in-scope companies to recapture rules and a top-up tax, reducing the benefit of full expensing.
Where Pillar Two allows it, the proposal argues for extending R&D allowances to both tangible and intangible assets used for research and development.
Practical implications
The Tax Omnibus proposal would simplify parts of the EU direct tax framework by:
- Broadening access to withholding tax relief
- Reducing administrative steps for cross-border tax exemptions and refunds
- Narrowing controlled foreign company rules
- Reducing overlap with Pillar Two
- Creating a more uniform interest limitation standard
- Introducing full expensing for certain R&D investments
The proposal could reduce compliance costs and improve capital mobility, but its effectiveness depends on whether the rules are implemented uniformly and whether legal uncertainty around mandatory exclusions is resolved.
The broader policy trade-off is that some pro-growth measures may reduce revenue in the short term, while potentially producing long-term gains through higher investment, capital stock, and GDP.
Source article: taxfoundation.org
