Issue 2024, no 11

EU Gateway newsletter

14/11/24

The European stage is buzzing with activity, and October 2024 was a crescendo of developments. This EU Gateway newsletter captures the symphony of changes from the EU and its Member States. Picture this: the EU is orchestrating a new Pillar Two exchange of information framework, and an updated draft public CBCR implementing regulation is already making sound waves, reminding companies that public CBCR kicks in for most from 1 January 2025.

On the domestic front, the musical ensemble featured impressive solos. France played a powerful tune with its tax reforms through the 2025 Finance Bill. Finland's Supreme Court harmonized Finnish folk (or hard rock?) music with the ATAD’s EBITDA rule. Ireland struck a chord with new tax measures, as vibrant as a traditional Irish jig. And let's not forget Portugal, keeping the rhythm steady with its adoption of Pillar Two rules, reminiscent of soulful Fado melodies—perhaps with a mourning tone given the late adoption of the rules and the chasing from the European Commission.

Our newsletter aims to keep you in tune with the latest developments. Ready to join the concert? We are!

Remember, the EU Gateway team or your local PwC tax advisor is just a call or email away for any follow-up questions or comments.

Jeroen Peters, Maurits Vedder & Vassilis Dafnomilis

EU highlights

Relevant for: MNEs falling within the scope of Pillar Two rules

On 28 October 2024, the European Commission adopted an amendment to the Directive on administrative cooperation in the field of taxation (DAC), the so-called “DAC9”. The Directive aims to make it easier for companies to fulfill their filing obligations under the Pillar 2 Directive. More specifically, the Directive:

sets up a system for tax authorities to exchange information with each other;
introduces a standard form (information return), in line with the form developed by the Inclusive Framework of the OECD and the G20, which MNEs and large scale domestic groups will have to use to report certain tax-related information.

In line with the proposed rules, the EU Member State of the ultimate parent entity of the MNE should receive the full Top-up tax information return. All EU Member States that have implemented a qualified IIR or a qualified UTPR or both should be provided with the full General section of the Top-up tax information return and QDTT-only EU Member States, where constituent entities of the MNE are located, should be provided with the relevant parts of the General section of the Top-up tax information return.

See here PwC Tax Policy Alert for more information.

EU Gateway observation

Once adopted by the EU Council, EU Member States will have until 31 December 2025 to implement DAC9. For countries that have chosen to delay implementing the Pillar 2 Directive, the same deadline will apply to them for implementing DAC9.

Businesses should consider the EU Member State where they might wish to file their Top-up tax information return, using a designated filing entity if that is not the location of the UPE. They should also consider the data requirements if they have not already done so.

Important to note though, is that DAC9 only arranges the exchange mechanism between the 27 EU Member States, and not with non-EU jurisdictions.

Relevant for: Companies doing business in the EU

Ahead of the European Parliament's confirmation hearing on 7 November 2024, Commissioner-designate for Climate, Net-Zero and Clean Growth, Wopke Hoekstra, has outlined his priorities in a written questionnaire. Hoekstra emphasized that EU tax initiatives will bolster Europe’s competitiveness, prosperity, and social fairness, while continuing the fight against tax fraud, evasion, and avoidance. Key areas of focus include:

Evaluating Existing EU Legislation: The European Commission is assessing the Directive on Administrative Cooperation and the Anti-Tax Avoidance Directive to address inconsistencies.
Supporting Tax Administrations: Sharing best practices and developing rigorous methodologies to eliminate tax gaps.
DEBRA Initiative: Gauging Member States’ willingness to reconsider the DEBRA proposal in light of the new mandate's competitiveness agenda. DEBRA introduces a debt-equity bias reduction allowance to help businesses become more resilient and access the financing they need.
BEFIT Proposal: Reviewing this proposal through the lens of experiences with Pillar Two.
Pillar Two: Encouraging jurisdictions to implement rules and cooperate in information exchange, with a focus on engagement with major players like the United States.
Pillar One: EC is committed to a multilateral approach to taxation of the digital economy.
Financial Sector: Identifying innovative solutions for a coherent tax framework to support integration, cross-border operations, and digitalization. A study is underway to explore taxing the financial sector.
Unanimity Requirement: Achieving results on corporate taxation proposals through interaction with all EU Member States, considering unanimity requirements.

EU Gateway observation

While the EC has made numerous promises and outlined several general policy aspects, we distill these three key points from Wopke Hoekstra's input. Firstly, the EC is working on streamlining the EU direct tax acquis to simplify and reduce burdens, aligning with the EC President’s goal to cut reporting obligations by at least 25%, and by 35% for EU SMEs. Secondly, as direct tax laws in the EU require unanimity, the EC will not push for qualified majority voting on taxation matters, emphasizing the challenge of reaching consensus among 27 Member States. Lastly, the EC is revisiting the DEBRA Directive, previously considered "dead" due to a lack of support from Member States. Time for some resurrection—perhaps DEBRA stands for "Directive Everyone Begrudgingly Resurrects Again"!

It will also be interesting to see whether Hoekstra can move the needle on Pillar One. With Trump in the White House, and both a Republican House and Senate, we can imagine that the cross-Atlantic cooperation on Pillar One is no easy feat. For now, we would recommend to first consider the impact of digital services taxes around the EU.

Relevant for: EU and non-EU investors and EU/non-EU financial intermediaries

The ECON Committee of the European Parliament has adopted a positive opinion on the FASTER Directive without amendments. This draft report will form the basis of the European Parliament's mandatory but non-binding opinion, which will be voted on at a later date. The FASTER Directive is set to apply from 1 January 2030, with EU Member States required to implement the rules by the end of 2028. FASTER introduces several key measures: 1. An electronic digital tax residence certificate, 2. Two fast-track procedures for withholding tax (WHT) relief and 3. Extensive reporting obligations for financial intermediaries.

EU Gateway observation

If you think you - as a financial intermediary - have ample time to comply with the new reporting requirements to have your clients (investors) benefit from the new relief rules, think again. The information that financial intermediaries must report to the source EU Member States is extensive, and they will be liable for any WHT revenue loss by the source EU Member State as a result of non-compliance.

Relevant for: Companies involved in transactions with blacklisted or greylisted jurisdictions

Currently in the “EU black list”: American Samoa, Anguilla, Fiji, Guam, Palau, Panama, Russia, Samoa, Trinidad & Tobago, US Virgin Islands, and Vanuatu. Currently in the “EU grey list”: Antigua and Barbuda, Belize, British Virgin Islands, Costa Rica, Curaçao, Eswatini (Special economic zone), Seychelles, Türkiye, and Vietnam

EU Gateway observation

Being listed as a jurisdiction can lead to various tax consequences, such as denial of the participation exemption, non-deductibility of costs, enforcement of CFC rules, and imposition of withholding tax. Additionally, the EU blacklist is crucial for the application of DAC6 and FASTER, as well as for public CBCR purposes. For more details, you can refer to our EU Gateway publication, which provides insights into the measures taken by EU27 regarding blacklisted jurisdictions and the importance of listing and delisting for DAC6, FASTER, and public CbCR.

Relevant for: MNEs/Groups that will have a reporting obligation based on the public CBCR Directive.

And since we are talking about public CbCR (CbCR), the European Commission has published an updated draft of the Public CBCR implementing Regulation. The regulation lays down the common template for MNEs and provides guidance on how to complete it. This is an important next step for the implementation of the Public CbCR Directive in the EU, as from 1 January 2025 forward all MNEs with a presence in the EU and a consolidated revenue exceeding EUR 750 mln EUR for the last 2 fiscal years will have an obligation to make up a report in accordance with the Public CbCR directive. The updated draft implementing regulation expands on who is obliged to make use of the common template (preamble), the required content of the common template (see Annex I), the electronic reporting format that needs to be used (see Annex II) and the marking up and filing requirements (see Annex III).

Time for some Brussels bureaucracy (that’s the EU you know and love): The term “comitology” comes into play when the European Commission is granted implementing powers within a law, like the pCBCR directive. The draft pCBCR regulation recently went to a vote by the relevant committee and received a positive opinion through a majority vote (26 to 1). This means the Commission is now obliged to adopt the regulation, which will then be published and take effect. And if you're wondering which EU Member State didn't vote for the implementing regulation, we can only make assumptions—but let’s just say this nation won the 2014 World Cup. Any guesses?

EU Gateway Observation

The template must be used by EU UPEs. Non-EU headed groups with public CBCR obligations in the EU do not have to use this template. We believe this undermines consistency in public CBCR within the EU and may lead to discrepancies between reports from different EU subsidiaries of the same group. This issue is especially concerning if the non-EU UPE does not share the necessary information with its EU operations, forcing each EU subsidiary to report based on a “best effort” approach. Given the purpose of the common template, it is unclear why the Commission has chosen this approach for EU subsidiaries and branches of non-EU UPEs.

Relevant for: MNEs with presence in the Netherlands

According to the Court of Justice of the EU (CJEU) in X BV (C-585/22), Article 10a Dutch Corporate Income Tax (CITA), an interest deduction limitation rule, is compatible with EU law. Although this Article introduces a difference in treatment between a domestic and a cross-border situation, such a difference is justified based on the need to combat tax fraud and tax evasion. In addition, the Court considered that Article 10a Dutch CITA is proportional to this objective and took a position regarding its previously decided Lexel AB (C-484/19) case. Furthermore the Court ruled that where a loan is in itself devoid of economic justification, and would never have been contracted between unrelated parties, it is consistent with the principle of proportionality to refuse the deduction of the full interest. See EUDTG newsalert for more information about the judgment.

EU Gateway observation

In the X BV case, the CJEU clarified the concept of abuse concerning inter-group loans. The CJEU ruled that the mere fact that the terms of such a loan are at arm's length does not necessarily imply that the loan and related transactions do not constitute wholly artificial arrangements. Building on - was it really? - its previous Lexel AB case, the Court has now introduced an economic logic test, in addition to the formally agreed terms of the loan, for assessing whether a loan can be considered a wholly artificial arrangement. Was it perhaps “too good to be true” to suggest that if the terms of the loan are at arm’s length, there is no abuse? Yes, it seems now. But even AG Emiliou explicitly stated that the CJEU ruled this in Lexel AB, despite his request for the CJEU to reverse Lexel AB.

Relevant for: Lawyers that have an obligation to report transactions based on the EU Directive on Administrative Cooperation.

As per the CJEU, legal advice given by a lawyer in company law matters falls within the scope of the strengthened protection of communications between lawyers and their clients guaranteed by Article 7 of the Charter of Fundamental Rights of the European Union. This Article recognises that everyone has the right to respect for his or her private and family life, home and communications. As a result, a decision requiring a lawyer to provide the authorities of the requested EU Member State – for the purposes of an exchange of information on request in accordance with the EU Directive on Administrative Cooperation – with all the documentation and information relating to his or her relations with his or her client, concerning such legal advice, constitutes an interference with the right to respect for communications between lawyers and their clients guaranteed by that article. See here for more information about the CJEU judgment.

Domestic Highlights

Finance Bill 2025: Government Proposes, Amongst Others, Introducing Temporary CIT Surcharge for Large Companies and Amendments to Pillar Two Rules

Relevant for: Companies doing business in France

On 10 October 2024, the French Government presented the Finance Bill for 2025. We distinguish the following measures:

Introduction of a non-deductible exceptional surcharge of corporate income tax (CIT) for companies with annual turnover in France exceeding EUR 1 billion. The surcharge applies for 2 fiscal years ending on or after 31 December 2024, based on CIT before deducting tax reductions, tax credits, and tax receivables of any kind, including carrybacks. More specifically, companies with turnover between EUR 1 billion and EUR 3 billion face a 20.6% surcharge in the first year and 10.3% in the second. Companies with turnover of EUR 3 billion or more face a 41.2% surcharge in the first year and 20.6% in the second.

Introduction of an 8% tax on capital reductions for large French companies (with a turnover exceeding EUR 1 billion) following share buybacks. This tax, based on the amount of the share capital reduction and the portion of the amounts that are accounted for as capital-related premiums, is non-deductible from the CIT base and applies to capital reductions realized on or after 10 October 2024.
Aligning French GloBE rules (IIR & UTPR) with the standards of the OECD/G20 Inclusive Framework (i.e., implementation of most of the missing parts of the OECD administrative guidance, except for those released in June 2024). There are slight changes to the French QDMTT (e.g., calculation of the financial net accounting income or loss according to the accounting standard available under the IIR/UTPR and allocation of the QDMTT only between French Constituent Entities having an individual effective tax rate below 15% based on the ‘polluter pays’ principle).

EU Gateway observation

The National Assembly has received the Finance Bill, and discussions were set to begin on 21 October 2024. These discussions are expected to result in the addition or amendment of further measures to the Bill. Stay tuned for an upcoming version of the newsletter, where we will inform you about the final version of the measures.

Foreign Exchange Gains and Losses Only on Interest Taxable or Deductible under Business Income Tax Act

The Supreme Administrative Court of Finland has decided in the case KHO:2024:103, addressing the tax treatment of foreign exchange gains and losses under the Business Income Tax Act (BITA). The case concerned a Finnish resident company (FI Debtor) that obtained a loan denominated in Norwegian krone from its parent company based in Norway (NO Creditor). The issue was whether the foreign exchange gains and losses associated with this loan, both for the principal amount and the interest, should be considered taxable income and deductible expenses under the BITA.

The Supreme Administrative Court clarified that, according to domestic legislation, foreign exchange losses are not classified as interest on a loan. Therefore, the limitations on the deductibility of interest expenses do not apply to them. However, the Court emphasized that the Finnish “tax-EBITD” rule (18a of the BITA), being based on that of the Anti-Tax Avoidance Directive, must be interpreted in accordance with the ATAD’s objectives. Article 2 of the ATAD defines "borrowing costs" to include interest expenses on all forms of debt, other costs economically equivalent to interest, and expenses incurred in connection with raising finance, which encompasses certain foreign exchange gains and losses. The exact definition is left to the national law.

The Court ruled that realized foreign exchange gains and losses related to the principal amount of the loan in NOK did not differ from any other payment of debt capital. Hence, such gains and losses were not considered interest income or expenses. However, realized foreign exchange gains and losses related to the interest paid on the loan are part of the borrowing costs and thus deemed to be interest income or expenses.

EU Gateway observation

The decision continues to refine the significance of the ATAD for purposes of interpreting domestic law. In the absence of specific domestic definitions for interest, the directive has proved to be an important source for interpreting the concept, in particular where the Court considers the items to be sufficiently similar to interest economically. This has been the case, for example, with certain payments related to swap agreements, whereas certain advisory fees related to arranging financing have not been included in the definition.

This court case may be valuable should you have discussions about the scope of similar rules in other EU Member States. For instance, in the Netherlands the ‘interest’ for the earningsstripping rule includes both foreign exchange results on interest as well as on the principal sum. One could indeed debate whether that implementation is in line with ATAD.

One Step Closer to Implement Participation Exemption for Certain Foreign Dividends

There have been incremental changes made to the tax treatment of dividends received by Irish resident companies from non-Irish resident companies over the past 20 years - all aimed at either simplifying or improving Ireland’s holding company regime. The introduction of a Participation Exemption in the Finance Bill 2024, exempting certain income receipts from share capital, is one further such progressive measure of relevance to dividends, or other distributions received from ‘relevant territory’ resident companies from 1 January 2025 onwards. A ‘relevant territory’ includes EEA and Tax Treaty territories as well as territories where a Tax Treaty with Ireland has been made but is not yet in force.

The key features of the Participation Exemption introduced in the Finance Bill 2024 include:

Applicable in respect to dividends or other distributions received as income from EEA/Treaty resident companies;
Optionality - elect in on an accounting period by accounting period basis. Exists in tandem with current ‘tax and credit’ regime;
Ownership requirement - 5% of ordinary share capital, profits and assets entitlements for continuous 12 month period;
It is expected that where a dividend/distribution is paid out of profits - no 626B requirement exists (Note: the current wording creates slight uncertainty around this point and clarification may be needed);
Where dividend/distribution paid out of assets - 626B test to be satisfied; and
Exclusions for S110 companies, capital receipts and, amounts in respect of which a tax deduction was or may be taken

See here for more information.

EU Gateway observation

The introduction of the regime follows a long period of engagement between stakeholders and the Department of Finance. It is expected that further engagement will continue into 2025, after the introduction of the first iteration of the regime. Expectedly, consideration may be given to extending the Participation Exemption regime, to include dividends or other distributions from non-EEA/Treaty resident companies. For now though, it will only remain available in respect of EEA/Treaty resident companies.

Other Domestic Developments

Belgium

consults on the Qualified Domestic Minimum Top-up Tax Return for Pillar Two purposes. See here for more information.

Germany

publishes official specimen form for the group parent Pillar Two notification: A notification of the head of the minimum tax group to the German Federal Central Tax Office must be made no later than two months after the end of the taxable period for Pillar Two purposes. In the case of a financial year beginning on 1 January 2024, the notification should, therefore, be made on 28 February 2025 at the latest. See here for more information.
removes Antigua and Barbuda, Bahamas, Belize, Seychelles, Turks and Caicos Islands from its list of low-tax jurisdictions.
Ministry of Finance clarifies on the credit of foreign corporate tax under previous imputation tax system: The focus of the circular are two CJEU judgements as regards the calculation and verification of the creditable corporation tax underlying a dividend from another EU Member State. See here for more information.

Italy

consults on assessing and improving i) the currently available tax credit for investments in certain qualifying high-tech tangible assets and ii) the R&D tax credits.
has issued a Decree on the Pillar Two substance-based income exclusion (SBIE). When determining the amount of top-up tax due, the relevant net income of a qualifying multinational or large Italian group is reduced by income from substantial economic activities, which includes a payroll carve-out and a tangible asset carve-out. Each carve-out is 5% of the eligible payroll costs and tangible assets, respectively.
clarifies on definitions of “platform” and “seller” under DAC7: any platform that allows a seller to sell goods to other users, even indirectly, appears to fall within the definition of “platform”. Moreover, according to the Italian tax authorities’ opinion, the definition of “seller” also includes those sellers who have not registered with the platform by creating a specific account, but who have entered into a contractual relationship with the platform operator. See here for more information.

Latvia

removes Antigua and Barbuda from its list of low-tax jurisdictions as of 1 November 2024, following their delisting from the EU blacklist. Remember, Antigua and Barbuda is one country—don’t fall into the trap!

Lithuania

proposes legislation transposing DAC8 and a rollback mechanisms for bilateral Advance Pricing Agreements if the facts and circumstances of previous tax years are consistent with the anticipated transaction and are verifiable.

Netherlands

consults on DAC8 implementing bill (cryptos).
Dutch State Secretary highlights limited impact on the effectiveness of current tax incentives for Pillar Two. However, introducing tax credits that qualify under Pillar Two may present greater challenges.

Portugal

approves Pillar Two bill.
Portugal proposes the reduction of CIT rate from 21% to 20% in its 2025 budget. SMEs and Small Mid Caps will be subject to an CIT rate of 16% (currently 17%) on the first EUR 50,000 of taxable income. See here for more information.

Judicial Developments

Portugal

Supreme Administrative Court: Transfer Pricing Rules Apply at Transaction Date

According to the Court, the relevant moment for the purposes of verifying whether special relations are in place, as a condition for the application of transfer pricing rules, is the date when the transaction occurs – and not the period during which the respective negotiations took place. Furthermore, the Court noted that if tax authorities suspect the transaction of being abusive or lacking valid economic reasons, they should challenge it using other provisions, like the general anti-abuse rule (GAAR), instead of transfer pricing regulations.

Tax Treaty Developments

France: Tax authorities announce activation of MFN clauses on interest and royalties on the tax treaty between France and Latvia.

France: Tax authorities comment on suspension of provisions of the treaty with Russia.

Ireland: Signs tax treaty with Liechtenstein

Luxembourg: Luxembourg and Oman sign a tax treaty.

Romania: Suspends tax treaty with Russia.

Sweden: Government initiates procedure to suspend tax treaty with Russia.

EU Gateway contacts

For questions regarding the content of this newsletter, please contact

Vassilis Dafnomilis (Senior Manager Tax Knowledge Centre), vassilis.dafnomilis@pwc.com, PwC Netherlands

For market related questions please contact:

Jeroen Peters (Partner International Tax Services), jeroen.h.peters@pwc.com, PwC Netherlands (EMEA)
Chahid el Tarrahi (Partner Financial Services), chahid.el.tarrahi@pwc.com, PwC Netherlands (Americas)
Pieter Janson (Partner International Tax Services), pieter.janson@pwc.com, PwC Netherlands (Asia)
Vincent Voogt (Partner International Corporate Tax), vincent.v.voogt@pwc.com, PwC Netherlands (USA)

or contact your PwC advisor.

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This content is for general information purposes only, does not constitute professional advice and should therefore not be used as a substitute for consultation with professional advisors. PricewaterhouseCoopers Belastingadviseurs N.V. does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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