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On 21 June 2016, the European Council unanimously agreed on a package of anti-tax avoidance measures. This introduces some of the OECD’s BEPS Actions such as CFC and anti-hybrid rules, as well as an exit tax and a GAAR. The controversial “switch-over clause” has been dropped and pre-17 June 2016 finance arrangements are excluded from the new interest limitation rules. The new measures will apply from 1 January 2019.


In our Client Alert of May 2016 we announced the deferral of agreement on the Anti-Tax Avoidance Directive (ATAD) following the ECOFIN meeting on 25 May. The EU Finance Ministers reconvened on 17 June in a further bid for consensus, which has now been reached. Approval of the latest version of the ATAD represents significant progress by the European Commission in pursuing its anti-tax avoidance agenda in response to the OECD’s Base Erosion and Profit Shifting (BEPS) project.

The approval of the ATAD within a little over half a year from when it was first proposed is a major achievement. However, the rapid progress has meant that many changes have been made and the agreed text is a compromise on earlier versions.

Switch-over clause dropped

The original “switch-over clause” ensured that low-taxed foreign income would be taxed, with a credit for foreign taxes paid, instead of being exempted. This would have had a significant impact on exemptions that currently exist in many Member States for dividends and capital gains. The effective tax rate criterion that would have triggered the switch-over was strongly criticised on the basis that it amounted to the EU itself imposing corporate tax rates. Following this criticism the switch-over clause has been dropped in order to secure agreement of the ATAD.

Controlled Foreign Company provisions changed

On Controlled Foreign Companies (CFCs), the final package adopts compromise language for a so-called “substance carve-out” for EU-resident subsidiaries that carry on “ a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances”. The requirement in  earlier drafts of the ATAD for the taxpayer to prove substantive economic activity has been removed and replaced by an emphasis on co-operation between tax administrations and taxpayers cooperating in gathering the relevant facts and circumstances to determine whether the carve-out rule apply.

Another change is to make the trigger for the rules the actual corporate tax paid by the CFC. In the approved text a subsidiary is a CFC when the actual corporate tax it pays is lower than the difference between the corporate tax that would have been charged in the parent company’s Member State and the actual corporate tax paid in the other country. In practice, this is not much different from the effective tax rate trigger, but certain countries were unhappy about the rules being connected to a tax rate and therefore the language has been amended.

Rule on interest deduction limitations delayed

Following objections from Belgium, among other countries, the final package allows Member States to delay introducing the limitation on interest deductions until 1 January 2024 (or earlier date if the OECD before then adopts the BEPS Action 4 recommendations as a “minimum standard”), provided that the Member State’s existing  rules on interest deductions are “equally effective” as the ATAD provision.

Hybrid mismatches

As in the 25 May version of the ATAD, only intra-EU hybrid mismatches are within the scope of the rules. However, in response to concerns raised by several countries, the Council has asked the Commission to propose, by October 2016, rules extending to hybrid mismatches involving third countries, which would be consistent with BEPS Action 2.

What’s next?

Now that political agreement has been reached, the latest version of the ATAD will be submitted through the Committee of Permanent Representatives to the Council for formal adoption. This means that no further substantive discussion will be needed and it can be assumed that the ATAD will be adopted. Member States are obliged to adopt any laws and regulations to comply with the ATAD by 31 December 2018. As from 1 January 2019, domestic provisions to comply with the ATAD must be in place, with the exception of the rules on limitation on interest deductions, which should apply as of 1 January 2024 at the latest.

Contact Wouter Paardekooper, Alex Chadwick, Heico Reinoud, James Wilson, Mounia Benabdallah.


Wouter Paardekooper is a partner in Baker & McKenzie’s International Tax team in Amsterdam. As a qualified tax advisor (member of the NOB) and attorney-at-law, he specializes in direct taxes. He focuses on rendering tax advice to multinationals, particularly in relation to tax policy (BEPS), tax risk management, and tax and legal aspects of M&A and financing transactions. He regularly speaks at international seminars, courses and conferences. Since 20 May 2015, Wouter serves as the president of the American Chamber of Commerce in the Netherlands, representing US businesses in the Netherlands and all companies involved in transatlantic trade.


Alex Chadwick heads Baker McKenzie’s Corporate Tax Practice Group in London and sits on Baker McKenzie’s Europe Tax Transactions Steering Committee.


Heico Reinoud is an experienced tax lawyer at Baker & McKenzie’s Amsterdam office. He is a member of the Dutch Association of Tax Advisors (Nederlandse Orde van Belastingadviseurs) and the Dutch branch of the International Fiscal Association. In addition to his practice, Heico regularly publishes articles related to corporate tax law.


James Wilson leads Baker McKenzie's global Tax Planning, Transactions and Tax Policy group. He has 18 years of experience in advising the world's largest multinational corporations on cross-border tax matters. James is a recommended lawyer for International Tax in Legal 500 USA, in particular for his expertise in advising clients in the consumer goods and retail sector. James is a member of the Firm's Consumer Goods and Retail Industry Group steering committee.


Mounia Benabdallah is a partner in Baker McKenzie’s International Tax Practice Group. She joined Baker McKenzie in 2006 and has practiced in the Firm’s offices in Amsterdam, Chicago and New York. As an attorney at law she is admitted to the Netherlands Bar. Mounia is repeatedly recognized as leading advisor in ITR’s Women in Tax Leaders guide. Because of her strong US focus, Mounia is based in New York and member of the Global Reorganizations Practice Group. Mounia mainly advises US multinationals on the interplay between US international tax law, European tax law and Netherlands tax law in global restructuring projects, with a strong focus on global (OECD BEPS) and European tax policy developments.