Documents considered by the Committee on 30 April 2014 - European Scrutiny Committee Contents

24 Taxation



+ ADDs 1-3

COM(13) 814

Draft Council Directive amending Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States

Legal baseArticle 115 TFEU; consultation; unanimity
DepartmentHM Treasury
Basis of considerationMinister's letter of 15 April 2014
Previous Committee ReportsHC 83-xxvii (2013-14), chapter 6 (15 January 2014) and HC 83-xxxiv (2013-14), chapter 11 (26 February 2014)
Discussion in Council6 May 2014
Committee's assessmentPolitically important
Committee's decisionCleared


24.1 The purpose of Directive 2011/96/EU, the Parent Subsidiary Directive (PSD), is to ensure that companies from the same group are not taxed twice. It achieves this by exempting dividends paid by a subsidiary in one Member State to a parent in another Member State and prohibiting withholding tax on these dividends.

24.2 This draft Directive would make two amendments to the PSD. Both are intended to prevent tax avoidance and reflect specific action points detailed in the Commission's 2012 Communication, Action Plan to strengthen the fight against tax fraud and tax evasion.[102] The first amendment, related to Article 1 of the PSD, would provide for what the Commission refer to as a general anti-abuse rule (GAAR), although in the UK it would be considered a targeted anti-abuse rule (TAAR), as it is confined to a specific piece of legislation rather than applying generally to aggressive tax planning. The second amendment, related to Article 4 of the PSD, would remedy a specific tax loophole concerning the use of hybrid loan arrangements in cross-border situations resulting in double non-taxation.

24.3 Knowing that the Government's overarching concern was to ensure any agreed Directive would be in line with developments in the OECD Base Erosion and Profit Shifting (BEPS) project, when we considered this proposal for a second time, in February, we looked forward to hearing about success in firmly securing the progress reported to us on this issue in the continuing Council working group discussions. We also wanted to hear about progress on other UK interests in the draft Directive. Meanwhile the document remained under scrutiny.[103]

The Minister's letter of 15 April 2014

24.4 The Exchequer Secretary to the Treasury (Mr David Gauke) now tells us that:

·  in advance of a Council working group meeting on 8 April, the Presidency proposed splitting the proposal, to focus only on reaching agreement as regards the amendment to Article 4 of the PSD, to address the specific loophole concerning the use of hybrid loan arrangements;

·  the other element of the proposal would be left for future discussion under the next, Italian, Presidency;

·  there was a broad consensus amongst Member States, including the UK, that the Article 4 amendment would effectively eliminate avoidance opportunities through the use of hybrid loans;

·  in addition, Member States agreed that it complemented related work being carried out as part of the OECD BEPS project to address avoidance through the use of mismatch arrangements in other areas;

·  this proposed change would ensure that, in situations where cross-border payments under a hybrid loan are classified in the Member State of the payer as a tax deductible expense, then the Member State of the payee should tax this amount where it would otherwise treat the payment as a tax-exempt dividend distribution;

·  the Government continues to support this solution, which is in line with how the UK's current dividend exemption rules operate; and

·  the proposed change to Article 1 of the PSD will now form a separate new proposal and is likely to progress during the Italian Presidency.

24.5 The Minister continues that:

·  the Presidency's intention is to take the newly split file to Coreper for full discussion on 30 April, before going to Ministers at ECOFIN on 6 May for political agreement;

·  there is, however, still some degree of uncertainty on this timetable; and

·  the Government would vote in favour of it, should such a political agreement be tabled on the split proposal.


24.6 We are grateful to the Minister for this account of where matters stand on the draft Directive. On the presumption that the proposal will now only concern Article 4 of the PSD we clear the document.

24.7 We note that we will, of course, be scrutinising in the normal way any new proposal made in relation to Article 1 of the PSD.

102   (34548) 17637/12 + ADDs 1-16: see HC 86-xxvii (2012-13), chapter 3 (16 January 2013), HC 86-xxxi (2012-13), chapter 5 (6 February 2013) and HC 83-v (2013-14), chapter 8 (12 June 2013). Back

103   See headnote. Back

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