The Anti Tax Avoidance Directive introduced a new directive by the EU. This directive, like many previous directives, does not have the effect of realising freedom, but rather of restricting freedom. What this is and what this has to do with the current objectives of the EU will be discussed below.

As an introduction to the topic of the Anti Tax Avoidance Directive at Begin, it is important to remember the background and the objective. This quickly makes it clear what this directive is intended to achieve.

Because the fight against harmful tax competition between different countries and aggressive tax avoidance practices by international companies has been the focus of international tax policy for several years. For this purpose, the BEPS (Base Erosion and Profit Shifting) project was initiated at OECD level in 2012, which flowed into 15 action points in 2015. Since then, these points have generally been regarded as soft law regulations, i.e. as non-binding recommendations.

Furthermore, the EU Commission also noted that unfair tax competition and aggressive tax arrangements can harm the internal market within the EU and has initiated various measures to combat it. On the one hand, by reviewing selective national tax concessions under the State aid rules on the basis of Article 107 of the TFEU. On the other hand, by extending the exchange of information between Member States' tax authorities and the enhanced reporting requirements with the EU Mutual Assistance Directive and the VAT Cooperation Regulation, additional ways have been created to limit aggressive tax arrangements and abuses and tax avoidance.

Recently, through the implementation of some of the BEPS Action Points in all Member States, a prerequisite for national laws on these topics was adopted in a uniform manner through the introduction of the Anti Tax Avoidance Directive, which have now been implemented in the Member States.

1.1.2. Special features at ATAD

The following special features must be particularly noted in connection with ATAD. On the one hand, unlike the previous directives in the field of direct taxes, ATAD does not contain any tax concessions, but rules to safeguard tax revenue. Until now, national rules with this objective have been subject to strict scrutiny on the basis of fundamental freedoms. With the new regime, Union law requires Member States to adopt such rules at national level. In some cases, the regulations of ATAD are special anti-abuse regulations, but mainly general regulations for securing the control substrate.

This includes not only cross-border, but also purely national issues. Furthermore, ATAD only establishes a minimum level of protection as set out in Article 3 ATAD. The Member States can lay down stricter rules in national law. Later, we will take a closer look at the five regulatory areas contained in the Anti Tax Avoidance Directive, which are largely independent of each other.

ATAD is based on Article 115 TFEU as an EU directive. The rationale behind ATAD and the need for internal market involvement for its introduction stems from unfair tax competition and aggressive tax arrangements that distort competition. The directive is also necessary because uncoordinated national defensive measures cannot effectively remedy distortions of competition and have hardly succeeded in the past.

Technical advice for

Anti Tax Avoidance Directive?

As a secondary law, ATAD must be measured against higher-ranking primary law, including the fundamental freedoms, which are very relevant for tax law. However, the ECJ still gives the EU legislature a wide margin in this respect. In relation to other secondary legislation, such as the Parent-Subsidiary Directive, the Interest and License Directive and the Merger Directive, the general conflict-of-law rules apply. These include, in particular, the lex specialis case, which provides for a priority of the specific case, and the principle of the lex posterior that new regulations have priority in principle.

According to Article 1(1) ATAD, the Directive applies to all taxable persons subject to corporate tax in one or more Member States, including permanent establishments. However, there is a difference here than, for example, the MTR, since the ATAD does not define what corporate tax liability means. If there are doubts, this must be clarified by the ECJ.

In addition, in accordance with Article 3, ATAD has established only a minimum level of protection, whereby Member States:

can therefore extend the regulations to non-corporate taxpayers.

Because of Article 3 ATAD, Member States may not fall below the level of protection provided by ATAD, but may provide for stricter rules. In doing so, however, they must in turn comply with primary law, in particular fundamental freedoms. For example, a blanket suspicion of abuse in the case of additional taxation is contrary to EU law, unless the possibility of counter-evidence in individual cases is possible. This is what the ECJ stipulated in the Cadbury Schweppes case.

In addition, ATAD contains five different areas of regulation, which, while pursuing a uniform objective by preventing unfair tax competition and aggressive tax design, have no common features.

These five areas include, firstly, the limitation of the deductibility of interest payments, the so-called interest rate barrier, which is listed according to the German model in Article 4 ATAD. The BEPS Action Point 4 played a major role. In addition, the de-knitting and exit taxation in the operational area, as so-called exit tax, can be found in Article 5 ATAD.

In addition, there is now a general anti-abuse provision in Article 6 ATAD. Furthermore, Article 7 provides for the following ATAD rules on controlled foreign companies, i.e. the so-called additional taxation. This is based on BEPS action point 3 . Finally, the fight against hybrid designs is addressed in Article 9 of the following ATAD. The background is BEPS Action Point 2.

The interest rate barrier adopted according to the German model is intended to prevent artificial financing structures that lead to an erosion of the tax base in the internal market. The following tax-damaging leverage in the Group are conceivable:

On the one hand, the targeted borrowing of debt by group companies in high-tax states, while at the same time the corresponding income is transferred to low-tax states. In addition, intra-group loans can be used to obtain higher interest expenses than under normal market conditions. There is also the possibility of financing tax-free income through external capital. A particular incentive of the interest rate barrier is the possibility of strengthening the equity base of companies.

The functioning of the interest rate barrier is based on the deductibility of the interest expense at the interest debtor, which is restricted depending on his earnings situation and thus leads to equality with a capital transfer. Logically, any excess borrowing costs are not deductible.

3.1.2. Scope of Article 4 ATAD

The personal scope of Article 4 includes all corporate tax entities as already defined in Article 1(1) ATAD. In addition, exemptions are possible for stand-alone companies, in accordance with the stand-alone clause in Article 4(3)(b) ATAD and for financial companies Article 4(7) ATAD. In particular, it is relevant that the interest rate barrier concerns only the level of the debtor.

The scope of application is described below. Consequently, the tax deductibility of borrowing costs is limited regardless of the amount, duration or otherwise of the interest.

In addition, the borrowing costs are unlimited deductible up to the amount of the interest income. But the deductibility of the excess borrowing costs is only up to a maximum of 30% of the

tax principles determined EBITDA possible. EBITDA represents the operating result before taxes, interest and depreciation.

Also important is a possible exemption limit, which according to Article 4(3) ATAD up to an amount

in the amount of 3 million EUR may be granted by the Member States.

Implementation in Germany provides for the following measures:

Here, the legislator has used the opportunity to extend the scope of application and has also prescribed the regulation for all individual companies and partnerships. In addition, a capital clause was inserted in § 4h (2) sentence 1 letter c of the EStG on the stand-alone clause under letter b.

We have already taken a detailed position on the cases of derailment and the taxation of departures and have shown their limitations. In the case of exit taxation, a possible violation of EU law comes into play, which could currently and in the coming years for an uncertain legal situation.

The third rule is reflected in Article 6 ATAD and contains a general anti-abuse rule, which should be applied as a catch-all rule whenever there is no more specific abuse prevention rule in national law or within other directives.

In order to prevent misuse, Article 6 of ATAD refers both to the reasons for the implementation of a particular arrangement and to the purpose pursued. Consequently, tax arrangements are inappropriate insofar as they have not been made for valid economic reasons reflecting the economic reality of the undertaking. Furthermore, in the case of an inappropriate arrangement, at least one of the essential purposes must be to obtain a tax advantage not provided for by law.

to be obtained.

However, German tax law already contains a general misuse prevention provision in § 42 AO, which also refers to the inadequacy of the design. However, in accordance with Section 42(2), second sentence, of the AO, the taxable person also has the opportunity to present considerable extra-tax reasons for the arrangement. Thus, there is no need for adaptation in national law and the previous paragraph will continue to apply.

Just as with the cases of de-entrapment and departure, there are already detailed analyses regarding the additional taxation, which estimate to what extent this taxation is to be managed.

Within the framework of Article 9, the following ATADs are to be combated hybrid designs. This is specifically about preventing double non-taxation. Consequently, there are several cases in which this can occur:

For example, by taking certain expenses into account for tax reduction in several countries

become. Then we speak of a so-called double deduction.

In addition, if for tax deductible expenses at the recipient no corresponding

Taxation is done. In this case, the combination deduction and no inclusion is present.

In addition, conflicts of assertion can be triggered by different qualification decisions in the affected states. This is called the hybrid effect. For example, hybrid financial instruments that are treated by one State as equity and by the other State as debt. In addition, hybrid entities treated by one State as non-transparent under the principle of separation and by the other State as transparent under the principle of transparency may exploit a tax loophole.

All these measures are significantly more restrictive than the previous ones, thus significantly restricting tax abuse and the relocation of tax substrate.

The restrictive measures of the Anti Tax Avoidance Directive I and II have limited the scope for international companies to design. It should be noted that this may not have been the last directive on cross-border trade. If you need support with questions about these topics, please contact us.

GmbH

-