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25 July 2017 / article

Tax uncertainties for European headquarters and intermediary holding companies

In the short term, both European headquarters and intermediary holding companies will be faced with important new tax uncertainties. This is what you need to know to be well prepared.

Tax uncertainties for European headquarters and intermediary holding companies

The new uncertainties are:

  • How to limit an increase of foreign withholding taxes on dividends and other payments received?
  • How to prevent inclusion of foreign profits in the domestic tax base under the so-called Controlled Foreign Companies rules (CFC rules)?
  • Intermediary holding companies may also have to deal with potential national withholding taxes on payments to their parent companies.                                                                           

Increase of foreign withholding taxes

By far the biggest cause of the first uncertainty – the potential increase of withholding taxes – is the OECD, which encourages countries to include anti-tax avoidance measures in bilateral tax treaties. With respect to withholding taxation, especially treaty shopping is affected. The OECD’s goal is that as many existing bilateral tax treaties as possible will be amended by using a multilateral instrument. Negotiations on this ‘super tax treaty’ are still ongoing. The new rules can enter into effect at the earliest on 1 January 2018. As the amendments are subject to domestic ratification procedures in most contracting states, we expect that the rules will enter into effect on a large-scale only from 2019. 

Time to explore impact

This time frame leaves room for European headquarters and intermediary holding companies to explore the impact of the new rules and act accordingly to accomplish tailor-made solutions. What kind of measures against treaty shopping should we consider? The multilateral instrument provides the following options:

  • A principal purpose test, which in general denies a reduction of withholding taxes if this reduction was one of the principal purposes (PPT);
  • A detailed limitation on benefits rule, which denies the reduction of withholding taxes in certain situations (LOB rule);
  • A combined approach of a PPT and a simplified LOB rule.


The PPT, in particular, leaves room for interpretation by the source state applying the tax treaty. A worldwide uniform interpretation seems highly unlikely. As there is no common understanding of abusive situations, we expect a variety of views by different source states. 

Another recent development that potentially increases the levy of withholding taxes is the introduction of general anti-abuse rules, similar to a PPT, in existing European directives on direct taxation, such as the EU Parent Subsidiary Directive. 

CFC rules

The new European Anti-Tax Avoidance Directive (ATA Directive) is the cause of the second tax uncertainty. The ATA Directive states that all European Member States must introduce CFC rules by 2019 at the latest. The impact of CFC rules depends heavily on the model an EU Member State chooses. The ATA Directive provides an EU Member State with two options:

  • A categorical approach under which the non-distributed income of a foreign CFC will be taxed if it falls within specific categories of passive income, like interest, royalties and dividends.
  • A transactional approach under which the non-distributed income of a foreign CFC will be taxed if it arises from non-genuine arrangements which have been put in place for the essential purpose of obtaining a tax advantage.


In its EU country of residence a headquarter or intermediate holding company may be faced with an immediate taxation of profits of subsidiaries, if such subsidiaries classify as CFC (i.e. passive/low taxed). 

Under the categorical approach the ATA Directive leaves room for EU Member States to provide a substance carve-out. This means that the CFC rules do not apply if the CFC conducts a substantive economic activity supported by staff, equipment, assets and premises. Transfer pricing rules play a major role to determine whether a transaction is non-genuine under the transactional approach. 

Despite the fact that European CFC rules are laid down in the ATA Directive, uniformity throughout the EU is not guaranteed. This is because the CFC rules contain various options and provide only minimum standards. EU Member States are allowed to implement stricter CFC rules. 

If the CFC rules appear not to be manageable for headquarters or intermediary holding companies in an EU Member State, Switzerland could be an alternative. CFC risks are well manageable, for example by establishing a headquarter / holding company in Switzerland.