EU Tax Simplification Series #2: How will the EU streamline its anti-tax avoidance rules?

Why revisit ATAD now?

The ATAD sets minimum standards against tax avoidance across the EU. Following the introduction of Pillar Two, the European Commission is proposing several changes to reduce complexity and overlap.

What would change?

The Taxation Omnibus proposes several changes relevant to multinational groups, including:

• Earnings stripping: These rules limit deductions for net borrowing costs by reference to earnings before interest, tax, depreciation and amortisation (EBITDA). EU Member States can currently impose stricter rules than ATAD requires, resulting in differences across the EU. The proposal would remove that flexibility and make the 30% EBITDA limitation, the EUR 3 million safe harbor, group escape and additional carve-outs mandatory. Certain genuine third-party financing would also be excluded. As a result, US groups could generally deduct more interest in EU Member States with stricter rules, including the Netherlands. The overall benefits would depend on each country’s current implementation.
• CFC rules: Pillar Two groups would generally be excluded from the CFC rules. A targeted exclusion would also apply to groups headquartered in a jurisdiction with a qualifying “Side-by-Side” regime (currently only the US), subject to conditions. The CFC rules would therefore have a significantly narrower scope. For US-parented groups, relief may be limited as the relevant CFC must be subject to a qualified domestic minimum top-up tax in its country of residence.
• Hybrid mismatches: The ATAD2 rules counter tax advantages arising from differences in how countries classify entities or financial instruments. The proposal would abolish imported mismatch rules, which can deny a deduction where a payment indirectly funds a hybrid mismatch elsewhere. This would remove a particularly complex element of ATAD2 and should generally simplify documentation requirements, although other hybrid mismatch rules may still affect US groups.
• R&D allowance: The proposal also introduces an EU-wide R&D allowance, allowing qualifying expenditure on tangible assets used directly for R&D to be deducted immediately or in any of the following four tax periods. For US multinational groups investing in tangible R&D assets through their EU operations, this could accelerate deductions and provide more consistent treatment across the EU.

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