The Taxation Omnibus introduces amendments to the Parent-Subsidiary Directive, Interest and Royalties Directive, Tax Merger Directive, Anti-Tax Avoidance Directive and Dispute Resolution Mechanisms Directive, together with a targeted amendment to the FASTER Directive on withholding tax relief (Proposal). This initiative reworks rules that were adopted at different points in time and that, taken together, have grown complex, overlapping and in places out of line with more recent international developments, in particular the global minimum tax under Pillar Two. 

The Proposal will now be submitted to the Council for adoption. Based on its current wording, Member States will have to adopt the Proposal ultimately by 31 December 2028 and generally apply the provisions as of 1 January 2029. Most changes to the Parent-Subsidiary Directive and the Interest and Royalties Directive as well as the mandatory safe harbour of the interest deductibility limitation rule apply as of a later date. 

Below, we set out the background and the key changes of the Proposal.  

Background

In recent decades, the EU has adopted a broad range of direct tax directives aimed at facilitating cross-border activities, preventing tax avoidance, and eliminating double taxation. While these instruments have played a significant role in strengthening the EU market, the Commission observes that their cumulative development, combined with divergent national implementation and evolving international tax developments, has significantly increased the complexity of the EU tax framework and the compliance burden for cross-border businesses.  

The aim of the Taxation Omnibus is therefore to simplify and streamline the existing framework while preserving the original objectives and the level of protection against tax avoidance. Hence, the Proposal supports the Commission’s broader objective of enhancing the EU’s competitiveness. 

Key changes 

The Parent-Subsidiary Directive (PSD) exempts dividends and other profit distributions paid by subsidiaries to parent companies in other EU Member States from withholding tax at source and eliminates double taxation at the level of the parent. The Commission considers the minimum-holding condition and divergent upfront procedures to be sources of inconsistency and unnecessary cost. The following main amendments are proposed to apply as of 1 January 2037: 

  • The 10% minimum holding requirement would be removed. Distributions between companies in the EU may benefit from both a withholding tax exemption and a participation exemption regardless of any level of participation. The option to substitute a voting-rights criterion for a capital criterion is also eliminated to ensure more uniform application.   
  • The scope of the PSD is extended to explicitly cover pension funds, irrespective of their legal form. Pension funds would qualify for the benefits of the PSD through a derogation from the subject-to-tax condition. The explicit inclusion of pension funds in the scope of the PSD would remove significant tax obstacles to cross-border investments by pension funds. 
  • The option for Member States to disallow deduction of charges relating to the shareholding is limited to cases where there is a relevant holding of at least 10%. 
  • Member States may no longer require prior authorisation or administrative procedures to verify eligibility for the exemption at the time of distribution. Eligibility becomes self-assessed by the taxpayer, subject to ex-post controls by the relevant authorities and the application of anti-abuse rules.  
  • Where withholding tax is withheld at source (for example because eligibility cannot be verified upfront), Member States must, in line with the Interest and Royalties Directive, ensure refund within one year following due receipt of the application and such supporting information it may reasonably ask for. The minimum length of the period to apply for a refund must be two years from the date of distribution. 
  • For publicly traded securities, the FASTER directive procedures will be made available. 

Finally, as of 1 January 2029 the annex to the PSD listing the company forms eligible for the PSD is updated and the Commission is empowered to further amend the list via delegated acts.  

The Interest and Royalties Directive (IRD) exempts cross-border interest and royalty payments between associated companies (requiring a minimum 25% holding) from withholding tax in the source state. As with the PSD, the Commission considers that procedural barriers and legal uncertainty have arisen in practice, and that the limited material scope no longer fits today’s economic reality. The following main amendments are proposed to apply as of 1 January 2037: 

  • The concept of associated company, including the 25% holding requirement, is removed as a condition for the exemption. As a result, interest and royalty payments between companies in the EU may benefit from the exemption regardless of any level of participation between them. The IRD is also amended to apply to payments attributable to the activities of a permanent establishment, irrespective of whether those payments are tax-deductible in the Member State where the establishment is situated. 
  • Mirroring the proposed amendments to the PSD, Member States will no longer be permitted to require prior authorisation or administrative procedures to verify, at the time of payment, whether the conditions for the exemption are met. Eligibility becomes self-assessed by the taxpayer, subject to ex-post controls by the relevant authorities and the application of anti-abuse rules.  
  • For publicly traded securities where the investor is unknown to the paying company, the Proposal instead routes relief through the FASTER directive procedures. 
  • To prevent the proposed broader exemption from producing double non-taxation, Member States must either levy withholding tax or deny deductibility at source where the recipient is established in a jurisdiction where no corporate income tax is levied or where a zero rate is applied on interest and royalty flows. This safeguard does in principle not apply where the recipient is subject to a qualified domestic top-up tax (QDMTT), or is part of an MNE group within the scope of the Pillar Two Directive (or, for third countries, the OECD GloBE Model Rules), which reflects the interaction with the global minimum tax. 

Finally, as of 1 January 2029 the annex to the IRD listing the company forms eligible for the IRD is updated and the Commission is empowered to further amend the list via delegated acts. 

The Tax Merger Directive (TMD) defers taxation of capital gains arising from certain cross-border reorganisations – mergers, divisions, transfers of assets and exchanges of shares – until the assets are actually disposed of, so that restructurings can take place without immediate taxation. The Commission notes that the scope of the TMD no longer aligns with more recent EU company law, in particular the cross-border operations introduced by the Mobility Directive. The following main amendments are proposed: 

  • The scope and definitions of the TMD are aligned with the Mobility Directive to include a “simplified merger” and “division by separation”, which were not yet covered. The aim is to ensure coherence between the tax framework and company law and to remove the legal uncertainty that the mismatch created. 
  • A new chapter is added covering cross-border conversions, i.e. the cross-border transfer of a company’s registered office and conversion into a legal form of the destination Member State. In line with the neutrality principle, taxation of capital gains arising on the assets of a company undergoing such conversion is deferred until actual disposal, provided the company remains tax resident in the departure Member State or keeps a permanent establishment there with which the assets remain connected. The cross-border conversion may as such not give rise to an exit tax in the hands of the shareholders of the converted company.  
  • Finally, the annex to the TMD listing the company forms that can benefit from the Directive is updated, and the Commission is empowered to adopt delegated acts. 

The Anti-Tax Avoidance Directive (ATAD) sets a common minimum level of protection against base erosion and profit shifting through rules on interest limitation, exit taxation, controlled foreign companies (CFCs), hybrid mismatches and a general anti-abuse rule. The Commission’s evaluation concludes that several of these rules are no longer up to date, have become overly complex, in part overlap with Pillar Two, create disproportionate compliance burdens or legal uncertainty and the risk of not targeting base erosion and profit shifting in a proportionate manner. 

The Taxation Omnibus reworks them and – notably – adds a new framework for the tax treatment of research and development (R&D) expenditure. 

To strengthen the EU’s competitiveness, support innovation and facilitate the green and digital transition, the Proposal intends to promote investment in R&D across the EU market. A new chapter therefore introduces an EU-wide R&D allowance as a minimum standard, allowing full deductibility of qualifying expenditure – broadly capital expenditure on plant, machinery and tangible assets used directly for R&D or to provide R&D facilities. Taxpayers may deduct the expenditure in the year it is incurred or over any of the four subsequent tax periods. To prevent abuse, qualifying expenditure must be used for R&D for a minimum of three years, with balancing-charge rules on disposal.  
  • 30% EBITDA cap made mandatory: Member States may no longer set stricter deductibility thresholds, ensuring consistent treatment across the EU. 
  • Carve-out for low-risk third-party loans: borrowing costs on genuine third-party loans used to fund the borrower’s own activities are excluded from the rule, unless used for on-lending within the group or to fund capital contributions of a group company. These borrowing costs are currently in-scope but pose a rather limited risk on base erosion and profit shifting. 
  • Higher, mandatory safe harbour: the de minimis safe harbour is made mandatory and is beneficially increased to EUR 3 million with automatic annual indexation. Member States are currently free to determine if and to what amount the de minimis safe harbour applies. The mandatory EUR 3 million threshold will apply as of 1 January 2032.  
  • Economic downturn safeguard: no interest deductibility limitation applies for a tax year in which the taxpayer’s EBITDA falls by at least 50%, to avoid a procyclical effect of the rules and companies being affected as a result of economic downturns. 
  • Mandatory group escape: Companies will be allowed to deduct a higher amount of borrowing costs if they can demonstrate that their leverage is in line with that of the group. This group escape is currently optional but will be made mandatory.  
  • Mandatory carry-forward of exceeding borrowing costs: the carry forward of exceeding borrowing costs and unused interest capacity are both made mandatory.  
  • Public-benefit and defence carve-outs: the optional exclusion for long-term public infrastructure is reframed around long-term public-benefit projects. The change in wording is intended to extend the exception to cover a broader range of projects. 
  • Exemption for Pillar Two groups: the CFC rules significantly overlap with the Pillar Two income inclusion rule. The Taxation Omnibus provides an exclusion from the CFC rules for taxpayers in-scope of Pillar Two. A targeted exclusion in principle also applies to groups headquartered in jurisdictions qualifying as a side-by-side regime, currently only the US, provided the CFC is subject to a QDMTT and receives no refund or indirect financial benefit in relation to the tax. 
  • Exemption for SMEs: small and medium-sized groups and standalone undertakings are exempted. Practice has shown that SMEs are only sporadically subject to the CFC rules.  
  • Single model: the ATAD currently provides two options for CFC rules, being Model A targeting specific categories of passive income and Model B targeting non genuine arrangements under a transfer pricing approach. The Commission considers Model B to offer limited added value. It therefore proposes to simplify and harmonise the CFC rules by removing Model B and making Model A the only approach for CFC rules. This implies that various Member States would be required to amend their CFC rules.  

The general anti-abuse rule (GAAR) is reworded to confirm that it applies to all direct taxes to which companies are subject, including withholding and top-up taxes resulting from the Pillar Two Directive.  

The rules on imported hybrid mismatches are deleted, as the Commission considers them excessively complex and burdensome relative to the results achieved.

The Dispute Resolution Mechanisms Directive (DRM) provides mechanisms for resolving cross-border disputes between States when those disputes arise from the interpretation and application of agreements and conventions that provide for the elimination of double taxation. The Commission introduces targeted amendments to address interpretative divergences identified in practice, streamline procedures and improve taxpayers’ access. The following main amendments are proposed: 

  • The Proposal clarifies that where the taxation of more than one person is directly affected by the same question, each person qualifies as an affected person. This should remove uncertainty in multi-entity cases. In these cases, each affected person may submit the complaint only to the competent authority of its Member State of residence, thereby avoiding multiple filings.  
  • To enhance legal certainty, the notion of “simultaneous submission” is replaced by a clear 30-calendar-day submission window, responding to divergent national interpretations.  
  • Procedural failures may lead to rejection of the complaint. However, affected persons will now be allowed to remedy deficiencies regarding the complaint within 30 days and may resubmit a rejected complaint within the overall 3-year time limit. 
  • Where competent authorities agree that no agreement can be reached, they must inform the taxpayer without delay rather than waiting for the two-year MAP period to expire. 
  • Other ongoing procedures do not need to be ended anymore. Instead, these are suspended once a DRM complaint is submitted and terminated only once the complaint is accepted by all competent authorities or the affected person withdraws it. This should ensure taxpayers are not left without protection while avoiding overlapping procedures. 
  • A new provision empowers the Council to adopt implementing acts laying down binding technical and procedural rules. A harmonised statistical reporting framework is introduced, aligned with the OECD framework. 

Impact and next steps  

If adopted, the revisions in the Taxation Omnibus will be very welcome for businesses operating across the EU. The most tangible effects of the Taxation Omnibus are likely to be the broader and procedurally lighter withholding-tax exemptions under the IRD and PSD, the new R&D allowance, the reshaped interest deduction limitation rule, and the alignment of CFC rules with Pillar Two.  

The Taxation Omnibus confirms a trend in the Commission’s tax agenda, focusing on a business-friendly climate and increasing the tax competitiveness of the EU. The Taxation Omnibus can be seen as an attempt to recalibrate existing measures, most of which have been adopted against a different background.  

At the same time, these ambitions are likely to trigger discussions in the Council of the EU. The proposed changes can have material budgetary consequences for Member States. As the adoption of the Taxation Omnibus requires unanimous consent of all Member States, the Taxation Omnibus may change prior to adoption.  

We will continue to monitor the legislative process. Should you wish to discuss what the Taxation Omnibus may mean for your structure or your cross-border operations, please do not hesitate to contact your tax adviser or one of our experts.