Member states will have until 31 December 2018 to transpose the directive into their national laws and regulations, except for the exit taxation rules which will come into force from 31 December 2019.

The directive is part of a January 2016 package of Commission proposals to strengthen rules against corporate tax avoidance. The package builds on 2015 OECD recommendations to address tax base erosion and profit shifting (BEPS), endorsed by G20 leaders in November 2015.

Where targeted rules already exist within EU countries, for example on interest limitation and deductibility, local laws may apply until the OECD reaches agreement on a minimum standard, or until 1 January 2024 at the latest.

The Council said the directive will ensure that the OECD anti-BEPS measures are implemented in a coordinated manner in the EU, including by six member states that are not OECD members. 

‘This new directive aims to protect our domestic corporate tax bases against aggressive tax planning practices that directly affect the functioning of the internal market,’ said Peter Kažimír, minister for finance of Slovakia and president of the Council.

The final wording of the directive does allow for some interpretation, stating ‘to reduce the administrative and compliance burden of the rules without significantly diminishing their tax effect, it may be appropriate to provide for a safe harbour rule so that net interest is always deductible up to a fixed amount, when this leads to a higher deduction than the EBITDA-based ratio.

‘Member states could reduce the fixed monetary threshold in order to ensure a higher level of protection of their domestic tax base.’

There is also more detail on treatment of publicly financed projects and state aid rules. The document states: ‘Without prejudice to state aid rules, member states could also exclude exceeding borrowing costs incurred on loans used to fund long-term public infrastructure projects considering that such financing arrangements present little or no BEPS risks.’

The directive covers all taxpayers that are subject to corporate tax in a member states, including subsidiaries of companies based in third countries. It lays down anti-tax-avoidance rules for situations that may arise in five specific fields:

Interest limitation rules. Multinational groups may artificially shift their debt to jurisdictions with more generous deductibility rules. The directive sets out to discourage this practice by limiting the amount of interest that the taxpayer is entitled to deduct in a tax year.

Exit taxation rules, to prevent tax base erosion in the state of origin. Corporate taxpayers may try to reduce their tax bills by moving their tax residence and/or assets, merely for aggressive tax planning purposes.

General anti-abuse rule. This rule is intended to cover gaps that may exist in a country's specific anti-abuse rules, and thereby enable tax authorities to deny taxpayers the benefit of any abusive tax arrangements that may occur.

Controlled foreign company (CFC) rules. In order to reduce their overall tax liability, corporate groups can shift large amounts of profits towards controlled subsidiaries in low-tax jurisdictions. CFC rules reattribute the income of a low-taxed controlled foreign subsidiary to its - usually more highly taxed - parent company.

Rules on hybrid mismatches. Corporate taxpayers may take advantage of disparities between national tax systems in order to reduce their overall tax liability, for instance through double deductions.

Implementation

The directive was adopted without discussion at a meeting of the Economic and Financial Affairs Council. Political agreement was reached on 17 June 2016, following a silence procedure.

The European Council directive laying down rules against tax avoidance practices that directly affect the functioning of the internal market is available here