EU’s Take on CFC Rules Could Trip Up Multinationals

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By Penny Sukhraj

Sept. 28 — Tax practitioners in Europe are concerned that the European Union’s implementation of Action 3 of the OECD’s BEPS project will lead to a tax bias against countries outside Europe.

Action 3 of the Organization for Economic Cooperation and Development's project to combat tax base erosion and profit shifting concerns strengthening rules for controlled foreign companies. However, European tax professionals—from practitioners to technical experts—fear the EU’s Anti-Tax Avoidance Directive (ATAD) will spur EU countries to adopt even stricter measures due to its minimum-standards framework.

These measures would go beyond those agreed through the BEPS initiative, they said Sept. 28.

“We are concerned with the fact that the way in which the European Union implements the BEPS project Action 3 is creating a tax bias,” Pasquale Pistone, professor at the Vienna Institute for Austrian and International Tax Law, said at a meeting of tax practitioners and lawyers for the International Fiscal Association congress in Madrid.

“To some extent, we are not entirely sure about the compatibility, even with primary European Union law,” Pistone said. “We have to understand that what we do in the European Union has implications for third countries,”

Anti-Tax Avoidance Directive

The ATAD is expected to regulate how EU countries apply CFC legislation. Many member countries already have CFC rules in place, and the directive has the potential to change the conditions under which the rules can apply.

Chairing a panel on EU tax law developments and implications for third countries, Pistone said of his panel that their views may differ but in particular, they all recognize “issues with a possible bias against non-EEA countries,” referring to the European Economic Area.

“If the goal of the directive is to promote a level playing field and to achieve it by means of the directive itself, from the very moment in which the directive sets minimum standards it allows member states to go beyond it,” he said.

Referring to a specific provision of the ATAD, which applies a measure connected with the Estonians’ system and the possibility for taxing profit distribution, he suggested that the resulting system “may be more complicated.”

“We are even more concerned about this when it comes to CFC legislation because there are specific possibilities to depart from the standard to apply stronger measures in connection with third countries—non-EEA countries,” he said.

Action 3 of the BEPS project recognizes that groups can create low-taxed nonresident affiliates to which they shift income, and that these affiliates may be established in low-tax countries wholly or partly for tax reasons. CFC rules combat this by enabling jurisdictions to tax income earned by foreign subsidiaries where specified conditions are met.

Intra-EU and Third Countries

Robert Danon, a professor at the University of Lausanne, Switzerland, noted that the ATAD on several occasions indicates distinctions between intra-EU situations and third countries.

“Those distinctions are not always consistent—they exist, for example, in the field of CFC legislation. But when you look at the general anti-avoidance rule, the GAAR, you see that there is opinion that this rule should apply in a uniform fashion,” Danon said. “You have the feeling that there is a discrimination vis-a-vis third countries, whereas in other areas you have the feeling that we’re going for a uniform application of the anti-avoidance rule.”

The issue throws up the potential for challenges to the rules, especially around CFC legislation application, where the distinctions between EEA and non-EEA countries aren't mandatory.

“Member states can choose to discriminate or not to discriminate against third countries, which shows that in fact the minimum framework would not necessarily require discrimination,” Danon said.

Stricter CFC Rule Applications

Noting that EU member states may choose to adopt stricter measures, Danon said the question that then arises is whether the ATAD will modify or amend existing CFC legislation with the EU’s internal market jurisdictions.

“We know that European member states” without CFC legislation “will have to do something in accordance with the framework, but the question is whether states such as France, Italy or Germany, for example—will the ATAD affect these CFC legislations?”

Practical Questions

Danon said that in comparing an EU context with a third-country scenario, three practical issues might arise for multinationals and their subsidiaries under CFC legislation. In each case, he recommended checking the local legislation.

“What happens if you have a subsidiary that is taxed at a general rate which is too low but the taxpayer chooses to increase voluntarily the tax rates? Does this work? Does this allow you to avoid the CFC legislation?”

According to the panel, current experience varies among states, with some allowing avoidance of the CFC rules while others don't.

Danon said companies will have to consider how such a voluntary increase of the tax liability could be reconciled with the general anti-avoidance rule in the ATAD, or the domestic member state’s general anti-avoidance principle.

The second issue facing companies relates to cases in which multinationals have a subsidiary with international activity, and find that in some states there are carve-outs with provisions for third countries, “meaning that it is possible to escape the CFC legislation even when you have a subsidiary in the third country.”

“But then the critical question is to what extent is it necessary for the company, the subsidiary, to act on the local market—and there if you compare recent development and selected member states, differences still exist,” he said. “Answers may still be different.”

Controlled Foreign Company

Multinationals will also need to consider the possibility of not being able to avoid CFC rules at all.

“Would the state of the parent company allow you to take advantage of the incentives that would have been given had the subsidiary been a resident of the parent company?” Danon asked.

Danon put forward the example of a subsidiary with IP income that is picked up at the parent level. “Could the parent company take advantage of a patent box regime, for example, if this incentive exists in the state of residence of the parent? This, of course, changes the outcome for the group and the taxpayer. So there are a number of uncertainties,” he said.

To contact the reporter on this story: Penny Sukhraj in Madrid at

To contact the editor on this story: Molly Moses at

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