Direct taxes in the EU and the Taxation Omnibus. Less WHT, simpler ATAD, and new rules for capital groups

One of the most significant proposals is the amendment to the Parent-Subsidiary Directive (PSD).

Currently, the EU's dividend withholding tax exemption requires a certain level of equity participation by the company receiving the dividend in the subsidiary. The Commission proposes to remove this restriction. The amendment would extend the withholding tax exemption to dividends and other profit distributions between qualified entities in the EU, regardless of the level of equity participation. At the same time, the minimum holding period as a condition for applying the preference would also be removed.

This is an important change, especially for structures in which the company receiving the dividend holds a minority stake.

Pension funds also in the scope of PSD

The bill goes even further. The WHT exemption is to be extended to pension institutions, regardless of their legal form. The solution is also to cover entities participating in certain social security systems, with a specific rule applied to the current tax treatment.

In practice, this means trying to limit the situation in which the legal form of the pension investor itself becomes an obstacle to the application of the WHT exemption.

The end of mandatory pay-and-refund?

Another change concerns the pay-and-refund procedure. The PSD draft proposes abolishing the requirement for a prior decision or administrative verification of exemption conditions at the time of payment. Therefore, the taxpayer would be able to assess whether the conditions have been met and apply the exemption, with the review being possible later, i.e., ex post. The draft also provides for a mechanism for claiming a refund of WHT if the tax has been collected, as well as appropriate deadlines for filing a claim.

This is a significant change for the smoother and more organized WHT process. While the administrative burden does not disappear completely, it shifts from "obtain approval before payment" to "have the proper documentation and be ready to demonstrate eligibility for exemption."

For finance departments, this means the need to streamline procedures before the new regulations come into effect. The mere fact of abandoning pre-clearance does not mean abandoning the review of the exemption's validity.

A similar approach has been taken for the Interest and Royalties Directive (IRD). The Commission proposes removing the minimum capital requirement for the WHT exemption. This means that interest and royalty payments between EU companies could benefit from the exemption regardless of the level of capital ties between the payer and the payee.

This may be important especially in groups where financing or use of intellectual property does not take place exclusively between entities in a typical "parent company - daughter company" relationship.
At the same time, the bill removes the option of making the exemption conditional on a prior administrative decision. As with the PSD, the emphasis shifts from pre-payment inspections to the taxpayer's responsibility for accurately assessing the conditions.

The greatest practical significance may not be the removal of the shareholding threshold itself, but rather a change in the exemption verification model. Eliminating pay-and-refund is a step in the right direction and will reduce documentation requirements before paying WHT receivables. However, entrepreneurs should prepare for more frequent inspections ex post – points out Szymon Lipiński, Senior Tax Consultant at Crowe Poland.

However, the simplification of the IRD is not intended to completely eliminate these protective mechanisms. The bill provides special protection for payments to jurisdictions that do not impose corporate income tax (CIT) or apply a zero nominal CIT rate to interest and royalties. If the source country does not collect WHT, it will have to apply one of two mechanisms: collect WHT or deny the tax deduction for the financing or licensing costs.

The solution is intended to prevent situations where income is effectively untaxed in both jurisdictions. Importantly, the draft provides exceptions related to Pillar Two and the qualified domestic equalization tax. This means that applying the safeguard will require analysis not only of the cash flow but also of the recipient's tax regime.

The Taxation Omnibus combines the PSD and IRD changes with solutions already known from the FASTER directive. FASTER is primarily intended to streamline procedures for refunding WHT on investments in publicly traded securities. The problem was that current regulations allow member states to restrict fast-track refund procedures when a taxpayer claims full exemption from WHT.

The project aims to change this. FASTER will also be able to be used for returns related to the PSD and IRD. In practice, this means the possibility of broader use of fast-track procedures in situations where the EU exemption has been applied or should have been applied, but WHT has been collected.

For investors, this means a potentially shorter path to recovering funds, and for capital groups – a more coherent system for dealing with WHT.

R&D tax relief: a common standard for fixed assets

The Commission proposes to introduce into ATAD a common minimum standard for accounting for expenditure on tangible assets used in research and development activities.
Qualified expenses for installations, machinery, and other tangible fixed assets used directly for R&D would be fully deductible from the tax base. Taxpayers could make the deduction in the year the expense was incurred or choose one of the four subsequent years. At the same time, the asset would have to be used for for at least three years.

This solution should be seen as an attempt to reduce differences between EU countries. Currently, tax rules for depreciation of such assets are determined at the national level. The Commission wants to introduce a common basis for investments in tangible assets related to R&D.

For Polish enterprises, this may be particularly interesting in the case of investments in laboratories, pilot lines, specialized machines or technical infrastructure used in research and development projects.

Financing costs: 30% of EBITDA as common level

The project also provides for significant changes to the interest limitation rule, i.e. the rules limiting the inclusion of debt financing costs in tax costs.

The Commission proposes that the basic limit be 30% of EBITDA, and that Member States should not be allowed to set a more restrictive level within this framework. At the same time, a mandatory de minimis threshold of €3 million, indexed to inflation (currently PLN 3 million in Poland), will be introduced.

The bill also excludes certain low-risk loans from unrelated third parties from the cap. This primarily applies to financing that is not intended to shift profits within a group, but to actually finance the company's operations.

Another interesting solution is to provide protection in the event of a sudden deterioration in results. If a taxpayer's EBITDA falls by at least 50% in a given year compared to the previous year, the taxpayer would be entitled to a full deduction of excess financing costs in that year.

At the same time, the project provides for the mandatory use of certain group mechanisms and the carry-forward of undeducted financing costs to subsequent periods. From an entrepreneur's perspective, it is not just the 30% limit itself that is important, but the entire structure of the rule. For groups with high levels of financing, the analysis will need to encompass, among other things, the debt structure, financing source, EBITDA, group rules, and the possibility of using deductions in subsequent years.

CFC: Pillar Two's increased importance and SME exclusion

In the area of CFCs, i.e. the rules on controlled foreign companies, the Commission proposes several changes.

First, member states would be required to apply a single model, Model A, based primarily on passive income. The current option of choosing Model B would disappear. The Commission points out that the current diversity of national implementations increases uncertainty and compliance costs.

Second, certain entities covered by Pillar Two, as well as SMEs and small and medium-sized groups, are to be excluded from the CFC regime, subject to specific cases. The Commission justifies this approach, among other things, by the limited risk of aggressive tax planning in smaller entities and the overlap between CFC mechanisms and the global minimum tax. This is one example of a broader trend: EU regulations are intended not only to add new safeguards but also to limit situations in which different tax regimes duplicate the same functions.
Hybrids: Remove imported hybrid mismatches

The draft also proposes repealing regulations on so-called imported hybrid mismatches. The Commission points out that identifying such structures often requires information on transactions and tax arrangements used outside the EU, to which tax authorities may have limited access. From a business perspective, this may mean simplifying the analysis of certain cross-border financing structures.

GAAR: clarifying the scope of the anti-avoidance rule

An important correction also concerns GAAR, i.e. general anti-abuse rule. The Commission wants to clarify that the clause covers all taxes to which companies are subject. In particular, it aims to remove any doubt as to whether the scope of the GAAR also covers WHT and the Pillar Two-related top-up taxes.

Therefore, this is not a completely new anti-abuse mechanism, but primarily a clarification of its scope.

The changes also include the Tax Merger Directive, i.e. EU rules on the tax neutrality of cross-border reorganisations.

Simplified mergers and divisions by carve-out/separation are to be included in the scope of the directive. Cross-border conversions may be even more important. The proposal also extends tax neutrality to certain cross-border conversions. In practice, this could avoid immediate taxation of unrealized gains on assets if they remain tax-linked to the departure country.

This is important in the practice of international groups, because corporate law and tax law have not always developed at the same pace.

The changes to the Dispute Resolution Mechanisms Directive are primarily intended to simplify the procedure for resolving double taxation disputes.

One of the most significant changes involves replacing the vague requirement to submit complaints "simultaneously" with a specific 30-day window for filing them. The bill also provides for the taxpayer to be able to correct any formal deficiencies.

The Commission also wants to enable a faster transition to the arbitration phase. If the competent authorities know they are unable to reach an agreement, they will not have to wait until the end of the standard mutual agreement procedure period but will inform the taxpayer without undue delay.

The draft also provides for the possibility for the Council to issue implementing acts specifying detailed technical and procedural rules concerning, among others, complaints, mutual agreement procedures and arbitration.

For companies operating in many EU countries, this may mean greater procedural predictability.

The most important change is not limited to a single provision. The package's significance stems from the Commission's attempt to simultaneously simplify several areas where cross-border settlements are currently costly or formally complex.

The first area worth considering is WHT. Abolishing the shareholding thresholds in the PSD and IRD could expand the scope of entities eligible for withholding tax exemption. Abolishing prior authorization could further accelerate the disbursement process. The Commission estimates that extending the WHT exemption under the preferred option alone could generate approximately €5.34 billion annually for businesses in the form of lower compliance and financing costs.

Secondly, changes in financing may be significant. For companies using loans, bonds, or external financing, the mandatory threshold of €3 million, the exclusion of certain loans from unrelated entities, and a protective mechanism in the event of a sharp decline in EBITDA will be particularly important.

Third, Pillar Two groups should review the relationship between the minimum tax and CFCs. The Commission is clearly seeking to reduce overlap between these regimes.

Fourth, companies investing in innovation can gain more predictable rules for accounting for tangible assets used in R&D.

Finally, groups planning mergers, divisions or cross-border transformations should monitor proposals for amendments to the TMD, as the scope of operations covered by the principle of tax neutrality may be expanded.

In the case of WHT, it is worth analysing all dividend, interest and royalty payments made between EU entities and checking how the possibility of applying the exemption would change after the removal of the shareholding thresholds.

It is also worth reviewing current WHT documentation and procedures. If the EU model does shift verification from pay-and-refund to ex-post verification, the importance of properly documenting compliance with exemption criteria will increase.

In the ATAD area, a good step would be to simulate the impact of the proposed rules on financing costs and CFC. Companies conducting R&D projects should identify investments in tangible fixed assets that could potentially be covered by the new mechanism.

For groups planning cross-border reorganisations, the comparison of planned operations with the proposed TMD extension will be particularly important.

The Taxation Omnibus is not just a package of technical adjustments. It is an attempt to restructure several elements of the EU's direct tax system so that it relies less on national procedures and more on common EU rules.

Three directions of changes may be of greatest importance for businesses: broader exemptions from WHT without shareholding thresholds, simplification of ATAD and extension of tax neutrality of cross-border reorganisations.

For now, however, these are just proposals. The legislative process is still ongoing, and the final shape of the regulations may still change.

For businesses, the most important question today is not “when will the new rules come into force?”, but which processes and transactions in our group would change if the Commission proposal were adopted in its current form?