EU Simplifies Corporate Income Tax

At the same time, a proposal was also made to amend the Directive on Administrative Cooperation (DAC), which governs the exchange of information between Member States.

The core of both proposals is to reduce complexity, differences between Member States and administrative burdens.

Withholding tax

One of the most significant elements concerns the revision of withholding tax rules. The Commission proposes to fully abolish the minimum shareholding requirements, meaning that in principle all dividends, interest, and royalties within the EU would qualify for exemption. At the same time, prior administrative procedures will be abolished and replaced by a system of self-assessment with ex-post controls.

Currently, many companies are still subject to withholding tax on dividends, interest, and royalties within the EU, while this tax cannot always be fully credited in the recipient country. Even when this does not lead to final taxation, the administrative burden can be substantial due to the steps required to obtain exemptions.

If adopted in this form, the proposal would result in significant tax savings and a reduction in administrative burdens for companies with substantial intra-EU payments. It may also reduce the tax burden and administrative costs for companies investing in shares in other EU countries.

An anti-abuse measure is proposed. In situations where the exemption does not result in taxation (for example due to an exempt recipient), the source state must still levy withholding tax or deny the deduction. Because the payer must determine whether the exemption conditions are met, this may increase administrative pressure on the distributing entity.

Adjustment of earnings stripping rules

In the Netherlands, interest deductibility is currently limited to the higher of 24.5% of EBITDA and €1 million. Interest paid to third parties is included. This rule stems from an EU directive allowing Member States certain choices; the Dutch implementation is relatively strict compared to other Member States.

The Commission now proposes a more harmonised regime:

• a mandatory 30% EBITDA limit;
• a mandatory threshold of €3 million (to be indexed annually); and
• an exception for external debt used for own activities.

Importantly, this exception does not apply where funds are on-lent within the group. In such cases, the interest remains subject to the earnings stripping rules.

Relief is also provided in the case of economic shocks. If EBITDA decreases by at least 50%, the restriction on interest deductibility is lifted for that year, meaning that in principle all interest is deductible. Anti-abuse rules are expected to prevent artificial reductions.

For clarity regarding the exact working of the rules in Netherlands, we must wait until the tax bill for the transposition of the rules. Especially for the impact of those rules on a fiscal unity. If, for example, a third party loan is onlend within the fiscal unity, is the external loan still subject to the earnings striping rules or not?

CFC rules and interaction with Pillar 2

The Commission largely removes the options within the CFC rules and prescribes a single mandatory model. The Netherlands already applies this model, so the impact appears limited.

An exemption is introduced for:

• multinationals subject to Pillar 2; and
• SME groups.

This prevents double regulation and disproportionate compliance costs. Groups lose SME status once at least two of the following thresholds are exceeded:

• turnover above €50 million;
• total assets above €25 million; or
• more than 250 employees.

R&D deduction

A new element is an EU-wide framework for the tax treatment of R&D investments. Companies can immediately deduct investments in R&D assets or depreciate them over a maximum of four years. For the Netherlands, the impact on intangible R&D costs is limited, as these are often already immediately deductible. The framework may, however, be relevant for tangible assets such as machinery used for R&D.

Cross-border mergers

The Merger Directive is modernised. New forms of cross-border reorganisations, such as conversion of legal form between Member States, are explicitly included. The impact is expected to be limited, although alignment between Member States may improve and disputes may decrease.

Exchange of information between Member States

The DAC has been expanded multiple times over the past decade (DAC2–DAC9), creating a complex framework. The Commission proposes to codify this into a single integrated system to improve clarity and usability. DAC6 reporting obligations will be reduced, meaning some structures will no longer need to be reported. Companies subject to Pillar 2 are fully excluded from DAC6. For DAC7, the minimum transaction threshold is abolished and the revenue threshold is increased to €3,000, meaning users with only a few transactions may fall within scope more quickly.

Notifications for Country-by-Country Reporting (DAC4) and Pillar 2 (DAC9) will be combined into a single standardised notification. There will be increased focus on the use of tax identification numbers (TINs), supported by a central verification database. Authorities will exchange more data, including from non-tax registers such as real estate or pension registers.

Final remarks

The first elements are expected to apply no earlier than 2028, with phased implementation potentially extending to 2030. The financial impact is significant, with an estimated total burden reduction of €7.9 billion, including €3.3 billion in administrative savings. This may also result in reduced tax revenues for Member States, potentially leading to adjustments during negotiations or increases in other taxes.

Contact

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