On October 25, 2016, the European Commission (EC) published a council directive proposal for Common Corporate Tax Base (CCTB) and a proposal for Common Consolidated Corporate Tax Base (CCCTB). The proposals are based on a relaunch of the earlier CCCTB proposal of 2011.
CCTB
The aim of the CCTB is to harmonize the tax base across member states. In a first phase, the new rules are applicable to all EU companies belonging to a group with consolidated revenue above €750 million (smaller groups may choose to opt-in). The following main elements are part of the CCTB proposal:
- All revenues are taxable except for dividends and proceeds from the disposal of shares held in a participation of at least 10%;
- For depreciation, assets are categorized per asset class with depreciation terms of 8, 15, 25, and 40 years respectively. In addition, a rollover relief mechanism is introduced for replacement assets as well as a pool system for other assets;
- A “super-deduction” of research and development (R&D) expenses is introduced, on top of the current R&D deductible amounts, for R&D expenses up to €20 million. For R&D expenses of €20 million and above, companies are allowed to deduct 25%. In addition, eligible start-up companies without any related parties may be entitled to an enhanced “super-deduction” of 100% of their R&D expenses.
- Allowance for Growth and Investment (AGI) is introduced to stimulate growth and neutralize irregularity between debt and equity financing;
- A General Anti-Abuse Rule (GAAR) is included, allowing tax authorities to ignore “tax advantage” arrangements. The GAAR is enhanced by (i) a switch-over clause, and (ii) CFC rules; and
- An introduction of rules pertaining to hybrid and tax residency mismatches between member states and third countries (see earlier article above).
CCCTB
The aim of the CCCTB is to offer multinationals the option to file a single consolidated corporate income tax return for all their European entities. The following main elements are part of the CCCTB proposal:
- The group companies will interact with one principal tax authority in the EU, based on the location of the parent company;
- Similar to the 2011 proposal, a two-part test with set thresholds is introduced to define the group. Failing to meet the thresholds would result in the company not falling under the group. In addition, the company should meet the thresholds for nine consecutive months. The set thresholds are:
- Control (>50% of voting rights); and
- Ownership (>75% of equity) or rights to profits (>75% of entitlement to profit);
- Formula apportionment to distribute taxable profits amongst member states is left unchanged and consists of labor, assets, and sales (equally weighted). The formula apportionment will also be used to determine the distributable proceeds of withholding taxes on interest and royalty payments.
The proposals need to be approved unanimously by all member states with the aim for member states to incorporate the CCTB rules by December 31, 2017 and CCCTB rules by December 31, 2019 into their local legislations. Once incorporated, the rules will be effective as of January 1st the following year.
When looking at the initial reactions from member states, it is unlikely the proposal will be accepted by member states in its current form.