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THE STATE OF THE EUROPEAN UNION
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adopt more stringent regulation regarding any
issue addressed in the Directive.
Several of the measures contemplated in the
ATAD are particularly worth mentioning. The
controlled foreign companies rules addressed in
articles 7 and 8 concern multinational compa-
nies that artificially shift profits from their parent
companies located in high tax countries to con-
trolled subsidiaries in others with more favour-
able tax regimes. Control in this context is
deemed as 50 % or more of share capital, vot-
ing or economic rights of the subsidiary. Under
ATAD, a member state in which a parent com-
pany is located has the right to tax any profits
that company has parked in a low or no tax
country and thus recover this otherwise lost tax
revenue.
The exit taxation rule is intended to prevent
companies from relocating high value assets
from member states to no- or low-tax countries
to avoid paying tax in the EU on the profits
these assets generate when sold. This form of
tax avoidance is largely related to the transfer of
patents and other forms of intellectual property
set to deliver high future profits. This rule allows
member states to apply an exit tax on such as-
sets when they are moved from their territory
based on the value of those assets at that time.
Hybrid mismatch rules address situations in
which companies lower their taxes by exploiting
differences in the ways in which countries treat
the same type of income, operation or entity for
tax purposes. For instance, multinational com-
panies aware that what is considered a loan by
one country may be classified as a capital injec-
tion in another country often take advantage of
this mismatch to deduct income related to such
operations in both countries (a practice referred
to as double deduction) or to get a tax deduc-
tion in one country on income that is tax ex-
empt in the country of destination (referred to
as double non-taxation). Article 9 of the ATAD
establishes that in the event of such a mismatch,
the legal characterisation given to a hybrid in-
strument or entity by the member state where a
payment originates shall be followed by the
member state of destination; whereby, in the
context of the example provided above, the op-
eration would be considered a loan in both of
the countries implicated.
Switch-over clauses are another important
type of anti-abuse measure. Member states are
increasingly using foreign income exemptions as
a way of avoiding double taxation. This practice
has unfortunately been used by certain compa-
nies to achieve double non-taxation. Double
non-taxation is most apt to occur in the course
of operations involving the repatriation of divi-
dends and capital gains from foreign subsidiar-
ies.
By taking advantage of instruments availa-
ble under current EU law, multinationals are
often able to bring revenue not previously taxed
or taxed at a very low rate elsewhere into the
internal market without paying their fair share
of taxes in the country to which it is repatriated.
Switch-over clauses resolve this problem by
denying exemptions on transfers from third
countries if the effective tax rate in that country
is less than 40 % of that of the member state in
question.
Although contemplated in the Commission’s
initial proposal, due to a lack of consensus a
switch-over clause was not included in the text
of the ATAD eventually approved by the Council.
A proposal to establish a common consolidated
corporate tax base (CCCTB) for the EU
In addition to the anti-abuse measures enumer-
ated above, in November 2016 the Commission
proposed the establishment of a consolidated