4.3.6 Interim conclusion: a group approach in EU directives

The table below gives an overview of the directives that have been discussed in this chapter:

In the EU directives discussed, the individual entity remains the starting point and no group approach is hence applied as such. In various directives a form of a group approach is used to make sure there is not too much or not enough tax.

In designing tax treaty rules that aim at stimulating cross-border investments for groups of companies various lessons can be learned from EU directives. The PSD applies a group approach with the aim to avoid juridical and economic double taxation, whereas the OECD MTC solely aims to avoid juridical double taxation with respect to dividend payments. However, given the objectives and scope of the OECD MTC, and from a more economic perspective, it seems logical to provide for PSD-like benefits in group situations. The juridical double taxation with respect to dividends is not effectively solved under the OECD MTC. In order to encourage the grouping together of companies and in order to avoid juridical double taxation, it could be considered to include an exemption from withholding tax on dividends in the OECD MTC if a certain minimum holding percentage is met. Additionally, with a view to eliminate economic double taxation in group situations, a change in the distributive rule, or an exemption or credit method at the level of the recipient of the dividends might be advisable.

In the IRD a group approach is applied aimed at eliminating juridical double taxation on interest and royalty payments. With a view of fully eliminating juridical double taxation on interest in group situations, in line with the IRD, an exemption from withholding tax on interest could be an option for the OECD MTC.

The MD aims to remove tax barriers with respect to reorganizations. To remove tax obstacles concerned with reorganizations on a treaty level, in line with the MD, a reorganization clause might be advisable with a view to stimulate cross-border investments and to eliminate both juridical and economic double taxation in situations that are not fully covered in the current treaty framework.

The PSD, IRD and MD are all in essence positive for taxpayers as tax obstacles that can hinder cross-border investments for groups of companies are fully or partially eliminated. The directives are thus aimed at making sure there is not too much tax. In this regard, however, it should be kept in mind that group situations easily provide tax avoidance opportunities with respect to dividend, interest and royalty payments, as well as reorganizations.

The ATAD is, in contrast to the PSD, IRD and MD, in general unfavourable for taxpayers. The anti-abuse provisions contained in the ATAD mainly aim to target situations where there is not enough taxation in a group situation. As tax treaties generally do not revolve around the answer to the question whether payments are deductible or not and whether they are effectively taxed or not, provisions similar to the ATAD anti-abuse provisions are generally not included in the OECD MTC. The only provision that is somewhat similar to an ATAD provision is the PPT. In my view there is already a group approach underlying the PPT, which makes an amendment in this respect unnecessary. Apart from that, it could be considered to introduce rules on exit taxes and CFC legislation in the OECD MTC to eliminate double taxation.

To be able to truly eliminate double taxation of dividends, interest, royalties and reorganizations within groups of companies while ensuring that no tax avoidance opportunities exist, an overarching solution would be required. This also applies for combatting the tax avoidance possibilities that the ATAD aims to tackle on a treaty level with respect to interest limitation rules, exit tax rules, CFC rules and hybrid mismatches. The root cause for the fact that double taxation occurs in group situations, as well as that tax avoidance is possible, is the fact that a separate entity approach is applied. Therefore, an overarching group approach is required to rule out both double taxation and tax avoidance possibilities. To be able to better reflect economic reality, a comprehensive new approach would be required which regards the group of companies as a single taxpayer. This approach will be outlined in the following chapters.