The European Commission has asked the potentially tax aggressive countries such as Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta, and the Netherlands to address features of their tax system that may facilitate aggressive tax planning. The request was followed a recommendation report to change tax practices.
The move is a response to criticisms that no European countries appear on the EU list of non-cooperative tax jurisdictions. In this regard, the European Commission released a report laying out the recommendation for those countries to change their tax aggressive regime.
The individual country reports call on Ireland, the Netherlands, Cyprus, Luxembourg, and Malta to address features that may facilitate aggressive tax planning. In particular by means of outbound payments. The commission acknowledged efforts made by the Netherlands, especially the announcement of the reform agenda on taxation, including withholding taxes on royalty and interest payments in case of abuse or payments to low-tax jurisdictions.
Ireland has also taken measures to thwart aggressive tax planning. However the commission noted that the limited application of withholding taxes on outbound (i.e., from EU residents to third country residents) royalty and dividend payments made by companies based in Ireland may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.
The report on Malta raises concerns about the country's national interest deduction regime. The scheme’s anti-abuse rules, combined with a generous rate and a stock-based regime, warrant close monitoring to prevent any misuse for aggressive tax planning.
The commission further warned of potential abuse of Cyprus’ Scheme for Naturalization. The Scheme gives access to a low personal tax rate on income from foreign financial assets and does not require an individual to spend a significant amount of time in the jurisdiction offering the scheme. They are also listed by the OECD.
In addition, the commission also scrutinized Cyprus’s national interest deduction scheme as it needs to be closely monitored to prevent any misuse for aggressive tax planning.
As for Hungary, the commission noted the relatively high capital inflows and outflows through special purpose entities, which have no or little effect on the real economy and called on the country to continue simplifying the tax system, while strengthening it against a risk of aggressive tax planning.
The fact that the commission singles out some serious issues in its recommendations is a very clear and very strong message that the commission urges the six countries to change their tax harmful practice. Otherwise they would be added to non-cooperative jurisdiction list. The commission expects EU leaders to endorse the recommendations, which it believes will send a strong signal.
Source: European Parliament
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