The EU Tax Omnibus proposes: fewer formalities, broader exemptions and new incentives for investment

The European Commission has presented a draft directive referred to as the tax Omnibus package. Its main objective is to simplify EU rules on direct taxation, reduce administrative costs for businesses and tax authorities, and strengthen the competitiveness of the internal market. The proposal does not aim to abandon the fight against tax avoidance, but rather tries to make existing regulations more coherent, proportionate and easier to apply.

The changes cover several key areas of EU tax law: withholding tax exemptions for cross-border payments, tax neutrality of reorganizations, anti-tax avoidance rules, the treatment of research and development expenses, and mechanisms for resolving tax disputes between Member States.

1. Broader withholding tax exemptions in the EU
2. FASTER procedures and payments from securities
3. Support for research and development
4. Changes to the limitation on debt financing costs
5. CFC rules, Pillar Two and simplifications for SMEs
6. Less complex hybrid mismatch rules and more up-to-date reorganization rules
7. Tax disputes to be resolved more efficiently
8. Scale of potential savings and timeline

1. Broader withholding tax exemptions in the EU

The changes concerning dividends, interest and royalties paid between entities from different EU Member States may be of the greatest practical importance for many corporate groups. The proposal provides for the removal of minimum shareholding thresholds that currently determine eligibility for exemptions under the Parent-Subsidiary Directive and the Interest and Royalties Directive. In simple terms, this means that an exemption could apply regardless of the level of shareholding held in the paying company.

At the same time, the Commission proposes limiting prior authorization or certification procedures before an exemption is applied. Member States would still be able to carry out subsequent audits and apply anti-abuse rules, including those concerning the beneficial owner of the payment. The direction of the changes should therefore be understood as a move away from overly formalized procedures, rather than as a resignation from verifying entitlement to preferential treatment.

The proposal also includes a safeguard against double non-taxation of interest and royalties paid to jurisdictions that do not levy income tax on this type of income or apply a zero rate. In such cases, the source state would be required to ensure taxation at source or deny the deduction of the cost on the payer’s side, with exceptions including certain situations covered by global minimum taxation.

2. FASTER procedures and payments from securities

In the case of publicly listed securities, the paying company often does not know the final investor, as shares or interests may be held through financial institutions. For this reason, the proposal provides for linking the new exemptions with procedures under the FASTER Directive, so that, where appropriate, mechanisms for quicker refunds or relief at source can be used.

3. Support for research and development

A new element of the package is a common EU preference for selected research and development expenses. Businesses would be able to fully deduct qualifying capital expenditure on machinery, equipment and other tangible assets used directly in R&D activities or used to provide infrastructure for such activities. The deduction could be made in full in the year in which the expense is incurred or in one of the following four tax periods.

This solution is intended to reduce fragmentation among national tax incentive systems and improve the attractiveness of innovative investments in the EU. The proposal also includes safeguard conditions, in particular the requirement to use the assets for R&D purposes for at least three years, as well as adjustment mechanisms in the event of the sale or discontinuation of use of the asset.

4. Changes to the limitation on debt financing costs

The Omnibus package also simplifies the EU rule limiting the deductibility of excess debt financing costs. The 30% EBITDA limit would become a uniform standard across the EU, with Member States no longer able to apply lower thresholds. At the same time, a safe harbour threshold of EUR 3 million would become mandatory and would be indexed annually.

Certain loans from unrelated parties would be excluded from the scope of the limitation, provided they finance the borrower’s own activity and not further group financing. The proposal also provides for a solution mitigating the effects of a sudden drop in profitability: e.g., if a taxpayer’s EBITDA falls by at least 50% compared with the previous year, the interest limitation rule would not apply in that tax year.

5. CFC

The proposal provides for the exclusion from CFC rules of entities belonging to groups covered by global minimum taxation, in order to limit the overlap between two regimes with a similar purpose. In addition, an exclusion is envisaged for small and medium-sized groups and standalone SMEs with a foreign permanent establishment.

An important systemic change is also the departure from one of the two existing CFC models. Member States would be required to apply a uniform approach based on categories of passive income. From the taxpayers’ perspective, this would mean greater predictability, although it will still be necessary to carefully monitor how the new rules are implemented in individual Member States.

6. Less complex hybrid mismatch rules and more up-to-date reorganization rules

The proposal provides for the removal from the ATAD Directive of provisions concerning so-called imported hybrid mismatches. The Commission justifies this by pointing to their significant complexity and limited practical effectiveness. The package also adjusts the directive concerning mergers and divisions of companies to newer EU company law regulations, including in relation to selected cross-border operations. This is intended to facilitate restructurings carried out within the internal market and reduce the risk of tax uncertainty.

7. Tax disputes to be resolved more efficiently

The proposed provisions clarify, among other things, the rules for submitting complaints in cases involving more than one taxpayer, introduce a 30-day window for making notifications to the competent authorities, and aim to reduce the risk of cases being rejected for purely procedural reasons. The objective is to resolve disputes concerning double taxation faster and in a more predictable manner.

8. Scale of potential savings and timeline

According to the impact assessment, the preferred variant of the package could reduce tax compliance costs and related financial costs for businesses in the EU by approximately EUR 6.6 billion annually, of which around EUR 2 billion would relate to recurring administrative costs. The Commission links the largest cost impact to the simplification of withholding tax rules and the reduction of overlaps between ATAD and Pillar Two rules.

The proposal assumes that Member States would adopt implementing provisions by the end of 2028 and, in principle, apply them from 1 January 2029. However, some changes, in particular those concerning selected elements of withholding tax and the safe harbour threshold under the interest limitation rule, would start to apply later.

In practice, however, it is very possible that the first elements of the Omnibus initiative will only become applicable from 2030, due to the long and complex legislative process at both the European Parliament level and the national legislation level.

What does this mean for businesses?

If adopted, the proposal may significantly simplify settlements for groups operating in several EU Member States, especially in the areas of withholding tax, debt financing, R&D and restructurings. However, this will not amount to an automatic “de-formalization” of taxes. Businesses will still have to demonstrate that they meet the conditions for exemptions and preferences, while tax authorities will retain the ability to carry out audits and apply anti-abuse rules.

In practice, it is worth analyzing already now which intra-group flows, financing structures, R&D projects and foreign subsidiaries could fall within the scope of the new regulations. This will make it easier to prepare for the changes and assess whether the planned simplifications will in fact translate into lower costs and reduced tax risk for a given group.