Candice Horbacz
Brussels, Belgium – November 4, 2026 – The European Commission’s ambitious Tax Omnibus proposal, designed to streamline and modernize tax frameworks across the European Union, is currently under intense scrutiny from stakeholders, with Tax Foundation Europe submitting detailed testimony to the European Commission today. Head of Policy, Martha Caziero, outlined critical concerns regarding the proposal’s potential impact on economic growth, competitiveness, and fiscal equity among Member States. The testimony, while not exhaustive, zeroes in on two pivotal areas: the proposed elimination of holding requirements for withholding tax exemptions under the Parent-Subsidiary Directive (PSD) and Interest and Royalty Directive (IRD), and the ambiguous nature of the Anti-Tax Avoidance Directive (ATAD) amendments concerning minimum versus maximum harmonization.
Background to the Tax Omnibus Proposal
The European Commission’s Tax Omnibus proposal represents a significant legislative effort aimed at creating a more efficient, resilient, and fair tax system within the EU. Introduced earlier in 2026, the proposal seeks to address various facets of direct taxation, from simplifying cross-border investment flows to strengthening anti-tax avoidance measures and fostering research and development. This initiative comes amidst ongoing global discussions on international tax reform, including efforts by the OECD/G20 Inclusive Framework, and the EU’s persistent drive to deepen its Single Market. The primary objective is to reduce administrative burdens, eliminate tax obstacles, and prevent aggressive tax planning, thereby enhancing the EU’s overall economic competitiveness and attracting investment. The proposal’s journey through the European Council, where Member States deliberate and negotiate its final form, is a complex process, often marked by divergent national interests and fiscal priorities.
Reforming Cross-Border Investment: Withholding Tax Exemptions
A central tenet of the Tax Omnibus proposal involves significant amendments to the PSD and IRD, directives originally established to prevent double taxation on intra-EU dividend, interest, and royalty payments between associated companies. Currently, these directives stipulate minimum shareholding thresholds – 10 percent for the PSD and 25 percent for the IRD – for companies to benefit from withholding tax exemptions. The proposal aims to abolish these thresholds entirely, extending the exemption to so-called "portfolio investments" (i.e., holdings below these percentages).
The current system, while designed to foster integration among corporate groups, leaves significant gaps. For shareholdings not covered by the directives, Member States retain the freedom to levy withholding taxes on outbound payments. This often leads to definitive double, and in some cases, triple taxation within the EU. For dividend income, a distributing company’s profits are taxed by its state of residence, followed by a withholding tax from the distributing company’s state on the dividend payment, and finally, the receiving company’s state of residence taxes the dividend again as part of its corporate income. Similarly, interest and royalty payments can face double taxation: a withholding tax at source and a corporate income tax in the recipient’s state.
Limits of Existing Safeguards
While EU fundamental freedoms and bilateral Double Tax Conventions (DTCs) offer some protection against such definitive double taxation, their efficacy is limited. EU law mandates equal treatment for resident and non-resident taxpayers in comparable situations, narrowing Member States’ ability to levy outbound withholding taxes, particularly for dividends. For instance, a Member State exempting domestic dividends from corporate income tax cannot simultaneously levy a withholding tax on dividends paid abroad without potentially violating EU law. However, for interest and royalties, the scope for levying withholding tax remains broader, as these are typically deductible expenses for the payer and income for the recipient.
DTCs further constrain national taxing powers by limiting withholding tax rates and obliging residence states to grant credit for taxes paid abroad. Yet, even with these safeguards, instances of definitive double taxation persist within the internal market. Complex "triangular" or multi-country scenarios, along with differing interpretations of treaty terms by national authorities, often create loopholes that existing mechanisms cannot fully resolve.
Administrative Burdens and Investment Deterrence
Beyond the legal complexities, the administrative realities of claiming withholding tax exemptions or refunds present a tangible barrier to cross-border investment. The testimony highlights that while definitive withholding taxes might not directly deter investment location decisions, the associated administrative requirements and time lags for obtaining refunds certainly do. Member States often apply higher statutory withholding tax rates initially, pending verification of complex requirements, leading to significant delays in processing refunds. Research indicates a negative correlation between high recovery costs for over-withheld taxes and investment decisions, thereby hindering the free movement of capital within the internal market.
The Rationale for Abolishing Holding Requirements
Tax Foundation Europe argues that the distinction between "direct" (controlling) and "portfolio" investments for withholding tax exemption is not inherently convincing. The avoidance of double taxation is equally justified for both categories, as any dividend or interest payment is taxed at least twice, regardless of the percentage of investment. The OECD Model Convention’s rationale for more beneficial treatment of direct holdings – to avoid recurrent taxation and facilitate international investment – applies equally to portfolio investments.
A more compelling argument for the current direct holding exemption concerns tax neutrality between establishing a subsidiary and operating through a permanent establishment (PE). Since transfers within the same legal entity (PE and head office) are not subject to dividend withholding tax, exempting dividends from subsidiaries prevents a tax incentive for businesses to choose a PE over a subsidiary. However, the testimony argues that extending this exemption to all dividend payments, including portfolio investments, would still preserve neutrality while eliminating an additional layer of taxation for portfolio investors.
Asymmetrical Revenue Impact and Proposed Solutions
The proposed abolition of holding requirements, while beneficial for market integration, raises significant fiscal concerns among Member States. The change would reallocate taxing rights, shifting revenue from "capital-importing" countries (which currently collect withholding taxes at source) to "capital-exporting" countries (which currently provide credits for those taxes). Eurostat data from 2026 shows a clear divide: countries like Germany, Italy, and Sweden are net exporters of portfolio investments, while Luxembourg, France, and the Netherlands are net importers. This implies negative revenue impacts for capital-importing countries that currently levy withholding taxes, and positive impacts for capital-exporting countries that would no longer need to grant foreign tax credits.
To mitigate this asymmetrical impact, Tax Foundation Europe proposes two alternative solutions:
- Revenue-Sharing Clause: Inspired by the now-repealed Savings Directive, a revenue-sharing mechanism could be inserted into the directives. Capital-exporting countries that gain revenue from no longer crediting foreign withholding taxes would transfer all or part of that gain to capital-importing countries that lose revenue. This mechanism could use a statistical formula based on annual returns on aggregate equity and debt assets, applying average EU rates. For dividends, a rate of 2.34 percent is suggested, approximating the average maximum withholding tax consistent with CJEU case-law. For interest and royalties, a 6 percent rate is proposed, based on average DTC-based withholding tax rates among EU Member States. These rates and classifications would be updated annually.
- EU Own Resource: Alternatively, the amounts forgone by capital-importing countries could be treated as an EU own resource, financing common EU expenditures. Capital-exporting countries would transfer amounts corresponding to their former foreign tax credits to the EU budget, making the operation revenue-neutral for them compared to the status quo. While capital-importing countries would lose direct revenue, they would benefit collectively from the financing of common EU projects, and the new resource would lower their GNI-based own resource quota. This approach offers a clearer EU-wide distributional rationale.
Clarifying ATAD: Minimum Standard vs. Maximum Harmonization
The second major area of concern pertains to the Anti-Tax Avoidance Directive (ATAD), which was initially designed as a minimum standard, allowing Member States to implement stricter measures if compliant with EU Treaties. The Tax Omnibus proposal introduces ambiguities that threaten this foundational principle.
CFC and Interest Limitation Rules: The proposal’s amendments to the Controlled Foreign Company (CFC) provision and the interest limitation rule use mandatory language ("the Member States shall") for certain exclusions, while Article 3 of ATAD still states it’s a minimum standard. This creates conflicting signals: are these new provisions exhaustive, or can Member States still go further? This lack of clarity undermines harmonization efforts, leading to diverse national interpretations and negatively impacting legal certainty and the EU’s tax system competitiveness. Tax Foundation Europe recommends amending ATAD Article 3 to clarify that the Directive establishes a minimum standard "unless otherwise provided," and to explicitly distinguish between mandatory ("shall") and optional ("may") rules within the CFC provision.
R&D Full Expensing: The proposal introduces a new R&D full expensing provision as a minimum harmonization measure, requiring Member States to allow taxpayers to deduct qualifying R&D capital expenditure in the year of acquisition or within four years. However, Member States are concerned about how to assess the equivalence of their existing, often varied, domestic R&D incentives against this new provision. The principle of full expensing aims to eliminate the erosion of deduction value due to inflation and the time value of money, thereby lowering the cost of capital and incentivizing innovation.
To address the equivalence concern, the testimony suggests that a clear criterion, such as the net present value of deductions allowed, be used. If a domestic rule allows the taxpayer to recover at least the real value of its capital investment, it should be considered equivalent. Examples include neutral cost recovery rules or certain super deductions. Without a clear definition of equivalence, the provision risks failing its harmonization goal and potentially not genuinely removing obstacles to the internal market, thus raising questions about its legal basis under Article 115 TFEU. Clarity is crucial to ensure that the provision genuinely fosters a more uniform and competitive environment for R&D across the EU.
Broader Implications for EU Competitiveness and Legal Certainty
The issues raised by Tax Foundation Europe are not merely technical tax matters; they directly bear upon the functionality of the EU’s Single Market, its attractiveness to investors, and the stability of its legal framework. Uncertainty in tax rules, whether from conflicting signals on harmonization or complex administrative hurdles, deters cross-border investment and hinders economic growth. The Commission’s stated goal of enhancing competitiveness and reducing tax obstacles can only be achieved if the proposals are clear, equitable, and implementable without creating new complexities or unintended fiscal consequences.
Conclusion and Outlook
Tax Foundation Europe concludes that the Tax Omnibus proposal, while broadly favorable to the internal market’s functioning, requires significant refinement. The elimination of holding thresholds for withholding tax exemptions is a positive step towards a more integrated market, but it must be coupled with clear solutions for mitigating asymmetrical revenue impacts among Member States, such as a statistical revenue-sharing mechanism or the establishment of an EU own resource. Furthermore, the ATAD amendments necessitate greater clarity to ensure that the directive’s character as a minimum standard is preserved where intended, and that mandatory provisions are unequivocally defined. For the R&D full expensing provision, a precise definition of equivalent domestic regimes, based on criteria like the real value of deductions, is essential to achieve its harmonization objectives and genuinely support EU innovation. As discussions continue in the Council, addressing these legal and fiscal challenges will be paramount to realizing the full potential of the Tax Omnibus proposal for a more competitive and coherent European Union.
