COMMISSION EUROPÉENNE SECRÉTARIAT GÉNÉRAL

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1 COMMISSION EUROPÉENNE SECRÉTARIAT GÉNÉRAL Direction F SG-F-1 Affaires horizontales et GRI (Groupe des Relations Interinstitutionnelles) Bruxelles, le 13 février 2017 SI(2017) 36 GRI du 10 février 2017 point 3.3. NOTE À L'ATTENTION DES MEMBRES DU GRI Objet : Proposition de directive du Conseil modifiant la directive (UE) en ce qui concerne les dispositifs hybrides faisant intervenir des pays tiers ("ATAD 2") 2016/0339 CNS ( ) rapport LUDVIGSSON Mmes et MM. les membres du GRI trouveront en annexe une fiche préparée par la DG TAXUD sous l'autorité du cabinet de M. MOSCOVICI et en accord avec le cabinet de M. DOMBROVSKIS. Annexe:

2 GRI MEETING OF 10 February 2016 NOTE TO THE MEMBERS OF THE GRI Subject: Proposal for a Council Directive amending Directive 2016/1164 as regards hybrid mismatches with third countries (ATAD 2) Ref.: COM (2016) 687 Procedure: Adoption by Council by unanimity Council(s): ECOFIN Coreper II Rapporteur: Mr LUDVIGSSON (S&D/SE) Lead parliamentary committee: ECON Former GRI fiche: SI (2016) 471 PURPOSE OF THIS FICHE The draft ECOFIN agenda of 21 February 2016 includes as a possible agenda item a general approach on the Commission proposal amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (ATAD 2). Such proposal, which was adopted by the Commission on 25 October 2016 as part of the Corporate Tax Package, was already discussed at the 6 December 2016 ECOFIN. While there was broad general support for the compromise proposal tabled by the SK Presidency, Member States could not reach an agreement due to three outstanding issues, notably the derogation for hybrid regulatory capital issued by financial institutions, the derogation for financial traders and the date of implementation. It was concluded that the SK Presidency compromise text would be frozen and passed on to the MT Presidency with a view to finalising the work and reaching an agreement shortly. The MT Presidency has continued working on this file with a view to addressing the remaining issues and reaching a general approach at the February ECOFIN. In view of ECOFIN, it will table a compromise text including: (1) a sunset clause for the derogation for hybrid regulatory capital ending on ; and (2) a postponement of the date of implementation with three years for one specific provision and one year for the other provisions. The Commission services have expressed their concerns that a Member State's decision to make use of the derogation for hybrid regulatory financial instruments in respect of financial institutions could amount to state aid if not adequately justified. Therefore, the MT PR has included in the recitals that any derogation in national laws would be without prejudice to state aid rules. To raise the Member States awareness the implications under State aid law that such a derogation could create, the Commission should make a statement to record its position. Nevertheless, the Commission should support the MT Presidency compromise proposal to make optimal use of the political momentum to make progress on this file. The aim of this fiche is to inform the College on the latest state of play of negotiations with a view to establishing a Commission position in the case that a general approach is reached during the 21 February ECOFIN. It complements the previous GRI fiche which was prepared in view of the December 2016 ECOFIN. 2

3 1. BACKGROUND 1.1.Objective of the proposal The proposal aims at amending the Anti-Tax Avoidance Directive 1 (ATAD) in order to address hybrid mismatches involving third countries, as requested by the ECOFIN Council at the time when political agreement was reached on ATAD. Furthermore, ATAD 2 also addresses hybrid mismatches involving permanent establishments, both in their intra-eu and third-country dimension, hybrid transfers, so-called imported mismatches and dual resident mismatches. 1.2.Date of the Commission proposal Opinion of national parliaments The Commission has so far received six Opinions from national Parliaments. While three are overall positive (General Assembly of the Portuguese Republic, Bundesrat of the Federal Republic of Germany and the Congreso de los Diputados and Senado of the Kingdom of Spain), three others challenge the proposed directive on its compliance with the principle of subsidiarity (Swedish Riksdagen, the Eerste Kamer der Staten-Generaal and the Tweede Kamer der Staten-Generaal of the Netherlands). The Commission will respond to all reasoned Opinions and will, in particular, address the issues raised in those Opinions which challenged its proposal, in the framework of its political dialogue with national Parliaments. In respect of these last opinions, the Commission will act in accordance with its obligations under Protocol 2 of the Treaties. 1.4.Opinions of the Economic and Social Committee and the Committee of the Regions Opinion of European Economic and Social Committee: ECO/422, December 2016 Opinion of the Committee of the Regions (CdR): N.A. 1.5.Opinions of other institutions and bodies None 2. STATE OF PLAY IN THE COUNCIL The SK Presidency brought a compromise text of the proposal to the 6 December 2016 ECOFIN with a view to reaching a general approach. While there was broad general support for the compromise proposal tabled by the SK Presidency, Member States could not reach an agreement due to the following outstanding issues: (1) the derogation for hybrid regulatory capital issued by banks and insurers; (2) the derogation for financial traders; and (3) the date of implementation. It was concluded that the SK Presidency compromise text would be frozen and passed on to the MT Presidency with a view to finalising the work and reaching an agreement shortly. 1 Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (OJ L 193, , p.1). 3

4 The MT Presidency has continued working on this file based on the latest compromise text tabled by the SK Presidency, focusing on the three outstanding issues (the two derogations and date of implementation). The MT Presidency convened five Council Working Party meetings to find a compromise on the outstanding issues. The compromise text that the MT Presidency will table for ECOFIN includes an optional derogation for hybrid regulatory financial instruments issued by banks (Article 9-4-b) and for payments made by financial traders (in the definition's article). The rationale for 9-4-b is that otherwise banks could not deduct payments on these instruments which are not tax driven but are issued to satisfy financial regulatory requirements. Compared to the proposal tabled at the 6 December 2016 ECOFIN, the derogation no longer applies to insurers. Furthermore, additional requirements have been included to prevent any risk of tax avoidance. At a working meeting, the Commission's services flagged that the carve-out for financial institutions from the hybrid mismatch provisions could raise State Aid concerns, if not adequately justified. To address this comment, the MT Presidency has included a caveat in the recitals that the inclusion of the carve-out in national laws would be without prejudice to State Aid rules. The rationale for the carve-out for financial traders is to prevent the possible application of the mechanical anti-mismatch rules to payments made by a financial trader. A financial trader does not intend to benefit from any mismatch given that he is engaged in the business of buying and selling financial instruments and is taxed on any profits made by trading these instruments. Member States have diverging views on both derogations. UK has on several occasions stated that the derogations are a red line and that it is not prepared to agree on a text not including these. LU and ES are also in favour of the derogations, although their position appears less strong compared to the UK. FR, supported by AT, DE, SI and EL, is principally opposed to these. To find a compromise the MT Presidency has proposed a sunset clause for the optional derogation for hybrid regulatory financial instruments. Based on this clause the derogation for hybrid regulatory financial instruments would automatically end on Furthermore, the Commission would be asked to review the derogation and, if deemed necessary, table a proposal to prolong the derogation. It seems that FR (as well as AT, DE, SI, EL) could accept such a sunset clause. UK is opposed to it and, at present, there is no indication that it will finally accept it. A possible prolongation of the time frame could be a way forward but this remains to be seen. The time frame of the sunset clause is likely to be discussed at ECOFIN. The compromise proposal does not include a sunset clause for the derogation for financial traders. FR e.a. have also asked for a sunset clause on that derogation. As regards the date of implementation, NL has asked for the option of a later date than , at least for some provisions in the directive. NL does not have the support of the other Member States. SE has asked for an optional postponement of Article 9a (reverse hybrid mismatches) arguing that this article would oblige SE to fundamentally change its tax laws. 4

5 To meet these requests, the MT Presidency has proposed: (1) a postponement for 3 years for the provision on reverse hybrid mismatches (Article 9a); and (2) a postponement of one year for the other provisions of the directive; Member States agree that the date of implementation should be left to ECOFIN to decide. 3. STATE OF PLAY IN THE EUROPEAN PARLIAMENT The EP agenda issued on 24 November 2016 foresees the following: Deadline of draft report: Max 1 February Consideration of Draft Report: 27/28 February Deadline for amendments: 6 March 2017 at Consideration of amendments and vote in ECON: 27 March Vote in plenary: 26 April THE POSITION OF THE COMMISSION As the compromise proposal by the MT Presidency meets the tax policy objectives of the Commission proposal of 25 October 2016, the Commission should be in a position to support it. Although, in general, the Commission does not favour derogations like those proposed by the MT Presidency, they are acceptable, from a tax perspective, as part of the overall compromise as they are limited in scope and do not seem to leave room for abuse. The Commission considers that if a Member State were to exclude the financial sector from the application of the anti-hybrid rule without a valid justification, this could amount to State aid. To raise the Member States awareness of the implications under State aid law that such an exclusion could create, the Commission should make a statement to record its position. (A draft statement is attached.) As regards the time frame of the sunset clause, a short period would be preferable. However, the Commission could be flexible on this for the sake of compromise. As regards the date of implementation, the preferred option is the same date as for ATAD, namely However, for the sake of compromise, a limited postponement could be accepted, preferably for all rules on hybrid mismatches including those of ATAD, but as a last resort also a postponement of Article 9a. 5. RECOMMENDATION TO THE COMMISSION In the event that agreement on a general approach on the final compromise text is reached, it is suggested that the Commission authorises Commissioner Moscovici, in agreement with Vice-President Dombrovskis, to welcome this consensus and accept the compromise proposal. In addition, it is suggested that the GRI recommends allowing the Commission s statement annexed to this Fiche to be transmitted to the Council and recorded. 6. OFFICIALS RESPONSIBLE 5

6 Annex Commission Statement: The Commission recalls that, in principle, the notion of State aid enshrined in article 107(1) TFEU does not allow to grant economic advantages to selected undertakings without a valid justification. The Directive allows excluding certain payments by banks from the application of the anti-hybrid rule when related to regulatory financial instruments. If using this exclusion, under EU State aid rules Member States would have to provide such a valid justification. 6