Update 2022: PwC overview of defensive tax measures in EU

21/06/22

PwC has prepared an updated overview of defensive tax measures applicable or proposed by EU Member States. This overview follows the updated version of the EU list of non-cooperative jurisdictions (the EU list) of 24 February 2022, to which these measures are linked. EU Member States committed at a political level, to use the EU list, as of 1 January 2021, in the application of at least one of four so-called ‘defensive tax measures’:

non-deductibility of costs incurred in a listed jurisdiction;
controlled foreign company (CFC) rules, to limit artificial deferral of tax to offshore, low-taxed entities;
withholding tax measures, to tackle improper exemptions or refunds, and
limitation of participation exemption on shareholder dividends.

The publication is available here. It serves as an update of the previous publication (March 2021). Up-to-date information regarding the defensive tax measures as well as new interesting observations are included in this updated publication. The results of this publication are based on the input that was provided by the members of PwC’s EU Direct Tax Group (EUDTG).

The EU list of non-cooperative jurisdictions

The EU list of non-cooperative jurisdictions (the EU list) is a tool of the European Union to promote fair tax competition and address harmful tax practices. The list consists of non-EU countries that were assessed against agreed criteria for tax good governance and is updated twice per year. The EU list includes countries that either have not engaged in a constructive dialogue with the EU on tax governance or have failed to deliver on their commitments to implement the necessary reforms. Those reforms should aim to comply with a set of objective tax good governance criteria.

As of 24 February 2022, the EU list is composed of the following jurisdictions: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.

Main conclusions and interesting observations

Not all EU Member States managed to meet the political commitment to introduce a defensive measure as of 1 January 2021:
- Bulgaria extended the definition of the jurisdictions to which their withholding tax measures apply to include jurisdictions on the EU list, with effect from 17 February 2021.
- In Luxembourg, the non-deduction measure is applicable only regarding expenses accruing as of 1 March 2021.
- In Malta, the participation exemption is limited on dividends paid as of 16 April 2021.
- In Denmark, the defensive measures are effective as of 1 July 2021.
- In Germany, Estonia and Slovenia defensive measures apply as of 1 January 2022.
- Finally, Cyprus will apply a withholding tax regarding certain payments to EU listed jurisdictions as of 31 December 2022.

Certain EU Member States apply a defensive measure linked to both the EU list and a domestic list. This is the case, for instance, in Belgium, Bulgaria, France, Hungary, the Netherlands, Poland and Slovakia.
EU Member States that do not link the EU list to the application of at least one tax measure may use the EU list for other measures: for instance, the EU list has been used for DAC6 purposes.
There is some degree of variation in the types of costs incurred in listed jurisdictions that are deemed non-deductible by EU Member States. In some EU Member States, such as France and Luxembourg, both interest and royalties do not qualify as deductible costs if they are paid to a company in a listed jurisdiction. Whereas in other EU Member States, such as Sweden and Slovenia, only interest is deemed as non-deductible costs. In the same vein, there is a degree of variation in the types of payments to which withholding tax measures apply: for example, in Bulgaria a withholding tax applies to penalties or damages payments (except for insurance compensations) accrued to entities in EU listed jurisdictions. While in the Netherlands a withholding tax applies to interest and royalty payments.
France, Germany, Latvia and Portugal apply all four defensive measures.

For more interesting observations, we refer you to the updated publication.

What does it mean for you?

A transaction related to a country included in the EU list may have important consequences not only in your EU Member State of residence but also in other EU Member States in which activities are performed. In addition, given that the EU list will be updated twice per year, the listing of a country may have immediate consequences in certain EU Member States as regards to their defensive tax measures. Therefore, you should be able to monitor the defensive measures applicable or proposed in each EU Member State and follow the (policy) developments with regard to the EU list. With the help of PwC’s broad European network, we are able to assist you in this.