On 24 June, the European Commission published the Tax Simplification Package consisting of the Simplification Omnibus & Recast of the Directive on Administrative Cooperation (DAC).

The Simplification Omnibus proposal amends six Directives:

1. The Interest and Royalties Directive (IRD),
2. The Tax Merger Directive (TMD),
3. The Parent-Subsidiary Directive (PSD),
4. The Anti-Tax Avoidance Directive (ATAD),
5. The Dispute Resolution Mechanisms Directive (DRM), and
6. The FASTER Directive on withholding tax is subject to targeted changes.

A central element of the proposal is the abolition of withholding taxes on cross-border payments of dividends, interest and royalties between EU companies. Changes are made to the interest limitation rules. A new exclusion is introduced for exceeding borrowing costs on "low-risk third-party loans," defined as loans not from associated parties that exclusively fund the borrower's own activities with no on-lending within the group. Meanwhile, the safe harbour threshold (minimum deductible amount regardless of EBITDA) is raised to EUR 5 million within the first six years of entry into force. Elsewhere, a new public-benefit carve-out expands the existing infrastructure exclusion to cover projects deemed in the public interest, including in areas such as energy security, climate, and digitalization. This includes borrowing costs on loans used to fund defence products or defence-related capabilities.

On the DAC recast, there has not been an importation of the economic substance criteria from the Unshell Directive, as had been rumoured. Rather, changes are put forward to the hallmarks on reportable cross-border arrangements within the DAC itself. Elsewhere, the proposal exempts large multinationals subject to the EU’s 15% corporate minimum tax law from reporting on their cross-border tax arrangements. The proposal would also eliminate a host of hallmarks—generic indicators that trigger disclosure obligations—stating that they have little value in fighting tax fraud and “generate disproportionate levels of reporting.”

In terms of next steps, the proposal will now go to the European Parliament (for its non-binding opinion) and the Council (where unanimous agreement among all 27 are needed for it to pass).

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