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Ref. Ares(2015)1978140 - 11/05/2015
ROOM DOCUMENT # 3 
Code of Conduct Group (Business Taxation) 
20 March 2013 
ORIGIN: Commission 
 
 
WORKPACKAGE 2011 – MONITORING GUIDANCE ON INBOUND PROFITS 
 
Background 
1.  Following the adoption of the Code Group's Work Package 2011 on 19 December 2011 
(doc. 17081/1/11 REV 1 FISC 144), at its meeting of 7 February 2012, the Code Group 
decided that the monitoring of the implementation of guidance notes previously agreed 
by the Group would begin with the guidance on inbound profit transfers. 
2.  The guidance says; 
Member States may opt to tax inbound profit transfers or to operate a participation exemption. 
Member States which operate a participation exemption should either ensure that the profits which 
give rise to foreign source dividends are subject to effective anti-abuse or countermeasures, or 
apply switch-over provisions targeted at ensuring effective taxation. The first could be achieved 
through a Member State having CFC-legislation or other anti-abuse provisions which ensure that 
profits artificially diverted from that Member State which may give rise to foreign source 
dividends are appropriately taxed.1 
Therefore if a MS grants a participation exemption the guidance requires it to apply either 
effective anti-abuse rules (e.g. CFC rules) or a switch over provision.  A switch over 
provision is one that applies in particular circumstances to provide relief for double 
taxation via the credit method rather than exemption.  The assessment of any Member 
State's rules against the guidance is therefore a question of what constitutes an effective 
anti-abuse or switch over provision.  
3.  To help with the monitoring exercise a questionnaire for Member States was agreed at the 
meeting of 17 April 2012.  A consolidated version of MS replies was initially circulated 
to Group members for the meeting of 4 June 2012.  A revised version of the replies 
together with a summary table was circulated with room document 2 of 10 September 
2012.  The same room document provided an analysis of MS replies against the agreed 
guidance. 
 
 
 
 
 
 
                                                            
1 Code Group Report of 22 November 2010, doc. 16766/10 FISC 139, par. 16. 

 

 
 
 
 
 
 
 
 
 
 
 
 
Agreeing the basis on which to apply the guidance 
 
 
 
 
 
 
   
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
Controlled foreign company rules 
 
 
 
 
 
  

 

 
 
 
 
 
 
   
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 

 

 
 
 
 
  
 
 
 
Switch over rules 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
   
 
 
 
 
  
 
 
 

 

 
 
 
   
 
 
 
 
 
  
 
 
 
•  Do MS think that this paper makes the distinction between the toolbox and 
minimum standard approaches clear?  
•  What additions would MS like to make to the tables in either columns A or B? 
•  Do MS think that the minimum standard and toolbox approaches could be 
combined, for example if column A set out the minimum standards and column B 
provided the tool box? 

 
______________________ 

 

link to page 8 Annex 1, table A - CFCs 
Annex 1 
Table A – elements of effective anti-abuse provisions: controlled foreign companies 
 
 
A 
 
B 

Definition of a CFC 

Company not resident in MS 
 
 

Company controlled directly or indirectly by MS Company 
 
 

Control to be determined by ownership of more than a specified percentage of the 
CFC's share capital and/or voting rights 
 
 

Control to be determined by rights to receive more a specified percentage of the 
CFC's profits regardless of legal form of the shareholding 

Definition of the persons on whom CFC tax1 

Limit charge to CFCs ultimately controlled by nationals of MS 
will be charged 
 
 

Charge resident companies in respect of their foreign subsidiaries 

Method of accurately calculating the CFC's 

Calculate tax base by reference to international standards (e.g. IAS, OECD) 
tax base 
 
 

Calculate tax base using the rules applied to companies resident in MS 
 
 

Calculate tax base using the rules applied to companies in the LS with any necessary 
adjustments to remove divergence from international standards (e.g. application of 
arm's length principle) 
                                                            
1 See list of definitions on page 8. 

 

Annex 1, table A - CFCs 
 
 
A  

4  Distinguish between active and passive  a 
Target the regime specifically at passive income 
income 
 
 

Target the regime broadly but provide exemptions for active income 

Apply only to territories with a lower level of 

Define a lower level of tax in relative terms as a specified percentage of the MS' 
tax 
own tax rate 
 
 

Define a lower level of tax in relative terms as a percentage of some other figure 
such as the average rate in the EU 
 
 

Define a lower level of tax in absolute terms as a fixed percentage 
 
 

Base the definition of a lower level of tax in a, b or c on the local tax actually paid 
 
 

Base the definition of a lower level of tax in a, b or c on the headline rate 

Contain other territorial exclusions 

Exclusion for  members of the EEA/EU 
 
 

Exclusion for members of the OECD 
 
 

Exclusion for members with which the MS has a double taxation agreement 
including particular articles (e.g. exchange of information or non-discrimination 
articles) 

 

Annex 1, table A - CFCs 
 
 
A  

7 Counter-act 
the 
artificial diversion  of profits 

Charge CFC tax to bring the local tax rate up to the MS tax rate 
 
 

Allow double taxation relief for local tax 
 
 

Allow relief for CFC tax paid when profits subsequently distributed 
 
 
Definitions used in the table 
CFC tax 
tax chargeable on MS Co in respect of the profits of the CFC 
LS 
the CFC's territory of residence, the local state 
Local tax 
tax paid by the CFC in its territory of residence 
MS 
the Member State applying the CFC rules 
MS Co   
the company resident in MS which controls the CFC 
 
 

 

Annex 2, table B – switch over rules 
Annex 2 
Table B – elements of effective anti-abuse provisions: switch over rules 
 
A 
 
B 

Apply only to dividends from territories with 

Define a lower level of tax in relative terms as a percentage of some other figure 
a lower level of tax 
such as the average rate in the EU 
 
 

Define a lower level of tax in absolute terms as a fixed percentage 
 
 

Base the definition of a lower level of tax on the local tax actually paid rather than 
headline rates (e.g. to remove the effect of special regimes) 
 
 

Base the definition of a lower level of tax in a, b or c on the local tax actually paid 
 
 

Base the definition of a lower level of tax in a, b or c on the headline rate 

Contain territorial exclusions 

Exclusion for  members of the EEA/EU 
 
 

Exclusion for members of the OECD 
 
 

Exclusion for members with which the MS has a double taxation agreement 
including particular articles (e.g. exchange of information or non-discrimination 
articles) 

Provisions to restrict abuse 

Exclusion from exemption for particular types of dividends 
 
 

Exclusion from exemption for dividends connected to abusive transactions 
 

 

 
Annex 3 
Extract from room document 2 of 10 September 2012 
 
[…] 
2.3 Elements in assessing effectiveness of anti-abuse measures 
As set out above, most MS have established one or more qualitative criteria, either as a condition to 
grant full exemption for inbound dividends or to establish situations in which their CFC provisions 
or other anti-abuse measures kick-in. All MS that have established these qualitative criteria have 
their own policy in that respect, using one or more of the criteria and giving more or less weight to 
each of them. COM realises that establishing common ground in this area is an ambitious task in 
view of the different policies pursued by the MS. Nevertheless, it may be useful for the Group to 
discuss in more detail the benefits and disadvantages of these criteria for potential further 
guidance3. 
a)  Relevance of the subsidiary being a resident of the EU / EEA  
Some MS do not set any qualitative conditions if the subsidiary is located in an EU or EEA 
State or if the conditions of the PS Directive apply. This could be considered acceptable in view 
of the need to comply with the EU legal framework and given the fact that EU and EEA States 
are subject to certain minimum standards (e.g. State Aid; within the EU also the Code of 
Conduct). 
b)  Relevance of the subsidiary being a resident of a DTC country 
Some MS do not set any qualitative conditions if the subsidiary is located in a State with which 
they have a DTC, in some cases this must concern a qualified DTC (containing a provision on 
EoI). In COM's view, it could be questioned whether the presence of a (qualified) DTC is 
sufficient not to set any further conditions. Bilateral treaty partners do not have to meet the same 
legal obligations as EU / EEA States. Some MS may have concluded or want to conclude a 
DTC with a third country that other MS would not conclude a DTC with. If the Group were to 
accept the presence of a DTC as sufficient for not setting any further qualitative conditions, the 
Group may want to consider the usefulness of more coordination of MS's DTC policy, e.g. by 
setting minimum standards. 
c)  Relevance of a minimum statutory tax rate for 3rd countries 
For subsidiaries resident of a 3rd country some MS require that minimum criteria concerning the 
corporate tax rate in that 3rd country are met. In some cases this concerns an absolute minimum 
level (e.g. 10% or more) but in most cases the minimum level is linked to the applicable 
domestic corporate tax rate (e.g. minimum half of the domestic rate or "comparable" to the 
domestic rate). The Group could agree that a minimum tax rate requirement should be set, with 
the minimum to be determined by the MS in question.  
                                                            
3 Art. 73 of the CCCTB Directive proposes a switch-over if the entity making the profit distribution is subject, in its 
country of residence to a tax on profits, under the general 82, see footnote 5). 
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Alternatively, the Group could also consider more coordination in this respect, which would 
effectively require agreement on a common minimum tax rate vis-à-vis 3rd country dividends 
(see also footnote 3). 
d)  Formulating the minimum tax criterion 
As explained under c) above, some MS set minimum tax rate conditions for the jurisdiction of 
which the subsidiary is a resident.  
Some MS apply these conditions to the subsidiary itself rather than to the jurisdiction (the 
subsidiary must be subject to a corporate tax with a rate of at least x%). Finally, some MS place 
conditions upon the effective tax burden of the subsidiary, requesting the profits of the 
subsidiary to be subject to a minimum effective corporate tax rate of y%. The last requirement is 
the most specific and therefore also most effective. The Group could consider developing 
recommendations in this area. 
e)  Relevance of foreign tax base 
Not only the tax rate, but also the tax base can be relevant to determine appropriate taxation of 
the underlying profits. Therefore some MS set requirements as regards the tax base, e.g. the 
requirement that the tax base of the subsidiary is comparable to – or at least not more beneficial 
than – the domestic tax base. Another example is the requirement that the subsidiary or its 
profits are not subject to a special tax regime.  
The Group could consider requiring some sort of qualitative tax base condition next to a tax rate 
condition, with the exact requirements to be determined by the MS in question. The Group 
could also pursue a coordinated approach in this regard.  
f)  Relevance of the subsidiary's activities  
Some MS make the application of their switch-over provision or CFC provision dependant on 
the business activities performed by, the type of income earned by and/or the assets owned by 
the subsidiary. All three elements can be described either positively (defining good 
activities/income/assets) or negatively (defining bad activities/income/assets). If certain 
specified tests for these elements are not met, a sanction may apply (anti-abuse kicks in or the 
switch-over provision applies). 
The Group could discuss whether the full exemption for intercompany dividends should be 
limited to subsidiaries meeting one or more of the above tests with a view to differentiating 
between real economic activities and passive, mobile activities. The Group could also discuss 
whether there is sufficient support to pursue a coordinated standard in this respect4. 
g)  Relevance of applying the above tests also to lower tier subsidiaries 
                                                            
4 Art. 82 of the CCCTB proposal to that extent states that CFC provision applies if – in addition to other requirements – 
more than 30% of the income accruing to the CFC falls within one or more of specified categories of income (mainly 
passive income such as interest, royalty and dividend income) and more than 50% of the entity's income falling within 
these categories comes from transactions with associated enterprises. In the compromise proposal by the DK Presidency 
(doc. 8387/12, FISC 49) the associated enterprises test only applies to specified financial institutions.  
11 
 

 
Dividends are normally received from direct subsidiaries only. Consequently, the conditions to 
identify a qualifying subsidiary to which the participation exemption applies regard features of 
that subsidiary only. Business, however, could easily circumvent these conditions by 
interposing a qualifying subsidiary in the structure to ensure tax free repatriation of profits from 
non-qualifying (lower tier) subsidiaries. For this reason most CFC provisions and some other 
anti-abuse (switch-over) provisions also apply directly or indirectly to lower tier subsidiaries.  
The Group could discuss the need for provisions also affecting lower tier subsidiaries as a 
precondition for being "effective". 
 
•  Do MS agree that all or some of the above mentioned elements could be relevant 
when designing effective anti-abuse or counter measures to be combined with a 
participation exemption?  

•  Do MS consider one or more of these elements essential in the sense that they should 
be present in all anti-abuse provisions of all MS? 
•  Do MS agree that there is a need for more coordination in defining the critical 
criteria in these essential elements to ensure a more coherent approach of MS anti-
abuse measures especially vis-à-vis third countries?
 
 
[…] 
 
 
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