The European Commission’s ambitious tax simplification package

KPMG’s EU Tax Centre believes that the proposed removal of withholding tax barriers on intra-EU dividend, interest and royalty payments would be a key development in the EU’s ambition to strengthen the single market.

In our view, one of the most valuable aspects of the proposal, in addition to the removal of withholding taxes, is the move to a common and simplified withholding tax relief procedure based on self-assessment. Several Member States have traditionally required some form of prior approval for relief at source from withholding taxes,² whilst others rely on refund procedures that can be time-consuming and administratively burdensome.³ By facilitating access to relief upfront and aligning processes across jurisdictions, the proposed measures should not only reduce compliance costs but also alleviate cash flow constraints and provide greater certainty for taxpayers operating in the EU. At the same time, we note that Member States will likely want to maintain some level of domestic upfront notification or documentation procedure. In this respect, we encourage the Council Presidency and the Member States to ensure that these requirements should be sufficiently clear and administrable, provide legal certainty and operate within clear and appropriate deadlines.

In the same vein, we believe that extending WHT exemptions to dividends paid to EU pension funds is an important step towards boosting cross‑border investment, increasing effective returns and, in turn, enhancing the liquidity and depth of EU capital markets. At the same time, consideration should be given to extending similar treatment to certain investment funds and other entities that benefit from a tax-exempt status for genuine public policy reasons. These entities play an important role in financing European businesses and infrastructure projects, and broadening access to withholding tax relief could further support capital market integration and enhance the EU's competitiveness. In our view, ideally, an exemption from withholding taxes on intra-EU payments should be available to investment funds at the same time as the proposed exemption is implemented for corporates and pension funds. Should Member States, however, assess the budgetary impact of such an exemption according to the same timeline to be too great, the measure could be introduced from a later date. A clear timeline for the removal of all withholding tax barriers would send a strong signal regarding the EU’s commitment to guaranteeing the free movement of capital in the EU and to fostering cross-border investment.

We note that the proposal allows national anti-abuse measures to apply as part of the ex-post control framework. In this context, to safeguard legal certainty, we encourage the Council Presidency and the Member States to ensure that ex-post review and refund procedures operate within clear and reasonable deadlines, and that the application of national anti-abuse measures (including beneficial ownership requirements) is sufficiently clear and administrable.

We also note the requirement for Member States to either levy a withholding tax on interest and royalty payments or deny their deductibility where the recipient of the payment is established in a non-EU jurisdiction that does not levy corporate income tax or applies a nominal zero tax rate to interest and royalty income. To ensure a consistent and harmonized identification across Member States and therefore provide certainty around the application of the rule, we believe that it would be useful for the EC to publish and regularly update a central record of such jurisdictions. Member States may also want to consider clarifying the application of the safeguard clause where the interest and royalty income is effectively subject to tax elsewhere in the ownership chain (e.g., in cases where the recipient is a tax transparent entity or subject to foreign CFC rules). In addition, the application of the safeguard clause may require further consideration to ensure that it does not undermine the objective of facilitating cross-border investment, particularly in cases where the identity or tax residence of the ultimate investor is not readily available.

KPMG’s EU Tax Centre welcomes the proposed carve-out for groups in-scope of Pillar Two from EU CFC rules and the EU Mandatory Disclosure Rules. The proposed exclusion recognizes that such groups are already subject to an effective tax rate of at least 15 percent and to significant reporting obligations under those rules. In our view, from the perspective of the role of CFC rules as a deterrent measure, there would be no additional benefit in applying such rules to groups in scope of Pillar Two, whereby a minimum level of taxation is ensured either in the jurisdiction of the subsidiary, or in the state of residence of another group entity. The proposed carve-out is therefore a welcome step in addressing the risk of double taxation, duplicative compliance obligations and overlapping anti-avoidance measures.

While this proposal represents an important simplification measure, further consideration could be given to other areas where similar overlaps arise. In particular, we recommend examining whether comparable simplification could be extended to the anti-hybrid mismatch rules for groups already subject to Pillar Two.

In addition, we note that the carve-outs from EU CFC rules⁴ and the EU Mandatory Disclosure Rules⁵, as well as for the proposed safeguard clause in the Interest and Royalties Directive⁶ include certain limitations for groups headquartered in a jurisdiction that operates a qualified ‘Side-by-Side’ regime. We believe that these complex exceptions and counter exceptions from the carve outs should be further aligned and clarified to avoid uncertainty and potential differences in local implementation.

In this context, we also assume the reference to the granting of financial benefits to stem from the ongoing work at the level of the OECD Inclusive Framework (IF) on defining so-called ‘related benefits’ and determining the consequences of such benefits being granted to in-scope constituent entities. Should this indeed be the case, we are of the view that this point should be clarified during the legislative process or through subsequent guidance, and a clear link should be made to any relevant administrative guidance adopted by the OECD IF in this respect.

We also encourage the Council Presidency and the EU countries to ensure that the reference to an assessment performed at OECD level (i.e., whether a countries is considered to have qualified ‘Side-by-Side’ regime status) is sufficiently clear and administrable, including the moment in time when changes to the qualified status of a country become applicable for the respective EU provisions.

In particular, in the context of the EU Mandatory Disclosure Rules, it would be incumbent upon intermediaries to assess whether the conditions for the exclusion are met. Absent further clarifications in this respect, this rule would essentially mean that intermediaries would have to assess whether each EU and non-EU based participant in the arrangement is subject to a Qualified Domestic Minimum Top-up Tax (QDMTT) without being granted a refund or direct or indirect financial benefit in relation to the QDMTT. Under the current wording of the Directive, intermediaries assess whether a reporting obligation arises based on the information available to them during the course of their engagement with their client. Intermediaries are therefore under no obligation to investigate beyond the information that is made available during the normal course of business – this should remain the case as regards the above-mentioned assessment.

Finally, we note the proposed changes to the scope of the General Anti Abuse Rules (GAAR) by referring broadly to tax liability instead of corporate tax liability. Based on the Preamble to the Directive proposal, we understand that this aims to clarify that the GAAR also applies to Pillar Two Top‑up Taxes. In this context, we encourage the Council Presidency and the Member States to take into consideration the ongoing work at OECD level on Pillar Two integrity measures and ensure that the two measures are compatible and do not overlap.

We support the EC's efforts to enhance consistency in the application of the ATAD interest limitation rules across Member States by proposing to make mandatory the 30 percent EBITDA threshold, the indexed EUR 3 million de minimis threshold, the group escape clause, as well as the carry forward of non-deducible interest expenses.

We also believe that the proposed additional carve-outs relating to, for example, qualifying third-party debt, situations where the EBITDA is reduced by 50 percent in a given tax year as well as public‑benefit projects and investments in the defense sector are a welcome step towards aligning the rules with the EU’s common priorities and limiting the scope of the rules to instances that pose an actual risk of base erosion and profit shifting.

At the same time, we note that the exclusion for third-party loans may be limited in practice, as it does not apply where financing is centralized within the group for business reasons (such as operating ease and access to favorable lending rates). In particular, groups that raise external debt through entities that perform centralized treasury functions (and subsequently lend onwards to other group companies) would not benefit from the exclusion, meaning that such typical group financing models may remain within the scope of the limitation rules. Therefore, we believe that a more ambitious scope of the third-party loan exclusion should be considered.

In addition, we note the proposed removal of Alternative Investment Funds (AIFs) from the carve-out for ‘financial undertakings’. We are uncertain as to the policy rationale behind this exclusion and are generally of the view that financial undertakings that are subject to a robust EU regulatory framework should be included in the carve out. In the same vein, we refer to the opinion of Advocate General Kokott (June 18, 2026) in case C-138/24 on the lack of a specific and proportionate reason why regulated securitization entities should be treated more restrictively than other regulated financial undertakings. The AG noted that the spirit and purpose of the derogation provisions included in Article 4 of the ATAD (interest limitation rules) support a broad reading of the term ‘financial undertaking’ and that the higher risk and complexity of securitization are addressed by the Securitization Regulation and comparable to those of other regulated financial products.

In our view, further assessment during the legislative process will therefore be needed to ensure that the proposal does not result in unintended distortions, takes into consideration the wider EU regulatory and supervisory framework applicable to complex entities and transactions, and remains aligned with broader objectives in respect of the EU’s capital markets.

We welcome the proposed introduction of a common minimum standard for R&D tax incentives in form of a tax allowance that offers full deductibility of qualifying R&D expenditure , whilst allowing Member States to maintain or introduce more favorable domestic incentives. We believe that establishing a common floor of R&D tax support in form of a temporary book-to-tax difference is a welcome step towards enhancing innovation capacity and alleviating cash flow constraints during early state R&D activity, whilst limiting the budgetary implications for Member States (that would result from other types of incentive offerings such as cash grants or super deductions).

At the same time, we note that the benefit of the allowance is realized only to the extent that the resulting deductions can be offset against profits for tax purposes. For loss-making businesses, including early-stage innovative companies, the value of the R&D allowance will depend on the availability of tax loss-relief mechanisms under domestic law. Against this background, we encourage the Council Presidency and the Member States to consider whether the Tax Omnibus should also address the treatment of losses generated by the R&D allowance (e.g., by disabling domestic loss restriction rules that prevent the deduction of larger tax losses or by providing the option to surrender those losses in exchange for cash tax credits).

Furthermore, we encourage the EC to consider whether current legal boundaries to the design of tax incentives (e.g., EU State aid rules) set limitations for EU countries to compete with incentives offered in other regions. In particular, we note that the new Substance-based Tax Incentive Safe Harbour (SBTI SH) – applicable from 2026 – offers a more favorable Pillar Two treatment with respect to a wider range of incentives, including refundable and non-refundable tax credits, super deductions, exemptions and preferential rates, subject to a number of conditions (referred to as Qualified Tax Incentives).

To ensure consistency and coherence within the EU tax framework, we believe that the EC should consider, at a minimum, updating the current EU State aid conditions to allow the use of tax incentives that are treated as Qualified Tax Incentives for Pillar Two purposes where those are provided as a selective measure, subject to conditions.

We welcome the proposed alignment of the Merger Directive with recent developments in EU company law, including the extension of tax neutrality to cross-border conversions. These changes should facilitate cross-border reorganizations and provide greater legal certainty for taxpayers operating across multiple jurisdictions.

While the proposal represents a significant and welcome modernization of the Directive, further simplification could be considered in relation to the treatment of carry-forward losses and other tax attributes in the context of cross-border reorganizations. Greater coordination in this area could limit potential disputes between tax authorities and taxpayers and further facilitate business restructurings across the EU internal market.

In addition, we note that the proposal does not address the issue of non-share consideration being limited to cash (capped at 10 percent of the nominal value of the shares issued) as a condition for the tax neutrality of mergers, divisions, and partial divisions. We believe that consideration could be given to extending this concept to other forms of remuneration and replacing the nominal value threshold with a market value test that better reflects economic reality.

We welcome the proposed clarifications to the scope of the Directive, including the measures aimed at making it easier for taxpayers to access dispute resolution procedures and reducing the risk that cases are rejected on procedural grounds. We also support the introduction of additional safeguards designed to strengthen taxpayers' procedural rights and provide greater transparency throughout the process. In our view, these changes should help ensure that double taxation disputes are resolved more efficiently and consistently across Member States.

At the same time, several practical challenges remain unresolved. In particular, taxpayers may continue to incur significant late-payment interest costs even where double taxation is ultimately eliminated; access to dispute resolution procedures may remain uncertain where penalties apply due to divergent approaches across Member States; and the interaction between the Directive and parallel dispute resolution initiatives may increase complexity rather than reduce it. Addressing these issues would make the dispute resolution process more predictable and help ensure that taxpayers can obtain effective relief from double taxation without unnecessary delays or additional costs.

With respect to the proposed amendments to the EU MDR, we welcome in particular the proposed extension of the reporting deadline from 30 to 90 days. We are of the view that the extended deadline would reduce the number of instances of multiple reporting as it would give intermediaries a more reasonable time frame within which to determine where the reporting obligation lies. We also welcome the proposal to limit the reporting obligations to arrangements that are being implemented (i.e., where the first step in implementation has been made in relation to the relevant taxpayer). The removal of the additional trigger points that are currently applied under the MDR (i.e., the day after the reportable cross-border arrangement is made available for implementation, and the day after the reportable cross-border arrangement is ready for implementation) will reduce uncertainty with respect to the reporting triggering event.

To further simplify coordination of MDR reporting between the arrangement participants, we are of the view that a more appropriate solution would be for taxpayers to be given the option to take on the primary reporting obligation, in cases where the responsibility would otherwise rest with different advisors. We stress the importance of this approach being an option for the taxpayer, rather than a mandatory solution. For many taxpayers, having a primary reporting responsibility with respect to all relevant transactions would be too burdensome and would require additional investment in resources and processes, which would go against the envisaged aims of the recast. However, there may be instances where taxpayers would prefer to take on the responsibility of reporting – this could be particularly the case when working with multiple advisors across several jurisdictions.

We also welcome the proposed removal of the Category A hallmarks alongside the removal of the special quarterly reporting requirements for so-called marketable arrangements, which takes account of the fact that a high volume of disclosures are being triggered by these hallmarks (given their broad focus on confidentiality clauses and standardized documentation) without necessarily producing information that support Member States' ability to safeguard their tax base. Where EU Member States find that it is not feasible to remove certain hallmarks altogether, we recommend that they consider introducing specific safe harbors to automatically exclude from these hallmarks certain types of arrangements that are generally already known to the tax authorities (e.g., through existing disclosures in local commercial and/or trade registers or transfer pricing documentation), are of a purely commercial nature (e.g., cash pooling transactions, employee stock ownership plans), or that make use of tax advantages that are in line with the policymaker’s intent (e.g., use of participation exemptions).

At the same time, we want to note that – in our view, no additional hallmarks should be added to the MDRs and no additional criteria should be added or developed with respect to existing hallmarks, in light of the high volume of relevant public and non-public data already available to tax authorities, as well as technological advancement that can support tax authorities in making better use of existing information.

We also note that, whilst the proposal does not introduce substantive changes to the legal scope or definition of the Main Benefit Test (MBT), the Explanatory Memorandum indicates the EC’s intention to provide clearer guidance on the MBT with a view to reducing “defensive reporting” of standard commercial transactions. We would welcome guidance that promotes a narrow and consistent interpretation and application of the MBT (e.g., clarification that the MBT only refers to tax advantages obtained in EU Member States). At the same time, we would like to reiterate our previous suggestion for EU Member States to also consider extending the application of the MBT to all applicable hallmarks given that many disclosures are currently triggered by hallmarks that are not subject to any tax benefit test. 

We welcome the proposed introduction of a single centralized notification for Country-by-Country Reporting and GloBE Information Return (GIR) purposes within the EU, which would remove the need to file notifications in each relevant EU jurisdiction.

We note, however, that the deadline for the combined notification would be aligned with the deadline that currently applies for CbyC Report notifications (i.e., last day of the fiscal year of the MNE group). Notably, this would require changes to the notification deadlines currently applied by EU countries with respect to Pillar Two. A majority of EU judications require notifications within the same deadline as for the GIR (i.e., within 15 months of the end of the relevant financial year, and 18 months for the first filings) with only a few EU jurisdictions requiring the notification at an earlier time.

It further appears that the notification is required on an annual basis. We believe that consideration should be given to limiting the notification requirement to instances where there have been changes in the information previously submitted.

Finally, we welcome the proposed adjustments to the reporting obligation on platform operators (DAC7), including the removal of the transaction-based threshold for the sale of goods and the increase of the monetary threshold from EUR 2,000 to EUR 3,000. In our view, these changes are welcome steps towards a more proportionate reporting framework for platform operators by focusing on information that is used by local tax authorities for risk assessment and tax audit purposes. In addition, we believe that the proposed treatment of related entities of a Reporting Platform Operator as Excluded Sellers constitutes a helpful step to exclude from the DAC7 obligations purely intra-group platforms that cannot be used by third parties.