Executive summary

On June 24, 2026, the European Commission adopted an ambitious tax simplification package designed to simplify existing EU tax rules and reduce compliance for businesses. It is part of the Commission’s wider simplification agenda under the 2026 Work Programme to simplify Union legislation, reduce unnecessary administrative burdens and strengthen the competitiveness of the EU. The proposal follows the special legislative procedure (Articles 113 and 115 of the Treaty on the Functioning of the European Union) and requires unanimity in the Council, with the European Parliament and the European Economic and Social Committee consulted. The directive will amend six instruments:

• Interest and Royalties Directive (2003/46/EC) and Parent-Subsidiary Directive (2011/96/EU): the minimum-shareholding requirement is removed, so the withholding-tax exemption applies regardless of participation and removal of upfront authorization procedures. 
• Directive on Faster and Safer Relief of Excess Withholding Taxes (2025/50): amended so that its standardized relief-at-source and quick-refund procedures remain available where a full IRD / PSD exemption is claimed, relevant to publicly traded securities held through nominee accounts.
• Tax Merger Directive (2009/133/EC): updated to align with EU company law to add a simplified merger and “division by separation,” and a new chapter granting tax neutrality to cross-border transfers (transfers of registered office).
• Anti-Tax Avoidance Directive (2016/1164): various rules in the Anti-Tax Avoidance Directive are amended to align with the Pillar Two Directive and the amendments introduce a new R&D expenditure allowance rule. 
• Dispute Resolution Mechanism Directive (2017/1852): includes targeted procedural clarifications and simplifications.

The Commission estimates the package will cut compliance and related financial costs by roughly EUR 6.6 billion per year. Member States must transpose the Directive into domestic legislation by 31 December 2028, with general application from 1 January 2029. However, the headline withholding-tax changes under the Interest and Royalties Directive and Parent-Subsidiary Directive are deferred to 1 January 2037, and the mandatory EUR 3 million interest-limitation safe harbour applies from 1 January 2032. 

Detailed discussion

Background and context

Over the past two decades the EU has layered multiple direct-tax directives on top of national rules. The Interest and Royalties Directive, Parent-Subsidiary Directive, and Merger Directive removed withholding taxes on certain intra-group payments and ensured tax neutrality for cross-border reorganizations. The Anti-Tax Avoidance Directive introduced a minimum standard against base erosion and profit shifting (BEPS) and the Dispute Resolution Mechanism Directive created a mechanism for resolving double-taxation disputes. The subsequent adoption of the Pillar Two global minimum tax has, in the Commission’s view, created overlaps and duplicative compliance for in-scope groups, while divergent national implementation of optional ATAD features has fragmented the single market. The Proposal seeks to simplify and modernize the combined set of rules, introduce certain rules to increase the competitiveness of the EU, without lowering anti-abuse standards.

1. Interest and Royalties Directive (IRD, 2003/46/EC)

Under the Interest and Royalty Directive (“IRD”), interest and royalty payments arising in a Member State are exempt from withholding taxes provided certain requirements are met, including a beneficial ownership test and minimum-holding requirements. In addition, Member States may apply prior authorization procedures to verify a priori whether access to the exemption under the IRD should be granted.

Broadened scope. The minimum-holding requirement built into the definition of “associated company” is removed (deletion of Article 3(b)), as a result of which interest and royalty payments between EU companies can benefit from the exemption irrespective of the level of participation between them.

Introduction of anti-double-non-taxation safeguard. This will require the source State to either levy withholding tax or deny deductibility where interest or royalties are paid to a recipient in a third-country jurisdiction that levies no corporate income tax, or a zero rate, on such income, and no withholding tax is applied at source. In practice this targets EU payments into zero-tax financing or IP-holding locations. The rule looks only to the direct recipient, so the payer does not need to trace intermediary structures. It does not apply where the recipient is subject to a qualified domestic top-up tax (with no refund or financial benefit) or is part of an MNE group within the scope of Pillar Two or the OECD Model Rules — but that carve-out is switched off, and the safeguard can apply, where the group’s ultimate parent sits in a jurisdiction with a qualified “side-by-side” regime.

Introduction of exemption at source. Member States may no longer require prior authorization or an administrative procedure to verify eligibility at the time of payment. Eligibility is self-assessed, subject to ex post controls and anti-abuse rules (including beneficial-ownership rules).

Other points. A permanent establishment is treated as the payer only insofar as the payment is an expense of its activity in the State where it is situated, and the IRD is clarified to apply to payments attributable to a PE’s activities regardless of local deductibility.

2. Parent-Subsidiary Directive (PSD, 2011/96/EU)

The Parent-Subsidiary Directive (“PSD”) exempts dividends and other profit distributions paid by subsidiaries to shareholders in different Member States from withholding tax at source and aims to eliminate double taxation of such income at the level of the shareholder through credit relief or participation exemption. The PSD only applies where the minimum holding requirements are met and does not harmonize procedures for accessing the PSD benefits.

Broadened scope. Mirroring the IRD, the minimum-holding requirement in the definition of “parent company” is removed, as a result of which dividends and other profit distributions between EU companies are exempt from withholding tax regardless of participation level. The option to substitute a voting-rights test for the capital test is also eliminated with a goal of ensuring a more uniform application of the Directives.

Pension institutions. The exemption under the PSD is extended to pension institutions.
Cost-deduction option re-calibrated. Because scope is broadened, the option to deny deduction of charges relating to the holding (and losses on distributions) is confined to holdings of at least 10% of capital or voting rights, where management costs are genuinely incurred; any flat-rate management cost remains capped at 5% of the profits distributed.

Introduction of exemption at source. Similar to the IRD, no prior authorization or administrative procedure may be required at the time of distribution for an exemption at source. A refund claim may be made at source, with at least two years to submit and repayment within one year of due receipt, failing which interest accrues.

3. Directive on Faster and Safer Relief of Excess Withholding Taxes (2025/50)

The Directive on Faster and Safer Relief of Excess Withholding Taxes (“FASTER”) is intended to make withholding tax procedures more efficient and secure for investors, financial intermediaries and national tax administrations. It provides standardized relief-at-source and quick-refund procedures for withholding tax on dividends and interest from publicly traded securities. Under the current text, Member States may deny fast-track access where a full exemption is claimed — which would have blocked the new IRD / PSD exemptions for portfolio holdings (typically below 5%) held through nominee accounts, where the payer cannot identify the investor at the time of payment. The Proposal aims to ensure that the exemption resulting from the IRD or PSD no longer triggers that exclusion, ensuring FASTER refunds remain available. Member States may also retain an existing national relief-at-source system in the relevant cases, subject to equal-treatment verifications.

4. Tax Merger Directive (2009/133/EC)

The Tax Merger Directive (“TMD”) provides for common rules in relation to the deferral of taxation of capital gains in case of certain (cross-border) reorganizations, including mergers, divisions, transfer of assets etc. The aim of this Directive is to ensure reorganization flexibility without immediate taxation. The updates are aimed at aligning the TMD with recent developments in company law of Member States.

Expanded definitions. Definitions of "merger" and "division" are extended to include the "simplified merger" (transfer of all assets and liabilities to an acquiring company without issuance of new shares) and "division by separation" (transfer to recipient companies in exchange for securities issued to the dividing company).

Cross-border conversions. A new provision is introduced in relation to cross-border conversions, ensuring tax neutrality where a company transfers its registered office to another Member State while retaining its legal personality. Capital gains are deferred provided the company remains tax resident in the departure Member State or the assets remain effectively connected to a permanent establishment in that State.

Other. The annex of qualifying forms is updated.

5. Anti-Tax Avoidance Directive (2016/1164)

The Anti-Tax Avoidance Directive (“ATAD”) was established to introduce a common framework of anti-avoidance rules aimed at protecting Member States’ corporate tax base against aggressive practices of base erosion and profit shifting. The ATAD includes rules for limiting interest deductions, exit taxation, controlled foreign companies (“CFC”), hybrid mismatches and general anti-abuse rules (“GAAR”). The Commission acknowledges that there have been significant international developments, in particular the introduction of the OECD Pillar Two rules and related EU Pillar Two Directive, which can overlap with the ATAD rules. The amendments to ATAD are aimed at ensuring consistency between the different sets of rules. In addition, the Commission intends to introduce certain R&D expenditure rules to increase the competitiveness business landscape of the EU.

New R&D allowance. A new R&D allowance rule – as a minimum standard – is introduced to ensure full deductibility of R&D qualifying expenditure (i.e., capital expenditure on plant, machinery and tangible assets used directly for R&D or to support R&D facilities). The allowance is equal to the qualifying expenditure and deductible from the taxable base. The taxpayer may claim the allowance in the period the expenditure is incurred or in any of the four subsequent tax periods (no claim after the fourth period). The assets must be used wholly and exclusively for R&D for a continuous period of at least three years, or otherwise the allowance is withdrawn or if it has already been granted the amount of the allowance is included in the taxable base. This, however, will not apply if the failure to meet the conditions of the qualifying expenditure is due to force-majeure or to circumstances beyond reasonable control of the taxpayer; otherwise, the allowance is withdrawn. On disposal, the disposal value is brought into account, and a balancing charge may arise (the lower of the excess of disposal value over any unclaimed allowance, and the allowance claimed). Specific rules will be introduced to ensure this allowance does not impact the EBITDA for purposes of the EBITDA rules.

Interest limitation rule.

Key changes are made to the Interest Limitation Rules in the ATAD:

• Mandatory 30% EBITDA cap. Member States can no longer set a lower deductibility threshold.
• Low-risk third-party loan carve-out (mandatory). Exceeding borrowing costs on loans from non-associated lenders are excluded, provided the funds finance the borrower’s own activities (no on-lending or equity contributions within the group).
• Mandatory EUR 3 million safe harbour. The safe harbour becomes mandatory (de facto excluding most SMEs), is indexed annually and applies to the whole group.
• Procyclicality relief. Full deduction of exceeding borrowing costs is allowed in a period in which EBITDA falls by at least 50% versus the immediately preceding period (for that period only).
• Group escape and carry-forward made mandatory. Both provisions are set to become compulsory (Member States keep the choice between the existing mechanisms to implement carry-forward) and carry-back of up to three years may be permitted; the optional standalone-entity exclusion is deleted as redundant.
• Updated definitions. The definition of “financial undertaking” is modernized to include, among others, investment firms, AIFMs, UCITS management companies, CCPs, CSDs, payment and e-money institutions, crowdfunding service providers and crypto-asset service providers.

As mentioned above, the EBITDA calculation is adjusted to add back amounts deducted under the new R&D allowance.

General anti-abuse rule

The GAAR wording is updated and broadened to confirm that it applies to all direct taxes to which companies are subject – including withholding taxes and top-up taxes resulting from the Pillar Two Directive.

Controlled foreign company (CFC) rules

The Commission acknowledges that the objective and effect of the ATAD CFC rules significantly overlap with the Pillar Two Directive. To fix this, the Directive introduces an exemption for taxpayers which fall within the scope of the Pillar Two Framework. However, note that the side-by-side exception below can pull US-headed groups back into charge depending on how the US regime is classified. In short:

• Pillar Two carve-out. Taxpayers in groups within the scope of Pillar Two (or the OECD Model Rules) are exempt from the CFC rules, reflecting the overlap with the income-inclusion rule. A targeted residual exemption applies where the ultimate parent entity is in a qualified Side-by-Side jurisdiction and the low-taxed entity is not subject to a qualified domestic top-up tax.
• SME exemption. Small and medium-sized groups (and qualifying standalone micro/small/medium undertakings with a permanent establishment abroad) are excluded from the CFC rules going forward. 
• Single model. Model A (categories of passive income) becomes the only approach. Model B (non-genuine arrangements) and its associated de minimis rule are deleted. The passive-income carve-out (one-third threshold) becomes mandatory.

Hybrid mismatches (Article 9)

The rules on imported mismatches are deleted on proportionality grounds, the Commission considering them excessively complex relative to their results. The remaining hybrid-mismatch rules are retained.

6. Dispute Resolution Mechanism Directive (DRM, 2017/1852)

The Dispute Resolution Mechanism Directive (“DRM”) is the EU’s binding double-taxation dispute mechanism backed by mandatory arbitration. The amendments are procedural and introduce certain clarifications and procedural simplifications. In short:

• “Affected person” is clarified so that, where the same question in dispute directly affects more than one person, each qualifies as an affected person.
• Filing is streamlined: in multi-party cases each affected person may file only with its State of residence, and the ambiguous “simultaneous submission” requirement is replaced by a 30-calendar-day window (within the overall three-year limit).
• Rejections are limited to defined grounds, with a 30-day opportunity to cure deficiencies and a right to resubmit within the three-year period.
• Earlier exit to arbitration: where authorities agree no agreement can be reached, they must inform the taxpayer without delay rather than waiting for the two-year mutual-agreement period to expire.
• Other clarifications are introduced: timing of objections to independent persons of standing; use of an alternative dispute-resolution commission for admissibility questions; suspension and termination of parallel procedures; and a simplified-filing clarification for individuals and smaller undertakings.

7. Entry into force and transposition

The directive enters into force 20 days after publication in the Official Journal. Member States must transpose by 31 December 2028 and generally apply the rules from 1 January 2029 — but several provisions are deferred:

The deferral of the IRD / PSD withholding-tax package to 2037 is the single most important planning point: the broadened exemptions and the removal of upfront procedures will not take effect on the general 2029 date.

Implications – What MNEs should do now

• Pillar Two groups: map where ATAD CFC and interest-limitation obligations currently overlap with Pillar Two computations; the CFC carve-out and the safe-harbour / R&D add-back may reduce duplicative work, but the side-by-side conditions needs to be taken into account.
• Intra-EU dividends, financing and IP flows: model the impact of the eventual removal of minimum-holding thresholds and the move to self-assessment, taking into account implementation dates; keep beneficial-ownership and substance evidence robust.
• Existing financing structures: reassess interest-limitation positions under the mandatory 30% cap, the third-party-loan carve-out, the indexed EUR 3 million safe harbour (from 2032), the procyclicality relief and the now-mandatory group-escape and carry-forward rules.
• R&D-intensive businesses: quantify the benefit of immediate (or four-year) full expensing of qualifying tangible R&D capex, and check interaction with more generous domestic regimes, the three-year use condition and balancing charges on disposal.
• Groups undertaking reorganizations: the TMD’s alignment with the Mobility Directive11 (simplified mergers, division by separation, cross-border conversions) may expand the range of tax-neutral restructurings.
• Taxpayers in cross-border disputes: the DRM changes should ease access — review how changes may impact ongoing disputes. 
• SMEs: expect reduced exposure to the CFC and interest-limitation rules; confirm group-size classification under the Accounting Directive.12

As the proposal moves through the Council and the parallel DAC Recast advances, MNEs should monitor the ongoing legislative process and potential changes to the Proposal closely.

Conclusion

The Tax Omnibus is the most significant attempt yet to streamline the EU’s direct tax Directive, pairing simplification measures (broader withholding-tax exemptions, fewer optional ATAD features, lighter procedures) with increased competitiveness (R&D expensing) and tighter alignment with Pillar Two. For most MNE groups the impact is expected to be positive, but the staggered application dates — especially the 2037 deferral of the withholding-tax package — mean the practical benefits may not arrive until a later time. A&M will continue to track the file and issue further alerts as it advances.

Key references

[1]. European Commission, Proposal for a Council Directive amending Directives 2003/49/EC, 2009/133/EC, 2011/96/EU, (EU) 2016/1164, (EU) 2017/1852 and (EU) 2025/50 as regards the simplification of the Union framework on direct taxation and supporting growth and competitiveness of the EU, COM (2026) 560 final, 2026/0163 (CNS), (Jun. 24, 2026, together with Annexes 1 to 3 and accompanying documents SEC (2026) 560 final and SWD (2026) 560, 561, and 562 final.
 

[2]. European Commission, Commission Staff Working Document: Impact Assessment Report, SWD (2026) 561 final (Accompanying the Proposal. All cost-saving and GDP estimates are drawn from this report; figures are approximate and indicative).

[3]. Council Directive 2003/49/EC of 3 June 2003 on a Common System of Taxation Applicable to Interest and Royalty Payments Made Between Associated Companies of Different Member States.

[4]. Council Directive 2011/96/EU of 30 November 2011 on the Common System of Taxation Applicable in the Case of Parent Companies and Subsidiaries of Different Member States.

[5]. Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States.

[6]. 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 (as amended by Council Directive (EU) 2017/952)

[7]. Council Directive (EU) 2017/1852 of 10 October 2017 on Tax Dispute Resolution Mechanisms in the European Union

[8]. Council Directive (EU) 2025/50 of 10 December 2024 on Faster and Safer Relief of Excess Withholding Taxes.

[9]. Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for MNE groups and large-scale domestic groups in the Union.

[10]. Council Regulation (EU) 2025/1106 of 27 May 2025, Establishing the Security Action for Europe (SAFE) through the reinforcement of the European defence industry instrument.

Contacts

For further information or to discuss how the Tax Omnibus affects your organization, please contact your usual A&M Tax adviser or one of the following:

Matt Andrew, Managing Director Hong Kong | m.andrew@alvarezandmarsal.com

Bruno Aniceto da Silva, Senior Director Hong Kong | banicetodasilva@alvarezandmarsal.com

Willy van Exel, Senior Director United States | wvanexel@alvarezandmarsal.com 

Maaike Muit, Senior Director United States | mmuit@alvarezandmarsal.com 

This alert is general in nature and is provided for information only. It is based on a legislative proposal that may change before adoption and does not constitute legal, accounting or tax advice. It may not be applicable to, or suitable for, specific circumstances and should not be relied upon as a substitute for professional advice tailored to the facts. Recipients should consult a qualified Alvarez & Marsal professional before taking any action. A&M assumes no obligation to update this material for subsequent developments.