Malta supports closure of EU’s tax loophole for multinationals’ subsidiaries

Finance Minister Edward Scicluna is disputing reports that he is opposing closing a European tax loophole against tax shopping by multinationals, and insisting that Malta is against the wording of an amended directive.

Malta is being reported to be the only member state “stopping a tax loophole costing billions of euros” from being closed, according to the authoritative euractiv.com.

The European Commission has identified “hybrid loan arrangements” – a combination of debt and equity – as a tax-planning tool. Some member states classify profits from hybrid loan arrangements as tax-deductible debt.
Others don’t, creating a mismatch in national laws, that is being exploited by multinational companies which open subsidiaries in other member states so that they pay little or no tax.

But Scicluna today said that Malta agrees on closing the loophole, and that at the last meeting of EU finance ministers only disagreed with the wording of the amended directive, but not the objective of the Parent-Subsidiary Directive.

“We fully agree that profits which have benefited from a deduction in the member state of the subsidiary ought not to escape taxation in the member state of the parent, and that of the subsidiary,” a spokesperson quoted Scicluna as having said at the last ECOFIN meeting.

Scicluna also said Malta supported the Greek president’s compromise to split the adoption of this proposal, with a view to fast-track a rapid agreement on this aspect. “Let me be clear therefore that Malta equally shares the view that this ‘hybrid loan mismatch’ loophole ought to be closed as quickly as possible.”

The proposed solution is that if a subsidiary is based in a country where profits from financial instruments with both debt and equity characteristics are tax-deductible, those dividends must be taxed by the member state where the parent company is based.

The compromise deal states that countries should tax certain profits. The Commission’s original proposal said member states should not tax profits if they were not deductible by a subsidiary company.

Scicluna said that since the Parent-Subsidiary Directive is not a taxing instrument, the wording of the law should respect member states’ competence in this area.

“Malta’s preferable option of wording is the one that most safeguards member states competence in this area. To this effect, the government is currently seeking legal advice which while safeguarding Malta’s interests would achieve the aim of the amending directive, that of closing a tax loophole,” Scicluna said.