Malta gives its agreement to close European tax loophole

Malta has consented to a Greek compromise after having held up a Council law to “stop a tax loophole costing billions of euros” from being closed.

The agreement by EU finance ministers will stop multinational companies exploiting hybrid loan arrangements to pay little or no tax.

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.

A proposed solution brokered by the Greek presidency 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.  

"Our concerns were recognised as legitimate...  there were two issues, that direct taxation remains the competence of member states, which has been addressed by the wording in Annex II of the Council directive. And the second issue was to include a paragraph to say that the fact that Malta was agreeing to closing this tax loophole, does not set any precedent for the future, and that member states' unanimity is always needed in these cases," Scicluna said.

Malta supported the closing of the hybrid loan loophole, but said the wording was a “point of principle” as it strayed into national competences. Agreeing to the deal could also set a precedent for future legislation, which Malta was keen to avoid.

Malta argued that the wording of the compromise will compel member states to levy taxation on the basis of the revised Parent-Subsidiary Directive, which infringes on its sovereignty over tax decisions.  

The Greek compromise would have split the revised Parent-Subsidiary Directive in two, allowing EU governments to close the loophole, without agreeing to a hotly debated general anti-tax abuse rule. The anti-tax abuse rule also requires unanimity to become law.