On 24 June 2026, the European Commission published its proposal for simplifying EU direct tax rules and reducing compliance burdens for businesses operating across borders.
The package consists of two legislative proposals: the Tax Omnibus Directive, amending several existing EU direct tax directives, and a recast of the Directive on Administrative Cooperation (DAC).
These developments are particularly relevant international businesses and for multinational groups with EU operations. Our direct tax experts discuss several key proposals and their implementation schedule.
Competitiveness of the internal market
The main objective of these proposals is to strengthen the competitiveness of the EU internal market by facilitating cross‑border economic activity and eliminating complexity and overlap in taxation, in line with the Draghi Report on EU Competitiveness and the broader objectives set out in the Competitiveness Compass for the EU. The proposal reflects the need to ensure that the EU tax framework remains coherent, proportionate and effective. It aims to simplify the existing framework to reduce unnecessary compliance burdens, improve legal certainty and ensure the coherent functioning of the internal market.
In line with our previous expectations, this is done primarily by adjusting current rules and directives. Please note: the proposals described below have yet to be approved and will likely face changes during the political discussions and legislative process.
Parent‑Subsidiary Directive (PSD)
The proposal removes withholding taxes on all cross‑border dividend payments between EU companies. This may lead to a significant simplification of dividend flows within EU group structures. Importantly, the proposal includes abolishing the current minimum shareholding requirement. As a result, the exemption would apply regardless of the percentage of the participation.
In addition, the scope of the PSD is extended to include pension institutions, allowing them to benefit from withholding tax relief on intra‑EU dividends. Current anti‑abuse provisions will remain in place.
Interest and Royalties Directive (IRD)
The Tax Omnibus proposes abolishing withholding taxes on cross‑border interest and royalty payments between EU companies, again without any minimum participation requirement and with current anti‑abuse rules remaining in place.
As part of the proposal rules, a withholding tax must be applied in situations where the recipient is established in a zero‑tax or no‑tax jurisdiction. This safeguard should not apply if the recipient is subject to a qualified domestic top‑up tax under Pillar Two.
Targeted simplifications under ATAD
The Anti-Tax Avoidance Directive (ATAD) is to include a minimum EU standard for the tax treatment of R&D investments. This measure is aimed at ensuring full deductibility of qualifying R&D expenditure. Qualifying capital expenditure on tangible assets such as machinery used for R&D may be deducted immediately, or spread over up to four subsequent tax periods. If these assets are not subsequently used for R&D purposes for at least three years, a claw‑back may apply.
Interest limitation rule (earnings stripping)
The proposal simplifies and harmonises the ATAD interest limitation rule or earnings stripping measure by:
making the 30% EBITDA threshold mandatory across the EU;
introducing a mandatory € 3 million safe harbour, with automatic annual indexation for inflation;
excluding qualifying third‑party loans, provided the funds are used for the taxpayer’s own activities;
introducing a safeguard where EBITDA decreases by 50% or more compared to the previous year;
making the group escape rule mandatory;
explicitly expanding the current optional exemption for long-term public infrastructure projects to include long-term public-benefit projects; and
introducing a temporary exclusion for certain defence‑related investments.
As the earnings stripping measure is currently a hotly debated topic in the Netherlands, it will be interesting to see whether the Dutch government might unilaterally make legislative changes sooner, to the extent the current ATAD language permits.
Further steps towards simplification
In addition to the measure described above, the proposal contains simplifications, clarifications and enhancements to other rules, including:
Introduction of an exemption from the CFC rules for small and medium‑sized groups, reducing disproportionate compliance burdens.
Exclusion of groups within scope of Pillar Two from the CFC rules, subject to certain limitations.
Removal of rules on imported hybrid mismatches.
Expansion of the scope of the Tax Merger Directive (TMD) to cover new forms of cross‑border reorganisations, including certain divisions and conversions, to ensure tax neutrality and remove barriers to internal market restructurings.
Finally, a recast of the DAC is proposed, consolidating the existing directive and various amendments into a single legal text, to simplify administrative cooperation, clarify obligations and reduce unnecessary reporting overlaps. To give two examples, the notification process for entities within the scope of DAC4 (CbCR) and DAC9 (Pillar Two) will be significantly streamlined. The proposed measure will introduce a single notification, where one entity will submit the notification on behalf of the entire group. Secondly, the requirement to report cross-border arrangements under DAC6 will be removed for entities that are subject to Pillar 2, provided that they fulfil certain conditions.
Political debate and implementation schedule
Under the current proposal, Member States would need to transpose the rules into national legislation by 31 December 2028, with general application from 1 January 2029. However, certain key measures would not enter into force until later, notably 1 January 2032 for the mandatory € 3 million safe harbour for the earnings stripping measure, and 1 January 2037 for several changes to the PSD and IRD (including the removal of minimum ownership requirements).
Please note that the proposals need to be submitted to the European Parliament for consultation and to the Council for adoption. Much political debate is expected, and the proposals may need to be adjusted in order to reach the required unanimous approval of all Member States. It is possible that the plans and the implementation schedule may alter.
If you have any questions about the Tax Omnibus, the legislative process or how the proposed changes may affect your business, please contact our international direct tax experts.
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
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