EU Direct Taxation Omnibus: Key takeaways

Introduction

On 24 June 2026, the European Commission published proposals to change several key EU tax directives (a Taxation Omnibus) and, by way of a separate proposal, a “recast” of the Directive on Administrative Cooperation (DAC). The changes are presented as a “major overhaul of EU tax legislation”. The Commission estimates that taken together, the changes would reduce compliance and financial costs for EU businesses by approximately EUR 8 billion per year.

Aim of the package – to simplify

The proposals are designed to further the Commission’s objective of reducing regulatory burdens to strengthen EU competitiveness. To this end, the Commission has proposed a number of so-called “Omnibuses” (packages of proposals to amend multiple legal acts simultaneously). To date, there have been ten Omnibus proposals published across different policy areas.

With regard to tax, the Commission’s byword has been “decluttering”, which translates as: eliminating regulations deemed excessive or unnecessary. The Tax Omnibus aims to “streamline procedures”, “clarify concepts” and address “inconsistent or divergent” application of the rules. According to the EU Commissioner overseeing the simplification agenda, Valdis Dombrovskis, the tax proposals “will bring the total simplification agenda savings so far to almost half of our goal for this mandate”.

The six directives targeted in the Tax Omnibus are: the Interest and Royalties Directive (IRD), the Tax Merger Directive, the Parent-Subsidiary Directive (PSD), the Anti-Tax Avoidance Directive (ATAD), the Tax Dispute Resolution Mechanisms Directive and the FASTER Directive.

Some of the proposals go beyond “decluttering”, such as the removal of minimum holding requirements under PSD and IRD (point 1 below) and the changes to the interest limitation rules (point 2 below), and are expected to have a material budgetary impact for Member States. Others are also political tools to promote the competitive advantage of EU businesses, such as the introduction of an R&D allowance (point 3 below) and the disapplication of the earnings stripping rule to public benefit projects and (temporarily) defence products.

The proposals that go beyond “decluttering” are expected to be subject to most discussion. In particular: the removal of PSD and IRD minimum holding requirements would be a fundamental change to the system of withholding taxation within the EU, and the changes to the interest limitation rules would be contrary to deliberate policy decisions previously taken by Member States (for example, the Netherlands explicitly decided to apply a threshold of lower than 30%) and could materially affect national budgets. Member States have already indicated that the (EU) simplification agenda will need to be balanced with their need to pursue budget revenue, especially at the current time of constrained budgets.

The DAC recast, which accompanies the Tax Omnibus, consolidates all previous revisions to the DAC into one instrument. The aim is not only to ensure clarity but also to simplify reporting obligations under the DAC.

The provisional transposition deadline for the Taxation Omnibus is set for 31 December 2028 with the general application date for most of the proposals envisaged for 1 January 2029 (with some of the proposals applying from 1 January 2032 and 1 January 2037). For the DAC recast, adoption is set for 31 December 2027 and 31 December 2029, with application to take place from 1 January 2028 and 1 January 2030.

1. PSD and IRD — removal of minimum holding requirements

Both directives would be amended to remove the minimum participation threshold required to access withholding tax exemptions. Accordingly, dividends, interest and royalty payments between EU companies would qualify for the relevant exemption regardless of participation level. The PSD’s scope is also extended to cover pension funds, and both directives would update their lists of eligible corporate entities. The IRD would be clarified to cover payments attributable to permanent establishments.

Prior authorisation and advance verification procedures are to be removed and replaced with ex post controls (see also point 6 below on FASTER). Safeguards against abuse would be introduced in both directives — the IRD adds a provision against double non-taxation, while the PSD narrows the Member State’s ability to deny deductions for costs related to shareholdings to cases where a relevant holding (10%) exists.

2. Interest limitation rule

ATAD introduced an interest limitation rule to discourage base erosion and profit shifting through (inter alia) excessive interest payments, by limiting the deductibility of borrowing costs. Under the Tax Omnibus, several currently optional provisions of ATAD are made mandatory, and the parameters of the rule are adjusted:

• The deductibility threshold of 30% EBITDA would become mandatory — Member States would no longer be permitted to set lower thresholds.
• “Low-risk third-party loans”, being loans from non-associated enterprises used to fund the borrowing taxpayer’s own activities (rather than those of group companies) are excluded from scope.
• The de minimis safe harbour of EUR 3 million would become mandatory, with such amount automatically indexed for annual inflation three years after the entry into force of the mandatory safe harbour.
• The group escape rule and carry-forward mechanism for non-deductible interest pursuant to the application of the interest limitation rule are both made mandatory.
• The option to exclude standalone entities would be removed and a mechanism introduced to address the rule's procyclical effect by permitting a taxpayer to fully deduct exceeding borrowing costs in a tax period in which its EBITDA has decreased by at least 50% compared to the immediately preceding tax period.
• A mandatory but temporary exclusion would be introduced for exceeding borrowing costs incurred on loans used to finance defence sector investments made within the first five tax periods following entry into force.

3. R&D allowance

ATAD would be extended to include a new mandatory EU-wide R&D allowance. Qualifying R&D expenditure — including capital expenditure on plant, machinery, and tangible assets used for R&D — would be deductible in full either in the tax period incurred or in any one of the following four tax periods. Qualifying expenditure would need to be “used” for R&D for a minimum of three years. The EBITDA calculation under the interest limitation rule would be adjusted to ensure the allowance does not reduce EBITDA and thereby affect interest deductibility.

4. Hybrid mismatch rules — removal of imported mismatch rules

The imported mismatches rules would be removed from ATAD entirely.

5. GAAR — expansion of scope

The general anti-abuse rule (GAAR) would be extended to cover all direct taxes to which companies are subject, including withholding taxes and Pillar Two top-up taxes.

6. Other proposals

• Controlled Foreign Company (CFC) Rules: Taxpayers subject to Pillar Two would be exempted from CFC rules in most circumstances with full exemption for SME groups. Model B (targeting non-genuine arrangements) to be eliminated in favour of mandatory Model A (targeting categories of passive income).
• Tax Merger Directive: Tax neutrality would be extended to cross-border conversions; the directive would be aligned with the Company Law Directive (so as to also cover “simplified merger” and “division by separation”).
• Dispute Resolution Mechanism Directive: Procedures would be streamlined, definitions clarified, and access to dispute resolution mechanisms improved.
• FASTER Directive: The scope of the directive would be extended to cover refunds for PSD and IRD exemptions.

7. DAC recast

The most significant changes to DAC6 are:

• Groups subject to Pillar Two would be relieved of DAC6 reporting obligations in most circumstances, with reporting preserved only where the group is headquartered in a side-by-side regime jurisdiction and has EU entities with arrangements involving jurisdictions lacking a qualified domestic top-up tax, or where related benefits are received.
• All generic hallmarks under Category A (hallmarks linked to the main benefit test) are to be removed.
• Hallmark D2 economic substance criteria are to be developed separately through a Council implementing act rather than by importing hallmarks from the (abandoned) Unshell Directive proposal.
• Hallmark C1 (targeting cross-border payments) would reference recipients resident for tax purposes in a jurisdiction on the Code of Conduct Group list rather than the OECD list of non-cooperative jurisdictions.
• Reporting would be limited to  taxpayers who have implemented the first step of a reportable arrangement (as opposed to taxpayers to whom an arrangement is ‘made available’ for implementation), with reporting deadlines extended from 30 to 90 days.
• The main benefit test would be retained for certain other hallmarks, with guidance issued to reduce “defensive reporting” of standard commercial transactions.
• Legal professional privilege (LPP) is to be clarified to apply only to lawyers and those legally authorised to provide legal representation. Lawyers would be obliged to notify clients directly but need not notify other intermediaries. Professionals without a recognised legal title would not benefit from LPP protection.

More generally/other DACs:

• Member States should not introduce or maintain additional reporting obligations in the area covered by the DAC.
• Notification obligations for DAC4 (country-by-country reporting) and DAC9 (Pillar Two-related reporting) would be harmonised.
• An EU-wide TIN verification tool would be introduced, accessible to both Member States’ tax administrations and reporting entities.