In our April 2026 edition, we reported on the European Commission’s Tax Omnibus initiative (the “Initiative”), then at the call-for-evidence stage, and expected to result in a legislative proposal in the second quarter of 2026. On 24 June 2026, the Commission published that proposal for a Council Directive (the “Proposal”), registered as COM(2026) 560 final, procedure 2026/0163 (CNS). The Proposal amends six existing EU tax directives rather than replacing them, confirming the simplification and consolidation approach announced at the Initiative stage. As with the Initiative, the Proposal is based on Article 115 of the Treaty on the Functioning of the European Union (“TFEU”), meaning it requires the Council’s unanimous agreement following consultation, but not co-decision, of the European Parliament (“EP”).
Scope of the Proposal
The Proposal amends:
- the Interest and Royalties Directive (2003/49/EC);
- the Merger Directive (2009/133/EC);
- the Parent-Subsidiary Directive (2011/96/EU);
- the Anti-Tax Avoidance Directive (“ATAD”) ((EU) 2016/1164);
- the Tax Dispute Resolution Mechanisms Directive ((EU) 2017/1852); and
- the FASTER Directive on withholding tax relief ((EU) 2025/50).
Parent-Subsidiary Directive
The Proposal removes the minimum 10% shareholding and the minimum one-year holding period currently required for the dividend exemption and the related withholding tax exemption between EU companies, extending both to all EU shareholdings. Most of these changes would apply only from 1 January 2037.
Interest and Royalties Directive
Domestic authorisation procedures for the existing withholding tax exemption would be removed and the exemption aligned with the refund procedures under the FASTER Directive. A new safeguard is also introduced for interest and royalty payments leaving the EU towards related recipients in third countries that levy no, or a nominal zero, corporate tax on that income: the source Member State would have to apply either a withholding tax or a denial of deduction, subject to exceptions for recipients within the Pillar Two framework. This measure would also apply only from 1 January 2037.
Anti-Tax Avoidance Directive
The interest limitation rule is revised, including a new exclusion for certain low-risk third-party loans, a mandatory indexed EUR 3 million threshold, and temporary relief where a taxpayer’s EBITDA falls sharply. The current option for Member States to choose between two methods of taxing controlled foreign companies is removed: only the category-based method (the so-called Model A) would remain available, subject to a mandatory substance carve-out for EU/EEA subsidiaries. The general anti-abuse rule is extended to cover all taxes, not only corporate tax, and a new immediate expensing incentive is introduced for certain research and development assets. These changes would generally apply from 1 January 2029, other than the indexed EUR 3 million interest-limitation threshold, applying from 1 January 2032.
Other directives
The Merger Directive would be extended to certain additional merger and division structures; the Tax Dispute Resolution Mechanisms Directive would be clarified on procedural points; and the FASTER Directive would be adjusted so that fast-track withholding tax relief is not denied solely because a payment also relies on the Parent-Subsidiary or Interest and Royalties Directives.
Luxembourg impact
For Luxembourg, the proposed move to a single, category-based method for taxing controlled foreign companies and the new safeguard on interest and royalty payments to low-tax third countries are the two measures whose implementation should be monitored closely as both would depart from the current Luxembourg legislation, although the interest and royalty measure would not apply, if adopted, before 1 January 2037.
Next steps
The Proposal will now be examined by the Council and consulted on by the EP. As a directive under Article 115 TFEU, it requires the unanimous agreement of all 27 Member States, and any Member State may seek changes to the text during negotiation. If adopted, Member States would have until 31 December 2028 to transpose the directive, with general application from 1 January 2029, except for the provisions noted above applying from 2032 and 2037 respectively.
Conclusion
The Proposal marks the transition of the Tax Omnibus from a policy initiative to a concrete legislative text, confirming the broad direction previously announced by the Commission while adding detail on scope, exceptions and timing. Its final form, and the extent to which the 2029, 2032 and 2037 application dates are preserved, will depend on the outcome of negotiations in the Council over the coming months.
Share on
