EU Commission proposes tax simplification package to streamline compliance and boost competitiveness

On 24 June 2026, the European Commission published a comprehensive tax simplification package consisting of two major proposals: the Direct Taxation Omnibus, which simplifies substantive EU tax rules, and the DAC Recast, which consolidates the administrative cooperation framework. 

The major changes include the elimination of withholding taxes on all intra-EU interest, royalty and dividend payments (regardless of holding percentage), relaxation of the Earnings stripping rules and CFC rules, and new R&D incentives. Together, these reforms should reduce compliance burdens for taxpayers in the EU by approximately EUR 6.6 billion annually while maintaining high standards against tax fraud and avoidance.

Background

Over the years, the EU has developed an extensive framework of directives governing direct taxation, including the Interest and Royalties Directive (IRD), the Parent-Subsidiary Directive (PSD), the Tax Merger Directive (TMD), the Anti-Tax Avoidance Directive (ATAD), and the Dispute Resolution Mechanisms Directive (DRM). While these instruments have facilitated cross-border activity, their cumulative complexity, combined with divergent national implementation and the overlay of Pillar Two global minimum taxation, has created significant compliance burdens for businesses operating across borders.

The Direct Taxation Omnibus

The Omnibus is the flagship element of this package. It addresses six existing directives and introduces the following key changes.

• Withholding taxes on intra-EU payments (IRD/PSD). Currently, the Interest and Royalties Directive requires a minimum 25% holding between associated companies while the Parent-Subsidiary Directive requires a 10% holding for dividends. The proposal eliminates these thresholds entirely: as of 1 January 2037, all intra-EU interest, royalty and dividend payments between companies would be exempt from withholding tax, regardless of holding percentage or any form of affiliation. The scope of the PSD is also extended to explicitly cover pension funds, irrespective of their legal form, through a derogation from the subject-to-tax condition, removing significant tax obstacles to cross-border investments by pension funds. Burdensome upfront administrative procedures will be prohibited, companies will self-assess eligibility, subject to ex post controls. Where withholding tax is nevertheless withheld at source, member states must ensure a refund within one year following due receipt of the application. For publicly traded securities, the FASTER Directive procedures will apply.
  
  To prevent double non-taxation, a safeguard requires member states to levy withholding tax or deny deductibility where payments flow to zero-tax jurisdictions. This safeguard does not apply where the recipient is within Pillar Two scope.
•  CFC rules (ATAD). The ATAD currently provides two models for CFC rules: Model A (targeting specific categories of passive income) and Model B (targeting non-genuine arrangements under a transfer pricing approach). The Commission considers Model B to offer limited added value. The proposal therefore:
  • Removes Model B entirely: Model A becomes the only approach, implying that member states currently using Model B (including the Netherlands) will need to amend their CFC rules.
  • Exempts Pillar Two groups: Companies within Pillar Two scope are exempt from CFC rules entirely, as the 15% minimum tax already achieves the anti-avoidance objective. A targeted exclusion also applies to groups headquartered in jurisdictions qualifying as a side-by-side regime (currently only the US), provided the CFC is subject to a QDMTT.
  • Exempts SMEs: Small and medium-sized groups and standalone undertakings are carved out completely; tax administrations report almost no CFC cases involving SMEs in the decade since ATAD took effect. 
• Earnings stripping rule (ATAD). The proposal addresses fragmentation in the earnings stripping rule through the following mandatory changes:
  • 30% EBITDA cap made mandatory: Member states may no longer set stricter deductibility thresholds (such as the current Dutch cap of 24.5%), ensuring consistent treatment across the EU.
  • Higher, mandatory safe harbour: The de minimis threshold is increased to EUR 3 million (from the current maximum) with automatic annual indexation. Member states with lower thresholds (e.g. the current Dutch threshold of EUR 1 million) will need to raise them.
  • Carve-out for low-risk third-party loans: Borrowing costs on genuine third-party loans used to fund the borrower’s own activities are excluded from the rule (which are currently all in scope), unless used for on-lending within the group or to fund capital contributions of a group company.
  • Economic downturn safeguard: No interest limitation applies for a tax year in which the taxpayer’s EBITDA falls by at least 50%, avoiding procyclical effects.
  • Mandatory group escape: The optional group ratio rule (allowing higher deductions where leverage is in line with the group) becomes mandatory.
  • Mandatory carry-forward: Both exceeding borrowing costs and unused interest capacity must be carried forward.
  • Public-benefit and defence carve-outs: The optional exclusion for long-term public infrastructure is reframed around long-term public-benefit projects (including social housing). A temporary five-year exclusion applies to loans for the defence industry taken out after 1 January 2029.

Parallel developments at the Court of Justice. These proposed amendments to the earnings stripping rule come at a time of significant judicial activity. In Case C-138/24, Advocate General Kokott recently issued an opinion concerning Luxembourg’s implementation of the ATAD earnings stripping rule. Although the ATAD text does not permit member states to exclude certain securitisation companies from the Interest Limitation Rule, the AG found Luxembourg’s broader exemption compatible with EU law, primarily based on the principle of equality as a general principle of EU law and Article 20 of the Charter. Notably, the AG emphasised that the ATAD’s purpose is to prevent BEPS and concluded that securitisation entities present limited BEPS risk. The AG also confirmed that member states must take account of higher EU law, including general principles, when implementing and applying directives, implementation is not merely a “copy-paste” exercise. Several ATAD cases are now pending before the Court of Justice, and proceedings concerning Dutch implementation are ongoing in the Netherlands. These developments raise the question whether parts of the proposed Omnibus amendments may be overtaken by case-law before its entry into force.

• R&D expensing (ATAD). To strengthen EU competitiveness, support innovation and facilitate the green and digital transition, a new chapter introduces an EU-wide R&D allowance as a minimum standard. Taxpayers may deduct qualifying expenditure, broadly capital expenditure on plant, machinery and tangible assets used directly for R&D or to provide R&D facilities, in the year incurred or over any of the four subsequent tax periods. To prevent abuse, qualifying assets must be used for R&D for a minimum of three years, with balancing-charge rules on disposal. This provision applies from 1 January 2032. 
• Hybrid mismatches (ATAD). The imported hybrid mismatch rules, which the Commission considers excessively complex and burdensome relative to the results achieved, are deleted entirely. Other hybrid mismatch provisions remain.
• General anti-abuse rule (ATAD). The GAAR is reworded to confirm that it applies to all direct taxes to which companies are subject, including withholding taxes and top-up taxes resulting from the Pillar Two Directive.
• Tax Merger Directive. The Commission notes that the scope of the TMD no longer aligns with more recent EU company law, particularly the cross-border operations introduced by the Mobility Directive (2019/2121). The proposal:
  • Aligns the scope and definitions with the Mobility Directive to include “simplified mergers” (without share issuance by the acquiring company) and “divisions by separation”, which were not yet covered.
  • Adds a new chapter covering cross-border conversions (transfer of registered office and conversion into a legal form of the destination member state). Taxation of capital gains is deferred until actual disposal, provided the company remains a tax resident in the departure member state or keeps a permanent establishment there. The conversion may not give rise to an exit tax in the hands of shareholders.
  • Updates the annex listing eligible company forms and empowers the Commission to adopt delegated acts for future amendments.
• Dispute Resolution Mechanism. The DRM provides mechanisms for resolving cross-border disputes arising from the interpretation and application of double taxation agreements. The Commission introduces targeted amendments to address interpretative divergences and improve taxpayer access:
  • Where taxation of more than one person is directly affected by the same question, each qualifies as an affected person and may submit the complaint only to its own member state of residence, avoiding multiple filings.
  • The notion of “simultaneous submission” is replaced by a clear 30-calendar-day submission window, responding to divergent national interpretations.
  • Affected persons may remedy deficiencies within 30 days and resubmit a rejected complaint within the overall three-year time limit.
  • Where competent authorities agree that no agreement can be reached, they must inform the taxpayer without delay rather than waiting for the two-year MAP period to expire.
  • Other ongoing procedures are suspended (rather than terminated) once a DRM complaint is submitted, ensuring taxpayers are not left without protection while avoiding overlapping procedures.
  • A new provision empowers the Council to adopt implementing acts laying down binding technical and procedural rules, with a harmonised statistical reporting framework aligned with the OECD.

The DAC Recast

The DAC Recast consolidates all nine amendments to the Directive on Administrative Cooperation (DAC1–DAC9) into a single legal text. Key simplifications include:

• DAC6 reporting. MNE groups within Pillar Two scope are exempted from DAC6 reporting, provided no benefits are granted that would lower taxation below 15%. The “generic hallmarks” (Category A), which triggered many low-value reports, are deleted entirely.
• Platform reporting (DAC7). The monetary threshold for reporting sellers on digital platforms increases from EUR 2,000 to EUR 3,000, and the 30-transaction threshold is removed.
• Streamlined notifications. A single notification can be filed for both Country-by-Country Reporting (DAC4) and Pillar Two purposes (DAC9), using one template and one deadline.
• TIN verification. A new centralised system will allow tax authorities and reporting entities to verify Taxpayer Identification Numbers before reporting, improving data quality.

Timeline

Both proposals now proceed to the European Parliament for consultation and the Council, where unanimity is required.

The Direct Taxation Omnibus requires transposition by 31 December 2028, with application from 1 January 2029. Certain provisions will apply later: the full scope expansion of the IRD and PSD from 1 January 2037, and R&D expensing from 1 January 2032.

The DAC Recast simplifications (DAC6 and DAC7 changes) take effect from 1 January 2028, with more technical changes (i.e. TIN verification) from 1 January 2030.

Implications for the Netherlands

The Netherlands is well positioned to benefit from these proposals, although certain changes will require adjustments to current Dutch tax practice and may affect government revenues. Under the current Dutch implementation of the IRD and PSD, the Netherlands generally does not levy withholding tax on outbound interest and royalty payments to EU recipients, and its dividend withholding tax exemptions already apply at the 5% threshold (below the current PSD minimum of 10%). The proposals would therefore confirm and extend this existing approach. The prohibition on upfront procedures, however, may affect the current Dutch attestation requirements for certain cross-border payments.

More significantly, the Dutch earnings stripping rule applies a relatively strict de minimis threshold of EUR 1 million (compared to the proposed mandatory EUR 3 million) and an EBITDA cap of 24.5% (compared to the proposed mandatory 30%). The mandatory harmonisation of these thresholds would represent a meaningful relaxation for Dutch taxpayers, but correspondingly reduces the Dutch government’s ability to limit interest deductions as a base protection measure. Similarly, the Dutch CFC regime currently uses Model B (the transfer pricing approach). If the proposal is adopted, the Dutch regime will need to switch to Model A (targeting specific categories of passive income). The Dutch rules do not currently apply the stand-alone exemption under ATAD Article 4(3)(b), which the proposal will abolish EU-wide in favour of the new SME and third-party loan carve-outs.

An important question for Dutch practice concerns the interaction between the proposed withholding tax exemptions and the Dutch anti-abuse rules. The Dutch dividend withholding tax exemption currently requires recipients in order to meet certain (i.e. economic) substance requirements and not be part of an abusive arrangement. The proposals explicitly preserve member states’ powers to carry out ex post controls and apply national anti-abuse rules, including rules on beneficial ownership. This means the Netherlands should remain able to apply its anti-abuse rules and beneficial ownership tests, but only through ex post verification, not as an upfront procedural condition for accessing the exemption. For groups potentially not meeting the relevant anti-abuse tests, this shifts the practical burden. Withholding tax must initially be exempted with potential clawback or denial following an ex post review.

The proposed elimination of the holding threshold for the PSD may have significant unintended consequences for the Dutch box 3 regime. Currently, the Dutch participation exemption applies only where a company holds at least 5% of the shares in another company. If the Omnibus is adopted, dividend income received by a Dutch BV from any EU shareholding, regardless of the percentage held, would be exempt from both withholding tax and corporate income tax. This makes it considerably more attractive for individuals to hold investments through a BV (taxed in box 2) rather than directly in box 3. This creates significant tax deferral opportunities and a lower effective rate. The budgetary impact could be substantial. These developments add further complexity to the ongoing debate about the new Dutch box 3 system based on actual returns, which is already facing political headwinds.

Adoption prospects

Regarding adoption prospects, these proposals benefit from strong political momentum. Member states unanimously adopted Council Conclusions in March 2025 setting a “tax decluttering and simplification agenda” to enhance EU competitiveness. Stakeholders, including businesses, tax advisors and member state administrations – have broadly supported the simplification objectives. The proposals are designed as targeted amendments to existing legislation rather than new obligations, which should facilitate negotiations. Nevertheless, unanimity remains required in the Council for tax matters. The proposed measures may have significant budgetary consequences for member states: allowing more interest deductions, reducing withholding tax revenues and introducing R&D incentives all represent revenue foregone. In this light, the Omnibus may undergo changes before adoption. The staggered implementation dates, with some provisions not applying until 2032 or 2037, also reflect an awareness that certain changes require longer transition periods.

Key takeaways

• Carve-outs from CFC rules, the more flexible interest deduction rules, including a mandatory EUR 3 million threshold (up from EUR 1 million in the current Dutch earnings stripping rules) will significantly reduce the compliance burden for smaller businesses. SMEs will no longer need to navigate complex CFC analyses or interest limitation calculations in most cases.
• The elimination of withholding taxes on cross-border interest, royalty and dividend payments, regardless of holding percentage, combined with the prohibition on upfront administrative procedures, should substantially reduce friction and costs. Groups will self-assess eligibility for exemptions with verification shifting to ex post controls.
• For multinational groups subject to Pillar Two, significant compliance savings from exemption from both DAC6 reporting obligations and CFC rules (since the 15% minimum tax already achieves the anti-avoidance objective), streamlined Country-by-Country Reporting notifications, and potential full exemption from withholding taxes on intra-EU flows.
• As unanimous approval is required, it remains uncertain whether and to what extent these measures will be adopted. Member states will also have to carefully consider the budgetary implications of the proposed changes before they approve.

CMS will continue to monitor developments as these proposals progress through the legislative process. 

For information on how this tax simplification package could impact your business, contact your CMS client partner or the CMS experts who contributed to this article.