On 24 June 2026, the European Commission adopted the Tax Simplification Package (the “Package”) aimed at cutting red tape and reducing costs for businesses operating across the European Union (“EU”). 

The Package contains two components:

• A recast of the Directive on Administrative Cooperation (“DAC”) and its eight amendments in order to consolidate into one text and clarify, simplify and enhance the EU legal framework for administrative cooperation in the field of direct taxation (“DAC Recast”).

• The Omnibus on Direct Taxation Directive as regards the simplification of the Union framework on direct taxation and supporting growth and competitiveness of the EU (the “Tax Omnibus Directive”). This amends six existing EU tax directives: the Anti-Tax Avoidance Directive (“ATAD”), the Interest and Royalties Directive (“IRD”), the Parent-Subsidiary Directive (“PSD”), the Tax Merger Directive (“TMD”) and the Dispute Resolution Mechanisms Directive (“DRM”) and the FASTER Directive on withholding tax relief (“FASTER”).

The Package comes after ten years of focusing legislative initiatives on the prevention of base erosion and profit shifting and forms part of the overall priority of the current European Commission to increase EU’s competitiveness.

Key drivers to promote competitiveness

The shift in focus is exemplified by the inclusion of a new chapter into ATAD setting down a minimum standard on the tax treatment of R&D expenditure in order to address the competitiveness challenges that arise from the fragmentation of R&D tax regimes across the Union, align more closely with the U.K. and U.S. and ensure EU business can benefit from the favourable treatment under the Pillar Two framework. 

Another key competitive push is the proposal for a full withholding tax exemption of interest and royalty payments between EU companies, as well as of dividends and other profit distribution under changes to the IRD and PSDs from 2037, subject to certain anti-avoidance rules including beneficial ownership requirements.

As was widely expected, the taxpayers within the scope of Pillar Two would no longer be subject to the controlled foreign company rules (“CFC”) under ATAD.

The introduction of the third party loan carve-out from the Interest Limitation Rule (“ILR”) in ATAD along with the expansion of the scope for public benefit exclusions, to encompass “a long-term public benefit project” in the general public interest by a Member State.

Next steps – Negotiations at Council

The proposals will need to be negotiated at Council in the coming months. Ireland will assume the Presidency of the Council of the European Union on 1 July, and chair the meetings, therefore assuming a more neutral position on the proposals in its role as Chair.

Progressing the Tax Omnibus Directive is a priority of the Irish Presidency, although not undertaking to conclude negotiations. The Tax Omnibus Directive indicates that the Proposal must be adopted by 31 December 2028 with provisions applicable from 1 January 2029.

Although part of the European Commission simplification agenda, the matters still constitute taxation measures which require unanimous agreement at Council. Given that these measures will materially impact on tax receipts of Member States, negotiations will likely be more difficult for the Tax Omnibus Directive than the DAC Recast, which the Irish Presidency has indicated it will aim to conclude during its Presidency.

We discuss the main changes contained in the proposed Tax Omnibus Directive below.

ATAD

ILR

Some of the key changes introduced include:

Mandatory 30% EBITDA Cap

To put all businesses in the EU on a level playing field, the 30% EBITDA cap is made uniform and mandatory. Member States will no longer be able to set different thresholds, removing one of the most significant sources of inconsistency across the single market. The Irish legislation transposing the ILR already sets the threshold at 30% so no change would apply.

Third-party loan carve-out

The proposal recognises that the main tax avoidance risk targeted by the ILR arises from loans between companies within the same corporate group, not from ordinary commercial borrowing. Loans from independent lenders, used to fund the borrowing company’s own activities, and not on-lent within a group are therefore excluded from the rule entirely. It is estimated that this change would save EU business around €430 million per year in compliance costs. This would be an improvement to the current Irish legislation transposing the ILR in Ireland and across the EU.

Mandatory €3 million safe harbour aligned with inflation

The proposal makes it mandatory for Member States to implement the €3 million safe harbour under which taxpayers can deduct exceeding borrowing costs in an amount equal to €3 million. Member States have 3 years to introduce the safe harbour, which will benefit from automatic annual indexation based on inflation. This effectively removes smaller businesses from the scope of the ILR and is expected to save EU business approximately €69 million per year. The earlier drafts contained an increase in the amount to €5 million, so it is regrettable that this more ambitious proposal was not included ultimately. The Irish legislation transposing the ILR already contains the 3 million safe harbour, however, would be improved by the introduction of the automatic annual indexation increase.

Pro-cyclicality safeguard

A prominent criticism of the ILR from stakeholders was the fact that because it links the deductibility of borrowing costs to earnings, which may decline during economic downturns; the rules restrict the ability to borrow when it is most necessary. To address this, no interest limitation will apply where a business’s EBITDA falls by 50% or more in a given year, providing a meaningful buffer during periods of economic difficulty. This would be an improvement to the current ILR legislation in Ireland and across the EU. 

Expanded scope of exclusions

The proposal contains an expanded scope for public benefit exclusions, to encompass “a long-term public benefit project” to provide, upgrade, operate or maintain a large-scale asset that is considered in the general public interest by a Member State. In this regard, any project that contributes to the EU’s common priorities in the area of climate, digitalisation, social and economic resilience, energy and social housing. This will be without prejudice to the EU State aid rules. This is very welcome and in line with stakeholder feedback.

In addition, in order to strengthen the EU’s overall defence readiness and facilitate the mobilisation of private investment in defence capabilities, it is proposed to introduce a temporary exclusion from the ILR for exceeding borrowing costs incurred on loans used to finance defence products in critical capability.

The proposal significantly updates the definition of “financial undertaking” in Article 2(5) of ATAD, which determines the scope of the optional exclusion from the ILR. The definition of financial undertakings is updated to reflect developments in EU financial regulation since the adoption of the directive. New categories added include investment firms (“MiFID II”), alternative investment fund managers (“AIFMs”), and UCITS management companies. Negotiations on this aspect will likely be influenced by the upcoming judgment of the Court in the case of Commission v Luxembourg (Case C-138/24), in which AG Kokott recently opined that Luxembourg did not infringe ATAD by excluding securitisation special purpose entities (SSPEs) from the scope of the ILR.

The standalone company exclusion will be repealed. 

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New Research and Development (“R&D”) Provisions

ATAD is expanded to introduce a new harmonised minimum standard framework for the tax treatment of R&D expenditure, addressing the fragmented national landscape and the EU’s competitive disadvantage relative to major trading partners. Under the new Chapter 1a inserted into ATAD, taxpayers are entitled to an R&D allowance, equal to the amount of the qualifying expenditure. Businesses will be entitled to immediately deduct the full cost of capital expenditure on plant, machinery and tangible assets used for R&D, claimable either in the period incurred or within the following four years. 

An anti-abuse condition requires the asset to be used wholly and exclusively for R&D for at least three years. If the relevant conditions are not met, the allowance is withdrawn and the corresponding amount is added back into the taxable base. 

Where a taxpayer ceases to own, demolishes, or disposes of a qualifying asset, the disposal value is considered for tax purposes, and if it exceeds any unclaimed allowance, a balancing charge arises capped at the lower of that excess or the allowance previously claimed.

As a related adjustment, the EBITDA calculation for the purposes of ILR is modified to include an add-back for the tax-adjusted amounts of qualifying R&D expenditure deducted under the new chapter or under national measures providing for higher deductibility. This ensures that the new allowance does not reduce a taxpayer’s EBITDA. In turn, it preserves the taxpayer’s entitlement to interest deductibility. 

The new provisions operate as a minimum standard only and Member States remain free to apply more favourable domestic rules.

This proposal mirrors that issued by the Commission in July last year as a Recommendation on tax incentives to support the Clean Industrial Deal.

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General Anti-Abuse Rule (“GAAR”)

The GAAR is updated to apply to all taxes that companies are subject to, including withholding taxes and the new top-up taxes arising under the Pillar Two global minimum tax rules. This resolves uncertainty caused by the previous, narrower reference to “corporate tax” alone. The Irish GAAR already applies to the Irish Pillar Two legislation so this would not result in a change of approach in Ireland.

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CFC Rules

Three targeted changes are made. 

First, an exemption from CFC rules is introduced for businesses already within the scope of the Pillar Two framework, removing duplicative calculations and reporting obligations estimated to cost around €160 million per year. All EU-located companies of groups headquartered in a Pillar Two jurisdiction, will benefit from this carve-out for their low-taxed subsidiaries. For US headquartered groups, which are subject to the qualified ‘side-by-side’ regime, the exclusion will only apply where the low-taxed controlled foreign subsidiary is subject to qualified domestic top-up tax and no refund, or direct or indirect financial benefit is granted in relation to that tax.

Second, CFC rules are disapplied entirely for small and medium-sized groups, reflecting evidence that administrations have had virtually no CFC cases involving SMEs.

Third, the existing option to apply an alternative CFC methodology (Model B) is removed. Model A, which is based on specific categories of passive income, is made the only permissible approach, as the European Commission asserts that it is more effective in practice. This represents a significant change for Ireland, given its adoption of a substance-based regime which aligned with transfer pricing principles.

It is expected that the CFC rule changes will be heavily debated at Council, with certain larger Member States reportedly unhappy about the exclusion for Pillar Two groups, which would result in lower tax receipts in light of the fact that Pillar Two will not raise significant tax revenue. Equally, given many Member States, including Ireland, Malta and the Netherlands have transposed CFC rules based on Model B, debate is expected on this.

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Hybrid Mismatch Rules

The rules on imported mismatches, which prevent businesses from exploiting differences between national tax systems, are removed from ATAD. These provisions proved disproportionately complex, generating significant burdens for both businesses and tax authorities without producing their intended results.

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IRD / PSD

The IRD currently exempts certain intra-EU payments from withholding tax, but access is constrained by minimum holding thresholds and administrative barriers that create legal uncertainty. The proposed reforms remove these thresholds, significantly broadening the availability of the exemption by removing the minimum holding requirement applicable under the concept of “associated company”. The result is that interest and royalty payments between companies within the EU may benefit from the withholding tax exemption regardless of participation levels. 

Targeted safeguards are introduced to prevent double non-taxation in low or no-tax third country scenarios, subject to Pillar Two exclusions. The safeguards require Member States to impose withholding tax or deny a deduction for interest and royalty payments at source where payments are made to recipients in a third country jurisdiction that does not levy corporate income tax or applies a zero rate to such income. Furthermore, administrative pre-authorisation is largely abolished, with taxpayers self-assessing eligibility, and the Directive’s application to permanent establishments is clarified irrespective of local deductibility.

Regarding the PSD, it currently eliminates withholding tax on intra-EU dividend payments and prevents double taxation at the level of the parent, subject to minimum shareholding thresholds and administrative conditions. The proposed reforms remove the minimum holding requirement from the definition of “parent company”. Therefore, dividends and other profit distributions held between companies within the EU may qualify for the exemption irrespective of the level of participation between them, though the existing option for Member States to deny deduction of charges relating to holding or losses resulting from the distribution of profits is restricted to cases involving a participation of at least 10%.

In a significant extension of the Tax Omnibus Directive’s scope, the proposal broadens the PSD to cover pension funds regardless of their legal form, thereby facilitating cross-border profit distributions to institutional investors. Aligned with the changes proposed for the IRD, Member States will no longer be able to require prior authorisation or administrative procedures for verifying whether the conditions for the exemption are fulfilled at the time of payment, with eligibility to be self-assessed by the taxpayer and subject to ex post controls and the application of anti-abuse rules by Member States.

Tax Merger Directive

The TMD is updated to cover additional types of corporate restructuring, including “division by separation”, and a new chapter defers taxation of capital gains arising on cross-border conversions until the relevant assets are actually disposed of.

Dispute Resolution Mechanisms Directive

Targeted amendments streamline the dispute resolution process. The definition of an “affected person” is clarified in multi-party disputes. Furthermore, “simultaneous submission” is replaced with a 30-day window; and competent authorities must notify businesses promptly if no agreement can be reached, allowing earlier access to the arbitration process.

FASTER Directive

The scope of FASTER is adjusted to cover refund procedures where a full withholding tax exemption is claimed under the amended IRD/PSD provisions, addressing practical difficulties in the context of publicly traded securities.

Conclusion

The proposed amendments to the ILR, CFC rules, hybrid mismatch provisions and withholding tax procedures would, if adopted, materially reduce administrative burdens for many taxpayers, although certain changes—particularly the move away from Ireland’s existing CFC approach and the final scope of the new ILR exclusions—will require careful consideration. As the proposals remain subject to Council negotiation, and Ireland will chair those discussions during its Presidency, businesses should monitor developments closely.