EU tax directives #1: Introduction to EU tax directives – New York office Snippet

Blog

06-02-2025

2 minutes read

Loyens & Loeff New York regularly posts ‘Snippets’ on a range of EU tax and legal topics. This Snippet is the first in a series on tax directives of the European Union (𝐄𝐔), which will provide practical and concise summaries of various EU tax directives and their relevance for US multinationals (𝐌𝐍𝐄𝐬) with a presence in the EU. As an introduction, this first Snippet describes the EU legislative process for adopting EU tax directives.

By accession to the EU, all EU member states (𝐌𝐒) have transferred part of their sovereignty to the EU. As such, the EU can adopt directives to harmonize the laws of the MS in certain policy areas that are embedded in the EU treaties.

Although MS in principle retain sovereignty in respect of their own tax system, the EU can harmonize the tax systems of the MS to avoid trade distortions between MS within the EU. An example is the EU Parent-Subsidiary Directive, which prescribes a withholding tax exemption for dividend distributions between qualifying entities resident in different EU MS.

A proposal for an EU tax directive originates with the European Commission, the EU’s executive branch. Directives are approved by the Council of the EU, which consists of one of the relevant government ministers of each MS (for taxation usually a Minister of Finance). To respect the sovereignty of the MS, unanimous consent of all 27 MS is required in order for a tax directive to be adopted. The European Parliament only has an advisory role: it must be heard but cannot veto the adoption of a tax directive nor enforce any amendments.

Once adopted by the Council of the EU, the MS must – within a specified deadline – transpose the directive into their domestic laws. MS must enact domestic legislation to implement the necessary provisions to achieve the goals of the directive. The content of a directive may leave MS certain choices and flexibility in the transposition, for instance by setting minimum standards. In practice, this can sometimes lead to differences in interpretation of tax directives by MS.

The trend in recent years is that there are more and more proposed EU tax directives aiming to harmonize tax legislation in the EU.

In this Snippet series, we will provide a brief explanation regarding the following EU tax directives which are relevant for US MNEs and were recently adopted or are still in the proposal stage: