Many US multinationals and asset managers use HoldCos for their non-US investments for various reasons, including securing access to the benefits of tax treaties and/or EU tax directives. In the past, it was often decided per investment in which EU jurisdiction the HoldCo would be located and in many cases the HoldCo hired an external service provider to provide its local directors.

In Dec 2021, the European Commission published a first proposal for the Directive. The proposed Directive seeks to combat HoldCos with inadequate substance that are used to avoid (withholding) taxes. It introduces a reporting requirement for HoldCos that derive cross-border, passive income and have limited substance in their country of residence. A carve-out applies for, inter alia, certain regulated financial undertakings (the 𝐂𝐚𝐫𝐯𝐞-𝐎𝐮𝐭). Information about in-scope HoldCos would be exchanged between the EU member states (𝐌𝐒). In certain abusive situations, the Directive could even deny the benefits of tax treaties and EU tax Directives to HoldCos with inadequate substance and commercial justification, resulting in higher withholding taxes. 

It was envisaged that the Directive would enter into force as per Jan 1, 2024. It turned out to be impossible to obtain unanimous consent from all 27 MS to adopt the Directive and become effective by that date. Since then, various amendments to the proposed Directive have been considered, such as initially limiting consequences for in-scope HoldCos to the exchange of information and broadening the scope of the Carve-Out to include HoldCos controlled by alternative investment funds. However, none of those alternatives obtained unanimous consent either. It is uncertain at this stage whether the Directive will be adopted and, if so, when and in what form.
 
Even though the Directive has not yet been adopted, we have seen significant changes with respect to HoldCos in recent years. The introduction of the ‘principal purpose test’ in tax treaties pursuant to the OECD’s Multilateral Instrument has given source states more instruments to deny treaty benefits to HoldCos with insufficient substance. The ability for source countries to deny treaty benefits to HoldCos is further supported by EU case law applying the notions of ‘beneficial ownership’ and ‘abuse’ to payments made to HoldCos. As a result, many taxpayers are centralizing their HoldCos in one country where they already have an operational presence or open an office to make sure that their HoldCos have an appropriate level of substance to withstand scrutiny from source countries.

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