The DAC recast: a single framework for tax cooperation

Anti-Tax Avoidance Directive and Pillar Two Directive

The proposal updates the core anti-avoidance rules of the Anti-Tax Avoidance Directive (EU) 2016/1164 (ATAD) and aligns them with the Pillar Two global minimum tax. The main changes are as follows:

• general anti-abuse rule (GAAR) is broadened to all direct taxes to which companies are subject;
• controlled foreign company rules (CFC) are consolidated into a single model (Model A);
• rules on imported hybrid mismatches are removed; and
• the directive is aligned with the Pillar Two Directive (EU) 2022/2523.

GAAR

The application of GAAR is broadened. The reference to corporate income tax is removed. As a result, its application extends to all direct taxes to which companies are subject, including withholding taxes and top-up taxes resulting from the application of the Pillar Two Directive. The amendment is presented as a clarification intended to ensure the consistent application of the rule across the EU and to remove uncertainty regarding its scope.

CFC rules

The controlled foreign company rules are consolidated. The option to apply the alternative model based on non-genuine arrangements (Model B) is removed, leaving the Model A as the only approach. In addition the existing exclusions for low levels of passive income and for certain financial undertakings are made mandatory.

An exemption from application of CFC rules is proposed for small and medium-sized groups and undertakings, reflecting the limited risk of base erosion and profit shifting that such taxpayers generally present and the disproportionate compliance burden.

Imported hybrid mismatches

The rules on imported mismatches are removed. The Commission considers that those rules have proven excessively complex and burdensome in practice, without achieving their intended results, and their deletion is presented as consistent with the principle of proportionality. The broadened general anti-abuse rule remains available to address arrangements that are not caught by the specific provisions.

Alignment with Pillar Two Directive

Currently, the CFC rules overlap significantly with the Pillar Two Directive income inclusion rule (IIR). This may result in the economic double taxation as well as duplicative compliance obligations for the groups in Pillar Two scope. The proposal introduces an exemption from the CFC rules for taxpayers that, for the tax period, form part of a multinational enterprise group or large-scale domestic group within the scope of the Pillar Two Directive.

In situations where ultimate parent entity (UPE) of the group is located in a jurisdiction that operates a qualified side-by-side regime (i.e. included in the OECD Central Record under the agreement of the OECD/G20 Inclusive Framework on a side-by-side package of 5 January 2026) the CFC rules continue to apply, unless the CFC is subject to a qualified domestic top-up tax in respect of which no refund or direct or indirect financial benefit is granted.

The proposed directive effectively incorporates the OECD side-by-side approach into the EU law. Together with the proposed extension of GAAR to top-up taxes, the these changes subordinate the ATAD to the Pillar Two framework where these two overlap. The aim is to avoid additional compliance while preserving the anti-tax avoidance objective of these measures.