Tax Omnibus Reform of the Interest & Royalties Directive

On 24 June 2026, the European Commission unveiled the Tax Omnibus package, one of the most significant EU tax simplification initiatives in recent years. The proposal is intended to modernise several cornerstone EU tax directives, reduce compliance costs for businesses and create a more consistent framework for cross-border activities within the Internal Market. The initiative forms part of the EU's broader competitiveness agenda and responds to growing concerns that the cumulative development of EU tax legislation has resulted in unnecessary complexity, administrative burdens and divergent implementation across Member States.

Rather than introducing entirely new tax rules, the Tax Omnibus focuses primarily on streamlining and updating the existing framework. The proposed amendments seek to remove overlaps, address practical issues identified through the application of the current rules and better align the EU tax acquis with more recent international developments, particularly the Pillar Two global minimum tax framework. The proposal also seeks to improve situations where withholding tax has been applied despite the substantive exemption conditions being met.

The result is a package designed to improve legal certainty, facilitate cross-border investment and ensure that EU tax rules remain proportionate, coherent and supportive of economic growth.

For more than two decades, the Interest and Royalties Directive (“IRD”) has provided relief from withholding taxes on certain intra-EU interest and royalty payments. However, ownership thresholds, holding period requirements and divergent administrative procedures have created compliance burdens for businesses operating across multiple Member States.

Against this background, the European Commission's Tax Omnibus proposal introduces a significant reform of the IRD aimed at simplifying cross-border financing and intellectual property transactions within the EU.

While the proposal remains subject to negotiation and unanimous approval by the Member States, the current draft envisages that most changes to the IRD would apply only from 2037.

The current framework

The IRD eliminates withholding taxes on certain cross-border interest and royalty payments within the EU. Under the current framework, the exemption generally applies where the recipient is the beneficial owner of the income and qualifies as an associated company located in another Member State. Two companies are regarded as associated enterprises where one holds directly at least 25% of the capital of the other, or where both are held through direct participation of at least 25% by the same shareholder. In addition, Member States may require that this ownership relationship be maintained for an uninterrupted period of at least two years before the exemption is granted.

Some Member States also require certifications, attestations, or other administrative approvals before granting the exemption, which can result in delays, additional documentation requirements, and increased compliance costs.

Removal of the ownership requirements

Perhaps the most significant amendment proposed under the Tax Omnibus is the removal of the ownership requirements currently embedded in the IRD. Under the proposal, the withholding tax exemption would no longer depend on a minimum ownership threshold or holding period between the payer and the recipient of the interest or royalties.

As a result, interest and royalty payments between EU entities could benefit from the exemption regardless of the level or duration of ownership, provided that the recipient remains the beneficial owner of the income and the other conditions of the Directive continue to be met.

Importantly, the proposal does not eliminate the beneficial ownership requirement, meaning that taxpayers will still need to demonstrate that the recipient is the genuine owner of the income to access the exemption. The definitions of “interest” and “royalties” also remain unchanged. In other words, the proposal broadens access to the exemption without changing the underlying concept of qualifying interest and royalty income.

From a business perspective, this could significantly simplify the treatment of:

• treasury structures involving minority shareholdings;
• joint venture arrangements;
• group reorganisations where ownership levels change over time;
• licensing structures involving sister companies and regional IP hubs.

The proposed change may also reduce situations where taxpayers currently need to rely on Double Tax Treaties because they do not satisfy the IRD's ownership requirements. More broadly, it should facilitate cross-border financing and licensing arrangements by extending access to withholding tax relief to a significantly wider range of intra-EU transactions.

As a result, the focus of eligibility assessments may gradually shift from ownership thresholds towards beneficial ownership, substance and anti-abuse considerations, areas where robust documentation and technical analysis will remain critical.

Extending the list of eligible companies

The proposal also updates the list of legal forms eligible for the IRD to ensure that entities that should naturally fall within the Directive's scope are expressly covered. Although largely technical, this amendment should increase legal certainty for groups operating through less common legal forms and reduce the risk that eligible entities fall outside the Directive's scope merely because they are not expressly listed.

This change is intended to align the Directive with developments in Member States and EU company law and ensure that newer legal forms are not inadvertently excluded from the exemption.

From prior approvals to taxpayer self-assessment

Another major change concerns withholding tax procedures. Under the new framework, Member States would no longer be allowed to require prior authorisation or administrative clearance to confirm eligibility for the exemption. Instead, eligibility would generally be determined through taxpayer self-assessment, subject to subsequent audits and anti-abuse controls.

For many groups, this could accelerate cross-border payments and improve cash-flow management by reducing the need to wait for administrative approvals before applying for the IRD exemption.

However, simplification does not eliminate risk. Businesses will need to ensure that they maintain appropriate supporting documentation, including evidence regarding beneficial ownership and the applicability of anti-abuse provisions, as tax authorities will continue to be able to perform ex-post reviews.

New anti-abuse safeguard against double non-taxation

The proposal also introduces a significant new safeguard designed to prevent double non-taxation.

Under the proposed rules, Member States would generally be required either to levy withholding tax or deny the deductibility of interest and royalty payments where the recipient is located in a jurisdiction that does not levy Corporate Income Tax or applies a zero rate to interest and royalty income and no withholding tax is imposed by the source jurisdiction.

The objective is to ensure that interest and royalty income is taxed at least once and does not leave the EU without being subject to taxation.

Importantly, the proposal includes exceptions where the recipient is already subject to a Qualified Domestic Minimum Top-Up Tax (QDMTT) or where the group falls within the scope of Pillar Two rules, subject to specific conditions.

This measure illustrates the broader philosophy of the Omnibus package: simplification should not come at the expense of preserving an adequate level of taxation and anti-abuse protection.

For multinational groups, this provision may require a reassessment of financing and intellectual property structures involving low-tax jurisdictions, particularly where existing structures rely on the current Directive benefits.

Clarification regarding Permanent Establishments

The proposal also confirms that the Directive applies to payments attributable to the activities of a Permanent Establishment regardless of whether the relevant payment is tax deductible in the Member State where the permanent establishment is located.

Although technical in nature, this clarification may help reduce disputes regarding the interaction between domestic deductibility rules and access to Directive benefits.

While the proposed changes are significant, they remain subject to unanimous approval by Member States and may undergo substantial revisions during the legislative process. In particular, measures affecting withholding tax revenues are likely to attract close scrutiny during Council negotiations.

More broadly, the proposed reform reflects a significant shift in the policy objectives of the IRD. Rather than conditioning withholding tax relief on formal ownership thresholds and holding periods, the proposed framework places greater emphasis on beneficial ownership, economic substance and targeted anti-abuse safeguards. If adopted in its current form, the changes would remove a number of practical obstacles that currently affect cross-border financing, licensing arrangements and corporate reorganisations within the EU, while preserving the Directive's core objective of preventing abusive structures.