EU Tax Omnibus Package: Key Changes for Europe and Luxembourg
On 24 June 2026, the European Commission published the long-awaited Omnibus proposal. This initiative aims to simplify the European Union’s direct taxation framework through substantial amendments to several tax directives: Council Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (PSD), Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (IRD), Council Directive 2009/133/EC on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States (TMD), Council Directive (EU) 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD), Council Directive (EU) 2017/1852 on tax dispute resolution mechanisms in the European Union (DRM), and Council Directive (EU) 2025/50 on faster and safer relief of excess withholding taxes (FASTER).
What is the proposal about?
For cross-border groups, the proposal operates as an interconnected reform: it broadens access to relief on dividends, interest and royalties, removes procedural obstacles relating to withholding tax, and clarifies the interaction between ATAD and Pillar Two. The objective is to strengthen legal certainty in the application of these directives and reduce the administrative burdens arising from EU legislation, while preserving an effective and proportionate anti-abuse framework.
What changes could be introduced?
Currently, access to the exemption under the PSD requires the parent company to hold at least 10% of the subsidiary and to satisfy a holding period of at least 12 months, whether already completed or committed to. The Omnibus package would remove these thresholds, allowing dividends and other profit distributions between EU companies to benefit from withholding tax exemption and the elimination of economic double taxation at parent-company level, regardless of the percentage or duration of the shareholding. The proposal would also extend the exemption to pension institutions—regardless of their legal form—and would restrict Member States’ ability to deny the deduction of expenses or losses connected with a shareholding to cases where the parent holds at least 10%, on the assumption that costs associated with managing shareholdings generally arise only in relation to holdings of a certain size.
The procedural aspect of the reform is equally important. The proposal would abolish prior authorisation and other ex ante administrative procedures for accessing the exemptions under the PSD and IRD, replacing them with a system under which entitlement to the exemption is, as a general rule, self-certified at the time of payment and subsequently subject, where appropriate, to ex post controls and anti-abuse review. Where the paying company can verify that the substantive conditions are met, relief should be granted without a prior approval procedure. Where this is not possible, the proposal distinguishes between two routes: for listed securities falling within the scope of FASTER, “relief at source” or “quick refund” procedures would have to remain available even where a full exemption is claimed under the PSD or IRD; in all other cases, national refund procedures with defined time limits would have to be available. This is important from a practical perspective, since the broader exemption will only have real value if taxpayers can obtain relief quickly and predictably.
The proposal would harmonise the operation of the interest limitation rule across the Union. Specifically, it would: (i) make the 30% EBITDA limit mandatory, whereas until now it has operated as a benchmark within a less uniform framework; (ii) make the EUR 3 million de minimis threshold—with annual indexation—mandatory during the first three years following entry into force; (iii) remove the exclusion applicable to stand-alone entities; (iv) disapply the limitation where EBITDA falls by at least 50% in a tax year; (v) exclude from the limitation low-risk loans granted by unrelated third parties, provided that they are used to finance the borrower’s own activities rather than intra-group financing; (vi) make the group escape rule mandatory in order to address the needs of capital-intensive sectors with high leverage for legitimate reasons; and (vii) make mandatory the carry-forward mechanism for non-deductible interest and unused interest capacity.
In addition, the general anti-abuse rule (GAAR) allows Member States to disregard non-genuine arrangements—or series of arrangements—put in place primarily to obtain a tax advantage that defeats the object or purpose of the applicable tax law. The proposal would confirm that this power extends to all taxes borne by companies, including withholding taxes and Pillar Two top-up taxes.
Taxpayers that are part of groups subject to Pillar II or SME groups would be excluded from the controlled foreign corporation (CFC) regime, unless the ultimate parent entity is located in a jurisdiction with a qualified side-by-side regime (currently, the United States) and the low-tax subsidiary is not subject to a qualified QDMTT tax. For those who remain within its scope, the proposal would eliminate the current choice between two methods and retain only the so-called “Model A”—that is, the approach that attributes certain categories of the subsidiary’s passive income (interest, dividends, royalties, financial income, among others) to the parent, rather than relying on a broader analysis of artificial structures. In practice, this directs the analysis toward more objective and predictable categories of income and reduces overlap with other anti-abuse tools, particularly transfer pricing rules.
In addition, the rules on imported hybrid mismatches would be eliminated; these rules currently may require taxpayers to trace cross-border financing chains to determine whether an expense deducted in one jurisdiction directly or indirectly finances a hybrid mismatch in another, with the consequent risk of denial of the deduction and particularly complex documentation and evidentiary burdens.
The practical consequence for businesses is that dividend flows, financing structures, withholding tax procedures and ATAD exposure will need to be reviewed in an integrated manner. The broader exemptions under the PSD and IRD will only achieve their full effect if treasury, documentation and refund processes are adapted to the new procedural model.
From a Luxembourg perspective, this approach is favourable for cross-border investment structures and fund platforms, particularly where they invest through listed instruments or financial intermediation chains. Simplification would reduce friction in obtaining exemptions, increase the predictability of refund procedures and make documentary compliance more efficient.
“The procedural aspect of the reform is equally important. The proposal would abolish prior authorisation and other ex ante administrative procedures for accessing the exemptions under the PSD and IRD, replacing them with a system under which entitlement to the exemption is, as a general rule, self-certified at the time of payment and subsequently subject, where appropriate, to ex post controls and anti-abuse review.”
Which aspects deserve the most attention?
The update to the definition of “financial company” for the purposes of the interest limitation rule raises questions regarding alternative investment funds (AIFs). The proposal expressly lists the entities considered to be financial undertakings—credit institutions, investment firms, alternative investment fund managers, UCITS management companies, insurance and reinsurance companies, occupational pension institutions, among others—but does not include AIFs as such. This could mean that these vehicles would be subject to the interest limitation rule, even though they are financing vehicles that should not be equated with conventional operating companies. Subjecting AIFs to this rule could compromise their tax neutrality and create distortions of competition.
The safeguard clause introduced into the IRD against double non-taxation—which allows Member States to impose withholding tax or deny deductibility where the recipient of interest or royalties is resident in a low-tax jurisdiction—could affect the tax neutrality of legitimate collective investment structures. Many funds and institutional investors are tax-neutral for public policy reasons (taxation at investor level, pension savings, sovereign investment mandates). It would be desirable for this safeguard to be limited to abusive arrangements and to provide for a clear exclusion—or rebuttable presumption—for regulated collective investment vehicles and fund platforms.
Finally, while the extension of the PSD withholding tax exemption to EU pension institutions is welcome, equivalent treatment should be considered for comparable non-EU pension funds, which represent some of the largest active investors in European private markets. Restricting the benefit exclusively to EU institutions could raise issues concerning the free movement of capital and reduce the Union’s attractiveness as an investment destination for global pension capital.
When would it take effect?
The proposal provides for general transposition by 31 December 2028 and application from 1 January 2029. However, several procedural measures under the PSD, IRD and FASTER would be deferred until 2037, while the mandatory de minimis threshold under the interest limitation rule would be postponed until 2032, meaning that implementation would take place in stages.
As the text remains a European Commission proposal that must be adopted under the special legislative procedure, taxpayers should closely monitor potential amendments to the initiative, as well as its possible transposition in Luxembourg and other Member States. In certain cases, this will require appropriate coordination and advance planning in light of the positive or negative effects that may arise.
Authors
Alejandro Domínguez Becerra
Partner
CMS Luxembourg
