The European Parliamentary Research Service  (EPRS) briefing analyses the European Commission's proposed amendments to six EU direct tax directives, highlighting key simplification measures, expected compliance savings, and concerns over anti-avoidance safeguards, national tax sovereignty, and Pillar Two interactions.

RF Report

The European Parliamentary Research Service (EPRS) briefing “Tax omnibus: Rethinking EU direct tax rules” (PE 797.014), authored by Vasiliki Papouliakou and published in November 2026, provides an in-depth analysis of the European Commission’s proposed Taxation Omnibus.

The key aspects of the tax omnibus proposal are summarised below:

Legislative proposal & context

The European Commission adopted the Taxation Omnibus Proposal (COM(2026) 560) on 24 June 2026 to simplify the EU direct tax framework and improve competitiveness. It proposes amendments to six directives: the Parent-Subsidiary Directive (PSD), Interest and Royalties Directive (IRD), Tax Merger Directive (TMD), Anti-Tax Avoidance Directive (ATAD), Dispute Resolution Mechanisms Directive (DRM), and FASTER Directive. The proposal follows the consultation procedure (2026/0163(CNS)), requiring a European Parliament opinion and unanimous Council approval.

The issue: complexity, minimum tax, and competitiveness

Overlapping EU direct tax rules have increased compliance costs and administrative burdens. The implementation of Pillar Two, which introduces a 15% minimum effective tax rate for large multinational and domestic groups, also overlaps with ATAD anti-avoidance rules, creating risks of double taxation and redundant compliance. Following the Draghi and Letta reports, tax simplification became a priority under the April 2026 “One Europe, One Market” roadmap, which included the taxation omnibus for delivery by late 2027.

Main points of the proposal

Most changes would apply from 1 January 2029, while the €3 million interest limitation safe harbour would apply from 2032 and the main PSD and IRD withholding tax changes from 2037.

  • Cross-border dividends, interest, and royalties: Removes minimum shareholding thresholds and holding periods for withholding tax exemptions between EU companies. Extends exemptions to certain pension institutions and introduces safeguards against double non-taxation involving zero- or no-tax third countries. Removes mandatory prior authorisation while retaining audits and anti-abuse controls. Qualifying investors would also access FASTER relief-at-source and quick-refund procedures, with refunds required within one year and interest payable on delays.
  • Cross-border corporate restructurings (TMD): Extends tax-neutral treatment to simplified mergers, divisions by separation, and cross-border conversions, allowing deferral of immediate capital gains taxation.
  • Interest limitation rule (ATAD): Standardises the net borrowing deduction limit at 30% of EBITDA and introduces a mandatory EUR 3 million inflation-adjusted safe harbour. Exclusions cover qualifying third-party borrowing, significant EBITDA reductions, public benefit projects, and certain defence investments. The group escape clause and carry-forward of unused borrowing costs become mandatory.
  • Common EU R&D allowance: Allows full expensing of qualifying tangible assets used exclusively for R&D for at least three consecutive years. Deductions may be claimed immediately or over four subsequent tax periods and are added back to EBITDA. More favourable national incentives may continue.
  • Controlled foreign company (CFC) rules: Retains Model A for specified passive income, including dividends, interest, and royalties, while abolishing Model B for non-genuine arrangements. Exemptions cover SMEs, smaller groups, and qualifying Pillar Two groups, subject to certain conditions.
  • Anti-avoidance and dispute mechanisms: Repeals the imported hybrid mismatch rule and clarifies that ATAD GAAR covers all corporate direct taxes, including withholding taxes and Pillar Two top-up taxes. DRM changes allow collective complaints, staggered 30-day filing, completion of incomplete applications, and resubmission of rejected cases within three years.

European Parliament’s prior opinions

In October 2026, Parliament supported tax simplification and reduced reporting under the “once-only” principle but stressed that anti-avoidance protections, transparency, and SME safeguards must remain intact. It also raised concerns about OECD side-by-side arrangements and protecting domestic R&D incentives under Pillar Two.

Earlier resolutions called for ATAD simplification and alignment with Pillar Two (October 2025) and a standardised EU withholding tax framework with relief at source and anti-abuse safeguards (March 2022).

Positions of other EU institutions

  • Council of the European Union: Supported reducing redundant tax reporting and simplifying ATAD and DAC while retaining anti-fraud safeguards. It also stressed national flexibility for clean industry incentives.
  • European Economic and Social Committee (EESC): Supported consistent terminology and competitiveness-focused simplification while warning against new tax avoidance loopholes.
  • European Central Bank (ECB): Identified fragmented withholding tax systems as obstacles to capital integration and criticised the absence of mandatory relief at source under FASTER.
  • European Court of Auditors (ECA): Its 2024 report found that inconsistent national implementation and insufficient monitoring weakened the effectiveness of EU anti-avoidance rules.

Preparation of the proposal & impact assessment

Preparatory evaluations were uneven. ATAD’s 2026 evaluation identified overlaps with Pillar Two and data gaps, while DRM lacked operational data, IRD had not been evaluated since 2009, and PSD and TMD had no recent formal evaluations.

The Commission received 117 contributions to its early 2026 consultation, nearly 70% from businesses and industry associations. Around 77% supported greater harmonisation and reduced national discretion.

The impact assessment estimated annual administrative and compliance savings of EUR 6.6 billion, including EUR 2 billion in recurring savings. The Regulatory Scrutiny Board requested stronger justification of revenue impacts, the R&D allowance, and repeal of the imported hybrid mismatch rule.

Points of view & subsidiarity objections

  • National governments (Antici Group feedback): Czechia, Germany, and Spain raised concerns about revenue losses and reduced source-taxing powers. France questioned the effectiveness of the third-country safeguard, while Italy opposed allowing Member States to choose between withholding tax and non-deductibility. The Netherlands and others challenged restrictions on national flexibility under ATAD. Austria opposed repealing the imported hybrid mismatch rule, while Romania supported it. Poland warned that Pillar Two jurisdictional blending could weaken CFC protections, while Luxembourg and Latvia opposed removing Model B.
  • Subsidiarity opinions from national parliaments: The Czech Chamber of Deputies and Swedish Parliament objected to the EU R&D allowance and restrictions on national tax policy flexibility. Italy considered the proposal consistent with subsidiarity but requested clearer administrative cost assessments.
  • Civil society and industry: CFE Tax Advisers Europe welcomed withholding tax exemptions but criticised restrictions on interest deductions for centralised intra-group treasury financing and warned of potential double taxation under GAAR. SMEunited questioned the benefits for ordinary SMEs. Tax Foundation Europe supported R&D expensing but opposed excluding intangible assets and software. The Tax Justice Network and EU Tax Observatory warned that removing hybrid mismatch and CFC safeguards could weaken anti-avoidance protections. Meanwhile, 23 EU business associations urged ministers to preserve the package, citing the costs of withholding tax collection and refund procedures.