EU Tax Reform and Private Capital – Something for Everyone?

The wide-ranging package of proposed EU tax reforms released by the European Commission (EC) on 24 June 2026 has been welcomed by the private capital sector. The ambition and scope of the proposed Taxation Omnibus and DAC Recast directives are noteworthy and the business-friendly measures they propose have the potential to address some genuine pain-points for investors in Europe. The prospects for full implementation of the package are mixed at best and opposition from Member States is expected. But as a directional bellwether for the European tax climate the proposal may prove to be a significant development.

Background to the proposals

Tax revenue maximisation measures – whether anti-avoidance or data-gathering in flavour – have dominated the EU’s direct tax policy priorities for a decade, in particular following the final reports from the OECD’s original base erosion and profit shifting (BEPS) project in 2015. 

Over the past 18 months, however, and especially following the Draghi report on European competitiveness in 2024, signs of a new approach on tax have started to emerge from the EC. The Competitiveness Compass policy roadmap of January 2025 promised a Taxation Omnibus simplifying tax rules in order to “lower compliance costs, encourage investment and make it easier for businesses to operate across the EU”. This new mood music continued with the EC’s separate evaluation of the nine Directives on Administrative Cooperation in November 2025 which proposed addressing a range of identified drawbacks (including “fragmentation of application across the EU” and some DAC 6 hallmarks being “no longer fit for purpose”) by consolidating and recasting the DACs into a single, more business-friendly instrument. 

Both the Taxation Omnibus and the DAC Recast were duly adopted by the EC on 24 June 2026 as draft directives. Termed “an ambitious tax simplification package” with an express intention of enabling businesses “to focus their resources on growth, innovation and investment”, the policy costings estimate savings for European businesses of approximately €7.9 billion as a result of the measures. These split 85:15 across the Taxation Omnibus and the DAC Recast and include €3.3 billion of compliance cost savings and, notably, €4.6 billion of actual tax reductions. As major investors in Europe, the private capital and alternatives industries therefore have a significant stake in this project.

Taxation Omnibus: whither withholdings?

The Taxation Omnibus proposes making approximately 25 distinct changes across six different EU tax directives.

The most eye-catching proposal is also, we suspect, the least likely to happen: the effective abolition of intra-EU withholding taxes on intercompany passive income via a package of amendments to the Interest and Royalties Directive and Parent-Subsidiary Directive. This includes removing the participation thresholds that have been design features in those regimes from the outset; currently the IRD requires a 25% holding and the PSD a 10% holding to qualify for exemption from withholding. The holding periods that have been design options would also be removed. Other significant aspects of the IRD/PSD reforms include updating the eligible (EU corporate) entities, extending PSD benefits to pension institution payees (irrespective of legal form and taxpaying status), broadening IRD benefits for permanent establishment payors, and mandating relief at source mechanisms. Protective measures against double non-taxation are also envisaged.

The proposed changes to the IRD and PSD envisage an implementation date of 1 January 2037, a remarkably leisurely timeline which a cynic might see as “the day after never”. The initial reaction has not been positive, either from Member States, who stand to lose most tax revenues here, or from some advisers. Direct taxation is a jealously-guarded Member State competence which the abolition of withholdings within the Union would infringe; periodic proposals to harmonise EU withholding taxes have been made (and failed) since the 1970s. Private capital will hope, however, that some of the other business-friendly amendments to the passive income tax directives emerge from the political process into the light of day: more straightforward pension fund qualification for PSD benefits, for example, would be a genuine boost to investment and facilitate common fund structures.

The Taxation Omnibus also proposes material changes to the Anti-Tax Avoidance Directives (ATADs):

• Interest barrier: The interest deductibility limitation of 30% of EBITDA would become mandatory – precluding the “super-equivalent” lower limitations imposed by various jurisdictions including the Netherlands – as would the €3 million de minimis safe harbour (which would also be indexed). Third-party borrowings for the borrower’s own use would be carved out while a group ratio escape mechanism (currently optional) would become mandatory. Flexibility would be increased by an exemption for major downturns in the business cycle (years with 50% drops in EBITDA), a topical five-year derogation for the defence sector (from 2029-2033), and an option to exempt long-term public-benefit projects (where operator, debt, assets and income are all in the EU).
• R&D relief: An EU-wide minimum standard for immediate expensing of capital expenditure on tangible R&D assets would be introduced (with no impact on the interest barrier calculation). Taxpayers would have the ability to take the deduction in-year or in any of the four subsequent tax periods. Qualifying assets would have to be used for R&D for at least three years to benefit from the relief.
• CFC rules: Groups subject to Pillar 2 would be exempted entirely. Optionality around the design of the CFC system, which currently permits an arm’s length-based model, would be removed. Small and medium-sized groups would be scoped out entirely.
• Hybrid mismatches: The “excessively complex” imported mismatches rules, which targets non-EU hybrid mismatches which are funded by a non-hybrid EU payment, would be removed entirely.

Various other changes include expanding the scope of the general anti-abuse rule (GAAR), which is harder to square with the simplification and business-friendly remit of the Taxation Omnibus project. The ATAD name would also be updated to reflect the evolution of the instrument. The proposed application date is 1 January 2029, save for the mandation of the €3 million de minimis safe harbour from 1 January 2032.

As with the IRD and PSD changes, the main obstacles to the changes to the ATADs are likely to be Member State sovereignty and tax revenues. The removal of optionality specifically provided for in the original ATADs is likely to prove highly controversial, especially where that means giving up revenues. Even the CFC change would require about a third of Member States to redesign their rules and move to a system based on income types. As with recent prior attempts to harmonise EU direct taxation, such as the CCCTB and BEFIT proposals, unanimity is likely to prove elusive unless and until negotiations find where the common ground lies. 

The Taxation Omnibus also proposes an extension of the Tax Merger Directive to cross-border conversions and an expansion of the Dispute Resolution Mechanism Directive. The FASTER Directive on relief at source procedures (for publicly-traded securities only) would also be amended – in advance – to track the abolition of intra-EU withholding taxes.

DAC Recast: lightening the load?

The proposed DAC Recast is also broad in scope. Not merely a consolidation directive, it proposes substantive amendments to the information exchange regime (currently DAC 1), to CBCR and Pillar 2 notifications (DAC 4 and DAC 9) and to digital platform reporting (DAC 7). The introduction of a centralised, EU-wide tax identification number (TIN) verification tool is a humble change which would have a positive impact for operations teams.

The focus for private capital will be the proposed updates to DAC 6, the reporting regime for “potentially tax harmful” cross-border arrangements. Since its sudden introduction in 2018 (with effect from 2020), the compliance costs under DAC 6 – whether in terms of taxpayer time, advisory costs, legal uncertainty, and impact on economic activity – are almost incalculable and the regime requires analysis on even the most straightforward market transactions. The large and lumpy data is striking: 79,274 individual disclosures in respect of 60,734 arrangements were made in the relevant period, at a rate of approximately 14,400 DAC 6 disclosures per year, while 75% of all DAC 6 disclosures were made to four Member States (Germany, Luxembourg, the Netherlands and Sweden). The proposed changes contain encouraging signs that the EC and national tax authorities recognise what the market has known for some time: DAC 6 is fundamentally not fit for purpose.

Under the proposals, the broad ‘Category A’ Hallmarks – covering arrangements with confidentiality conditions (A1), tax-linked contingent or premium fees (A2), and standardised documents and structures (A3) – would be deleted entirely. Astonishingly, the EC materials state that hallmark A3 alone has accounted for 42.6% of all DAC 6 disclosures (this may be a methodological glitch). 

Other hallmarks will be amended: logically enough, the EU Code of Conduct list of non-cooperative jurisdictions will be used in place of the OECD list in hallmark C1; potentially significantly, the substance criteria in hallmark D2 will be further developed in a Council implementing act within five years of the DAC Recast entering into force. The EC will also produce further guidance on the Main Benefit Test in order to address discrepancies in interpretation of the test across Member States. Entities within scope of Pillar 2 are also proposed to be exempted from DAC 6 reporting entirely – but with the (very significant) exception of groups in a side-by-side regime jurisdiction in certain circumstances. Other, more technical changes include limiting reporting to taxpayers who have implemented the first step of an arrangement, extended reporting deadlines (from 30 to 90 days), and a clarification of the scope of the legal professional privilege exemption.

The DAC Recast has a more ambitious timeline than the Taxation Omnibus: the DAC 6 simplification measures are intended to apply from 1 January 2028 (with the substance criteria to follow) while the more systems-heavy changes to the other DAC Directives would apply from 1 January 2030. 

Private capital will view the opportunity to revoke DAC 6 entirely, which the EC considered and rejected, as a missed opportunity given the regime’s wildly disproportionate compliance burden. Although a lesser good, any reduction in that burden will nevertheless be welcomed and the Main Benefit Test guidance may be especially useful in the interpretation of the remaining hallmarks (e.g., B2 on conversion of income) to which it attaches. The carve-out for Pillar 2 is already proving controversial, both with Member States questioning its rationale and with the U.S. seeking full recognition of its side-by-side regime. The proposal to develop substance criteria via an EC procedure is also likely to be treated suspiciously given the failure to reach consensus on the proposed Unshell / ATAD 3 package.

Conclusion

The EU Tax Reform package is a staging post rather than a destination. As negotiations take shape in earnest during the Irish Presidency, it is likely that elements of the proposals will stall and be dropped; the recent track-record of achieving consensus in EU tax matters is far from promising and there is a chance that something for everyone becomes nothing for anyone. 

The package does, however, suggest that the EC is looking seriously at ways to reduce the tax and compliance burden on investors in the Member States and improve the single market’s tax offer. The DAC Recast, in particular, has a reasonable chance of bearing fruit and it is hoped that some of the better ideas in the Taxation Omnibus emerge from the negotiations unscathed. Private capital will certainly be keeping a keen eye on the EU Tax Reform project as it progresses.

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