EU Tax Omnibus 2026: What the Commission's Direct Tax Overhaul Means for Firms

On 24 June 2026, the European Commission published its long-anticipated Tax Omnibus proposal, a package designed to strip back bureaucratic overlap, reduce compliance costs, and sharpen the Internal Market's competitiveness. The proposal touches nearly every cornerstone of EU direct taxation: the Anti-Tax Avoidance Directive (ATAD), the Parent-Subsidiary Directive (PSD), the Interest and Royalties Directive (IRD), the Merger Directive, and the Directive on Tax Dispute Resolution Mechanisms. For accounting firms and in-house tax teams advising EU multinationals, the changes are substantial, and the advisory window is now open.

Background: How the Omnibus Came About

The road to this proposal began in March 2025, when the ECOFIN Council adopted conclusions calling for a tax-decluttering and simplification agenda linked explicitly to EU competitiveness. The Council asked the Commission to reduce reporting burdens, eliminate duplicative rules, and improve consistency in how EU tax law is applied across Member States.

In February 2026, the Commission launched a formal call for evidence. Interested parties, including multinationals, trade bodies, and professional firms, submitted responses by 30 March 2026. The Commission received 117 responses in total before finalising the Omnibus text published in June.

What the Call for Evidence Targeted

The call for evidence asked respondents to identify rules that create unnecessary friction without meaningfully advancing the underlying policy objectives. Common themes in the feedback included the holding-period and participation-threshold requirements in the IRD, procedural complexity in dispute resolution, and the interaction between CFC rules and Pillar Two. The June 2026 proposal reflects many of those concerns directly.

Interest and Royalties Directive: The Biggest Structural Change

The IRD currently exempts cross-border intra-group interest and royalty payments from source-country withholding tax, but only where the payer and recipient are "associated companies," meaning one holds at least a 25% direct stake in the other, or both are held by a common shareholder at that same threshold. Member States can also impose a minimum holding period before the exemption applies.

The Omnibus removes both requirements entirely.

Removal of Participation Thresholds and Holding Periods

Under the proposed text, any two companies established in the EU can access the withholding-tax exemption for interest and royalty payments, regardless of the level of participation held by one in the other and regardless of how long that relationship has existed. The only remaining structural conditions are that both entities take one of the corporate forms listed in the Directive's Annex, both are subject to one of the listed corporate taxes, and the recipient is the beneficial owner of the payment.

The beneficial-ownership requirement is explicitly preserved. The definitions of "interest" and "royalties" are unchanged. What falls away is the participation-percentage and duration gatekeeping that currently excludes many legitimate intra-group structures from the exemption.

Permanent Establishment Clarification

The proposal clarifies that the IRD applies to payments representing an expense incurred in connection with the activities of a permanent establishment, regardless of whether those payments are actually deductible in the Member State where the PE is located. This resolves a long-standing ambiguity that has led to inconsistent treatment across jurisdictions.

Updated Entity Annex and Delegated Powers

The list of qualifying corporate forms in the Directive's Annex is updated to include company structures that have emerged under EU company law developments, including simplified mergers and divisions by separation. The Commission will also receive delegated powers to amend the Annex as new entity types are created under national or EU law, avoiding the need for full legislative revision each time.

New Anti-Abuse Safeguard for Zero-Tax Jurisdictions

Broadening the exemption without strengthening the anti-abuse perimeter would create obvious risks. The Omnibus addresses this with a new safeguard clause: where the recipient of an interest or royalty payment is established in a non-EU jurisdiction that levies no corporate income tax, or applies a nominal zero rate to such income, the Member State of the payer must either levy withholding tax on the payment or deny its deductibility.

This safeguard does not apply where the recipient is subject to a Qualified Domestic Minimum Top-up Tax (QDMTT) for the relevant tax period, or is part of a multinational enterprise group subject to the Pillar Two framework, unless the group's ultimate parent entity is located in a jurisdiction with a qualified Side-by-Side regime for that period. Firms advising on cross-border financing structures will need to map recipient entities against these carve-outs with precision. Our earlier analysis of EU Pillar Two qualified status for Cyprus illustrates how Pillar Two designations interact with these kinds of treaty-level and directive-level exemptions.

ATAD Amendments: CFC Rules, Interest Limitation, and GAAR Extension

The ATAD changes are wide-ranging. Rather than a single targeted fix, the Omnibus recalibrates several interconnected anti-avoidance mechanisms simultaneously.

Interest Limitation Rules Revised

The current interest limitation framework caps net borrowing costs deductible in a given period at 30% of tax-adjusted EBITDA. The Omnibus makes this threshold mandatory at 30% across all Member States rather than allowing lower caps. It also mandates the EUR 3 million de-minimis safe harbour that currently some Member States apply optionally, introduces a mandatory exclusion for qualifying third-party debt, and adds carve-outs for public benefit projects and the defence sector.

CFC Rule Carve-Outs

The controlled foreign company rules in ATAD are amended to exclude groups already in scope of the Pillar Two framework and SMEs from CFC attribution requirements. The proposal also mandates a categorical passive-income approach for CFC calculations where the rules continue to apply, replacing the current patchwork of national methodologies.

GAAR Scope Extended

The General Anti-Abuse Rule in ATAD is extended to cover withholding tax arrangements and Pillar Two top-up taxes. Imported mismatch rules are removed from the Directive on the basis that they have become redundant given the breadth of other anti-hybrid measures now in force.

EU-Wide R&D Allowance

The proposal introduces a common EU-wide research and development allowance. The source text does not specify the precise rate or base at this stage, so firms should monitor the legislative process for technical detail before advising clients on structuring.

Dispute Resolution: Faster, Clearer, More Accessible

The Directive on Tax Dispute Resolution Mechanisms is amended to address the procedural failings that have made cross-border tax disputes slow and unpredictable for taxpayers.

Key Procedural Improvements

The Omnibus clarifies the scope of disputes that can be admitted, simplifies the complaint process, and introduces clearer grounds for rejection with a corresponding 30-day remedy period before rejection becomes final. Earlier notification requirements apply when competent authorities fail to reach agreement within the prescribed timeframe. Admissibility issues are explicitly brought within the mechanism's scope, and a simplified filing procedure is introduced for SMEs and individual taxpayers.

For accounting firms managing cross-border dispute caseloads, the simplified admissibility rules and the structured remedy window should reduce the number of cases lost on procedural grounds before the substantive merits are even considered.

Merger Directive: Scope Aligned With EU Company Law

The Merger Directive is updated to reflect developments in EU company law. Simplified mergers and divisions by separation are brought within the Directive's scope, and tax neutrality is extended to cover cross-border conversions. These changes remove a structural gap that has required complex workarounds for groups undertaking straightforward intra-EU reorganisations.

What Firms and CFOs Should Do Now

The Omnibus is a proposal, not yet law. It enters the EU legislative process, meaning Council and Parliament scrutiny lie ahead. Nevertheless, the direction of travel is clear, and the ECOFIN mandate from March 2025 leaves little room for fundamental reversal. Firms should act on several fronts immediately.

First, review intra-group financing structures to identify where the removal of IRD participation thresholds creates new planning optionality or, conversely, where the new zero-tax safeguard clause introduces risk. Second, assess CFC and interest-limitation positions against the mandatory thresholds and carve-outs proposed. Groups in Pillar Two scope should specifically evaluate the CFC carve-out and its interaction with their existing compliance posture. Third, map open cross-border disputes against the revised DRM scope to determine whether restructured complaints could benefit from the new admissibility and procedural rules once the Directive is transposed. Teams using crypto accounting software or broader digital asset accounting software platforms should ensure their chart-of-accounts structures and entity mappings can accommodate the reclassifications the Omnibus may trigger across intra-group payment flows.

The EU's parallel push on VAT digitalisation adds further complexity to the compliance picture for EU-operating firms: our coverage of the EU ViDA 2026 implementation roadmap sets out the indirect tax timeline running alongside these direct tax changes.

Source: KPMG Digital Assets