What are the ATAD rules, and how have they changed LBO structures?
ATAD (the EU Anti-Tax-Avoidance Directive) is a set of EU rules against aggressive tax planning. ATAD I (2016) covered the interest limit and CFC (controlled-foreign-company) taxation. ATAD II (2019, effective 2020) added anti-hybrid rules.
the classic holding structure — a hybrid instrument treated as equity at the top holding and as debt in the local BidCo — no longer works automatically. If the same instrument is equity in one country and debt in another, the tax authority denies the interest deduction. Sponsors need genuine substance at the holding.
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| Aspect | Pre-ATAD II | Post-ATAD II |
|---|---|---|
| Hybrid PEC (equity abroad + debt locally) | double non-taxation | deduction denied locally |
| Sponsor PIK loan via the holding | interest deductible | no longer guaranteed |
| Holding substance requirement | a "letterbox" often sufficed | staff, office, directors required |
| Documentation | light | extensive (director meetings, local substance) |
holdings with genuine substance (2+ resident directors, a local office, staff) plus clean equity structures with no hybrid element. The tax shield for the acquisition debt is typically structured directly at the operating jurisdiction, using the participation exemption.
Question: "How did holding structures change after ATAD II?"
Answer: "Aggressive hybrid structures no longer work. Today the holding needs real substance and pure-equity structures with no hybrid PEC. The acquisition-debt tax shield is typically structured at the operating level, with the participation exemption for dividends."