EU Commission Proposes Change To Interest And Royalties Directive

by Ulrika Lomas, Tax-News.com, Brussels

29 January 2004

The European Commission announced on Tuesday a proposal that will aim to eliminate withholding taxes on payments of interest on royalties made between associated companies in different Member States.

According to the proposal, the relevant directive would be broadened in scope to cover a larger range of companies, including the European Company and the European Cooperative Society. The proposal would also, at the request of the EU's Council of Ministers, eliminate a loophole by providing that the Directive would not apply to companies that are exempt from tax on interest and royalties received.

"This proposal would be another important step towards removing all forms of double taxation and other tax obstacles currently encountered by companies exercising their freedom to operate across borders within the Internal Market," observed Taxation Commissioner Frits Bolkestein, commenting on the amendment. "At the same time, the proposal would make a necessary change to the Directive to ensure that it does not give rise to tax avoidance," he added.

The Commission explained its proposal would:

First, update the list of companies to which the Directive applies to cover new, specified, legal entities, including certain co-operatives and non-capital based companies, mutual companies, savings banks, funds and associations with commercial activity. The new list would include the European Company and the European Co-operative Society that can be created from 2004 and 2006, respectively, with the result that companies and co-operatives operating in more than one Member State will have the option of establishing themselves as single entities under Community law.

Second, the proposal would make it clear that Member States have to grant the benefits of the Interest and Royalties Directive only where the interest or royalty payment concerned is not exempt from corporate taxation in the hands of the beneficial owner. In particular, this addresses the situation of a company paying corporate tax but benefiting from a special national tax scheme exempting foreign interest or royalty payments received. In such a case the source state would not be obliged to exempt the payments from withholding tax.

The Commission proposes that Member States would bring these changes into force by 31 December 2004.

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