EU Commission To Relax Parent-Subsidiary Tax Rules

by Ulrika Lomas, Tax-News.com, Brussels

10 September 2003

The European Commission is proposing to amend taxation law relating to the European Communities Parent-Subsidiary Directive which will seek to broaden the scop of the legislation to include a wider base of companies, relax rules on inter-company holdings to enable greater use of tax benefits and improve mechanisms to prevent double taxation.

"This proposal is an important element of our strategy to remove all forms of double taxation and other tax obstacles currently encountered by companies exercising their freedom to operate across borders within the Internal Market" commented Taxation Commissioner Frits Bolkestein. "The Commission is determined to ensure that EU tax policy supports the objective of making the EU the most competitive economy in the world by 2010".

According to the Commission. the proposal contains three main elements designed to improve the operation of the Parent-Subsidiary Directive:

"First, it would update the list of companies annexed to the Directive to which the Directive applies to cover new, specified, legal entities, including certain co-operatives, mutual companies, certain non-capital based companies, savings banks, funds and associations with commercial activity. The new list would include the European Company, which can be created from October 2004 to allow companies operating in more than one Member State the option of being established as a single entity under Community law.

"Second, the proposal would relax the condition for the application of the provision of the Directive which exempts from withholding tax dividends paid by a subsidiary located in one Member State to its parent company located in another Member State. The minimum shareholding that a parent company must have in its subsidiary in order for the exemption to apply would be reduced from 25% to 10%.

"Third, it would render more complete the mechanism in the Directive for the elimination of double taxation of dividends received by a parent company located in one Member State from its subsidiary located in another. At present, since a subsidiary company is taxed on the profits out of which it pays dividends, the Directive obliges the Member State of the parent company either to exempt profits distributed by the subsidiary from any taxation or to impute the tax already paid in the Member State of the subsidiary against its own tax. The proposal would include in the tax to be imputed against the profits of the parent company any tax on profits paid by successive subsidiaries downstream of the direct subsidiary, in order to achieve fully the objective of eliminating double taxation."

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