European Commission Adopts Report On Interest And Royalties Directive

by Ulrika Lomas, Tax-News.com, Brussels

22 April 2009

The European Commission has sent to the Council a report on the functioning of the Interest and Royalties Directive.

The aim of the Directive is to eliminate double taxation on cross-border interest and royalty payments between associated companies. The report says that the overall implementation of the Directive has been "satisfactory." However, suggestions for more uniform interpretation and legal certainty are proposed.

The report also looks at improvements to the existing text, including broadening the scope of the Directive. Discussions on the findings of the report at Council level are expected to provide guidance to the Commission for a future amending legislative proposal.

The Council adopted the directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different member states (the I+R Directive) on June 3, 2003, based on a proposal from the Commission.

The I+R Directive is designed to eliminate withholding tax obstacles in the area of cross-border interest and royalty payments within a group of companies by abolishing withholding taxes on these types of payments arising in a member state. These payments are exempt from any taxes in that state provided that the beneficial owner of the payment is a company or permanent establishment in another member state.

As under the Merger and the Parent-Subsidiary Directives, the benefits of the I+R Directive are only granted to companies which are subject to corporate tax in the EU and tax resident in an EU member state.

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