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Common system of taxation: interest and royalty payments made between associated companies
The European Union establishes a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States in order to abolish taxes levied at source on these payments and therefore eliminate the double taxation of these payments
Council Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States [See amending acts].
Context and objective
Within the "tax package" to tackle harmful tax competition, the European Community (EC) has decided to establish a regulatory instrument intended to ensure that interest and royalty payments between associated companies of different Member States are subject to tax once in a Member State.
In a Single Market having the characteristics of a domestic market, transactions between companies of different Member States should not be subject to less favourable tax conditions than those applicable to the same transactions carried out between companies of the same Member State
An initial proposal for a Directive to abolish withholding taxes levied on payments made between parent companies and subsidiaries of different Member States was presented by the Commission at the end of 1990. Although this proposal was included in 1992 among the priorities for the establishment of the Single Market, the Council was unable to reach a consensus. The Commission had to withdraw the proposal at the end of 1994 in spite of the need to adopt a Community instrument in this area so as to eliminate double taxation completely.
Based in particular on the 1998 Commission proposal, this Directive is designed to abolish withholding taxes levied on interest and royalty payments made between associated companies of different Member States. The Member States will therefore exempt interest and royalties from any taxes levied on such income and affecting that type of company, whether the tax is collected by deduction at source or by assessment. However, transitional arrangements have been laid down for Greece and Portugal for both interest and royalties and for Spain for royalties only in order to limit the immediate impact of the Directive on the budget of these countries.
The Council has agreed that the advantages afforded by the Directive must not benefit companies exempt from tax on the income referred to by said Directive and that the Commission shall propose in due course the amendments to be made to this, if any.
Scope and procedure
Interest and royalty payments arising in a Member State will be exempt from any taxes imposed on those payments in that State, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another Member State or a permanent establishment situated in another Member State of a company of a Member State.
A payment made by a company of a Member State or by a permanent establishment situated in another Member State will be deemed to arise in that Member State, hereafter referred to as the "source State".
The source State will repay the excess tax withheld at source within one year following due receipt of the application and such supporting information as it may reasonably ask for. If the tax withheld at source has not been refunded within that period, the receiving company or permanent establishment will be entitled on expiry of the year in question to interest on the tax which is refunded at a rate corresponding to the national interest rate to be applied in comparable cases under the domestic law of the source State.
The term interest means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular income from bonds or debentures, including premiums and prizes attaching to such bonds or debentures. Penalty charges for late payment are not regarded as interest.
The term royalties means payments of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including cinematograph films and software, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific equipment. Payments for the use of, or the right to use, industrial, commercial or scientific equipment will be regarded as royalties.
The term company of a Member State covers any company that meets the following three criteria:
- the company was formed in accordance with the law of a Member State (i.e. it has its registered office, central administration or principal place of business within the Community and its activities present an effective and continuous link with the economy of that Member State);
- the company is resident in that Member State;
- the company is subject to corporation tax.
Two companies are regarded as associated companies:
- when one has a direct minimum holding of 25% in the capital of the other, or
- when a third company has a direct minimum holding of 25% in the capital of both companies.
Holdings must involve only companies resident in Community territory. However, Member States shall have the option of replacing the criterion of a minimum holding in the capital with that of a minimum holding of voting rights.
Finally, the term permanent establishment means a fixed place of business situated in a Member State through which the business of a company of another Member State is wholly or partly carried on.
Exclusion of payments as interest or royalties
The source State will be able to exclude from the application of the Directive payments purporting to be interest. For example:
- payments which are treated as a distribution of profits or as a repayment of capital under the law of the source State;
- payments from debt-claims which carry a right to participate in the debtor's profits;
- payments from debt-claims which entitle the creditor to exchange his right to interest for a right to participate in the debtor's profits;
- payments from debt-claims which contain no provision for repayment of the principal amount or where the repayment is due more than 50 years after the date of issue.
Where, by reason of a special relationship between the payer and the beneficial owner of interest or royalties, or between one of them and some other person, the amount of the interest or royalties exceeds the amount which would have been agreed by the payer and the beneficial owner in the absence of such a relationship, the provisions of this Directive will apply only to the latter amount, if any.
Fraud and abuse
This Directive will not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse. Member States may, in the case of transactions for which the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse, withdraw the benefits of this Directive or refuse to apply this Directive.
Transitional rules for Greece, Spain and Portugal
Greece and Portugal will be authorised not to apply the provisions of this Directive until the entry into force on 1 January 2005 of Directive 2003/48/EC on taxation of savings income. During a transitional period of eight years starting on the aforementioned date, the rate of tax on payments of interest or royalties made to an associated company of another Member State or to a permanent establishment situated in another Member State of an associated company of a Member State may not exceed 10% during the first four years and 5% during the final three years.
Spain will be authorised, for royalty payments only, not to apply the provisions of the Directive until the same date of 1 January 2005. During a transitional period of six years starting on the aforementioned date, the rate of tax on payments of royalties made to an associated company of another Member State may not exceed 10%.
These transitional rules will, however, remain subject to the continued application of any lower rate of tax specified by bilateral agreements concluded between Greece, Spain or Portugal and other Member States.
Where a company of a Member State, or a permanent establishment situated in that Member State of a company of a Member State, receives interest or royalties from an associated company of Greece or Portugal, or receives royalties from an associated company of Spain, or receives interest or royalties from a permanent establishment situated in Greece or Portugal of an associated company of a Member State, or receives royalties from a permanent establishment situated in Spain of an associated company of a Member State, the first Member State will allow an amount equal to the tax paid in Greece, Spain or Portugal on that income as a deduction from the tax on the income of the company or permanent establishment which received that income.
|Act||Entry into force||Deadline for transposition in the Member States||Official Journal|
|Directive 2003/49/EC [Adoption: consultation CNS/1998/0087]||26.6.2003||1.1.2004||OJ L 157 of 26.6.2003|
|Amending act(s)||Entry into force||Deadline for transposition in the Member States||Official Journal|
|Directive 2004/66/EC||1.5.2004||1.5.2004||OJ L 168 of 1.5.2004|
|Directive 2004/76/EC||1.5.2004||1.5.2004||OJ L 157 of 30.4.2004, corrected by OJ L 195 of 2.6.2004|
|Directive 2006/98/EC||1.1.2007||1.1.2007||OJ L 363 of 20.12.2006|