Brussels, 8th September 2003
Company taxation: Commission proposes amending Directive on taxation of parent-subsidiary dividends
The European Commission has proposed to amend the European Community's Parent-Subsidiary Directive (90/435/EEC). In particular, the Commission proposes to broaden its scope to cover a larger range of companies, lower from 25% to 10% the inter-company holding threshold required for the application of its tax benefits and improve the mechanisms it provides for the prevention of double taxation. The European Company which can be created from 2004 (see IP/01/1376) is among the new entities proposed for addition to the list of companies covered by the Directive. The existing Directive, which aims to eliminate tax obstacles for groups of companies in the EU by abolishing withholding taxes on payments of dividends between associated companies of different Member States and preventing double taxation of parent companies on the profits of their subsidiaries, is limited in its effectiveness because of its narrow application. The proposal is an element of the Commission's company tax strategy presented in 2001 (see IP/01/1468) in which the Commission identified a number of tax obstacles to cross-border economic activity in the Internal Market and announced its plans for short- and long-term Community action to remove them.
"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".
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.
The proposal replaces a previous 1993 proposal to amend the Parent-Subsidiary Directive (see IP/93/637) and the Commission has, consequently, now withdrawn the previous proposal.
Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the "Parent/Subsidiary" Directive) is designed to eliminate the double taxation of profits distributed in the form of dividends by a subsidiary in one Member State to its parent company established in another Member State. The Member State of the subsidiary is required to abolish any withholding tax, while the Member State of the parent company is required either to exempt the dividends or to impute the tax already paid in the Member State of the subsidiary against its own tax.
The presentation of a proposal to update the Parent/Subsidiary Directive was one of the targets that the European Commission set itself in October 2001 when it presented a strategy for company taxation in the EU. The Commission believes that company taxation systems in the EU have failed to keep up with developments such as globalisation, economic integration in the Internal Market and Economic and Monetary Union. A new approach is needed. The Commission in its strategy identified a number of tax obstacles to cross-border economic activity in the Internal Market where Community action is necessary and proposed a two-track strategy to remove them. It stated that it planned a number of targeted measures such as the present proposal for an extension of the Directive on dividends, a similar extension of an existing Directive on the tax treatment of mergers and measures dealing with cross border loss relief, transfer pricing, and double taxation conventions. At the same time, the Commission believes that companies must in the longer term be allowed a consolidated corporate tax base for their EU wide activities to avoid the current costly inefficiencies of fifteen separate sets of tax rules. The Commission in its study identified a number of ways of achieving a consolidated base and stated that it planned to launch and lead a wide-ranging and detailed debate on the subject. The Commission intends to report on its policy conclusions on this idea of a consolidated tax base towards the end of this year.
The text of the Commission proposal for a Council Directive to amend Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States is available on the Europa internet site: