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European Commission


Brussels, 25 November 2013

Questions and Answers on the Parent Subsidiary Directive

(see also IP/13/1149)

What is the Parent-Subsidiary Directive?

The Parent–Subsidiary Directive was designed to eliminate tax obstacles for profit distributions between parent companies and subsidiaries based in different Member States. The Directive therefore gives a tax exemption for dividends and other profit distributions paid by subsidiary companies to their parent companies. This eliminates the risk of double taxation i.e. the same income being taxed in the Member State of the subsidiary and Member State of the parent company.

Issued on 23 July 1990, the Directive has been amended several times, mainly due to the accession of new Member States. In 2003, the Parent-Subsidiary Directive was subject to substantial changes (additional types of companies covered, progressive reduction of the shareholding percentage requirements, and elimination of double taxation for subsidiaries of subsidiary companies) and recast in November 2011 (Council Directive 2011/96/EU).

Why has the Commission proposed to amend it?

While the Parent-Subsidiary Directive's purpose is to avoid companies from suffering from double taxation on the Single Market, there are many cases where it is being abused by companies to avoid paying taxes in any Member State. The Commission therefore wants to close loopholes being used for a particular tax planning arrangement (hybrid loan arrangements) and to introduce a general anti-abuse rule the Directive is not exploited by tax avoiders.

What is double non-taxation?

Double non-taxation may take many forms. In cross-border situations, double non-taxation occurs when income which is not taxed in the source State is exempt in the State of residence. As a result, it is not taxed anywhere.

Double non-taxation may give rise to even more advantageous tax situations than just non-taxation. For example, in a deduction/no inclusion a payment is deductible in the State of the payer and non-taxable in the State of the payee. Or in a double deduction, the same loss is deducted both in the State of source and of residence.

What are hybrid loan arrangements, and why are they the focus in this proposal?

Hybrid loan arrangements have been identified as a tax planning tool that can specifically exploit provisions of the Parent-Subsidiary Directive to minimise or avoid taxes. Hybrid loan arrangements are financial instruments that have characteristics of both debt and equity. Due to this, Member States may give different tax qualifications to hybrid loans: one Member State treats them as simple loan, while another Member State regards them as equity. As a result, cross border hybrid loans may be treated as a tax deductible expense (interest) in the Member State of the payer (subsidiary) and as a tax exempt dividend in the other Member State (that of the parent company). This results in a deduction in one Member State followed by exemption in the other Member State.

What is an anti-abuse rule, and why would MSs be obliged to implement one under this proposal?

Anti-abuse rules are aimed at tackling behaviour which may in line with the letter of the tax law, but defies its spirit and purpose in order to achieve undue tax advantages. Essentially, anti-abuse rules invalidate or block-off tax avoidance strategies. Anti-abuse rules may be shaped to tackle specific types of abuse, or may be designed to act more widely against any other abusive behaviour (i.e. general anti abuse rules – GAARs).

The anti-abuse rule included in the proposal follows the lines of the Recommendation on aggressive tax planning, and is then adapted to the specifics of the Parent-Subsidiary Directive.

How does the Parent-Subsidiary proposal fit into the Commission's wider work against tax evasion and avoidance?

The revision of the Parent-Subsidiary proposal was already foreseen in the Action Plan to strengthen the fight against tax fraud and tax evasion adopted by the Commission in December 2012 (IP/12/1325). This Action Plan, together with the Recommendation on aggressive tax planning, set out, for the first time ever, concrete measures to tackle the widespread problem of corporate tax avoidance. These included tackling mismatches between tax systems and an anti-abuse rule ('GAAR') in all Member States to counteract aggressive tax planning practices. The revisions to the Parent-Subsidiary Directive cover both the above measures.

How does this proposal fit with international work against corporate tax avoidance?

The issue of corporate tax avoidance is a high political priority internationally, as well as in the EU. It was on the agenda of recent G20 and G8 meetings, where the OECD work on base erosion and profit shifting ('BEPS') was endorsed as the way forward. This BEPS project is strongly supported by the EU, and both the Commission and Member States are actively involved in its development and delivery.

The Report on BEPS by the OECD stresses that there are various key pressure areas. One of these areas concerns international mismatches in entity and instruments characterisation, including hybrid mismatches arrangements. General anti-avoidance rules which stop undue tax benefits are seen as one of the most relevant rules against tax avoidance. The BEPS action plan includes proposals to develop, among the others, instruments to tackle hybrid mismatch arrangements.

While such global solutions are very important, there is also a need to address mismatches and anti-abuse at EU level, taking into account the existing EU legislation. The revision of the PSD can be an important contribution to the OECD BEPS work as it would represent a best practice in fighting base erosion.

Which companies would be affected by the new proposal?

This proposal will hit any company that has worked to reduce its tax bill by using artificial arrangements involving profit distributions/ dividend payments between a parent company in one Member State and a subsidiary in another. It will create a disincentive for companies to set up subsidiaries in another Member State purely to avail of mismatches in national tax laws.

More specifically, a cross-border group of parent and subsidiary companies using hybrid loan arrangements (see above) will be denied a tax exemption in the parent company's Member State if these payments are deductible in the subsidiary's Member State.

Example 1: anti-abuse rule

Member State A has withholding taxes on dividend payments to parent companies resident in a non-EU-country X. Member State B has no withholding taxes on dividend payments to parent companies in country X.

If a subsidiary in Member State A is owned directly from country X, there will be withholding taxes on profit distributions.

If the parent company in country X sets up an intermediate subsidiary in MS B, the withholding tax in Member State A can be avoided. Member State A cannot have withholding taxes on profit distributions to a parent company in another Member State under the PSD.

The anti-abuse rule could be applicable in Member State A if the set-up is a wholly artificial arrangement where the essential purpose for the insertion of the intermediate company in Member State B is to avoid the withholding taxes in MS A, e.g. a letterbox company with no substance. As a consequence of the application of the anti-abuse rule, the benefits of the Directive (including the non-application of the withholding) would be denied.

Current situation Proposed amendments

Country X



------------------------------------------------ -------------------------------------------

MS B no withholding no withholding

Intermediate subsidiary

Intermediate subsidiary

--------------------------------------------- -------------------------------------------

MS A no withholding no withholding

under the PSD under the PSD



To illustrate this example with figures, assuming that Sub-subsidiary in MS A distributes yearly 1 million euro profits to Parent in Country X and MS A domestic tax law provides for a 25% withholding tax on profit distributions to Country X, reduced to 10% under the bilateral Tax Convention to avoid double taxation entered into with Country X if certain shareholding thresholds are fulfilled by the Parent in Country X, the tax revenue lost in MS A because of the 'artificial' Intermediate subsidiary in MS B would be yearly 250.000 euro or 100.000 euro depending on the applicable withholding tax rate.

Example 2: The hybrid loan mismatches

Member State A, where the subsidiary is resident, treats the hybrid loan as a debt and payments on it as tax deductible expenses. Member State B, where the parent company is resident, treats the hybrid loan as equity and payments on it as tax exempt profit distributions. Under the proposed amendment, MS B will deny the tax exemption to hybrid loan payments deductible in MS A.

Current situation Proposed amendments




tax exempt TAXED

hybrid loan payment hybrid loan payment

-------------------------------------------- -------------------------------------------

MS A tax deductible tax deductible

hybrid loan payment hybrid loan payment



To illustrate this example with figures, assuming that Parent in MS B grants a ten-year 1 million euro hybrid loan to Subsidiary in MS A and that Subsidiary in MS A makes yearly a 100.000 euro payment on it to parent in MS B, each year, for ten years, Subsidiary in MS A would deduct 100.000 euro from its taxable income and this amount would not be taxed at the level of Parent in MS B. The calculation of the tax revenue lost because of this mismatch depends on the corporate tax rates in the relevant MS (in 2013 nominal tax rates vary in the EU from 10% to 35% ).

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