Explanatory Memorandum to COM(2003)462 - Amendment of Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States - Main contents
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| dossier | COM(2003)462 - Amendment of Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and ... |
|---|---|
| source | COM(2003)462  |
| date | 29-07-2003 |
1. The European Council held in Lisbon in March 2000 i concluded that the European Union had the strategic goal to become the most competitive and dynamic knowledge-based economy in the world. This objective was reiterated by the Stockholm European Council of March 2001 i. The Lisbon Council also called for building up a supportive general framework for economic activity in the EU.
2. In July 1999, the Council of Ministers had given a mandate to the Commission to investigate the impact of tax provisions that constitute obstacles to cross-border economic activities in the internal market and remedies thereto. The context generated by the Lisbon Council strengthens the importance of analysing corporate taxes since taxation of companies can play an important role in achieving the objectives set by the Council. Following this mandate, the Commission services conducted a study on company tax.
3. The conclusions of the company tax study i resulted in a Commission Communication i. There it was examined, among other things, whether the current application of company taxation in the internal market creates inefficiencies and prevents operators from exploiting its full benefits. This would imply a loss of EU welfare, undermine the competitiveness of EU businesses and thus be contrary to the Lisbon objectives. The Communication sets out the Commission view of what needs to be and what can be realistically done in the area of company taxation in the EU over the next few years in order to adapt company taxation in the EU to the new economic framework and to achieve a more efficient internal market without internal tax obstacles. For this purpose, a number of concrete initiatives were presented.
4. In addition, the Commission adopted in 2001 a Communication on tax policy for the European Union i where it identified both general objectives and a number of specific priorities in direct and indirect taxation. It referred in particular to corporate tax issues where it highlighted that, at present, cross-border activities of companies give rise to numerous cases of double taxation hampering legitimate business activities
5. Moreover, the Statute of the European company (Societas Europaea - SE) was adopted in 2001 i. It aims at contributing to the completion of the internal market and the spreading of the improvements that this brings about in the economic and social perspective throughout the Community. To this end, it provides for a legal framework so that structures of production can adapt to the Community dimension and carry out the reorganisation of their business on a Community scale. The success of the SE is very much related to the applicable tax regime. It should be able to benefit from the whole body of harmonised corporate tax law.
6. In view of the existing cross-border tax obstacles, ensuring the correct functioning of the internal market requires some action. According to Article 94 of the EC Treaty, the Commission has the power to propose to the Council directives for the approximation of such laws, regulations or administrative provisions of the Member States as directly affect the establishment or functioning of the common market.
7. The Directive on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (the Parent-Subsidiary Directive) i already provides for a solution to a cross-border obstacle arising from double taxation of profits. However, it is possible to improve the scope of the Directive and the methods provided for the elimination of double taxation.
8. During 1993 the Commission adopted a proposal amending the Parent-Subsidiary Directive i. This proposal included two modifications. The first amendment was designed to enable the Directive to be applied to all enterprises subject to corporation tax, irrespective of their legal form. The second amendment referred to the imputation method. It provided for parent companies to be able to take account of the tax paid by the subsidiary and any other lower-tier subsidiary where all the companies involved met the conditions laid down in the Directive.
9. The company tax study released in 2001 referred to these same issues. In addition, the experience gained after the implementation of the Directive in 1992 has revealed some other shortcomings and the study refers to them in detail and considers possible measures to tackle them.
10. The Commission Communication following the corporate tax study highlighted the priority of tabling the necessary amendments to the current Directives harmonising corporate tax, following technical consultations with Member States. In the course of 2002, the Commission services have called several meetings of the appropriate Commission working party during which the relevant issues have been discussed with delegations of technical experts from Member States.
11. This proposal for a Directive amends the Parent-Subsidiary Directive. It aims at introducing the necessary changes to this Directive to take into account the above-mentioned Conclusions and Communications. The final goal is to eliminate obstacles to the proper functioning of the internal market found in the tax regimes applicable to parent companies and subsidiaries of different Member States. Eventually, removing the various tax obstacles to cross-border economic activity in the Internal Market would require the introduction of a common consolidated tax base for the EU-wide activities of companies. However, as long as this objective is not achieved, specifically targeted measures are needed to address the most pressing practical tax problems of internationally active companies. Such measures include all those considered absolutely essential in order to improve the existing body of EU company tax law. In particular, this proposal deals with matters treated in the proposal adopted in 1993. It also has other provisions dealing with new issues. In consequence, the previous proposal amending the Parent-Subsidiary Directive is being withdrawn.
12. One of the main concerns is the limited scope of the Parent-Subsidiary Directive. It applies only to those companies included in the list annexed to the directive. The ECOFIN Council of 26-27 November 2000 i had already concluded that the updating of the list was a political priority. The Commission study on company taxation shows the need to extend and improve the Parent-Subsidiary Directive so as to cover a wider range of companies.
13. This topic was addressed in the proposal adopted in 1993. That proposal aimed at extending the Directive to all enterprises resident and subject to corporation tax in a Member State. However, the asymmetries found in commercial law governing the legal types of entities and the diversity of tax arrangements applicable to them in the Member States creates considerable problems. These difficulties were already brought up during the Council discussions on the proposal held during 1996 and 1997. These discussions were suspended without reaching a final conclusion. This subject has been discussed again with the Member States from a technical point of view in the framework of the appropriate Commission working party. As a result, the aim of improving the coverage of the Parent-Subsidiary Directive is achieved in this current proposal by proposing the extension of the list of entities annexed to the Directive, to cover new named legal types.
14. As already mentioned, the statute of the SE has been recently adopted. The Directives' scope should include the companies which will in future operate under this new legal form. Thus, the SE is among the new entries proposed for inclusion in the list of entities covered by the Directive.
15. Some of the new entities proposed for inclusion in the list raise a particular technical problem. It could be the case that the Member State where an entity is established treats it for its own tax purposes as a corporate taxpayer whereas another Member State whose resident has an interest in that same entity treats it for its own tax purposes as transparent (i.e. it looks through the 'corporate' structure). The latter State attributes the income of the entity to its resident having an interest in the entity and taxes it accordingly. This Member State should be obliged to extend the benefits of the Directive to that resident with an interest in the entity.
16. One of the basic elements of the Parent-Subsidiary Directive is the exemption of withholding tax charged on distributed profits. According to the Commission Communication following the company tax study, the Directive could be improved here by extending its benefits to a wider range of cases. This could be achieved by reducing the conditions required in order to qualify as a parent company and as a subsidiary company. It is proposed to lower the minimum holding threshold requirement from 25% to 10%.
17. The second main element of the Directive is the application of methods to eliminate double taxation of the parent company. A subsidiary company is taxed on its income. Its parent company may be taxed as well on its share of those profits when the subsidiary distributes them. In order to relieve double taxation, Article 4 i of the Directive obliges the Member State of the parent company to exempt distributed profits from the subsidiary or to authorise the parent company to deduct that fraction of the corporation tax paid by the subsidiary which relates to those profits. Member States may choose between one of these methods to eliminate double taxation. When the second method is chosen, the deduction is not extended to corporation tax paid by any lower-tier subsidiary of the subsidiary from which the profits are derived. In consequence, there is still a possibility that double taxation occurs. The Directive's aim of eliminating double taxation is therefore not fully achieved.
18. It is therefore appropriate to determine the tax to be offset by the parent company in such a way that economic double taxation is totally eliminated. The method now proposed is similar to that included in the proposal made in 1993.
19. The Parent-Subsidiary Directive does not deal explicitly with the situation where profits distributed are received by a permanent establishment in respect of shares effectively connected with it. The coverage of these situations is among the aims of the Directive. In addition, the European Court of Justice jurisprudence states that permanent establishments may not be discriminated against in relation to subsidiary companies when both are subject to a similar tax regime i. It is appropriate to clarify the text of the Directive concerning this issue.
20. The current wording of Article 4 i of the Directive permits Member States to exclude from tax deduction charges incurred by parent companies relating to their holdings in the subsidiaries. In the case of management costs, Member States may estimate the amount at a flat rate not exceeding 5% of the profits distributed. As a consequence, the parent company cannot deduct costs up to 5% of the profits distributed by the subsidiary while the real costs linked to the shareholding may be lower. In such a case, this company is effectively prevented from deducting other costs which would in the normal course of events be deductible.
21. This negative effect could be overcome by allowing the parent company to show that its actual expenses relating to the holding are lower. The non-deductible charges would then be limited to the real costs associated with the shares.
22. The transitional provisions authorising Greece, Germany and Portugal to charge withholding taxes on dividends are no longer effective. Being superfluous, this proposal will delete the corresponding texts included in paragraphs i, i and i of Article 5 of the Parent-Subsidiary Directive.
Contents
Article 1
This Article comprises five paragraphs amending the Parent-Subsidiary Directive.
The aim of this paragraph is to amend Article 1 of the Parent-Subsidiary Directive. It makes clear that the Member State where a permanent establishment is situated must grant the benefits of the Directive when this permanent establishment receives distributed profits. Among other situations, the change proposed will ensure that the Directive covers the case where the parent company and its subsidiary are tax residents in the same Member State and the dividend payment is received by a permanent establishment of the parent company situated in a different Member State.
Article 3.1 point (a) of the Parent-Subsidiary Directive is amended in order to reduce from 25% to 10% the shareholding requirements needed to qualify for the status of parent company and subsidiary company, thus increasing the number of companies that will be able to benefit from the relief provided for in the Directive.
1. Point (a) amends the wording of Article 4 of the Parent-Subsidiary Directive in order to include several measures. In the first place, paragraph 1 is modified to include the obligation of the Member State where a permanent establishment is situated to refrain from taxing distributed profits received by it from subsidiaries of the company of which it is a permanent establishment or to allow deduction of the tax paid by the subsidiary which relates to the profits distributed to the permanent establishment.
2. In addition, this same point (a) amends paragraph 1 of this same Article 4 in order to improve double taxation relief. The issue arises when the imputation method is applied. According to the text of the Parent-Subsidiary Directive, parent companies may be taxed on the profits received from their subsidiary and, in that case, they deduct from their tax on such profits the taxes already paid by the subsidiary on those same profits before distribution. This deduction has a limit: the tax owed by the parent company in respect of the profits received. However, the current draft of the Directive does not refer to those cases where there is a chain of companies. In such cases, the parent company may receive profits that have been distributed through the different tiers of the group of companies. These profits would have been subject to tax in the hands of the successive subsidiaries. Article 4.1 refers only to the deduction of the tax paid by the immediate subsidiary but does not refer to the taxes paid further downstream in the chain of companies. It is now proposed to allow deduction not only of the tax paid by the immediate subsidiary but also the tax paid by any other lower-tier subsidiary in relation to the profits distributed. This proposal maintains the current limit: the parent company can deduct taxes paid by its lower-tier subsidiaries subject to the specified limitation of the tax due on the profits received.
3. It also deletes the reference to the transitional provisions, included in paragraph 1 of Article 4 of the Parent-Subsidiary Directive, as those provisions are no longer applicable (see below n° 2 of the comments made to paragraph (5)).
4. Point (b) includes a new paragraph 1a in Article 4 of the Parent-Subsidiary Directive, due to the proposed changes to the Directive concerning the extension of the scope of the Directive. This new paragraph is needed to take account of matters arising as a result of including some of the new entries in the list. Some of these new entities are subject to corporation tax in their Member State of residence but, for tax purposes, are considered transparent in a different Member State. The latter Member States levy tax on their own resident taxpayers that have an interest in such entities. The aim of the text proposed is to provide for a specific tax regime applicable in these cases. These Member States will not be prevented from maintaining this taxation approach in the circumstances specified in the Directive. However, at the time when they come to tax their resident taxpayers with an interest in such entities, they will be obliged to allow them to deduct the taxes paid by those entities in their Member State of residence and those paid by its lower-tier subsidiaries. In addition, these same Member States must exempt from taxation the dividends paid by the companies they treat as transparent to the companies having an interest in them. As a requirement, the companies and the persons having an interest in them must fulfil the conditions set in the Directive in order to be considered as parent companies or as subsidiaries.
5. This new paragraph identifies those taxpayers by referring to companies which are fiscally transparent by reason of the applicable provisions relating to the organisation of commercial undertakings. These are the criteria that Member States use when deciding whether to treat a non-resident company as fiscally transparent. The text proposed avoids any reference to companies that are considered as fiscally transparent by a Member State based on the tax regime applicable to them in their State of residence. Hence, this provision does not deal with the issues raised by controlled foreign company legislation
6. Point (c) introduces a new sentence in paragraph 2 of Article 4 of the Parent-Subsidiary Directive. Its former text authorised Member States to deny the tax deduction of management costs relating to the holding in subsidiaries from the tax base of the parent company. These costs could according to the Directive be fixed at a flat rate not exceeding 5%. The proposed text will permit parent companies to prove, to the extent that they are lower than 5%, the actual management costs incurred in order to reduce the amount of non-deductible costs
7. Point (d) adds a reference to the new paragraph 1a of this Article 4 since it deals with similar issues as paragraph 1.
1. Point (a) amends Article 5 of the Parent-Subsidiary Directive in order to include the new shareholding requirements provided for in Article 3.
2. Point (b) deletes the transitional provisions in favour of the Hellenic Republic, the Federal Republic of Germany and the Portuguese Republic, as they are no longer applicable.
1. The list of companies, to which the Parent-Subsidiary Directive applies, contained in its annex, is replaced by a new one incorporating other types of entities and in particular the European company. This proposal will extend the benefits of the Directive to new legal types of entities, including co-operatives, mutual companies, certain non-capital based companies, saving banks, funds and associations with commercial activity. The new list has been drawn up following intensive discussions with the Member States
2. The European company is included under letter (z) of the annex. This new entry does not follow the natural sequence of letters because it is intended to make additional entries in the annex under points (p) to (y) to cover the types of company that exist in the accession countries.
This Article lays down the timetable and the requirements for transposing the Directive into Member States' national laws. Member States are required forthwith to inform the Commission of the transposition of the Directive in their national laws and submit a correlation table between this Directive and the national provisions adopted.
This Article refers to the date of entry into force of the amending Directive and to its publication.