ARCHIVESHISTORIQUES
DELACOMMISSION
COLLECTION RELIEEDES
DOCUMENTS "COM"
COM(73)1008
Vol.1973/0185

Disclaimer
Conformément aurèglement(CEE,Euratom)n°354/83duConseildu1erfévrier1983
concernantl'ouvertureaupublicdesarchiveshistoriquesdelaCommunauté économique
européenneetdelaCommunautéeuropéennedel'énergieatomique(JOL43du15.2.1983,
p.1),telquemodifiéparlerèglement(CE,Euratom)n°1700/2003du22septembre2003
(JOL243du27.9.2003,p.1),cedossierestouvertaupublic.Lecaséchéant,lesdocuments
classifiésprésentsdanscedossierontétédéclassifiésconformément àl'article5dudit
règlement.
InaccordancewithCouncilRegulation(EEC,Euratom)No354/83of1February1983
concerningtheopeningtothepublicofthehistoricalarchivesoftheEuropeanEconomic
CommunityandtheEuropeanAtomicEnergyCommunity(OJL43,15.2.1983,p.1),as
amendedbyRegulation(EC,Euratom)No1700/2003of22September2003(OJL243,
27.9.2003,p.1),thisfileisopentothepublic.Wherenecessary,classifieddocumentsinthis
filehavebeendeclassified inconformitywithArticle5oftheaforementioned regulation.
InÜbereinstimmung mitderVerordnung(EWG,Euratom)Nr.354/83desRatesvom1.
Februar1983überdieFreigabederhistorischen ArchivederEuropäischen
Wirtschaftsgemeinschaft undderEuropäischen Atomgemeinschaft (ABI.L43vom15.2.1983,
S.1),geändertdurchdieVerordnung(EG,Euratom)Nr.1700/2003vom22.September2003
(ABI.L243vom27.9.2003,S.1),istdieseDateiderÖffentlichkeitzugänglich.Soweit
erforderlich,wurdendieVerschlusssachen indieserDateiinÜbereinstimmung mitArtikel5
dergenanntenVerordnungfreigegeben.

COMMISSION OFTHEEUROPEAN COMMUNITIES .
COM(73 )1008 final
Brussels .18June 1973
REPORTOHTHETAXARRANGEMENTS APPLYING
TOHOLDINGCOMPANIES
CQK(73 )1003 final

REPORT ONTHE TAX ARRANGEMENTS
APPLYING TOHOLDING' COMPANIES
1.Atthe237th Council meeting held inLuxembourg on2and 3April 1973 »
theCommission recorded itsagreement ,onastatement bythe German
andFrench delegations inviting ittoexamine ,inthereport onthe
adjustment ofshort-term monetary support and theconditions forthe
progressive pooling ofreserves which itistoputbefore ;.theCouncil
by1July 1973 >theproblem ofthetaxstatus ofholding companies .
«
PART I
Possibilities ofusing holding companies forpurposes oftax evasion
2.Holding companies canserve mainly :
-tocontrol industrial orcommercial companies through theholding of
major shares ;- ' 1 . ,«,•
-tofinance thecompanies intheir' group bysupplying them with funds
which they generally obtain byfloating bond issues ;
-tocollect income consisting ofdividends ,loan interest orpatent
royalties andlicensing fees^"' ."Lc
From theangle oftaxevasion ,only thelast twofunctions need tobe
examined . ' -x - .
Use ofholding companies asfinancing companies
3.Theuseofholding companies forthis purpose isrelevant tothe
extent that major disparities exist between the tax arrangements
applied bythevarious countries tobond income .For instance ,ifan
industrial company established inacountry with high withholding tax
sets upaholding company which istofloat loans inanother country
with nooronly very lowwithholding tax ,this industrial company
escapes withholding tax initsowncountry .
Insome cases holding companies also play therole ofinvestment funds .
This activity isofnorelevance forthepurposes ofthis report .

-2-
L
■ί,<
\ ■ ■
Use ofholding companies asletter-box companies
k.Foreign taxpayers ,especially enterprises ,mayescape taxation intheir
country bytransferring their assets toaholding company they control
(letter-box company )andhaving therelevant income collected bythis
•holding company .This ispossible inparticular :
•*'incountries charging little ornotax atallonthis income ;
-incountries where income arising abroad isliable tolittle orno
tax atall ; •
-incountries granting taxprivileges tocertain types ofcompany ,
especially ifthese donot engage inany genuine industrial orcom­
mercial activity ("privilege ofdomicile ").
Aslong astheholding company does notredistribute it,theincome
collected remains tax-exempt .
But theholding company isnot content with holding the income collec­
ted . .Itplays therole ofa"turntable "forcapital byreinvesting
the funds sothat they again ,earn tax-exempt income ..Tothis end it
may even place these funds atthedisposal ofthenatural orlegal
person controlling theholding company ,intheform ofaloan ,i.e.
without the formal distribution ofdividends .Inthis way this person
enjoys theadditional advantage ofbeing able ,inprinciple ,todeduct
from taxable income theloan interest paid totheholding company .
Even ifthe income isformally distributed bytheholding company ,
taxation ofthis income inthehands oftherecipient isnot guaranteed
where withholding tax orother measures oftax control donot exist .
Moreover ,thecountries concerned generally supply noinformation on

-3-
holding companies toforeign taxadministrations totheextent that #
these companies donot fall under double taxation conventions .
5.This taxexemption andthepossibilities ofabusing itareopen to
special criticism inthe case ofinterest androyalties ,for this
income isnormally deductible -from the debtor 'staxable income and is
therefore notliable toanytax^".
Criticism ismuch less well-founded where itrelates todividends
collected byaholding company if,asisthe case inmost countries ,
this income isliable tocorporation tax atthelevel ofthecompany
distributing it.Exemption isthen aimed solely atavoiding economic
double taxation .Most countries have such arrangements ,though often
inthenarrower framework ofparent companies andsubsidiaries
(Belgium :nominimum share prescribed ;Netherlands :minimum share
5%;France :minimum share 10$). Sometimes this exemption iseven
granted ifthesubsidiary isnotsubject tocorporation tax (Belgium
andFrance )orifthetaxapplying tothesubsidiary isvery low
(Netherlands ). Ifthis principle isaccepted ,atleast forparont
companies andsubsidiaries ,taxexemption ofcapital gains onholdings
isalso justified ,forthese capital gains derive from thenon-
distributed (buttaxed )profits ofthesubsidiaries .
However ,anumber ofcountries levy awithholding taxonthis income ,
but ingeneral this tax isappreciably lowei *than corporation tax .

-k-
PAFT TI
Z,r ensrained bj^_hol di^gcom ,-an:esinthoCcmmunity
Use ofhold tng companies asfinancing companies
6.Inconnection with theuseofholding companies asfinancing companies ,
there are ,atpresent ,some major differences between the systems
applied byMember States inrer-pect ofwithholding tax onbond interest .
They range from nowithholding tax atall toavery high rate oftax .
Luxembourg legislation may well favour slightly holding companies ,
which are exempt from the usus.1 5a*withholding tax ,but other Member
States levy nowithholding tax inany circrrnatances ('lermany for
residents ,Denmark ,Netherlands ). This problem will not.,therefore ,
besolved byisolated action inrespect ofone orother ofthese -coun­
tries ,but byharncnizing thevarious withholding taxsystems ,fcai'moni *•
zation .which must affect all bend dobtors resident intheCommunity .
This harrscr.lzation -isalieady part oftheprogramme adopted bytne -
Council inthecontext oftheestablishment ofeconomic andmonetary
union ,and theCommission intends toput forward aproposal along these
lines inthe near future .
Useofholding companies asletter-b oxcompanies
XA.Holding compan :esenjoy ingpreferential taxtrertment
7.TheCommission has found that within theCommunity ,legislation exists
1 2inLuxembourg andGibraltar granting holding companies preferential
taxtreatment ofthetype described insec .kofPart I.
8.InLuxembourg these taxarrangements were introduced bythelawof
31July 1929 forholding companies which donot engage inindustry or
Inaddition tothecapital dut ;/-of1%charged atthemoment they are
formed &ik1when their capital isincreased ,theholding s>m?-?.nies nor­
mally have tjpayanannual "taxe d''abonnement "of0.16% onthevalue
ofshares andbonds they issue ,theminimum payable being Lfrs .1500 .
2Companies exstcising anactivity outside thecountry pr.y ^nlyanannual
taxof1%ontheir capital ,themaximum payable being £15u0 .

commerce andwhose sole object istheholding ofshares inother enter­
prises and themanagement ofsuch shares .These companies nay also
float bond issues ,manage patents orlicences ,grant loans ,purchase
bonds ,etc .
The income ofholding companies -mainly dividends ,capital gains ,
interest androyalties -isexempt from all direct tax .Theholding
companies are also exempt from withholding tax onthedividends they
distribute and theinterest they pay .However ,they cannot claim for
orrecover any taxwithheld onthe income they collect ,nor dothey N
qualify for theapplication ofconventions fortheavoidance ofdouble .
taxation .
Thephenomenon ofholding companies has grown insize inthepast ten
years ,with thenumber ofsuch companies more than doubling .Accord­
ing tofigures supplied bytheLuxembourg authorities ,itwent upfrom
1260in1962 to2114in1968 ,reaching 2596in1970 and5198at
theendof1972 .In1972alone ,itrosebysome ^Oo\
9.Asregards Gibraltar ,legislation also exists granting certain holding
companies preferential tax treatment . Itshould bestressed that the
EECTreaty articles oncapital movements and theapproximation of
legislation also apply tothis territory . .
Nofigures areavailable onthenumber ofholding companies inGibraltar ,
but there arenot thought tobemany .
Other cases
10.Theadvantages gained byusing holding companies enjoying special tax
status asletter-box companies ,canalso beobtained,' with additional
benefits ,byusing companies which are taxed normally .AsLuxembourg
holding companies areentitled tobenefit from double taxation conven­
tions ,they cannot recoup withholding tax levied for instance onroy­
alties they collect .But itispossible toescape allwithholding
taxbyintroducing into theprocedure anintermediary company subject
tonormal taxation .For the system towork :
^"Itisdifficult tojudge towhat extent thisincrease isduetothe
existence ofpreferential taxarrangements .Other factors such as
capital andexchange market regulations certainly play amajor role here .

-6-
-theintermediary company must qualify fortheapplication ofa
double taxation convention with the country where theroyalties
originate which provides that nowithholding taxwill belevied ;
-inorder toescape corporation tax theintermediary company must re­
mit these royalties toaletter-box company exempt from such tax ;
-theintermediary company must notbeliable toanywithholding tax
(asisthecase inDenmark andtheNetherlands forexample ).
Under such anarrangement itwould bemore profitable tomake use of
aletter-box company located inacountry other than Luxembourg or
Gibraltar ,than have royalties collected directly byaholding company
established inLuxembourg orGibraltar .
Insome cases itisnot even necessary touse anintermediary company
inorder tobenefit from the conventions . For instance aletter-box
company located intheNetherlands Antilles andwholly owned bya
,Dutch company qualifies for theapplication oftheconvention concluded
between theUnited States andtheNetherlands .Consequently royalties
originating intheUnited States ,collected bysuch acompany and re­
distributed asdividends totheDutch parent company seem toescape
almost alltaxation (they would beliable merely tocorporation tax
intheAntilles attherate of2.*f toy/o).
11.Tograsp the full scope oftheproblem under discussion ,itshould be
borne inmind that letter-box companies represent avery widespread
phenomenon throughout theworld .
Even inEurope ,there arecountries with farmore letter-box companies
than Luxembourg andGibraltar . .According tounofficial sources ,
Switzerland has about 10000 and Liechtenstein about 20000 letter-box
companies .

-7-
Moreover ,insome countries letter-box companies maybeused tocollect
trading income ,while Luxembourg holding companies maynotbeused to
this end .
Certain countries orterritories .-having special links with Member
States also have legislation under which letter-box companies may be
set up.This istrue ofcertain countries which arealready
associated with theCommunity (Netherlands Antilles )orwhich under
theAct ofAccession will beassociated on1February 1975 atthe
earliest (Bahamas ,Bermuda ,etc.),andoftheChannel Islands andthe
Isle ofMan . These countries orterritories have anautonomous tax
status (theUnited Kingdom ,.forinstance ,hasconcluded double taxation
conventions with some ofthese countries orterritories ),andthe
articles oftheTreaty ofRome referred toinsec .9donot apply to .
them .TheMember States concerned maynevertheless extend the
Community rules ontheliberalization ofcapital movements tothese
countries orterritories ,which hasalready been done insome cases
(between theNetherlands andtheAntilles ,andbetween theUnited
Kingdom andthecountries andterritories oftheformer sterling area ).
Harmonization measures taken inthe field ofdirect taxation ,however ,
could not beapplied tothem even inthis case .

-8-
PAKT III
Conclusions
12.Ifonewanted toeliminate tax disparities likely toengender distor­
tions inthe capital market ,and curb tax evasion within the
Community ,onewould have toabolish ,asrapidly aspossible ,those
privileges ofholding companies which lend themselves toabuse ,
especially tax exemption ofinterest androyalties collected by
these companies .
\
Already in19°7 the -Commission looked into these problems ,but atthat
time the Council did not consider itadvisable toact onthe matter .
Action restricted toholding companies within theCommunity would ,
however ,inevitably touch eff aflight ofcapital totaxhavens
outside theCommunity andwould therefore fail toput anend tothe
tax evas-on that isthe authorities' main concern inthis matter .
This flight could even betothebenefit ofcertain countries having
special links with Member States . Inthis case itwould beall the
more serious asharmonization ofdirect taxation does not apply to
these countries while themeasures concerning the liber Aliarticn of
capital movements ma3 rbeapplied tothem unilaterally bytheMember
States with which they have these links .This iswhy theCommunity
would have totake parallel action inrespect ofall taxhaven
countries .
TheCommission has already begun tostudy this problem incollabora­
tion with experts from theMember States . Itisalready clear that
inorder totake such action ,very complex problems must besolved .
Afirm political will istherefore necessary ifresults are tobe
achieved within areasonable period oftime .
/
13«Ifitisfelt that such acomplete solution cannot beimplemented
rapidly ,ways must besought ofquickly making afirst move inthis
direction through anumber ofarrangements likely toimprove the
present situation .Here ,consideration could begiven tothe
following measures :

-9-
(a)arranging forcooperation between thetaxauthorities oftho
countries concerned and those ofthe other Member States inorder
toenable the latter toobtain the information they need tocombat
taxevasion through holding companies ;strengthening cooperation
between Member States' tax authorities inorder toprevent abuse
ofthedouble taxation conventions ;
(b)charging withholding taxonanydividends distributed byholding
companies within theCommunity sothat this income isliable to
some tax ifdistributed ;
(c)charging ,intheMember States ,ahigh withholding taxoninterest
androyalties remitted tocompanies paying little ornotaxon
this income sothat income arising intheCommunity istaxed
effectively ;
(d)introducing arrangements intheMember States onthe ,lines of
Belgian legislation under which apresumption arises that the trains -
action isnot genuine andtheburden ofproof isshifted insuch a
wayasnottofall onthetaxadministration ^".
Adoption ofsuch measures would not solve all theproblems examined in
this document .But itwould constitute apartial solution which
would act asacertain discouragement totaxevasion . >
Under Belgian legislation ,interest ,royalties andconsideration for
thesupply ofgoods orservices paid byaBelgian taxpayer toa
foreign holding company operating under taxarrangements which are
notsubject togeneral lawmaybededucted from taxable income only
ifthetaxpayer proves that this remittance ismade inconnection
with true andgenuine transactions andstays within normal limits .
Another ,perhaps less effective ,rule under this legislation provides
that thevarious transactions through which ataxpayer transfers the
ownership ofcapital andmovable property tosuch aholding company
canberelied onasagainst theBelgian administration only ifthe
taxpayer proves that hereceived true consideration producing a
normal amount oftaxable income .

-10-
lh.TheCommission therefore arrives atthe following conclusions :
(a)Asregards theabsence ofwithholding taxoninterest payable on
■bonds issued byholding companies ,asolution should besought in
the general framework ofharmonization ofwithholding tax onbond
interest .
(b)Ontherole which holding companies setupintheCommunity play
intheir capacity as"letter-box "companies ,theCommission ,
guided bypolitical and economic realities ,considers that for
theproblem ofinternational taxevasion tobesolved completely ,
there must beCommunity action against all "taxhaven "countries .
Pending this ,subsidiary measures ofthetype referred toinsec .12
could beenvisaged .