EN    EN  
 EUROPEAN COMMISSION 
Brussels, 11.11.2011 
SEC(2011) 1333 final 
  
COMMISSION STAFF WORKING PAPER 
EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 
Accompanying document to the 
Proposal for a Council Directive on a common system of taxation a pplicable to interest 
and royalty payments made between associat ed companies of different Member States 
(recast) 
{COM(2011) 714 final} 
{SEC(2011) 1332 final}  
 
EN    EN EXECUTIVE SUMMARY 
This impact assessment will accompany the prop osal to recast Council Directive 2003/49/EC 
on a common system of taxation a pplicable to interest and royalty payments made between 
associated companies of different Member Stat es (‘the Directive’). Directives 2004/66/EC, 
2004/76/EC and 2006/98/EC and Annexes VI and VII to the Treaty of Accession of Bulgaria 
and Romania have amended the Directive by exte nding its application to  companies and taxes 
in the new Member States and granting some of them temporary derogations from some of its 
provisions1. In order to simplify the applicable rules it  is useful to merge all this legislation 
into a single legal text. 
The benefits of the Directive are granted to co mpanies which are subject to corporate tax in 
the EU, tax resident in an EU Member State and have one of the le gal forms listed in the 
Annex to the Directive. It covers payments be tween associated companies, i.e. where one of 
the companies has a direct minimum holding of 25 % in the capital of th e other company, or a 
third company has a direct minimum holding of 25 % in the capital of both the payer and the 
recipient company. 
Article 8 of the Directive requi red the Commission to report to the Council on the operation 
of the Directive with a view to extending its scope. The report was presented on 23 April 
2009 (COM(2009) 179) and concluded that legal amendments could be made to make the 
Directive function better and thus achieve its objectives more fully. 
Problem description 
The main issue addressed by this legislation is  the heavier taxation of cross-border capital 
flows than domestic transactions. In the case of international paymen ts, the recipient pays 
corporate tax in its State of residence and an  additional withholding tax charged by the State 
from which the payment is made (the source St ate). Tax relations between Member States are 
generally governed by double taxation conventions (DTCs) that may provide for the 
exemption or reduction of withholding taxes; al so, the residence State may allow the taxpayer 
to reduce its corporate tax by granting it a ta x credit linked to the withholding tax. The 
withholding taxes and the administrative proce dures required for thei r relief impede the 
smooth functioning of the internal market. During the early 1990s, the Parent-Subsidiary 
Directive had harmonised the tax regime applicable to EU profit distributions2. Only in 2003 
did the Council harmonised the tax regime app licable to cross-border interest and royalty 
payments between associated companies with a vi ew to putting them on an equal footing with 
domestic payments by providing for the exempti on of withholding taxes at source. Due to the 
different legislative procedures followed an d the more recent amendment of the Parent-
Subsidiary Directive in 2003, the scope s of the two instruments differ. 
Concerning the scale of these problems, in 82  % of cases, both the parent company and the 
subsidiary have a legal form that falls under the scope of the Directive; nearly 95  % of royalty 
                                                 
1 OJ L 157, 26.6.2003, p. 49, OJ L 168, 1.5.2004, p. 35, OJ L 157, 30.4.2004, p. 106, OJ L 363, 
20.12.2006, p. 129 and OJ L 157, 21.6.2005, p. 278 and p. 311. 
2 Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent 
companies and subsidiaries of different Member States, OJ L 225, 20.8.1990, p. 6, as amended by 
Directive 2003/123/EC, OJ L 7, 13.1.2004, p. 41. 
 
EN    EN payments and approximately 90  % of interest payments are covered by the Directive. As 
regards the association requirement, non-associated companies (0 to 25  % holding) represent 
12 % of holding links. This initia tive tries to solve some of the problems linked to cross-
border payments that fa ll outside its scope: 
- Cost-minimising firms try to avoid withholdi ng taxes through tax planning: company groups 
may establish an intermediate c onduit entity in a different Memb er State so that the payment 
received by it enjoys a tax exemption which would not be a pplicable otherwise. This can 
result in suboptimal choices driven not by e fficiency but by tax factors; on the other hand, 
Member States lose tax revenues. 
- Withholding rates vary in the different bilate ral relations between Member States. Different 
DTCs may provide for different rates. This  may distort economic decisions attracting 
investment to low tax countries. 
- The conditions for enjoying withholding tax exemption under the Directive re lating to the 
organisational form, the relations between the pa rties to the transacti on, the ownership shares, 
minimum holding periods, etc. induce firms to choose options driven by tax factors instead of by efficiency criteria. 
- The requirements to obtain the Directive’s benefits are stricter  than those established in the 
Parent-Subsidiary Directive for the exemption of dividends. The different tax regime for 
dividends, interest and royalties may distort the capital structure of companies and the 
allocation of intangibles. 
- The application of withholding tax reli ef at source provi ded by DTCs involves 
administrative procedures imposing heavy administ rative burdens and costs on firms. In many 
cases, it is provided only later via a refund. This resu lts in liquidity costs. Also, if it is granted 
through tax credits in the residence State, ther e is a delay between the withholding charge and 
the deduction in the tax return. This also gene rates liquidity costs. Th ese compliance costs for 
EU companies are estimated at €
 126 million each year. 
- Companies will be subject to double taxation: they  bear a levy at source  and corporate tax in 
their State of residence. This latter State may provide for double taxa tion relief either by 
exempting such income or by allowing deduction of  the tax charged at source. However, if the 
withholding tax charged on the gross payment is  higher than the corporate tax (low nominal 
rates) calculated on the net income derived fr om such payment, the companies suffer higher 
taxation than that charged on equivalent domestic payments. 
Another problem has to do with the conditions  imposed for exemption from withholding tax 
when the payment is made by a company through a permanent establishment, i.e. a branch: 
such payment has to be a tax-deductible expens e for this taxpayer. As it is currently worded, 
the Directive would not apply to cases where deduction is denied on grounds such as failure 
to comply with all the formal requirements, while the transaction is effectively connected to 
the activity of the permanent establishment. 
Finally, the Directive does not re quire the exemption at source to  be linked to taxation of the 
payment in the residence State of the recipient. This may lead to payments free of tax. At the 
 
EN    EN time the Directive was agreed, the Council inv ited the Commission to propose the necessary 
amendments. The Commission adopted an amending proposal, COM(2003) 841, to exclude from the withholding tax exemption companies already exempted from tax on interest and 
royalties received in their residence State. While ther e was general consensus on a 
compromise text, the discussions in the Council working groups between 2004 and 2006 did 
not result in a unanimous agreement. The Commission withdrew this proposal when it 
adopted the Communication ‘Commission Work Programme 2010 — Time to act’, 
COM(2010) 135 final, because it planned to pr opose this new recast of the Directive. 
Maintaining the current scenario would perp etuate distortions of  business behaviour, 
compliance costs for companies and the risk of double taxation. As a consequence, there 
would be less cross-border capital flows, re ducing capital and tech nology transfers. The 
process of cross-border alloca tion of resources would be adve rsely affected. In sum, the 
potential of the internal ma rket would not be achieved. 
In principle, this situation affects companies of all sector s and sizes, although compliance 
costs constitute a larger share of the total co st for smaller firms. Concerning interest, the 
problems addressed here affect mainly the fina ncial sector. Still, th e capital structure of 
corporate groups in any sector of activity is co mposed of equity and debt. This means that all 
sectors of activity are affect ed. Concerning royalties, sect ors intensive in the use of 
technology and intellectual rights face these tax burdens more frequently. 
Tax administrations are also affected since th ey receive income from  withholding taxes or 
their tax revenues are reduced by the tax credits used by taxpayers to eliminate double 
taxation. 
Subsidiarity 
This initiative is necessary since Member States tax cross-border activities according to their 
bilateral tax agreements, which are the result of bilateral negotiations . Each country pair 
arrives at a different solution. When there is no DTC applicable, withholding taxes are 
charged in accordance with unilateral rules decide d in line with national tax policies. There is 
no spontaneous coordinated action to eliminate th ese obstacles to the internal market. Thus, 
action at EU level is required to guarantee ha rmonised and coordinated tax policies in this 
particular area of taxation. 
The rationale for European action stems from th e cross-border nature of the problem and the 
impossibility for each individual Member State to establish a single tax policy for itself and across the EU. Clearly, action at EU level will guarantee that Member States are bound by the 
exemption of withholding taxes to the same extent.  
Objectives 
The objective of this initi ative is to reduce the above-described cross-bo rder obstacles to the 
internal market by extending the scope of th e withholding tax exemption provided by the 
Directive at the least possible cost. In particular , it is essential to eliminate the distortions due 
to the different regimes applicable to the capit al flows of dividends, in terest and royalties. 
Alignment of the Directive’s scope with that of the Parent-Subsidiary Directive is thus one of 
 
EN    EN the main goals. This should promote financing and technological activi ties and reinforce the 
EU’s specific policies in these areas. 
Policy options 
There is a range of policy op tions to be considered:  
- Option 1: not taking any particular action. 
- Option 2: the benefits of the Directive could be extended to payments between non-
associated undertakings; in addition, the list of types of company to  which the Directive 
applies could be broadened.  
- Option 3: another solution would be to align the conditions of the Directive’s benefits with 
those of the Parent-Subsidiary Directive, by co nsidering that companies are associated when 
there is a direct or an  indirect holding of 10  % and by extending the list of types of company 
to which the Directive applies. 
- Option 4: the legal text of the Directive could be amended to clarify that payments by a 
permanent establishment related to its activities do enjoy the tax exemption. 
- Option 5: a subject to tax requirement coul d be introduced that would rule out the 
withholding exemption when the recipient of the payment is not  effectively subject to tax on 
the income derived from it. 
Impacts of policy options  
Option 1 would not address the economic costs and distortions resulting from withholding 
taxes and would not solve the problems described above. 
Option 2 would affect Member States’ tax reve nues. Concerning interest payments, the 13 EU 
Member States that still appl y withholding taxes to outgoing interest payments – Belgium, 
Bulgaria, the Czech Republic, Greece, Hunga ry, Ireland, Italy, Latvia, Poland, Portugal, 
Romania, Slovenia and United Kingdom - account for intra-EU interest payments that 
equalled almost €  112 billion in 2008. Cons idering that only 10  % of the gross debt position in 
EU countries is between companies and that the average withholding rate in the countries that 
apply withholding tax to cross-bo rder interest payments is 7.1  %, the gross revenue from 
withholding tax on inter-company payments works out at €  0.8 billion. These lost revenues on 
outgoing interest would tend to be  offset by gains from lower credits for withholding taxes 
paid in host countries. Hence netting for this  effect would likely le ave very limited net 
revenue effects: the loss should not exceed €  200 to €  300 million3. 
Concerning royalty payments, the total intra-EU  outflow of royalties and licence fees was 
more than €  31 billion in 2008. The 22 EU countries th at apply withholding taxes to outgoing 
                                                 
3 Source: Copenhagen Economics, Taxation of interest and royalties — impact assessment of 
amendments to the present Directive,  October 2010. 
 
EN    EN royalty payments account for intra-EU royalty payments equal to €  23.3 billion. The gross 
revenue from outgoing royalty payments consider ing an average withho lding tax rate of 5.5  % 
is potentially around €  1.3 billion for the EU as a whole.  These lost revenues on outgoing 
royalties would tend to be offset  by gains from lower credits for withholding taxes paid in 
host countries. Hence netting for this effect would likely leave very limited net revenue 
effects: for the seven countries with the largest negative royalty balances as a share of GDP - 
Bulgaria, the Czech Republic, Greece, Poland,  Portugal, Romania and Slovakia - the loss 
should not exceed €  100 to €  200 million4. 
Currently, the scope of the Directive and the Parent-Subsidiary Directive is limited to 
associated companies. Extending the Directive’s benefits to unrelated undertakings would be 
a new feature affecting the EU tax relations of all Member States. 
For companies, the main effect of this second option would be to reduce compliance costs: up 
to approximately €  126 million could be saved each year . The positive effect would be 
important for SMEs, for which these costs are proportionally higher. This type of company 
would also benefit from the elim ination of withholding taxes on r oyalties: they tend to licence 
out their industrial property since they are not in a position to exploit their inventions 
themselves. On the other hand, disparities in taxation of dividends, in terest and royalties 
would remain, with the corresponding distortions affecting intra-firm capital structure, the 
allocation of intellectual property of EU firms and the organisational form. 
Option 3 would equalise the conditions provide d for in the Directives on taxation of 
dividends, interest and royaltie s. It would contribute to the reduction of the above-mentioned 
tax distortions. In addition, it could produce bene fits in terms of increased flexibility and 
lower restructuring costs in fi rms’ choice of organisational fo rm, capital structure, holding 
structures and allocation of intangibles. The sa vings in compliance costs for business could be 
estimated at between €  38.4 and €  58.8 million. The net revenue effects for the Member States 
would be even less than in the previous polic y option; they could be  roughly estimated at 
€ 160-€  310 million. Transposing these changes into domestic law should not be particularly 
burdensome, since experience was gained with  the implementation of the Parent-Subsidiary 
Directive. 
In addition, there are two other initiatives that ca n be combined with opti ons 2 or 3 in order to 
tackle two of the specific problems already desc ribed. Options 4 and 5 would surely help to 
make the Directive work better and should for this reason be includ ed in any amending 
proposal.  
The above estimates should, however, be taken w ith caution as they are based on a number of 
assumptions and statistical data, where le gal considerations could not be made. 
Comparing the policy options 
As options 4 and 5 can be combined with options  2 and 3 we will refer in the following to two 
alternatives: alternative I would combine options  2, 4 and 5 and alternative II would combine 
options 3, 4 and 5. 
                                                 
4 Source: see footnote 3. 
 
EN    EN While alternative I would be more effective in  reducing compliance costs, it would also be 
less efficient and inconsistent with other aims to  improve the functioning of the Directive. In a 
context of unstable public finances, this soluti on would involve steeper  reductions of Member 
States’ tax revenues; implementa tion would be more difficult; a nd it would be inconsistent 
with the aim of eliminating the distortions deri ving from the difference in scope between the 
Directive and the Parent-Subsidiary Directive. 
Thus, alternative II is the pref erred option since it offers a mo re balanced solution. It would 
not be as effective as alterna tive I in reducing compliance costs but it would still achieve all 
the objectives se t by this initiative, with smaller tax revenue  reductions. The public 
consultation launched by the Commission also shows that most of the stakeholders who 
responded preferred this alterna tive. On the other hand, the ma in option of alternative I, 
extending the Directive to paym ents between unrelated undertak ings, received very little 
support, 29  % of the responses received. 
The Member States also had an opportunity to express their views on these options at a 
meeting to discuss the Commission’s report on the Directive held on 23 November 2009. In 
general, they were more inclined to accept in itiatives on option 3; so me of them rejected 
clearly any amendment on the basis of optio n 2. Concerning the technical modifications 
proposed in option 4, most of the Member States’ delegates ag reed on the need for a solution. 
Concerning option 5, the subject was brought up at the Ecofin  Council meeting agreeing on 
the Directive, when there was a broad majo rity of Member States supporting Commission 
initiatives in this area. However, it should be stressed that the meeting of 23 November 2009 
was of a technical nature and delegations were not asked to take a po litical position on the 
initiatives. In fact, a number of dele gates remained silent during the debate.