COMMISSION OF THE EUROPEAN COMMUNITIES 
C0MC90) 595 final 
Brussels, 24 January 1991 
Proposal for a 
COUNCIL DIRECTIVE 
concerning arrangements for the taking into account by enterprises 
of the losses of their permanent establishments and subsidiaries 
situated in other Member States 
(presented by the Commission) 
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1. 
TnliiTrtunUnn 
1. One of the obstacles which might seriouslY haznper the activities of 
enterprises in a oomnon market having the sane characteristics as an 
internal market is their inability to deduct from their profits the 
losses incurred by permanent establishments and subsidiaries situated 
In Member States other than the one in which the enterprise in question 
is resident for tax purposes. 
In its oommunioation to Parliament and the Council of 20 April 1990 
concerning "Guidelines on company taxation" (Deo. SBC(90) 601 final), 
the Commission stressed the need to find a oommon solution enabling 
this obstacle to the single European market to be removed. 
2. While the results of establishments situated within the country of the 
head office form an integral part of the enterprise's results, the mere 
fact that there is a frontier between a permanent establishment and its 
head office may result in the losses of the foreign permanent 
establishment not being deductible from the profits of the head office. 
The enterprise therefore pays an excessive amount of tax In relation to 
the total net result of its activity since taxation is based on the 
result achieved solely in the oountry In which the head office Is 
situated. 
3. This problem does not arise In Member States which take aooount of the 
results - positive or negative - of a foreign permanent establishment, 
thus avoiding double taxation, where profits are made, by crediting 
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foreign tax to the domestic tax payable in respect of the permanent 
establishment (imputation or tax credit method).1 
In contrast, those other Member States which exempt the profits of a 
foreign permanent establishment (exemption method) do not in principle 
take into aooount the losses incurred by such a permanent 
establishment. However, same of them do allow foreign losses to be 
deducted while also taxing subsequently any profits the permanent 
establishment makes by reincorporating them into the results of the 
head office to the extent of the amounts previously deducted. 
4. It is the latter solution (reincorporation method) which the Commission 
has opted for in its proposal for a Council Regulation on the Statute 
for a European oompany (Article 133).2 
The Commission considers, however, that tills solution should be 
available not solely to the European oompany but to all companies 
engaged in transfrontier activities through permanent establishments or 
subsidiaries, whatever their legal form. 
The general application of arrangements for taking losses into aooount 
will also be of benefit to a new legal structure for transfrontier 
oopperation governed directly by Community law, i.e. the European 
economic interest grouping (EEIG). In practice, an EECG might be 
regarded by the tax authorities as a permanent establishment of its 
members. In this case, the results of the KKTG will be n^iniiftt^ 
separately from the results determined at the level of its members. 
1 See Annex. 
2 Doc. OOM (89) 268 Pinal - SXN 218 and SYN 279, 25th August,1989 
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In view of the auxiliary nature of an EEIG's activity, the risk that 
such determination of results in the country in which the KKEG is 
established will lead to losses is considerably greater than in the 
oase of the other enterprises. The noordeductlbl 11 ty of such losses in 
-Use member's country of residence constitutes an obstacle to making use 
of this new Community instrument for the purposes of transfrontier 
coopération. 
5. An enterprise may carry on its activity outside the territory of the 
Member State in which its head office is situated, either through the 
intermediary of a permanent establishment, or through that of a 
subsidiary, the latter having its own legal personality and coming 
under the law of the Member State in which it Is established. 
Economically speaking, these two structures used to carry on an 
activity abroad are equivalent, and the choice between them should not 
necessarily be influenced by tax considerations. However, the choice 
between them would not be neutral if the arrangements for deducting 
losses incurred by foreign subsidiaries were less favourable than those 
applicable to permanent establishments. 
Equality of treatment between permanent establishments and subsidiaries 
Is not, however, a generally accepted idea. Traditionally, oompany 
taxation Is based on the legal concept of the independence of companies 
without considération of the economic ties which may exist between 
them. In some Member States, this approach also determines the tax 
rules applicable to subsidiaries, not only on an international level 
but also domestically. 
Annex 1 contains a summary of the rules applicable in the Member States 
at both these levels. 
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6. Given that a number of Member States1 already apply the credit method 
to the results of foreign permanent establishments, it seems logical to 
adopt this method as one of the common solutions. 
This method must still allow any negative result which may arise for 
all foreign permanent establishments combined to be deducted from the 
profits of the head offioe. Consequently, provisions Imposing limits In 
this regard, such as those currently applied In Greeoe, oannot be 
7. Another solution is to permit enterprises to deduct losses incurred by 
their permanent establishments situated abroad from the results of the 
head office and subsequently to tax the profits of such permanent 
establishments by reincorporating them into the results of the head 
offioe to the extent of amounts previously deducted ("method of 
deducting losses and reincorporating subsequent profits"). 
This method may, for example, be chosen by Member States in which the 
law does not provide for the credit method and which consequently 
exempt profits earned outside the country. 
8. However, according to the particular characteristics of each of these 
two methods, pertain arrangements must be made in order to safeguard 
the revenue Interests of the country in which the enterprise is 
established and to prevent manipulation. 
1 See Annex. 
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Thi« is particularly true for the method of deduction and subsequent 
reincorporation since it would give the enterprise an unjustified 
advantage if it were possible to escape recovery of the tax not 
previously due because of reduced taxation. For this reason, 
Member States should, be permitted to reincorporate automatically 
amounts previously deducted if reincorporation has still not ooourred 
after five years or if the permanent establishment oeases to exist In 
that form. 
9. At the same time, compulsory reincorporation allows for some 
flexibility In the choice of tax legislation to be applied for 
determining the results of foreign permanent establishments. Since the 
oountry in which the head offioe is situated Is authorized subsequently 
to compensate for the deduction of losses by taxing the profits of the 
permanent establishment, there is no reason why both the losses and 
profits taken into aooount should, not be those determiner! in aooordanoe 
with the rules of the Member State In which the permanent establishment 
is situated. 
10. Arrangements for taking into aooount the losses of foreign permanent 
establishments must be oorapulsory only in respect of permanent 
establishments situated within the Conraunity. Of oourse, Member States 
remain free to extend the scope of the method they choose to cover all 
or some of the permanent establishments situated outside the Community, 
and to determine the conditions of such extension. Some of them, In 
particular those which apply the credit method as the basic 
arrangement, have already done so. 
11. In the interests of the proper functioning of the reincorporation 
mechanism based on the deduction method it is desirable for there to be 
parallel harmonization of the rules enabling the losses of a permanent 
establishment to be oarried forward to subsequent tax years in the 
oountry In which it is situated. It is thus Important that the 
proposal for a Council Directive on the harmonization of the laws of 
the Member States relating to tax arrangements for the carry-over of 
losses of enterprises,1 presented by the Commission on 11 September 
1984, be adopted alongside this proposal for a Directive. 
1 OT No C 253, 20.9.1984, p. 5, and QJ No C 170, 9.7.1985, p. 3. 
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12. The first question to be decided is that of the basic approach: is it 
enough simply to extend beyond national frontiers the arrangements for 
taking into aooount the losses of domestio subsidiaries wherever they 
exist, or should, common arrangements be established ? 
The former approach, i.e. extending the scope of national arrangements 
beyond the country's frontiers, at first sight offers the advantage 
that it affords strictly equal treatment to transfrontier activities 
and those carried on within the oountry. There are, however, two 
drawbacks. On the one hand, it would, offer no solution to the three 
Member States whose domestic legislation makes no provision for taking 
the losses of domestio subsidiaries into aooount. On the other hand, 
given the major disparities which exist between the Member States' 
domestio arrangements, it would create new distortions between their 
enterprises engaged In transborder activities. 
This approach, therefore, does not satisify at all the requirements of 
fiscal neutrality with respect to compétitive conditions on the 
Community level. For this reason, it has been ruled out by the 
The second approach, i.e. the establishment of common arrangements, 
does not have these drawbacks. On the contrary, it responds entirely to 
the necessity of fiscal neutrality. 
13. Before moving on to discuss the choice of methods to be adopted for the 
purposes of the oommon arrangements, it is necessary to establish the 
minimum holding which an enterprise must have in a subsidiary before 
the relationship between the enterprise and the subsidiary oan be 
considered equivalent to that between an enterprise and a permanent 
it. 
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The holding of a limited number of shares in anotber oompany tends to 
oonstitute a form of Investment for a given enterprise. In order to 
Justify the results, and particularly the losses, of that subsidiary 
being taken into aooount for tax purposes at the level of the 
enterprise heading the group, the latter should have a sufficient 
Influence on the management of the subsidiary. This condition can be 
considered satisfied if the holding In the subsidiary's capital is 
greater than 50%, thereby giving the enterprise beading the group a 
majority of voting rights. 
If a closer parallelism Is to be established between permanent 
establishment and subsidiary as regards their respective degree of 
economic integration with the head of the group, a threshold of 100% 
might even be envisaged. However, whilst this would offer dear 
advantages in terms of simplicity, it would, considerably limit the 
scope of the arrangements because the holding of the entire capital of 
a subsidiary is only possible in practice where new companies are 
formed. 
In this respect, it must be stressed that even those Member States 
which apply a system of consolidation at national level do not, with 
the exception of Denmark, require a 100% holding. 
On the other hand, in order to avoid, inverse distortions that work to 
the detriment of resident groups of undertakings, the conditions of 
common arrangements for taking foreign losses into aooount should not 
be too different from those applied at national level. In this regard, 
it is noteworthy that those Member States with a system of loss 
offsetting at the national level for subsidiaries require a holding of 
75% or more by the parent in its subsidiary. 
A holding of 75% would therefore appear to be appropriate for a common 
transborder system. It would ensure equal treatment among permanent 
establishments and subsidiaries and at the same time permit significant 
use of the common system. 
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14. As for the methods to be employed, the losses of a foreign subsidiary 
can, in principle, be taken into aooount in a similar manner to that 
described above for permanent establishments, the imputation method 
being similar to that of profit consolidation. 
Nevertheless, the Commissi on considers that, in view of current 
national tax laws Involving differences in both the tax base and tax 
rates, the application of this method would encounter considerable 
practical difficulties, and that it would be extremely difficult for 
the enterprise concerned to assess the usefulness of such a method. Tne 
fact that the French system of consolidation is seldom used is evidence 
of the latter difficulty. 
As the Internal market becomes more integrated, however, the Commission 
does not rule out future use of a common system of consolidation. It is 
with this prospect in mind, that the Commission will ask the Committee 
of experts responsible for studying the problems of business taxation 
to examine the broad range of questions related to the establishment of 
a common system of consolidation. 
15. Consequently, the Commission proposes only the second method, which 
involves allowing the enterprise heading the group to deduct the losses 
incurred in a given tax period by its subsidiaries situated in other 
Member States from its taxable profits for the same tax period, with 
any subsequent profits by these subsidiaries being reincorporated into 
the enterprise's taxable results to the extent of the loss previously 
deducted. 
In order to safeguard the tax revenue interests of the Member State in 
which the enterprise is situated and to prevent manipulation, provision 
should be made, as In the case of permanent establishments, to allow 
Member States to reincorporate deducted losses automatically into the 
enterprise's taxable results if such reincorporation has not been 
carried out after five years. 
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16. The Commission has not deemed it appropriate to Include at the 
Community level, another method of taking aooount of the losses 
incurred by subsidiaries, I.e. that of writing down the book value of 
the enterprise's holding. Making this method generally available oomes 
up against -Use problem that taxable profits are not determined in all 
Member States in accordance with commercial accounting rules. For this 
reason, it would be virtually impossible to apply in Member States 
whose tax legislation lays down that profits for tax purposes are to be 
determined independently of commercial profits. 
But even in those oountries which do determine their enterprises' 
taxable profits in accordance with commercial accounting rules, the 
effect of the write-down method is limited to the present value of the 
holding. In cases in which the amount of the subsidiary's losses is 
greater than the present value of the holding in the enterprise's 
balance sheet, that portion of losses in excess of the present value 
may not be taken into account. 
Moreover, reincorporation into the enterprise's profits of amounts 
previously deducted under the write-down method gives rise to a number 
of problems. This is because the subjective scope of the Directive 
takes in all enterprises which, under the tax laws of a Member State, 
are considered to be resident In that State for tax purposes, whereas 
the Fourth Council Directive of 25 July 1978 on annual accounts,1 
Article 35(l)(c)(dd) of which requires the lower value to be Increased 
if the reasons for which the value adjustments were made have ceased to 
apply, applies only to limited companies. There would not be any 
requirement on the other forms of enterprise falling within the scope 
of this Directive to revalue the holding in their balance sheet. Even 
in the case of limited companies, the occurrence of subsequent profits 
in a subsidiary does not as such give rise to revaluation unless it 
reflects a continuous Improvement in the subsidiary's productivity. In 
other words, the fact that a subsidiary makes a profit In a subsequent 
tax period does not necessarily result in an adjustment of the value of 
the holding in the parent enterprise's balance sheet. 
1 OT No L 222, 14.8.1978, p. 11. 
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17. Each enterprise will be free either to make use of the common method of 
taking into aooount the losses incurred by subsidiaries or to have the 
ordinary arrangements, i.e. separate taxation of subsidiaries, applied 
to it. 
Moreover, there is nothing to prevent a Member State from maintaining 
or introducing another method of loss offsetting, such as the 
consolidation method, alongside either of the methods laid down by the 
Directive, provided it is understood that an enterprise may not combine 
the former with the oommon system. 
TT ffrmrnlary rai ir^-tH^n*1 «rtioies 
Artlole 1 
18. Member States will have to make it possible under their laws for their 
enterprises to take into account the losses they incur through ventures 
situated in other Member States, be they permanent establishments or 
subsidiaries. 
It is not only limited companies which carry on transfrontier 
activities through permanent establishments or subsidiaries In other 
Member States, but also other forms of enterprise, Including 
partnerships and one-man businesses. One of the main alms of -Oils 
Directive is to establish the principle of equal treatment for all 
legal forms of enterprise. 
Article a 
19. The purpose of this Article Is to define three basic notions, i.e. 
"enterprise of a Member State", "permanent establishment" and 
"subsidiary". 
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An enterprise is deemed to be situated in a Member State if it is 
resident there for tax purposes according to the law of the 
l^nv^r state in question, account being taken of the provisions of 
bilateral agreements. 
The definition of "permanent establishment" is modelled on that of 
Article 5 of the GBCD Model Convention. 
The notion of subsidiary is defined with reference to two criteria: a 
majority of voting rights to be held by an enterprise of a 
Member State, and its holding in the subsidiary's capital to stand at a 
minimum level. The combination of these two criteria Is necessary 
because of the existence in several Member States of multiple voting 
shares i"*i non-voting shares. 
Although a Member State is free to fix a lower minimum holding, it must 
always respect the majority voting rights criterion. 
ArtiûlôJi 
20. ^« Article lists the taxes to which the enterprise, permanent 
establishment or subsidiary must be liable in order to qualify for 
application of the Directive. These are either personal income tax or 
corporation tax, depending on the enterprise's legal form. 
Article 1 
21. It is left to the discretion of each Member State whether to widen the 
geographioal scope of the arrangements laid down by the Directive to 
permanent establishments or subsidiaries situated outside the 
Community. Whereas all permanent establishments or subsidiaries 
situated in the Community must be oovered, it is up to the Member 
States to determine the extent to which the arrangements should apply 
on a world scale. 
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However, the provisions applicable to permanent establishments or 
subsidiaries situated outside the Community may not be more favourable 
than those applied within the Community. 
The results of all permanent establishments are already taxed In the 
hands of the head office in those Member States which apply credit or 
worldwide profit arrangements. 
Article 8 
22. i^iff Article lays down that Member States are required to apply to the 
losses of their enterprises' permanent establishments one of the two 
methods described in Articles 6 and 7, which are of equal status. 
Article 6 
23. Article 6 defines the credit method. It is important to note that this 
method Involves taking into account, at the level of the enterprise's 
head offioe, both the positive and the negative results of its 
permanent establishments. 
Articled 
24. Since the method of deducting losses and reincorporating subsequent 
profits gives the enterprise which applies it only a temporary cash 
advantage, it would seem justified to stipulate that the Member State 
in which the enterprise in question Is resident for tax purposes must 
allow the losses of permanent establishments situated in other Member 
States to be deducted as they are shown on the permanent 
establishments' tax accounts, and should not recalculate them aooording 
to its own tax rules. 
Should the Member State extend the scope of this method's application 
to permanent establishments situated outside the Community, it is free 
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to lay down more striot rules stipulating, for example, that foreign 
results must be recalculated according to the domestic rules. 
Article 8 
25. T*^« Article offers Member States the possibility of prescribing 
compulsory relnoorporation of amounts previously deducted if the 
enterprise's foreign activity does not yield a profit within five 
years. This five-year time limit applies separately to each tax period 
at the end of which losses have been deducted. 
26. Another situation which may give rise to automatic reincorporation Is 
where a permanent establishment is sold, wound up or transformed into a 
subsidiary; this Is because such an operation takes the permanent 
establishment outside the scope of the method. 
Article 9 
27. The method laid down for taking a subsidiary's losses into account Is 
Identical to that used for permanent establishments as described in 
Article 7, except that the losses allowed as a deduction are determined 
separately for each subsidiary, without any aggregation. 
Article 1Q 
28. As in the oase of the method of deducting the losses of permanent 
establishments, the Directive authorizes Member States to provide in 
their laws for the automatio reincorporation of amounts previously 
deducted if reincorporation has not oocurred by the end of the fifth 
year following deduction of the loss. The same rule applies where the 
subsidiary is sold, wound up or transformed Into a permanent 
it. 
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Provision must also be made to cover one further situation. Since the 
Directive is applicable only if the enterprise's holding in the 
subsidiary reaches a minimum threshold, it is logical that amounts 
previously deducted should automatically be reincorporated if its 
holding falls below that threshold. 
Article 15 
29. Notwithstanding the fact that the present directive does not provide 
the method of writing down the book value of the holding as a Community 
solution, Member States are free to Include this method as an 
additional one into their Internal legislation. In such a oase, it 
shall however be avoided that an enterprise applies at the same time 
both the method provided by this directive and the method of writing 
down the book value, because otherwise the same loss would be taken 
into aooount twice. 
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Proposal for a 
COUNCIL rJŒKBCTIVB 
nr«m«rrriT^ arrangements for the taking Into aooount by enterprises 
of the loflFww of their permanent establishments and subsidiaries 
situated In other Member States 
THE COUNCIL OP THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Eoonomio Community, 
and in particular Article 100 thereof, 
Having regard to the opinion of the European Parliament, 
Having regard to the opinion of the Economic and Social Committee, 
Whereas in a common market having the characteristics of an internal 
market, the activities of enterprises across Community borders should not 
be treated less favourably than activities limited to a single Member 
State, a requirement that is not currently met, since existing legislation 
often does not permit enterprises to take into aooount the losses Incurred 
by their permanent establishments and subsidiaries situated in other Member 
States; whereas it Is consequently necessary to introduce oommon rules 
covering all enterprises, whatever their legal form; 
Whereas, in the case of permanent establishments, Member States should 
ensure that the enterprises of which they form an Integral part are able to 
take aooount of their losses, either by allowing the results of such 
permanent establishments to be Included in those of the enterprises and, at 
the same time, authorizing the latter to deduct "tiae tax pa-iri by the said 
establishments in the other Member States from any tax due in respect of 
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their profits, or by authorizing the enterprise to deduct the losses of its 
permanent establishments from its own profits and taxing subsequent profits 
of the latter to the extent of the losses deducted; whereas the results of 
permanent establishments should be determined Member State by Member State; 
Whereas in the case of subsidiaries, the latter method appears under the 
present circumstances to be the most appropriate means of allowing 
enterprises to offset the losses Incurred with respect to activities across 
Community borders; whereas it is appropriate for the aooount taken by the 
parent enterprise of its subsidiaries' losses and profits to be determined 
separately for each subsidiary in proportion to the parent's holding 
therein; whereas, since a subsidiary is a legally independent entity, the 
enterprise which controls it should be free to decide whether or not to 
take into account its losses; whereas provision should be made to prevent 
the same losses from being taken into aooount twice by excluding the use of 
the method specified in this Directive in conjunction with an adjustment to 
the value of the holding; 
Whereas, where the enterprise applies the method of deducting losses with 
reintegration of subsequent profits, the results of permanent establish­
ments and subsidiaries may without any difficulty be determined according 
to the law of the Member State in which they are situated; 
Whereas, In order to preclude unjustified advantages for enterprises and to 
safeguard the Member States' tax revenues, Member States must be allowed, 
in pertain circumstances, to reincorporate automatically losses previously 
deducted; whereas, in addition, Member States should be free to apply 
provisions designed to prevent tax evasion and abuse; 
Whereas it is appropriate to allow Member States the option of TnAjirha-iTvtT^» 
or introducing other means of taking into aooount subsidiaries' losses 
alongside the common method defined in this Directive; 
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Whereas, with a view to Improving the worldwide competitiveness of 
Community enterprises, it appears appropriate to extend the arrangements 
i«jH down by this Directive to permanent establishments and subsidiaries 
situated in non-member countries; whereas Member States should be free to 
determine the conditions and scope of any such extension, 
HAS ADOPTED TEES DIRECTIVE : 
Article 1 
Member States shall adopt, in accordance with the provisions of this 
Directive, arrangements enabling their enterprises to take aooount of the 
losses incurred by permanent establishments or subsidiaries situated in 
other Member States. 
TITLE I 
General provisions 
Article 2 
For the purposes of this Directive: 
"enterprise of a Member State" means any enterprise which, under the 
tax legislation of a Member State, is considered to be resident for tax 
purposes in that State; 
"permanent establishment" means any fixed place of business through 
which an enterprise of a Member State carries on all or part of its 
activities; 
"subsidiary" means any company in the capital of which an enterprise of 
a Member State has a minimum holding of 75%, giving it a majority of 
voting rights. Member States may, however, stipulate a lower minimum 
holding. 
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Article 3 
In order to fall within the provisions of this Directive, the enterprises, 
permanent establishments, and subsidiaries referred to in Article 2 must be 
subject to, without being exempt from, one of the following taxes: 
(a) in Belgium: 
impôt des personnes physlques/personenbelasting, 
impôt des soolétés/veDnootschapsbftl asting, 
- impôt des non-rési dents/bel asting der niet-verblijfnouders; 
(b) in Denmark: 
selskabsskat, 
- indkomstskat til staten; 
Ce) in Germany: 
Kbrperschaftsteuer; 
(d) In Greece: 
- ipôpoç eiooônpaTOÇ tpuoiKÛv npooùnuv, 
«pôpoç EjooônpaTOÇ VOJJIKÛV npooûnuv, 
(e) in Spain: 
Impuesto sobre la renta de las personas fisicas, 
impuesto sobre sociedades; 
(f) in France: 
impôt sur le revenu, 
impôt sur les sociétés; 
(g) in Ireland: 
income tax, 
corporation tax; 
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(h) in Italy: 
Imposta sul reddito délie persone fislche, 
- imposta sul reddito delle persone glurldiohe; 
(1) in Luxembourg: 
impôt sur le revenu des personnes, 
impôt sur le revenu des collectivités; 
Cj) in the Netherlands: 
Inkomstenbel asting, 
(k) in Portugal: 
inrposto sobre o rendimento das pessoas slngulares, 
imposto sobre o rendimento das pessoas oolectivas; 
Cl) in the United Kingdom: 
income tax, 
oorporatlon tax, 
or any other tax which may be considered a subsltute for one of these 
taxes. 
Article 4 
Member States may extend the application of this Directive, under 
conditions which they shall lay down, to all or some of their enterprises' 
permanent establishments and subsidiaries situated outside the Community. 
However, these conditions may not be more favourable than those applicable 
to permanent establishments and subsidiaries situated in the other 
Member States. 
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TITLE II 
Provisions relating to permanent 
Article 5 
Member States shall make provision for their enterprises to take aooount of 
the losses Incurred by permanent establishments situated in another 
Member States either by means of the credit method defined in Article 6, or 
by means of the method of deducting losses and reincorporating subsequent 
profits, as defined in Article 7. 
Application of the credit method shall be obligatory for enterprises in 
Member States that have chosen it; application of the method of deducting 
losses and reincorporating subsequent profits is a matter for each 
enterprise to decide. 
Article 6 
The credit method shall consist of Including in the enterprise's results 
for a given tax period the positive or negative results of all the 
enterprise's permanent establishments situated in another Member State, 
and where appropriate, crediting the tax paid by the latter against any tax 
which may be payable by the enterprise on the profits of such 
its. 
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Article 7 
1. The method of deducting losses and reincorporating subsequent profits 
shall Involve: 
(a) the deduction from the enterprise's taxable profits for a given tax 
period of the loss incurred in the same tax period by the enterprise's 
permanent establishments situated in other Member States; 
Cb) the Incorporation of subsequent profits of such permanent 
establishments into the enterprise's taxable income to the extent of 
the loss deducted pursuant to subparagraph (a). 
2. The income of permanent establishments shall be determined Member State 
by Member State in accordance with the rules of the law of the 
Member State in which the permanent establishment is situated. 
Article 8 
Member States may make provision for losses which are deductible pursuant 
to Article 7 to be automatically reincorporated into the enterprise's 
taxable results in one of the following circumstances: 
Ca) where reincorporation has not ooourred by the end of the fifth year 
following that during which the loss became deductible; 
Cb) where the permanent establishment has been sold, wound up or 
transformed into a subsidiary. 
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TITLB III 
Provisions relating to subsidiaries 
Article 9 
1. Member States shall make provision for their enterprises to take 
aooount of the losses Incurred by subsidiaries situated in another 
Member State by means of the method of deducting losses and reincorporating 
subsequent profits. 
This method shall involve: 
(a) the deduction from the enterprise's taxable profits for a given tax 
period of the loss Incurred in the same tax period by the enterprise's 
subsidiaries situated in other Member States; 
Cb) the incorporation of subsequent profits of such subsidiaries into the 
enterprise's taxable income to the extent of the loss deducted pursuant 
to subparagraph (a). 
2. The Income of each subsidiary shall be determined in accordance with 
the rules of the law of the Member State in which it is situated, in 
proportion to the holding which the enterprise has In its capital. The 
level of holding to be applied in this respect shall be the lowest 
obtaining during the tax period in question. 
Article 10 
Member States may make provision for losses which are deductible pursuant 
to Article 9 to be automatically reincorporated into the enterprise's 
taxable income in one of the following circumstances: 
(a) where reincorporation has not occurred by the end of the fifth year 
following that in which the loss became deductible; 
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Cb) where the subsidiary is sold, wound up or transformed Into a permanent 
Co) where the enterprise's holding in the oapital of the subsidiary has 
fallen below the minimum level laid down by the Member State in which 
the enterprise is situated. 
Article 11 
Application of the method defined in Article 9 shall be Incompatible with 
any correction of the value of the holding of that enterprise in a 
subsidiary. 
Article 12 
The provisions of this Directive shall not prevent Member States from 
maintaining or introducing other methods of taking into aooount the losses 
of subsidiaries of its enterprises looated in other Member States, 
Including the consolidated profit method. 
TITLE IV 
Final provisions 
Article 13 
This Directive shall not preclude the application of provisions laid down 
by national law or under agreements to prevent tax evasion or abuse. 
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Article 14 
1. Member States shall bring into force the laws, regulations and 
administrative provisions necessary to comply with this Directive before 1 
January 1998. They shall immediately Inform the Commission thereof. 
When Member States adopt these measures, these shall contain a 
reference to this Directive or shall be accompanied by such reference at 
the time of their official publication. The prooedure for such reference 
shall be adopted by Member States. 
2. Member States shall ensure that the texts of the main provisions of 
national law which they adopt in the field oovered by this Directive are 
oommunioated to the Commission, and, should the oooasion arise, the texts 
of measures taken to extend the provisions of this Directive to permanent 
establishments and subsidiaries of their enterprises located outside the 
Community. 
Article 18 
This Directive is addressed to the Member States. 
Done at Brussels, 
For the Council 
The President 
TAX ARRANGEMENTS APPLICABLE TO LOSSES OF SUBSIDIARIES AND FOREIGN PERMANENT ESTABLISHMENTS 
Member State Resident subsidiary Foreign Permanent Establishment Foreign subsidiary 
Be I g ium -No tax treaty : deduction with reintegration 
following a certain order (art. 66 and following 
AR - CIR) 
- tax treaties exemption method 
- deduction with reintegration where a treaty 
provides for exemption 
Denmark ConsoIi dat i on 
consoIidated prof i t 
100% subsidiary) -No tax treaty: taxation of worldwide income 
with tax credit 
-tax treaties: taxation of worldwide income 
with either tax credit or exemption 
with progression, or exemption Consolidation (consolidated 
profit 100% subsidiary). 
Double taxation is In practice 
avoided in the same way as for 
foreign permanent establishments 
Germany Consolidation when the 
ORGANSCHAFT system is 
applied (subsidiary under 
financial (51% of votes) 
structural and economic 
control) at the option of 
the parent company No tax treaty taxation of worldwide 
income with tax credit 
tax treaties: exemption method 
deduction of losses with reintegration 
where a treaty provides for exemption 
Greece - No tax treaty :in principle tax credit 
method except if the global result of all 
permanent establishments is negative (no 
deduction of losses in such cases) 
- tax treaties tax credit method 
Spa in ConsoIi dat ion 
(consolidated profit) 
90% subsidiary minimum - No tax treaty : taxation of worldwide income 
wi th tax credit 
- tax treaties: tax credit method 
France ConsoI IdatIon if: 
1) consolidated profit 
(benefice consolidé) upon 
authorisation by the tax 
authorities. (1) 
2. System of fiscal 
integration (régime 
d'intégration fiscale) 
95% subsidiary minimum. Tax treaties: exemption method 
taxation of worldwide income In the framework 
of the "bénéfice mondial" system upon authori­
sation by the tax authorities (1) and 
irrespective of whether a treaty applies or 
not. 
(1) In practice very limited application ConsoI IdatI on if: 
1) Regime of "bénéfice consolidé 
on authorisation (1) 
2) deduction of lossss of the 
first five years to the Invested 
amount for investment In the EEC 
with automatic reincorporation 
once profits ore carried and at 
the latest after 10 years 
(art.39-80 CGI) 
TAX ARRANGEMENTS APPLICABLE TO LOSSES OF SUBSIDIARIES AND FOREIGN PERMANENT ESTABLISHMENTS 
Membe r State 
I re 1 and 
taly 
Luxembou rg 
Nether 1ands 
Por tuga 1 
United 
K I ngdom Resident subsidiary 
Loss offsetting if 
1) a minimum participa­
tion of 75% i n a 
subsidiary or 
2) consor t i urn 
-
Tax consolidation when 
the ORGANSCHAFT system 
is applied (subsidiary at 
99 %) at the option of 
the parent enterprise * 
and upon authorisation by 
the Minister of Finance 
Tax consolidation when 
appI 1 cat ion of f I sea 1 
entity (fiscale eenheid) 
99 % subs i d I ary 
Under certain conditions 
losses wh i ch arise in 
the case of winding up a 
subsidiary that is part 
of a fiscal entity can be 
taken Into account. 
Conso1i datI on 
(90% subsidiary at the 
option of the parent 
enterprlse) 
Tax arrangements for 
1 osses I f 
1) 75% subsidiary minimum 
or 
2) consor t i urn Foreign Permanent Establishment 
- no tax treaty: taxation of world 
wide income with tax credit 
- tax treaties: tax credit method. 
- if the foreign tax rate exceeds 
the Irish rate, a partial deduction 
is granted for the excess amount. 
- no tax treaty: taxation of world 
wide income with tax credit 
- tax treaties: tax credit method 
- no tax treaty taxation of world 
wide income with tax credit 
- tax treaties exemption method 
without deduction of losses 
- no tax treaty : taxation of world 
wide income with tax credit 
- tax treaties exemption method 
- deduction with reintegration in 
case of losses when a treaty 
provides for the exemption method 
- no tax treaty taxation of world 
i ncome 
- tax treaties : taxâtion of worldwide 
income with tax credit 
- no tax treaty taxation of world 
wide income with tax credit 
- tax treaties: tax credit method Foreign subsidiary 
-
-
-
Under certain conditions, losses 
which arise In the case of 
winding up a subsidiary can be 
taken Into account 
-
-!3 
- 28 
The Impact of the proposal on business with special reference to small and 
medium sized enterprises (SMEs) 
Title of the proposal: Proposal for a Council Directive concerning 
arrangements for the talcing Into account by 
undertakings of the losses of their permanent 
establishments and subsidiaries situated in other 
Member States. 
The proposal : 1. One of the aims of the internal market is to enable 
undertakings to operate throughout the Community 
without falling foul of frontiers or obstacles. One 
of the obstacles is due to the absence in many 
cases of national provisions allowing an 
undertaking to set against Its profits the losses 
Incurred by its permanent establishments or 
subsidiaries abroad. The proposal therefore 
provides to Introduce common rules to take Into 
account such losses. 
The impact on business 
All sectors and sizes of business will benefit from 
this directive which applies to incorporated and 
unincorporated undertakings, Including European 
Economic Interest Groupings. 
All undertakings falling within the scope of the 
Directive will benefit from It. No other 
compliance conditions are provided. 
The proposal will have a positive effect on 
transborder investment and thus improve the 
competitive position of Community undertakings. 
Consultation - 29 -
5. The proposal does not provide any reduced or 
different requirements for small and medium sized 
firms. 
6. The attached list describes the main views of the 
consulted organisations which are in general all in 
favour of the proposal. 
- 30 -
Systems proposed by the professional associations 
—^— —•—• ' « ——^m^t " ' ~—^—** * • • —^— i •— ——— m «. 
Foreign permanent Foreign subsidiary 
establishment 
CFE - choice between credit only reintegration system 
and reintegration 
system 
Fed. banc. CE choice between credit reintegration system or 
and reintegration provision for déprécia-
system tion 
FEE (Federation of Euro- credit or réintégra- only reintegration system 
pean Chartered Accountants tion 
UNlCE choice between credit reintegration system or 
and reintegration provision for depreela-
system tion 
CEEP proportional fiscal proportional fiscal 
consolidation consolidation 
- 31 -
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