Proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States
Date: 1998-03-04
Institutions: European Commission
Subjects: member country, national implementing measure, restriction on competition, tax system, type of business

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COMMISSION OF THE EUROPEAN  COMMUNITIES 

Brussels, 04.03.1998 
COM(1998) 67 final 

98/0087 (CNS) 

Proposal for a 
COUNCIL  DIRECTIVE 

on a common system of taxation applicable to interest and royalty payments 
made between associated companies of different  Member States 

(presented by the Commission) 

EXPLANATORY  MEMORANDUM 

I. 

General 

1. 

2. 

In its  Communication  of  5 November  1997  entitled  "A package  to  tackle  harmful 
tax  competition  in  the  European  Union"1,  the  Commission  stressed  the  need  for 
coordinated  action  at European  level  to tackle harmful  tax  competition  in order  to 
help  achieve  certain  objectives  such  as  reducing  the  continuing  distortions  in  the 
Single  Market,  preventing  excessive  losses  of  tax  revenue  and  encouraging  tax 
structures to develop in a more employment-friendly  way. The ECOFIN Council of 
1 December  1997 held  a wide-ranging  debate  on the basis  of that  Communication, 
highlighting  three areas in particular: business taxation, taxation  of savings income 
and  the  issue  of  withholding  taxes  on  cross-border  interest  and  royalty  payments 
between  companies2.  Following  the  debate  on  this  taxation  package,  the  Council 
and the Representatives  of the Governments  of the Member  States, meeting  within 
the Council, agreed to a Resolution  on a code of conduct  for business taxation. The 
Council  also  approved  a  text  on  taxation  of  savings,  considered  that  the 
Commission  should  submit  a  proposal  for  a  Directive  on  interest  and  royalty 
payments  between  companies  and  took  note  of  the  Commission's  intention  to 
submit  rapidly  two  proposals  for  Directives  on  these  subjects.  This  Memorandum 
deals  with  the proposal  for  a Directive  to  eliminate  taxation  in  the  country  where 
they  arise  of  payments  of  interest  and  royalties  between  associated  companies  in 
different  Member  States.  The  Commission  will  shortly  present  a  proposal  for  a 
Directive to ensure minimum effective  taxation  of income from savings, in order to 
facilitate parallel progress on all the elements of the taxation package. 

In  its  Communication  of  20  April  1990  setting  out  guidelines  on  company 
taxation3,  the  Commission  pointed  out  that  one  of  the  aims  of  the  Single  Market 
was 
in 
to  remove 
the Community. 

impeding  cross-border  business  activity 

tax  obstacles 

3.  One of the measures  the adoption  of which  was  considered  to be necessary  to that 
end  was  the  proposal  presented  by  the  Commission  at  the  end  of  1990 to  abolish 
withholding  taxes  levied  on  interest  and  royalty  payments,  initially  those  made 
between parent companies and subsidiaries of different  Member States4. 

4. 

In March  1992, the  Ruding  report5  included  this  Directive  among  its priorities  for 
the establishment of the Single Market. 

5.  As, however,  it was not possible to find  an unanimous resolution to some problems 
that arose in the course of the negotiations in the Council, the Commission  decided, 
after  several  compromises,  to  withdraw  the  proposal  at  the  end  of  1994.  It  had 
become clear  at that  stage that there was not  unanimous  agreement  in principle on 
the desirability of such a Directive . 

2 
J 
4 
5 

COM(97) 564 final of 5.11.1997. 
OJC2,6.1.199S. 
SEC(90) 601 final of 20.4.1990. 
OJC53,  28.2.1991, p. 26. 
Report  of  the  Committee  of  independent  experts  on  company  taxation,  Commission  of  the 
European Communities,  1992. 

6. 

The  Commission,  and  international  business  associations,  have  always  been 
convinced of the need  for a Community  instrument  in this area, as neither unilateral 
measures  taken  by Member  States  nor the bilateral  tax  agreements,  that  have  gone 
some  way  towards  overcoming  the  problems  resulting  from  the  taxes  levied  on 
these payments  in the Member  State where they arise, have provided  a  satisfactory 
solution  that  fully  meets  the  requirements  of  the  Single  Market.  Bilateral  tax 
treaties  do  not  cover  all  bilateral  relations  between  Member  States,  they  do 
not achieve  complete  abolition  of  double  taxation  and,  in  particular,  they  never 
provide  any  uniform  solution  for  triangular  and  multilateral  relations  between 
Member States. 

7.  Unilateral  measures  and  bilateral  agreements  generally  allow  withholding  taxes, 
often  levied  at  reduced  rates,  to  be  set  against  the  tax  payable  by  the  recipient 
companies.  However,  double  taxation  occurs  wherever  it  is  not  stipulated  that 
withholding  taxes  are deductible  from  the taxable profits  of  the recipient  company 
or where  that  company  cannot  use or can  only  partially  use  the  tax  credit  because 
the  amount  of  tax  payable  by  it  is  insufficient  or  nil.  What  is  more,  bilateral 
agreements  generally  make  the  reduction  or  abolition  of  the  withholding  tax 
conditional on completion of administrative  formalities. 

8.  Application  of withholding  taxes  may  also  give  rise  to  cash-flow  problems,  since 
some  time  will  elapse  between  receipt  of  the  income  from  which  the  withholding 
tax has been deducted and the setting-off of the tax credit against payment of tax. 

9. 

The  application  of  a withholding  tax  to  interest  limits,  for  the  above  reasons,  the 
possibilities  for  flexible 
intra-group  financing  arrangements.  In  such  cases 
financing has to be done locally, often  leading to higher costs. 

10.  Elimination  of  any  form  of  possible  double  taxation  can  best  be  achieved  by 
allocating  the  taxing  rights  to  the  Member  State  of  residence  of  the  beneficial 
owner  of  the  interest  or  royalties.  It  is  important  to  eliminate  not  only  the  tax 
collected by deduction at source in the Member State where the interest or royalties 
arise but also any tax liability that is levied by assessment in that Member State. 

11.  The only  satisfactory  way to effect  this is through  a Directive  which  enshrines  the 
principle  that  Member  States  should  not  impose  taxes  on  interest  and  royalties 
arising in their territory but beneficially  owned by non-resident  companies, in order 
to  ensure  that  such  income  is  taxed  only  once  in  the  Member  State  in  which  the 
beneficial  owner is established. This will allow companies to take better  advantage 
of the opportunities of the Single Market. 

12.  The  discussions 

in 

initiated  by  the  Commission  at  the  informal  meeting  of 
Ministers for  Economic  Affairs  and  Finance  in  Verona  in  April  1996  and 
culminating 
the  ECOFIN  Council  Meeting  on  1  December  1997  have 
demonstrated  a new  willingness  among  Member  States  to  compromise  in order to 
tackle  harmful  tax  competition  and  reduce  the  continuing  distortions  of  the 
Single Market.  In view  of  this  new  development,  the  Commission  is now  coming 
forward  with  a new  proposal  for  a Directive  to  eliminate  source  country  taxes  on 
payments of interest and royalties. 

13.  Both this proposal  and the text on the taxation of savings income in the Community 
which was also approved at the  1 December ECOFIN Council meeting'are aimed at 
removing  distortions  in  the  Single  Market.  The  directive  in  the  field  of  savings 
income  will  be  aimed  at  eliminating  non-taxation  of  income  while  this  proposal 
concerning  payments  of interest  and  royalties payments  is aimed  at eliminating  the 
distortions which arise through double taxation. 

14. 

15. 

In  order  to  alleviate  the  budgetary  impact  of  the  interest  and  royalties  proposal, 
particularly  for  those  Member  States  which  are  net  importers  of  capital  and 
technology  and  for  which  these  taxes  on  such  payments  represent  an  appreciable 
source  of  revenue,  a  gradual  approach  as  far  as  the  scope  of  the  Directive  is 
concerned would seem to be appropriate. 

Initially,  therefore,  it  is  only  proposed  that  the  taxes  collected  at  source  or  by 
assessment  on  interest  and royalty  payments  made  between  associated  companies, 
including the permanent  establishments of such companies, should be abolished, as 
such  taxes  fall  most  frequently  on  transactions  between  associated  companies.  It 
will  be  possible  to  extend  the measure  later,  as part  of  the  further  development  of 
the  Single  Market,  to  taxes  of  this  type  levied  on  interest  and  royalty  payments 
made between companies which are not associated. 

16.  As well  as this  limitation  in the scope of the  Directive, a further  step to help  those 
Member  States  which  are  net  importers  of  capital  and  technology  would  be  to 
include  arrangements  allowing  a gradual, rather  than  immediate,  abolition  of these 
taxes over a transitional  period. 

17.  This Directive does not preclude Member  States from  taking steps to combat fraud 
and  abuse.  In  particular,  it  does  not  affect  the  right  of  tax  authorities  to  adjust 
transfer  prices,  where  the  amount  of  interest  or  royalties  or  the  amount  of  a  loan 
exceeds  the  amount  which  would  have  been  agreed  upon  by  the  payer  and  the 
beneficial  owner had they stipulated at arm's length. 

18.  The  Directive  allows  Member  States  not  to  apply  the  exemption  from  source 
country taxation if the beneficial  owner of the payments benefits  from  a special tax 
rate which is lower than that generally  applicable to payments of this kind received 
by  a  company  or  a  permanent  establishment  of  the  Member  State  of  the 
beneficial  owner. 

19.  Furthermore,  the  provisions  of  the  Council  Directive  of  19 December  1977 
concerning mutual  assistance by the competent  authorities  of the Member  States in 
the field of direct and indirect taxation6 apply to interest  and royalty payments. The 
exchange - and in particular the spontaneous exchange - of information  where there 
appears  to  be  a  transfer  of  profits  can  enhance  the  effectiveness  of  measures  to 
prevent evasion and avoidance in these fields. 

OJL336,  27.12.1977,  amended  subsequently  by  Directives  79/1070/EEC  (OJ  L 331, 27.12.1979) 
and 92/12/EEC (OJ L 76, 23.3.1992). 

4 

20.  Provision  is made  for  the  Commission  to  report  on  the  operation  of  this  Directive 
on the basis of the experience of its operation  over the first three years, with a view 
to an extension  of its scope. It will be clearer at that  stage, in particular  in the light 
of progress on the code of conduct  for business taxation, whether  it is necessary to 
continue  to  allow  Member  States  the  option  of  not  applying  the  Directive  to 
payments  which  benefit  from  a  special  tax  rate  which  is  lower  than  the  normally 
applicable rate.  The question of reviewing the definition  of interest and royalties in 
the light of the convergence  of the provisions dealing with  interest  and royalties in 
national  legislation  and in bilateral  double taxation  treaties may  also be  considered 
at that stage. 

II.  Commentary 

Article 1 

1. 

The purpose of this Article is to exempt payments of interest and royalties from any 
taxation  at  source,  whether  collected  by  withholding  tax  or  by  assessment,  where 
such  payments  are  made  by  or  on  behalf  of  a  company  of  a  Member  State,  or  a 
permanent  establishment  situated  in  a  Member  State  of  a  company  of  another 
Member  State,  to  an  associated  company  of  another  Member  State,  or  to  a 
permanent  establishment  situated  in  another  Member  State  of  an  associated 
company of a Member State, which is the beneficial  owner of those payments. This 
provision  requires  an  exemption  to  be granted  at  source  (i.e. at  the moment  when 
the interest  and royalties  are paid); the beneficial  owner does not have to apply  for 
a refund  of tax. 

When a permanent  establishment  pays or receives interest  or royalties, it is for  the 
purposes  of  this  Directive  treated  as the payer  or  the beneficial  owner  and  not  its 
headquarters company, as also provided for in Article 3, paragraph 3. 

2. 

The  Directive  will  not  apply  in  situations  which  do  not  in  essence  involve 
cross-border payments. This could arise, for example: 

(a) 

(b) 

if  the  beneficial  owner  of  the  interest  or  royalties 
is  a  permanent 
establishment  situated  in  the  same  Member  State  as  the paying  company  or 
permanent  establishment  and the debt-claim or right or property  in respect of 
which  the payments of interest or royalties  are made is effectively  connected 
with  such  a permanent  establishment,  even  if the  interest  and royalties  are in 
fact paid to an associated company of another Member State; 

if the interest  and royalties  are paid  to  a permanent  establishment  in  another 
Member  State  of  an  associated  company  established  in  the  Member  State 
where  the  interest  or royalties  arise, whenever  such  payments  made  directly 
between  companies  of the  same Member  State  are  subject  to  a tax  collected 
by  deduction  at  source, unless  the  debt-claim  or  right  of property  in  respect 
of which  these  payments  are  made  is  effectively  connected  with  the 
permanent  establishment. 

ArticSe 2 

1. 

(a)  The  term  "interest"  as  used  for  the  purposes  of  this  Directive  denotes  in 
general  all income from debt-claims of every kind. The definition  is based on 
that used  in Article  11 of the  1996 OECD Model  Tax  Convention  on  income 
and  on  capital,  with  the  exception  of  income  from  government  securities 
which  is not  relevant  to  this  Directive.  Penalty  charges  for  late  payment  do 
not  really  constitute  income  from  capital,  but  are  rather  a  special  form  of 
compensation  for  loss  suffered  through  the  debtor's  delay  in  meeting  his 
obligations. These charges are therefore,  as in Article  11 of the OECD Model 
Tax Convention, not regarded as interest for the purposes of this Directive. 

(b)  The  term  "royalties"  as  used  for  the  purposes  of  this  Directive  denotes  in 
general all payments made as a consideration  for the use of,  or the entitlement 
to  use  copyright,  work,  patents,  etc.  as  included  in  Article  12  of  the  1996 
OECD  Model  Tax  Convention  on  income  and  on  capital,  as  well  as 
payments made  in  consideration  for  the  use  of  or  the  right  to  use  industrial, 
commercial  or  scientific  equipment, 
in  order  to  cover  all  payments 
considered by Member States to be royalties. 

Payments  made  in  consideration  for  software  may  represent  royalties  if 
less than  the  full  rights  in  the  software  are  transferred  (no  alienation 
of ownership),  i.e. payments  made  under  transactions  in  software  copyrights 
that  allow  the  transferee  to  commercially  exploit  the  copyright  by  using  it 
to reproduce  computer  software  products  for  sale  or  by  sublicensing 
the copyright  to  other  parties,  but  which  do  not  constitute  an  alienation  of 
the copyright.  This  Directive  will  apply 
to  payments  made  under 
such transactions. 

The term "royalties" does not, however, include so-called "mineral royalties" 
because such payments have rather the character of income from real estate. 

2. 

The  Directive  applies  not  only  to  the  payments  of  interest  or  royalties  as 
defined  under  paragraph  1 but  also  to  all  payments  regarded  by  Member  States 
as such,  either  under  a  Double  Taxation  Convention  in  force  between  the 
Member State  where  the  interest  or  royalties  arise  and  the  Member  State  of  the 
beneficial  owner  or,  in  the  absence  of  such  a  Convention,  on  the  basis  of  the 
national  tax  legislation  of  the  Member  State  where  the  interest  or  royalties  arise. 
This extends to payments made by or to a permanent establishment which would be 
considered  to be interest  or royalties  if they had been made by or to  a company  in 
the Member States concerned. 

Article 3 

1. 

(a)  The  term  "company  of  a  Member  State" covers  any  company  as  defined  in 
Article 58  of  the  Treaty  and  whose  activities  present  an  effective  and 
continuous  link  with  the  economy  of  a Member  State.  The  Council  adopted 
on  18 December  1961 (OJ 2 of  15 January  1962) a general programme  for the 
abolition  of  existing  national  restrictions  on  the  freedom  of  establishment. 
There, an economic  criterion has been introduced,  that  tempers the  liberalism 
of  Article 58  of  the  Treaty.  This  means  that  a  company  which  has  only  its 
in  the  Community  could  only  acquire  the  right  of 
registered  office 
establishment  when  its  activities  present  an  effective  and  continuous  link 
with the economy of a Member  State. It remains, however,  excluded  that  this 
link could depend  upon the nationality  of the shareholders  or managers of the 
company.  Such  a  company  has  moreover  to  be  resident  in  a  Member  State 
and to be subject  to tax in a Member State. 

(b)  The  term  "associated  company"  covers  as  a  minimum  all  companies  which 
are  associated  with  each  other  by  way  of  a minimum  holding  of  25% in  the 
capital held either directly or indirectly. 

The  Directive  covers  payments  of  interest  and  royalties  made  between  a 
parent  company  and  a  subsidiary;  between  a  parent  company  and  a 
sub-subsidiary;  between  fellow  subsidiaries  or sub-subsidiaries;  and  between 
subsidiaries and sub-subsidiaries, in so far as the company by, or en behalf of 
which,  the  interest  or  royalties  are  paid  and  the  company  to  which  these 
payments are made are both companies of a Member State. 

However, Member States who so wish are allowed to provide for a lower, and 
therefore  more  liberal,  level  of  holding  than  25%  in  order  to  determine 
whether  a  company  exercises  sufficient  control  over  another.  Furthermore, 
they can replace the criterion of a minimum  capital holding by the criterion of 
a minimum holding in the voting rights. 

(c)  The  notion  of  beneficial  owner  is  intended  to  secure  that  the  exemption 
applies  when  an  intermediary,  such  as  an  agent  or  nominee  or  trustee,  is 
interposed  between  the  beneficiary  and  the  payer,  only  if  the  true  owner  of 
the interest or royalty payments meets the requirements of the Directive. 

(d)  The  term  "permanent  establishment"  as  used  for  the  purposes  of  this 
Directive  denotes  in  general  a  fixed  place  of  business  in  a  Member  State, 
through which the business of a company of another Member  State is wholly 
or partly earned on, but that has no legal personality. 

(e)  As,  in  principle,  interest  or  royalty  payments  that  are  made  to  or  by  a 
permanent  establishment  are  actually  made  to  or  by  the  headquarters 
company,  the  fiction  that  is  inherent  in  this  provision  ensures  that  such 
payments  may  nonetheless  benefit  from  the  Directive,  provided  all  other 
conditions are met. 

2.  Member  States  may  also  cease  (with  retroactive  effect)  to  treat  a  company  as  an 
associated  company,  if the minimum  holding  requirement  set out  in paragraph  1(b) 
is not  met  throughout  a minimum  period  of  up  to  two  years.  Member  States  may 

not make the granting of the tax advantage provided  for by the Directive subject  to 
the  condition  that,  at  the  moment  of  the  payment  of  the  interest  or  royalties,  this 
holding period has already been completed, so long as it is subsequently  observed. 

Article 4 

Member  States  are  permitted  to  exclude  certain  payments  which  may  fall  under  the 
notion  of  interest  but  which  actually  have  the  character  of  distributed  profits,  income 
treated  as  a  return  of  capital  or  income  from  hybrid  financing.  This  could  arise,  for 
example,  under  the  provisions  of  a  Double  Taxation  Convention  in  force  between  the 
Member  State where the  interest  arises  and the  Member  State of the beneficial  owner or 
under the law of the Member State where the interest arises. 

Interest  that  has  been  re-characterized  as  distributed  profits  ought  to  benefit  from  the 
provisions of Directive 90/435/EEC7 provided  all other requirements of that Directive are 
met, in order to avoid double taxation of such profits. 

Article 5 

When  the  amount  of  interest  and  royalties  paid  exceeds  the  amount  which  would  have 
been agreed in the absence of a special relationship between the payer and the beneficial 
owner  or  between  both  of  them  and  another  person,  the  Directive  will  apply  only  to 
the amount  which  would  have  been  so  agreed.  This  is  in  line  with  the  principles  of 
Articles  11.6 and  12.4 of the OECD Model Tax Convention on income and on capital. 

Moreover,  in the case of interest, when the amount  of the debt-claim  exceeds that  which 
would  have been  agreed  in the  absence  of  such  a special  relationship,  the  Directive  will 
apply only to the interest in respect of the amount which would have been so agreed. 

Article 6 

1.  Member  States  should  be  able  to  prevent  and  combat  fraud  or  abuse  in  an 

appropriate way in accordance with the principle of proportionality. 

2. 

The benefit  of the Directive may be withdrawn in the case of a transaction which is 
established  as  having  as  its  principal  or  as  one  of  its  principal  objectives  tax 
evasion or tax avoidance. 

Article 7 

1. 

In order to ensure that the interest  and royalty payments are subject  at least once to 
taxation in a Member State at a level which is normally applicable to these items of 
income in the Member State of the beneficial  owner, Member States can, by way of 
derogation,  choose  not  to  apply  the provisions  of Article  1 if  the beneficial  owner 
of  these  payments  in  respect  of  the  interest  or  royalties  is  subject  to  the  tax 
mentioned  in  Article  3, paragraph  l(a)(iii)  at  a  rate  which  is  lower  than  the  rate 
which  is normally  applicable to such  income received  by  a company  or permanent 
establishment  of the Member State of the beneficial  owner. 

OJL225,  20.8.1990, p. 9. 

Member  States  have  the  same  possibility  to  derogate  when  the  beneficial  owner, 
while being  subject  to the aforementioned  tax, benefits  from  a reduction  in the tax 
base  (e.g.  by  way  of  the  creation  of  a  tax  base  deductible  provision  or  reserve 
implying specially  favourable  rules  for the calculation  of taxable  income on interest 
or royalty  income),  and  which  is not  generally  applicable  in  relation  to  interest  or 
royalties  received  by  companies  or  permanent  establishments  of  the  State  of  the 
beneficial  owner. 

As  in  certain  circumstances  it  can  happen  (e.g.  on  the  basis  of  a  ruling)  that  the 
beneficial  owner  is subject  to the tax  mentioned  in Article  3,  paragraph  l(a)(iii)  in 
respect  of  part  of  the  interest  or  royalties  under  the  conditions  as  provided  for  in 
paragraph  1,  Member  States  are  permitted  not  to  apply  the  provisions  of  this 
Directive  to that part  of those  items of  income. Member  States  shall  have  to  apply 
the provisions of this Directive at least to the other part of those items of income. 

Article 8 

1. 

The Directive should  in principle be applied by all Member  States without  delay. It 
is, however,  appropriate  to  introduce  arrangements  for  the  gradual  abolition  of the 
taxes  in  those  Member  States  which  are  large  net  importers  of  capital  and 
technology  and  for  which  these  taxes  represent  an  appreciable  source  of  revenue, 
namely Greece and Portugal. 

Provision is made for a transitional period of five years during which the rate of tax 
is to  be  reduced  progressively  (10%  during  the  first  two years  and  5%  during  the 
final three years). 

The  Council  may  decide,  on  a  proposal  from  the  Commission,  on  a  possible 
extension of this derogation beyond the period of five years. 

In order to avoid potential double taxation, the Directive requires the Member  State 
of  the  beneficial  owner  to  give  a  credit  for  the  tax  that  is  levied  in  Greece  or 
Portugal on the basis of paragraph  1. 

The deduction need not exceed the lower of the tax levied  in Greece or Portugal  on 
the  basis  of  paragraph  1,  and  the  tax  due  on  the  interest  and  royalties  in  the 
Member State of the beneficial  owner. 

2. 

3. 

Article 9 

Member  States  are  required  to  implement  the  Directive  not  later  than  1  January 2000. 
As indicated  in  the  Commission's  strategic  programme  of  19938,  Member  States  are 
required to refer  in their implementing  legislation  to the Community  Directives  to  which 
the  legislation  relates,  and,  in  addition,  to  provide  implementation  tables  showing  the 
correspondence  between 
to 
improve transparency  and  to  assist  the Commission  in  its task  of  monitoring  the  quality 
of implementation. 

the  Community  and  national  measures, 

in  order 

Communication  of  22.12.1993  "Making  the  most  of  the  internal  market:  strategic  programme" 
COM(93) 632 final, page  12. 

9 

Article 10 

It is important  that, in time, not only associated  companies can benefit  from  the removal 
of  taxes  on  interest  and  royalty  payments  as  provided  for  in  the  Directive.  Other, 
non-associated  companies, are also confronted  with the tax obstacles that this Directive is 
intended to remove, as are non-incorporated  undertakings. It is therefore  foreseen  that the 
Commission  will  report  on the operation  of this Directive  on the basis of the  experience 
of its operation  over the first three years, with  a view to an extension  of its scope and to 
assessing  the application  of Article 7, particularly  in the light  of progress  on the code of 
conduct for business taxation. 

10 

Proposal for a 
COUNCIL  DIRECTIVE 

on a common system of taxation applicable to interest and royalty payments 
made between associated companies of different  Member States 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article  100 thereof, 

Having regard to the proposal from the Commission9, 

Having regard to the opinion of the European  Parliament10, 

Having regard to the opinion of the Economic and Social Committee11, 

Whereas, in a Single Market having the characteristics  of a domestic market,  transactions 
between companies of different  Member  States must not be subject  to less favourable  tax 
conditions  than  those applicable to the same transactions  carried  out between  companies 
of the same Member State; 

is  not  currently  met  as  regards 

interest  and  royalty 
Whereas  this  requirement 
payments;  whereas  national 
laws  coupled,  where  applicable,  with  bilateral 
agreements  do  not  ensure  that  double  taxation  is  completely  eliminated,  and  their 
application  often  entails  burdensome  administrative  formalities  and  cash-flow  problems 
for the companies  concerned; 

tax 

Whereas  it  is  necessary  to  ensure  that  interest  and  royalty  payments  are  subject  to  tax 
once in a Member State; 

Whereas  the  abolition  of taxation  on interest  and royalty  payments  in the Member  State 
where they  arise, whether  collected  by  deduction  at  source  or by  assessment,  on interest 
and  royalty  payments  is  the  most  appropriate  means  of  eliminating  the  aforementioned 
formalities  and  problems  and  of  ensuring  the  equality  of  tax  treatment  as  between 
national and cross-border transactions; whereas it is particularly necessary to abolish such 
taxes  in  respect  of  such  payments  made  between  associated  companies  of  different 
Member States as well as between permanent establishments of such companies; 

Whereas  the  arrangements  should  only  apply  to the  amount  of  interest  or  royalties  or to 
the  amount  of  the  debt-claim  which  would  have  been  agreed  by  the  payer  and  the 
beneficial owner in the absence of a special relationship; 

*> 
1(> 
n 

O JC 
OJC 
OJC 

11 

Whereas  Member  States  should be permitted  not to apply the provisions of the Directive 
if such  payments  are made  to  a beneficial  owner  who, in the  Member  State  where he is 
situated,  is not  subject  to taxation  in respect  of those  items of income  at a level  which  is 
normally applicable to interest or royalties received by a company of that Member State; 

Whereas it is moreover necessary not to preclude Member States from  taking  appropriate 
measures to combat fraud  or abuse; 

Whereas  Greece  and  Portugal  should,  for  budgetary  reasons,  be  allowed  a  transitional 
period  in order that they can gradually decrease the taxes, whether collected by deduction 
at source or by assessment,  on interest  and royalty payments, until they are able to apply 
the provisions of Article 1; 

Whereas  it  is necessary  for  the  Commission  to report  to the  Council  on the operation  of 
the Directive  three years after  the date by which  it must be transposed,  in particular with 
a  view  to  extending  its  coverage  to  other  companies  or  undertakings,  to  reviewing  the 
application  of  Article 7,  and  to  reviewing  the  scope  of  the  definition  of  interest  and 
royalties  in  pursuance  of  the  necessary  convergence  of  the  provisions  dealing  with 
interest and royalties in national legislation and in bilateral double taxation treaties; 

Whereas, in keeping with the principle of subsidiarity and the principle of proportionality 
as  set  out  in  Article 3b  of  the  Treaty,  the  objectives  of  this  Directive  cannot  be 
sufficiently  achieved  by  the  Member  States  and  can  therefore  be  better  achieved  by  the 
Community; whereas this Directive is confined  to the minimum required to achieve those 
objectives  and does not go beyond what is necessary to achieve that purpose, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

1.  A  Member  State  shall  exempt  interest  and  royalties  from  liability  to  any  taxes 
levied  on  such  income  in  that  Member  State,  whether  collected  by  deduction  at 
source or by assessment, where such interest or royalties are paid by or on behalf of 
a company  of  that Member  State, or by  a permanent  establishment  situated  in that 
Member State of a company of another Member State, to an associated  company of 
another  Member  State  or  to  a  permanent  establishment  situated  in  another 
Member State  of an  associated  company  of a Member  State, where that  associated 
company  or  that  permanent  establishment  of  the  associated  company  is  the 
beneficial  owner of those payments. 

2. 

Paragraph  1  shall  not  apply  in  situations  which  do  not,  in  essence,  represent 
cross-border payments. In particular: 

(a) 

it  shall  not  apply  to  interest  and  royalties  paid  by  a  company  of  a 
Member  State, or by a permanent establishment  situated  in that Member State 
of a company  of another Member State, if the beneficial  owner of the interest 
or  royalties  is  a  permanent  establishment  situated  in  the  first-mentioned 
Member  State and the debt-claim  or the right or property  in respect  of which 
the  interest  or  royalties  are  paid  is  effectively  connected  with  such  a 
permanent  establishment; 

12 

(b) 

it  shall  not  apply  to  interest  and  royalties  paid  by  a  company  of  a 
Member State to a permanent  establishment  situated  in another Member  State 
of  an  associated  company  of  the  first  Member  State,  where  the  payment  of 
such  interest  or  royalties  to  the  associated  company  otherwise  than  to  a 
permanent  establishment  of  it  situated  outside  the  first  Member  State 
would be  subject 
in  that 
Member State,  unless  the  debt-claim  or  the  right  or  property  in  respect  of 
which  the  interest  or  royalties  are  paid  is  effectively  connected  with  the 
permanent  establishment. 

to  a  tax  collected  by  deduction  at  source 

1. 

For the purposes of this Directive: 

Article 2 

(a) 

(b) 

"interest"  means  income  from  debt-claims  of  every  kind,  whether  or  not 
secured  by mortgage  and whether or not  carrying  a right  to participate  in the 
debtor's  profits,  and  in  particular,  income  from  bonds  or  debentures, 
including premiums and prizes attaching to such bonds or debentures. Penalty 
charges for late payment shall not be regarded as interest; 

"royalties"  means  payments  of  any  kind  received  as  a  consideration  for  the 
use of,  or the right to use, any copyright of literary, artistic, scientific  work or 
software,  including  cinematograph  films,  any  patent,  trade  mark,  design  or 
model,  plan,  secret  formula  or process,  or  for  the  use  of  or  the  right  to  use 
industrial, commercial  or scientific  equipment,  or for  information  concerning 
industrial, commercial  or scientific  experience. Variable or fixed payments as 
consideration  for  the  working  of,  or  the  right  to  work,  mineral  deposits, 
sources and other natural resources shall be excluded, as well as payments  for 
the use of,  or the right to use, software  when ownership is  transferred. 

2. 

In addition  to the  income  and  payments  referred  to  in paragraph  1, any  income or 
payments  which  are considered  to be  interest  or royalties, or which would, but  for 
the  nature  of  the  payer  or  the  beneficial  owner,  be  considered  to  be  interest  or 
royalties  either  by  virtue  of  a  Double  Taxation  Convention  in  force  between  the 
Member  State  where  the  interest  or  royalties  arise  and  the  Member  State  of  the 
beneficial  owner or, in the absence of a Convention, by virtue of the tax legislation 
of the Member State where the interest or royalties arise, shall be treated as interest 
or royalties for the purposes of this Directive. 

Article 3 

1. 

For the purposes of this Directive: 

(a) 

"company of a Member State" means: 

(i) 

any company formed  in accordance with the law of a Member State and 
having  its registered  office,  central  administration  or principal place of 
business  within  the  Community  and  whose  activities  present  an 
effective  and  continuous  link  with  the  economy  of  that  Member  State; 
and 

13 

(ii)  which  according  to the tax  laws of  that Member  State  is considered  to 
be  resident  in  that  Member  State  and  is  not,  within  the  meaning  of  a 
Double  Taxation  Convention  concluded  with  a 
third  country, 
considered to be resident  for tax purposes outside the Community; and 

(iii)  which  moreover,  is subject  to one of the  following, taxes without  being 
exempt, or to a tax which is identical or substantially  similar and which 
is imposed  after  the date of entry into force of this Directive in addition 
to or in place of those existing taxes: 

impôt  des  sociétés/vennootschapsbelasting  and 
non résidents/beîasting der niet-verblijfhouders in Belgium, 

impôt  des 

selskabsskat  in Denmark, 

Kôrperschaftssteuer  in Germany, 

06poq  slooôrjijaToq  VO/JIKOÛV npooœnoûv  in Greece, 

impuesto sobre sociedades  in Spain, 

impôt sur les sociétés in France, 

corporation tax in Ireland, 

imposta sul reddito délie persone giuridiche  in Italy, 

impôt sur le revenu des collectivités in Luxembourg, 

vennootschapsbelasting  in the Netherlands, 

Kôrperschaftssteuer  in Austria, 

imposto sobre o rendimento da pessoas  colectivas in Portugal, 

yhteisôjen  tulovero/inkomstskatten for  samfund in Finland, 

Statlig inkomstskatt in Sweden, 

corporation tax in the United  Kingdom. 

(b)  One company is an "associated company" of a second company if,  at least, 

(i) 

(ii) 

the first company has directly  or indirectly  a minimum  holding of 25% 
in the capital of the second company, or 

the  second  company  has  directly  or  indirectly  a  minimum  holding  of 
25% in the capital of the first company, or 

14 

(iii)  a third  company  has  directly  or  indirectly  a minimum  holding  of 25% 
both  in  the  capital  of  the  first  company,  and  in  the  capital  of  the 
second company. 

However, Member States shall have the option  of: 

applying this Directive  in circumstances where the level  of the holding 
concerned  is less than 25%; 

replacing  the  criterion  of  a minimum  holding  in  capital  with  that  of a 
minimum holding of voting rights. 

(c) 

(d) 

the "beneficial  owner" of payments of interest or royalties is a company  of a 
Member  State or a permanent  establishment  which holds those payments  for 
its own benefit  and not as an agent, trustee or nominee for some other person. 

"permanent  establishment"  means  a  fixed  place  of  business  situated  in  a 
Member  State  through  which  the  business  of  a  company  of  another 
Member State is wholly or partly carried on. 

A permanent  establishment  shall be treated  as paying  interest  or royalties  in 
so  far  as  such  payments  represent  a  tax-deductible  expense  for  that 
establishment in the Member State in which it is situated; it shall be treated as 
the beneficial  owner of interest or royalties in so far as such receipts represent 
income  in  respect  of which  it  is  subject  in  that  Member  State  to  one  of  the 
taxes mentioned in paragraph  l(a)(iii). 

2.  Member  States may withdraw  the benefit  of this Directive  from  companies  of that 
Member State in circumstances where the conditions set out in paragraph  1(b) have 
not been maintained for an uninterrupted period of a minimum of two years. 

Article 4 

By way  of derogation  from  the provisions  of  Article  2(1 )(a)  and  (2), the  Member  State 
where  the  interest  arises  may  exclude  from  the  application  of  this  Directive  payments 
purporting to be interest such as any of the  following: 

(a) 

income which is treated as a distribution of profits  or as a repayment of capital; 

(b) 

income from debt-claims which carry a right to participate in the payer's profits; 

(c) 

(d) 

income from  debt-claims which entitle the creditor to exchange his right to interest 
for a right to participate in the payer's profits; 

income  from  debt-claims  which  contain  no  provision  for  repayment  of  the 
principal amount. 

Interest  that  has  been  re-characterized  as  a  distribution  of  profits  shall  accordingly  be 
subject  instead  to  the  provisions  of  Council  Directive  90/435/EEC12,  where  it  is  paid 
between companies to which the present Directive applies. 

12  OJL225,  20.8.1990, p. 6. 

15 

Article 5 

Where, by reason of the  special relationship  between  the payer  and the beneficial  owner 
of  interest  or  royalties,  or between  both  of  them  and  some  other  person,  the  amount  of 
that income or those payments  exceeds the amount which would have been agreed by the 
payer  and  the  beneficial  owner  in  the  absence  of  such  a relationship,  the  provisions  of 
this Directive  shall  apply only to the latter amount;  and, in the case of interest, where by 
reason of such a relationship the amount of the debt-claim  in respect of which the interest 
is paid exceeds the amount which would have been agreed by the payer and the  beneficial 
owner  in the  absence  of  such  a relationship,  the provisions  of  this  Directive  shall  apply 
only to interest in respect of the latter amount, if any. 

Article 6 

1. 

This Directive shall not preclude a Member State from taking appropriate measures 
to combat fraud or abuse. 

2.  A  Member  State  may  withdraw  the  benefit  of  or  refuse  to  apply  this  Directive  in 
the  case  of  any  transaction  which  has  as  its  principal  objective  or  as  one  of  its 
principal objectives tax evasion or tax avoidance. 

Article 7 

1. 

In  addition  to  the  situations  covered  by  Article  6,  Member  States  shall  be 
authorized  not  to  apply  the  provisions  of  Article  1 to  any  payments  of  interest  or 
royalties  made  to  an  associated  company  of  another  Member  State  or  to  a 
permanent  establishment  situated  in  another  Member  State  of  an  associated 
company  of  a  Member  State  which,  in  respect  of  that  income  and  by  virtue  of  a 
provision  made for  its benefit  or for the benefit  of certain companies  or permanent 
establishments or certain activities: 

(a) 

is  subject  to the tax mentioned  in Article  3(l)(a)(iii)  at a rate which  is lower 
than  the  rate  of  tax  which  would  otherwise  normally  be  applicable  to  such 
income  received  by  companies  of,  or  permanent  establishments  situated  in, 
that other State; or 

(b)  benefits  from  a reduction in the tax base which  would not otherwise normally 
be  available  to  companies  of,  or  permanent  establishments  situated  in,  that 
other State. 

2. 

If the  circumstances  referred  to  in  either  of points  (a)  or  (b)  of  paragraph  1 apply 
only  to  a part of the  interest  of royalties  referred  to  in paragraph  1, Member  States 
shall  be  authorized  not  to  apply  the provisions  of this  Directive  to that part  of the 
interest or royalties. 

Article 8 

1.  Greece  and  Portugal  shall  be  authorized  not  to  apply  the  provisions  of  Article 1 
during  a  transitional  period  ending five years  after  the  date  of  entry  into  force  of 
this  Directive.  In  such  a  case  the  rate  of  tax  on  payments  of  interest  or  royalties 
made  to  an  associated  company  of  another  Member  State  or  to  a  permanent 

18 

establishment  situated  in  another  Member  State  of  an  associated  company  of  a 
Member  State  may  not  exceed  10% during  the  first  two  years  and  5% during  the 
final  three  years.  Before  the  end  of  the  fifth  year,  the  Council  may  decide,  on  a 
proposal  from  the  Commission,  to  extend  the  term  of  the  transitional  period 
provided  for in this paragraph. 

2.  .  Where a company of a Member State, or a permanent  establishment  situated in that 
Member  State of a company of a Member  State, receives  interest  or royalties from 
an  associated  company  of  Greece  or  Portugal,  or  from  a permanent  establishment 
situated  in  Greece  or  Portugal  of  an  associated  company  of  a  Member  State,  the 
first  Member  State  shall  allow  an  amount  equal  to  the  tax  paid  in  Greece  or 
Portugal on that income as a deduction from the tax on the income of the company 
or  permanent  establishment  which  received  that  income  in  accordance  with 
paragraph 1. 

3. 

The deduction provided  for in paragraph 2 need not exceed the lower  of: 

(a) 

(b) 

the  tax  payable  in  Greece  or  Portugal  on  such  income  on  the  basis  of 
paragraph  1 ; and 

that part of the tax on the income of the company or permanent  establishment 
which  received  the interest  or royalties, as computed  before  the deduction  is 
given, which  is attributable to those payments  under the domestic  law of the 
Member  State  of  which  it  is  a  company  or  in  which  the  permanent 
establishment  is situated. 

Article 9 

1.  Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions  necessary  to  comply  with  this  Directive  not  later  than  1  January 2000. 
They shall forthwith  inform the Commission thereof. 

When Member States adopt these provisions, these shall contain a reference  to this 
Directive  or  shall  be  accompanied  by  such  reference  at  the  time  of  their  official 
publication.  The  procedure  for  making  such  reference  shall  be  adopted  by 
Member States. 

2.  Member  States  shall  communicate  to  the  Commission  the  text  of  the  main 
provisions of national  law which  they adopt  in the field covered  by this Directive. 
In this communication  Member States shall provide a correlation table showing the 
national  provisions  which  exist  or  are  introduced  in  respect  of  each  Article  of 
this Directive. 

Article 10 

Three years after  the date referred  to in Article  9(1), the Commission  shall  report  to the 
Council  on  the  operation  of  this  Directive,  in  particular  with  a  view  to  extending  its 
coverage to companies or undertakings other than those covered by this Directive, and to 
reviewing the application of Article 7. 

17 

Article 11 

This Directive shall enter into force on the twentieth day following  that of its publication 
in the Official Journal of the European Communities. 

This Directive is addressed to the Member States. 

Article 12 

Done at Brussels 

For the Council 
The President 

18 

Withholding tax rates on INTEREST  (%) 

Situation in September 1997 

B 
(1) 

DK 

D 
(2) 

EL 
(3) 

E 

F 
(6) 

IRL 

L 
(8) 

|  NL 
(9) 

A 
(10} 

p 

FIN 
(11) 

s 

UK 

40 

25 

15 

26 

25 

0 

34 

20 

28 

I 
(V 

30 
15 

Residence  state of 
the debtor  •> 
Residence  state of 
the beneficiary  ^ 
Country  without a 
tax  treaty 

B 

DK 

D 

EL 

E 

F 

IRL 

I 

L 

15 

0 

-

15 

0/15 

10 

15 

15 

15 

15 

0 

-

0 

0 

0 

0 

0 

0 

0/15 

0 

45.15 
26.87 

15/0 
15/0 

0 
0 
-

10 
10 

10 
10 
0 
0 
0 
0 
10 
10 

0 
0 

15 
15 

15 

8 

10 

::xx 

10 

xxx 

10 

8/10 
(4) 

10 

NL 

0/10 

0 

A 

P 

FIN 

s 

UK 

15 

0 

45.15 
26.87 

0/10 
(5) 

15 

xxx 

10 

10 

15 

0 

0 

0 

26.8/ 
15 
15/10/ 
0 
15 
0 
0 
0 
0 
0 

xxx 

10 

10 

0 

0 

0 

0 

xxx 

-

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

10 

10 

15 
10 

0 

0 

10 
0 

10 

-

0 

10 

10 

0 

12 
10 

10 

0 

0 

15 

15 

15 

1  o~ 

15 

15 

10 

0 

0 

xxx 

0 

0 

-

0 

0 

0 

15 

10 

10 

12 

10 

10 

10 

10 

10 

o 

0 

0 

0 

xxx 

10 

15 

0 

0 

14 

xxx 

10 

_ „ __ 
0 

5 

15 

10 

0 

0 

0 

0 

T~1 
0 

12 
~T~ 

""To" 
j 

o 

10 

15 

15 

xxx 

xxx 

0 

0 

0 

0 

0 

0 

0 

10 

10 

0 

10 

0/15 
/2.5 

0 

0 

10 

0 

15 

15 

xxx 

xxx 

10 

0 

0 

0 

15 

15 

0/10 

0 

0 

0 

0 

0 

0 

0 

0 

0 

15 

xxx 

10 

15 

-

0 

o 

0 

0 

0 

0 

0 

20 

15 

0 

0 

0 

12 

0 

~0~ 

0 

10 

0 

0 

0 

10 

0 

0 

o 

0 

0 

0 

0 

0 

0 

-

0 

(1)  Normally no withholding  tax on  interest paid by a Belgian  bank on deposits  and registered  bonds to non-resident 

company. 

(2)  Non-residents only taxed on interest deriving from loans secured by immovable  property (first  figure)  and interest 
deriving  from jouissance  rights  and  profit-sharing  bonds,  (second  figure).  Interest  on  over  the  counter  banking 
transactions:  35%. 

(3)  Exceptions, Greek Government  bonds: 7.5%, bank deposits  in Greek currency  and bonds  issued  by private banks 

and companies:  15%, bank deposits in foreign currencies: 0%. 

(4)  8% if paid to bank or other institution. 
(5)  0% if Austrian company owns 50%+ of Greek company. 
(6)  Numerous  exceptions  to general  rate, e.g.  interest  exempt  when  paid to non-resident  on  loans  contracted abroad, 

state bonds issued after  1/10/1984,  corporate bonds issued after  1/1/1987  and certain negotiable debt instruments. 

(7)  Different  rates depending on source. Maximum rates shown in this table. 
(8)  No withholding  tax on ordinary interest.  However,  interest on profit-sharing  bonds taxed  - these rates  shown  here. 
Interest  on  loans  secured  by  Luxembourg-situs  immovable  property  taxed  by  way  of  assessment  at  normal 
corporate tax rate. 

(9)  No withholding tax on  interest, except on  interest  from  profit-sharing  bonds, treated  in the same  way  as dividends. 
(10) Interest  derived  by  non-residents  not  taxable,  except  interest  deriving  from  a  loar.  secured  by  a  mortgage  on 

Austrian-situs  real estate, these rates shown here. 

(1 1) No tax  generally  withheld  on  interest  payments  to non-residents.  This  chart  shows the  lax  wiihhcid  iii exceptional 

cases, e.g. permanent  loans in lieu of contribution  of capital. 

19 

Withholding tax rates on ROYALTIES  (%) 
(the possible  value added tax applied is not included in these rates) 

Situation  in October,  1997 

B 

DK 

D 

EL 

E 

F 

IRL 

I 

L 

NL 

A 

p 

FIN 

s 

UK 

Residence state 
of the debtor  •* 
Residence state 
of the 
beneficiary^ 
Country  without 
a tax treaty 
B 

DK 

D 

EL 

E 

F 

IRL 

I 

L 

15/ 
25 
-

0 

0 

5 

5 

0 

0 

5 

0 

0 

-

0 

5 

6 

0 

0 

5 

0 

NL 

0 

0 

A 

P 

FIN 

S 

UK 

1 
10 
0 
5 

i 

10 
0 
xxx 

5 

0 

0 

0 

0 

0 

30 

26.87 

20 

25 

33.3 

26 

i 
30 

10/12 

0 

0 

-

0 

5 

0 

0 

5 

5 

0 

-

5 

6 

5 

xxx 

xxx 

5 

-

6 

xxx 

8/10/ 
5 

5/0 

0/5 

8/4 

5 

5/7 

10 

0 

0 

10 

5/7 

l 
10 
0 
xxx 

5/0 

0/10 

0 

0 

5 

0 

6 

5 

5 

5 

10 

10 

0 

0 

0 

5 

6 

-

0 

5 

0 

0 

0 

5 

0 

0 

0 

0 

0 

0 

5 

5 

0/5 

0 

0 

5 

xxx 

0/5 

5/7 

4/8 

10 

0 

0 

10 

0/5 

0 

-

10 

5 

0 

8/10/ 
5 
0 

-

0 

0 

0 

0 

0/10 

1 
10 
0 
xxx 

10 

12 

0 

0 

0 

0/5 

0/5 

5 

8 

0 

5 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

-

0 

0 

0 

0 

0 

20 

15 

28 

28 

23 

5 

0/5 

xxx 

0 

10 

0/5 

xxx 

0/10 

0 

0 

0 

5 

0 

0 

0 

0 

5 

5 

10 

5 

0 

0 

12 

0/5 

xxx 

0/5 

10 

10 

0 

0 

5 

0 

0 

0 

8 

5 

xxx 

0 

0 

0 

1 
10 
5 
-

10 

xxx 

5 

10 

10 

10 

28 

-

0 

0 

0 

-

0 

i 

10 
0 
5 

0 

0 

-

I 
10 
0 
1 
10 
0 
0 

11 

10 
0 
5 

0 

I 

10 
0 
1 
10 
0 
1 
10 
2 
20 
0 
l 
10 
0 
-

1 
10 
5 

i 

10 
0 

1 
10 
0 
1 
10 
0 

If the receiving company owns more than 50% of the voting stock of the paying  company. 
If the payee is not a Luxembourg holding company. 
30% generally applied to 75% of gross payment, effective  rate 22.5%. 

20 

FINANCIAL  STATEMENT 

This  proposal  for  a  Council  Directive  has  nc  financial  implications  for  the  Community 
budget. 

21 

BUSINESS IMPACT ASSESSMENT 

The impact of the proposal on business, with special reference 
to small and medium-sized enterprises (SMEs) 

Title of proposal:  Proposal  for  a  Council  Directive  on  a  common  system  of  taxation 
applicable  to  interest  and  royalty  payments  made between  associated 
companies of different  Member States 

Business impact assessment reference number: 97006 

The proposal: 

1.  One of the aims of the Single Market  is to enable companies to operate throughout 

the Community without frontiers  or obstacles. 

One  obstacle  is  caused  by  the  tax  levied  on  cross-border  interest  and  royalty 
payments in the Member State where they arise. 

The proposal  therefore  provides  for the abolition  of these taxes, initially on  interest 
and  royalty  payments  made  between  associated  companies  and  their  permanent 
establishments of different  Member States. 

This  objective  can  be  better  achieved  by  the  Community  in  order  to  meet  the 
requirements  of a Single Market. Neither unilateral nor bilateral measures taken by 
Member  States  have  been  able  to  provide  a  solution  to  the  problems  of  such 
cross/frontier  payments that fully  meets the requirements of the Single Market. 

The impact on business: 

2. 

The proposal  is initially restricted  to payments made between associated  companies 
and  their  permanent  establishments  that  are  subject  to  corporation  tax  in  a 
Member State.  This  covers  parent  companies  and  subsidiaries;  parent  companies 
and  sub-subsidiaries;  fellow  subsidiaries  or  sub-subsidiaries;  and  subsidiaries 
and sub-subsidiaries.  All  sectors  of  business  will  be  able  to  benefit  from  this 
measure,  whatever  the  sizes  of  the  businesses  or  their  geographic  location  within 
the Community. 

The scope can subsequently be broadened  on the basis of the experience of the  first 
three years. 

3.  All  companies  falling  within  the  scope of  the  Directive  will benefit  from  it.  They 
will  avoid possible  double taxation. Moreover,  they will  no longer have to comply 
with  burdensome  administrative  formalities  which  currently  exist  if  they  wish  to 
benefit  from  the reduction or abolition of withholding taxes foreseen  in bilateral tax 
treaties. No other compliance conditions are provided  for. 

22 

4. 

5. 

The  proposal  will  have  a positive  effect  on  cross-border  investment  and  improve 
the  competitive  position  of  Community  companies,  as  it  will  improve  their 
financial  situation. It will therefore  also have a positive effect  on  employment. 

The proposal  does not provide measures  to take account  of the special  situation  of 
small  and  medium-sized  enterprises,  because  these  enterprises  will  be  able  to 
benefit  from  the  provisions  of  the  Directive  under  the  same  conditions  as  other 
companies, in as much as they comply with the conditions of this Directive. 

Consultation: 

6. 

The views of business associations on this proposal  have been received.  They have 
all  expressed  strong  support  for  the  removal  of  source  country  taxes  on 
cross-border  interest  and  royalty  payments  in  order  to  remove  obstacles  to 
financial  flows. 

For example: 

-  UNICE; 

of  European  Chambers 

European Association of Cooperative Banks; 
Association 
and Industry; 
European Mortgage Federation; 
Banking Federation of the European Union. 

of  Commerce 

23 

/ 

ISSN 0254-1475 

COM(98) 67 final 

DOCUMENTS 

EN 

09  01  08  10 

Catalogue number  :  CB-CO-98-145-EN-C 

ISBN  92-78-31887-6 

Office  for  Official  Publications  of  the European  Communities 

L-2985  Luxembourg 

24