Proposal for a Council Directive amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States
Date: 2003-07-29
Institutions: European Commission
Subjects: EU Member State, EU law - national law, corporation tax, location of industry, parent company, subsidiary, tax on profits of self-employment, tax system

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 29.07.2003
COM(2003) 462 final

2003/0179 (CNS)

Proposal for a

COUNCIL DIRECTIVE

amending Directive 90/435/EEC on the common system of taxation applicable in the
case of parent companies and subsidiaries of different Member States

(presented by the Commission)

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EXPLANATORY MEMORANDUM

INTRODUCTION

The European Council held in Lisbon in March 20001 concluded that the European
Union  had  the  strategic  goal  to  become  the  most  competitive  and  dynamic
knowledge-based  economy  in  the  world.  This  objective  was  reiterated  by  the
Stockholm  European  Council  of  March  20012.  The  Lisbon  Council  also  called  for
building up a supportive general framework for economic activity in the EU.

In  July  1999,  the  Council  of  Ministers  had  given  a  mandate  to  the  Commission  to
investigate  the  impact  of  tax  provisions  that  constitute  obstacles  to  cross-border
economic  activities  in  the  internal  market  and  remedies  thereto.  The  context
generated by  the  Lisbon Council strengthens the importance  of  analysing  corporate
taxes  since  taxation  of  companies  can  play  an  important  role  in  achieving  the
objectives  set  by  the  Council.  Following  this  mandate,  the  Commission  services
conducted a study on company tax.

tax  study3  resulted 

the  company 

The  conclusions  of 
in  a  Commission
Communication4.  There  it  was  examined,  among  other  things,  whether  the  current
application  of  company  taxation  in  the  internal  market  creates  inefficiencies  and
prevents operators from exploiting its  full benefits.  This  would  imply  a  loss  of  EU
welfare, undermine the competitiveness of EU businesses and thus be contrary to the
Lisbon objectives. The Communication sets out the Commission view of what needs
to be and what can be realistically done in the area of company  taxation  in the  EU
over  the  next  few  years  in  order  to  adapt  company  taxation  in  the  EU  to  the  new
economic framework and to achieve a more efficient internal market without internal
tax obstacles. For this purpose, a number of concrete initiatives were presented.

In addition, the Commission adopted in 2001 a Communication on tax policy for the
European Union5 where it identified both general objectives and a number of specific
priorities  in  direct  and  indirect  taxation.  It  referred  in  particular  to  corporate  tax
issues where it highlighted that, at present, cross-border activities of companies give
rise to numerous cases of double taxation hampering legitimate business activities

Moreover,  the  Statute  of  the  European  company  (Societas  Europaea  -  SE)  was
adopted in 20016. It aims at contributing to the completion of the internal market and

Presidency  Conclusions  of  the  Lisbon  European  Council  of  23  and  24  March  2000,  Press  release  nr:
100/1/00, 24/3/2000, published on the website of the Council of the European Union (http://ue.eu.int).
Presidency Conclusions of the Stockholm European Council of 23 and 24 March 2001, Press release nr:
100/1/01, 24/3/2001, published on the website of the Council of the European Union (http://ue.eu.int).
Commission staff working paper "Company taxation in the internal market" SEC (2001) 1681.
Communication from the Commission to the Council, the European Parliament and the Economic and
Social  Committee,  "Towards  an  Internal  Market  without  tax  obstacles.  A  strategy  for  providing
companies with a consolidated corporate tax base for their EU-wide activities", COM (2001) 582 final.
Communication from the Commission to the Council, the European Parliament and the Economic and
Social Committee “Tax Policy in the European Union”, COM (2001) 260 final.
Council Regulation (EC) n° 2157/2001 of 8 October 2001 on the Statute for a European Company (SE)
and  the  Council  Directive  2001/86/EC  of  8  October  2001  supplementing  the  Statute  for  a  European
company with regard to the involvement of employees, OJ L 294 of 10.11.2001.

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the spreading of the improvements that this brings about in the economic and social
perspective  throughout  the  Community.  To  this  end,  it  provides  for  a  legal
framework  so  that  structures  of  production  can  adapt  to  the  Community  dimension
and carry out the reorganisation of their business on a Community scale. The success
of  the  SE  is  very  much  related  to  the  applicable  tax  regime.  It  should  be  able  to
benefit from the whole body of harmonised corporate tax law.

In view of the existing cross-border tax obstacles, ensuring the correct functioning of
the internal market requires some action. According to Article 94 of the EC Treaty,
the  Commission  has  the  power  to  propose  to  the  Council  directives  for  the
approximation of such laws, regulations or administrative provisions of the Member
States as directly affect the establishment or functioning of the common market.

The  Directive  on  the  common  system  of  taxation  applicable  in  the  case  of  parent
companies  and  subsidiaries  of  different  Member  States  (the  Parent-Subsidiary
Directive)7  already  provides  for  a  solution  to  a  cross-border  obstacle  arising  from
double  taxation  of  profits.  However,  it  is  possible  to  improve  the  scope  of  the
Directive and the methods provided for the elimination of double taxation.

During  1993  the  Commission  adopted  a  proposal  amending  the  Parent-Subsidiary
Directive8.  This  proposal  included  two  modifications.  The  first  amendment  was
designed to enable the Directive to be applied to all enterprises subject to corporation
tax,  irrespective  of  their  legal  form.  The  second  amendment  referred  to  the
imputation method. It provided for parent companies to be able to take account of the
tax  paid  by  the  subsidiary  and  any  other  lower-tier  subsidiary  where  all  the
companies involved met the conditions laid down in the Directive.

The company tax study released in 2001 referred to  these same  issues.  In addition,
the experience gained after the implementation of the Directive in 1992 has revealed
some other shortcomings and the study refers to them in detail and considers possible
measures to tackle them.

The Commission  Communication following  the  corporate  tax study highlighted the
priority  of tabling the necessary  amendments to  the  current  Directives  harmonising
corporate tax, following technical consultations with Member States. In the course of
2002,  the  Commission  services  have  called  several  meetings  of  the  appropriate
Commission  working  party  during  which  the  relevant  issues  have  been  discussed
with delegations of technical experts from Member States.

This  proposal  for  a  Directive  amends  the  Parent-Subsidiary  Directive.  It  aims  at
introducing the  necessary  changes  to  this  Directive  to  take  into  account  the  above-
mentioned Conclusions and Communications. The final goal is to eliminate obstacles
to the proper functioning of the internal market found in the tax regimes applicable to
parent companies and subsidiaries of different Member States. Eventually, removing
the  various  tax  obstacles  to  cross-border  economic  activity  in  the  Internal  Market
would require the introduction of a common consolidated tax base for the EU-wide

Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case
of parent companies and subsidiaries of different Member States, OJ L 225 of 20.8.1990.
Proposal  for  a  Council  Directive  amending  Directive  90/435/EEC  of  23  July  1990  on  the  common
system  of  taxation  applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member
States, COM (93) 293 final, OJ C 225 of 20.08.1993.

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activities  of  companies.  However,  as  long  as  this  objective  is  not  achieved,
specifically targeted measures are needed to address the most pressing practical tax
problems  of  internationally  active  companies.  Such  measures  include  all  those
considered absolutely essential in order to improve the existing body of EU company
tax law. In particular, this proposal deals with matters treated in the proposal adopted
in  1993.  It  also  has  other  provisions  dealing  with  new  issues.  In  consequence,  the
previous proposal amending the Parent-Subsidiary Directive is being withdrawn.

One of the main concerns is the limited scope of the Parent-Subsidiary Directive. It
applies  only  to  those  companies  included  in  the  list  annexed  to  the  directive.  The
ECOFIN Council of 26-27 November 20009 had already concluded that the updating
of the list was a political priority. The Commission study on company taxation shows
the  need  to  extend  and  improve  the  Parent-Subsidiary  Directive  so  as  to  cover  a
wider range of companies.

This  topic  was  addressed  in  the  proposal  adopted  in  1993.  That  proposal  aimed  at
extending the Directive to all enterprises resident and subject to corporation tax in a
Member  State.  However,  the  asymmetries  found  in  commercial  law  governing  the
legal types of entities and the diversity of tax arrangements applicable to them in the
Member  States  creates  considerable  problems.  These  difficulties  were  already
brought  up  during  the  Council  discussions  on  the  proposal  held  during  1996  and
1997.  These  discussions  were  suspended  without  reaching  a  final  conclusion.  This
subject has been  discussed again  with the Member States from  a technical point of
view in the framework of the appropriate Commission working party. As a result, the
aim of improving the coverage of the Parent-Subsidiary Directive is achieved in this
current  proposal  by  proposing  the  extension  of  the  list  of  entities  annexed  to  the
Directive, to cover new named legal types.

As  already  mentioned,  the  statute  of  the  SE  has  been  recently  adopted.  The
Directives'  scope  should  include  the  companies  which  will  in  future  operate  under
this new legal form. Thus, the SE is among the new entries proposed for inclusion in
the list of entities covered by the Directive.

Some of the new entities proposed for inclusion in the list raise a particular technical
problem.  It  could  be  the  case  that  the  Member  State  where  an  entity  is  established
treats  it  for  its  own  tax  purposes  as  a  corporate  taxpayer  whereas  another  Member
State  whose  resident  has  an  interest  in  that  same  entity  treats  it  for  its  own  tax
purposes  as  transparent  (i.e.  it  looks  through  the  "corporate"  structure).  The  latter
State attributes the income of the entity to its resident having an interest in the entity
and taxes it accordingly. This Member State should be obliged to extend the benefits
of the Directive to that resident with an interest in the entity.

One  of  the  basic  elements  of  the  Parent-Subsidiary  Directive  is  the  exemption  of
withholding  tax  charged  on  distributed  profits.  According  to  the  Commission
Communication following the company tax  study,  the Directive  could  be  improved
here by extending its benefits to a wider  range of cases. This could be achieved by
reducing  the  conditions  required  in  order  to  qualify  as  a  parent  company  and  as  a

Annex  to  the  Presidency  Conclusions  of  the  ECOFIN  Council  of  26  and  27  November  2000,  Press
release 453 nr: 13861/00, Brussels 26/11/2000, published in the website of the Council of the European
Union (http://ue.eu.int).

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subsidiary  company.  It  is  proposed  to  lower  the  minimum  holding  threshold
requirement from 25% to 10%.

The second main element of the Directive is the application of methods to eliminate
double taxation of the parent company. A subsidiary company is taxed on its income.
Its  parent  company  may  be  taxed  as  well  on  its  share  of  those  profits  when  the
subsidiary distributes them.  In order  to  relieve  double taxation,  Article  4  (1)  of  the
Directive  obliges  the  Member  State  of  the  parent  company  to  exempt  distributed
profits from the subsidiary or to authorise the parent company to deduct that fraction
of the corporation tax paid by the subsidiary which relates to those profits. Member
States may choose between one of these methods to eliminate double taxation. When
the second method is chosen, the deduction is not extended to corporation tax paid by
any  lower-tier  subsidiary  of  the  subsidiary  from  which  the  profits  are  derived.  In
consequence,  there  is  still  a  possibility  that  double  taxation  occurs.  The  Directive's
aim of eliminating double taxation is therefore not fully achieved.

It is therefore appropriate to determine the tax to be offset by the parent company in
such  a  way  that  economic  double  taxation  is  totally  eliminated.  The  method  now
proposed is similar to that included in the proposal made in 1993.

The  Parent-Subsidiary  Directive  does  not  deal  explicitly  with  the  situation  where
profits  distributed  are  received  by  a  permanent  establishment  in  respect  of  shares
effectively connected with it. The coverage of these situations is among the aims of
the  Directive.  In  addition,  the  European  Court  of  Justice  jurisprudence  states  that
permanent establishments may not be discriminated against in relation to subsidiary
companies when both are subject to a similar tax regime10. It is appropriate to clarify
the text of the Directive concerning this issue.

The  current  wording  of  Article  4  (2)  of  the  Directive  permits  Member  States  to
exclude  from  tax  deduction  charges  incurred  by  parent  companies  relating  to  their
holdings  in  the  subsidiaries.  In  the  case  of  management  costs,  Member  States  may
estimate the amount at a flat  rate not exceeding 5% of the  profits  distributed.  As  a
consequence,  the  parent  company  cannot  deduct  costs  up  to  5%  of  the  profits
distributed by the subsidiary while the real costs linked to the shareholding may be
lower.  In  such  a  case,  this  company  is  effectively  prevented  from  deducting  other
costs which would in the normal course of events be deductible.

This negative effect could be overcome by allowing the parent company to show that
its  actual  expenses  relating  to  the  holding  are  lower.  The  non-deductible  charges
would then be limited to the real costs associated with the shares.

The  transitional  provisions  authorising  Greece,  Germany  and  Portugal  to  charge
withholding  taxes  on  dividends  are  no  longer  effective.  Being  superfluous,  this
proposal will delete the corresponding texts included in paragraphs (2), (3) and (4) of
Article 5 of the Parent-Subsidiary Directive.

Judgment of the Court of 28 January 1986, case C-270/83, Commission vs. France, ECR 1986, p. 273,
and  Judgment  of  the  Court  of  21  September  1999,  case  C-307/97,  Compagnie  de  Saint-Gobain  v.
Finanzamt Aachen-Innenstadt, ECR 1999, p. I-6161.

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COMMENTARY ON THE ARTICLES OF THE PROPOSAL FOR A DIRECTIVE

This Article comprises five paragraphs amending the Parent-Subsidiary Directive.

Article 1

paragraph (1)

The aim of this paragraph is to amend Article 1 of the Parent-Subsidiary Directive. It makes
clear  that  the  Member  State  where  a  permanent  establishment  is  situated  must  grant  the
benefits  of  the  Directive  when  this  permanent  establishment  receives  distributed  profits.
Among  other  situations,  the  change  proposed  will  ensure  that  the  Directive  covers  the  case
where the parent company and its subsidiary are tax residents in the same Member State and
the  dividend  payment  is  received  by  a  permanent  establishment  of  the  parent  company
situated in a different Member State.

paragraph (2)

Article  3.1  point  (a)  of  the  Parent-Subsidiary  Directive  is  amended  in  order  to  reduce  from
25% to 10% the shareholding requirements needed to qualify for the status of parent company
and subsidiary company, thus increasing the number of companies that will be able to benefit
from the relief provided for in the Directive.

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paragraph (3)

Point (a) amends the wording of Article 4 of the Parent-Subsidiary Directive in order
to include several measures. In the first place, paragraph 1 is modified to include the
obligation  of  the  Member  State  where  a  permanent  establishment  is  situated  to
refrain  from  taxing  distributed  profits  received  by  it  from  subsidiaries  of  the
company of which it is a permanent establishment  or to  allow deduction  of the tax
paid  by  the  subsidiary  which  relates  to  the  profits  distributed  to  the  permanent
establishment.

In addition, this same point (a) amends paragraph 1 of this same Article 4 in order to
improve  double  taxation  relief.  The  issue  arises  when  the  imputation  method  is
applied. According to the text of the Parent-Subsidiary Directive, parent companies
may  be  taxed  on  the  profits  received  from  their  subsidiary  and,  in  that  case,  they
deduct from their tax on such profits the taxes already paid by the subsidiary on those
same  profits  before  distribution.  This  deduction  has  a  limit:  the  tax  owed  by  the
parent company in respect of the profits received. However, the current draft of the
Directive does not refer to those cases where there is a chain of companies. In such
cases, the parent company may receive profits that have been distributed through the
different tiers of the group of companies. These profits would have been subject to
tax  in  the  hands  of  the  successive  subsidiaries.  Article  4.1  refers  only  to  the
deduction of the tax paid by the immediate subsidiary but does not refer to the taxes
paid  further  downstream  in  the  chain  of  companies.  It  is  now  proposed  to  allow
deduction not only of the tax paid by the immediate subsidiary but also the tax paid
by any other lower-tier subsidiary in relation to the profits distributed. This proposal
maintains the current limit: the parent company can deduct taxes paid by its lower-

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tier  subsidiaries  subject  to  the  specified  limitation  of  the  tax  due  on  the  profits
received.

It also deletes the reference to the transitional provisions, included in paragraph 1 of
Article  4  of  the  Parent-Subsidiary  Directive,  as  those  provisions  are  no  longer
applicable (see below n° 2 of the comments made to paragraph (5)).

Point (b) includes a new paragraph 1a in Article 4 of the Parent-Subsidiary Directive,
due to the proposed changes to the Directive concerning the extension of the scope of
the Directive. This new paragraph is needed to take account of  matters  arising  as a
result of including some of the new entries in the list. Some of these new entities are
subject to corporation tax in their Member State of residence but,  for  tax purposes,
are  considered  transparent  in  a  different  Member  State.  The  latter  Member  States
levy  tax  on  their  own  resident  taxpayers  that  have  an  interest  in  such  entities.  The
aim  of the  text  proposed  is  to  provide  for  a  specific  tax  regime  applicable  in  these
cases.  These  Member  States  will  not  be  prevented  from  maintaining  this  taxation
approach in the circumstances specified in the Directive. However, at the time when
they come to tax their resident taxpayers with an interest in such entities, they will be
obliged to allow them to deduct the taxes paid by those entities in their Member State
of  residence  and  those  paid  by  its  lower-tier  subsidiaries.  In  addition,  these  same
Member States must exempt from taxation the dividends paid by the companies they
treat as transparent  to  the  companies  having  an  interest  in  them.  As  a  requirement,
the companies and the persons having an interest in them must fulfil the conditions
set in the Directive in order to be considered as parent companies or as subsidiaries.

This new paragraph  identifies  those  taxpayers  by  referring  to  companies  which  are
fiscally transparent by reason of the applicable provisions relating to the organisation
of  commercial  undertakings.  These  are  the  criteria  that  Member  States  use  when
deciding  whether  to  treat  a  non-resident  company  as  fiscally  transparent.  The  text
proposed  avoids  any  reference  to  companies  that  are  considered  as  fiscally
transparent  by  a  Member  State based  on  the  tax  regime  applicable  to  them  in  their
State  of  residence.  Hence,  this  provision  does  not  deal  with  the  issues  raised  by
controlled foreign company legislation

Point  (c)  introduces  a  new  sentence  in  paragraph  2  of  Article  4  of  the  Parent-
Subsidiary  Directive.  Its  former  text  authorised  Member  States  to  deny  the  tax
deduction  of  management  costs  relating  to  the  holding  in  subsidiaries  from  the  tax
base of the parent company. These costs could according to the Directive be fixed at
a  flat  rate  not  exceeding  5%.  The  proposed  text  will  permit  parent  companies  to
prove,  to  the  extent  that  they  are  lower  than  5%,  the  actual  management  costs
incurred in order to reduce the amount of non-deductible costs

Point (d) adds a reference to the new paragraph 1a of this Article 4 since it deals with
similar issues as paragraph 1.

paragraph (4)

Point (a) amends Article 5 of the Parent-Subsidiary Directive in order to include the
new shareholding requirements provided for in Article 3.

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Point  (b)  deletes  the  transitional  provisions  in  favour  of  the  Hellenic  Republic,  the
Federal  Republic  of  Germany  and  the  Portuguese  Republic,  as  they  are  no  longer
applicable.

paragraph (5)

The list of companies, to which the Parent-Subsidiary Directive applies, contained in
its  annex,  is  replaced  by  a  new  one  incorporating  other  types  of  entities  and  in
particular  the  European  company.  This  proposal  will  extend  the  benefits  of  the
Directive to new legal types of  entities, including co-operatives, mutual companies,
certain  non-capital  based  companies,  saving  banks,  funds  and  associations  with
commercial activity. The new list has been drawn up following intensive discussions
with the Member States

The European company is included under letter (z) of the annex. This new entry does
not  follow the  natural  sequence  of  letters  because  it  is  intended  to  make  additional
entries in the annex under points (p) to (y) to cover the types of company that exist in
the accession countries.

Article 2

This Article lays down the timetable and the requirements for transposing the Directive into
Member  States’  national  laws.  Member  States  are  required  forthwith  to  inform  the
Commission  of  the  transposition  of  the  Directive  in  their  national  laws  and  submit  a
correlation table between this Directive and the national provisions adopted.

This  Article  refers  to  the  date  of  entry  into  force  of  the  amending  Directive  and  to  its
publication.

Article 3

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2003/0179 (CNS)

Proposal for a

COUNCIL DIRECTIVE

amending Directive 90/435/EEC on the common system of taxation applicable in the
case of parent companies and subsidiaries of different Member States

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to the proposal from the Commission1,

Having regard to the opinion of the European Parliament2,

Having regard to the opinion of the European Economic and Social Committee3,

Having regard to the opinion of the Committee of the Regions4,

Whereas:

(1)

(2)

(3)

(4)

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2

3

4

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Council  Directive  90/435/EEC  of  23  July  1990  on  the  common  systems  of  taxation
applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member
States5  introduced  common  rules  in  relation  to  dividend  payments  and  other  profit
distributions, which are intended to be neutral from the point of view of competition.

The  objective  of  Directive  90/435/EEC  is  to  exempt  dividends  and  other  profit
distributions paid by subsidiary companies to their parent companies from withholding
taxes  and  to  eliminate  double  taxation  of  such  income  at  the  level  of  the  parent
company.

Experience  gained  in  the  implementation  of  Directive  90/435/EEC  has  revealed
different ways in which that Directive might be improved and the beneficial effects of
the common rules as adopted in 1990 extended.

Article 2 of Directive 90/435/EEC defines the companies falling within its scope. The
Annex  contains  a  list  of  companies  to  which  the  Directive  applies.  Certain  forms  of
companies are not included in the list in the Annex, even though they are resident for
tax purposes in a Member State and are subject to corporation tax there. The scope of

OJ C , , p. .
OJ C , , p. .
OJ C , , p. .
OJ C , , p. .
OJ L 225, 20.8.1990, p. 6, Directive as last amended by the Treaty of  Accession for  Austria, Finland
and Sweden.

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(5)

(6)

(7)

(8)

(9)

Directive 90/435/EEC should therefore be extended to other entities which can carry
out  cross-border  activities  in  the  Community  and  which  meet  all  the  conditions  laid
down in that Directive.

Since the European company as established in Council Regulation (EC) No 2157/2001
of 8 October 2001 on the Statute for a European company (SE)6 and Council Directive
2001/86/EC  of  8  October  2001  supplementing  the  Statute  for  a  European  company
with regard to the involvement of employees7 is a public limited-liability company of
similar  nature  to  other  legal  types  of  companies  already  covered  by  Directive
90/435/EEC the SE should be added to the list in the Annex to Directive 90/435/EEC.

The  new  entities  to  be  included  in  the  list  are  corporate  taxpayers  in  their  Member
State  of  residence  but  some  are  considered  transparent  for  tax  purposes  by  other
Member  States.  Member  States  treating  non-resident  corporate  taxpayers  as  fiscally
transparent  should  apply  the  benefits  of  Directive  90/435/EEC  to  them.  In  addition,
those  Member States  should  not  tax those  same profits a second time when they  are
distributed from the subsidiaries to their parent companies.

In  order  to  extend  the  benefits  of  Directive  90/435/EEC,  the  threshold  of  the
shareholding for one company to be considered a parent and the other as its subsidiary
should be lowered from 25% to 10%.

Directive 90/435/EEC does not expressly deal with the situation where shares are held
through a permanent establishment of the parent company. It should be made clear that
the Member State where the permanent establishment is situated is required to apply
the provisions of that Directive in such circumstances.

It is normal practice for corporate groups to be organised in chains of companies and
profits  to  be  distributed  through  the  chain  of  subsidiaries  to  the  parent  company.
Double  taxation  should  be  eliminated  in  such  cases.  Therefore,  the  parent  company
should be able to deduct any tax paid by any of the subsidiaries in the chain provided
that the requirements set out in Directive 90/435/EEC are met.

(10) Directive  90/435/EEC  allows  Member  States  to  fix  the  amount  of  non-deductible
management  costs  from  the  taxable  profits  of  the  parent  company  as  a  flat  rate  not
exceeding 5% of the profits distributed by the subsidiary. In some circumstances, that
flat  rate  might  not  correspond  to  the  real  management  costs  incurred,  meaning  that
other expenses could not be deducted. As an alternative to the flat-rate amount of 5%,
parent  companies  should  be  allowed  to  prove  the  actual  costs  incurred  in  relation  to
the holding which Member States may consider non tax-deductible.

(11)

The transitional provisions in Article 5 are no longer applicable and should therefore
be deleted.

(12) Directive 90/435/EEC should therefore be amended accordingly,

6

7

OJ L 294 of 10.11.2001, p. 1.
OJ L 294 of 10.11.2001, p. 22.

10

                                                
HAS ADOPTED THIS DIRECTIVE:

Article 1

Directive 90/435/EEC is amended as follows:

1.

In Article 1(1) the following indent is added:

“-  to  distributions  of  profits  received  by  permanent  establishments  situated  in  that
State of companies of other Member States which come from their subsidiaries of a
Member State. ”

2.

In Article 3 (1) point a is replaced by the following:

“(a)

the status of parent  company  shall  be  attributed  at  least  to  any  company  of  a
Member  State  which  fulfils  the  conditions  set  out  in  Article  2  and  has  a
minimum  holding  of  10  %  in  the  capital  of  a  company  of  another  Member
State fulfilling the same conditions; ”

3.

Article 4 is amended as follows:

(a)

Paragraph 1 is replaced by the following:

“1. Where a parent company or its permanent establishment, by virtue of the
association  of 
its  subsidiary,  receives
distributed  profits,  the  State  of  the  parent  company  and  the  State  of  its
permanent establishment shall, except when the subsidiary is liquidated,
either:

the  parent  company  with 

– 

– 

refrain from taxing such profits, or

tax  such  profits  while  authorising  the  parent  company  and  the
permanent establishment to deduct from the amount of tax due that
fraction  of  the  corporation  tax  paid  by  the  subsidiary  and  any
lower-tier subsidiary which relates to those profits, up to the  limit
of the amount of the corresponding tax. ”

(b) The following paragraph 1a is inserted:

“1a. Where  the  State  of  the  parent  company  considers  a  subsidiary  to  be
fiscally  transparent  on  the  basis  of  applicable  law  relating  to  the
organisation  of  commercial  undertakings  and  therefore  taxes  the  parent
company  on  its  share  of  the  profits  of  its  subsidiary  as  and  when  those
profits arise, the State of the parent company shall refrain from taxing the
distributed profits of the subsidiary;

When taxing the parent company’s share of the profits of its subsidiary as
they  arise  the  State  of  the  parent  company  shall  authorise  the  parent
company  to  deduct  from  the  amount  of  tax  due  that  fraction  of  the
corporation  tax  paid  by  the  subsidiary  and  any  lower-tier  subsidiary

11

which  relates  to  those  profits  up  to  the  limit  of  the  amount  of  the
corresponding domestic tax.”

(c)

In paragraph 2 the following sentence is added

“The parent company shall be allowed to provide evidence of the real management
costs incurred that are to be considered non-deductible.”

(d)

In paragraph 3 the first subparagraph is replaced by the following:

“Paragraphs  1  and  1a  shall  apply  until  the  date  of  effective  entry  into  force  of  a
common system of company taxation.”

4.

Article 5 is amended as follows:

(a)

Paragraph 1 is replaced by the following:

“Profits which a subsidiary distributes to its parent company shall, at least where the
latter  holds  a  minimum  of  10%  of  the  capital  of  the  subsidiary,  be  exempt  from
withholding tax.”

(b) Paragraphs 2, 3 and 4 are deleted.

5.

The Annex is replaced by the text in the Annex to this Directive.

Article 2

1.

2.

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative
provisions  necessary  to  comply  with  this  Directive  by  31  December  2004  at  the
latest.  They  shall  forthwith  communicate  to  the  Commission  the  text  of  those
provisions and a correlation table between those provisions and this Directive.

When  Member  States  adopt  such  provisions,  they  shall  contain  a  reference  to  this
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official
publication. Member States shall determine how such reference is to be made.

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.

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

Article 3

This Directive is addressed to the Member States.

Done at Brussels,

For the Council
The President

12

a)

b)

c)

d)

e)

f)

g)

h)

ANNEX

“ANNEX

List of companies referred to in Article 2 (a)

companies  under  Belgian 
"société  anonyme"/"naamloze
law  known  as 
vennootschap",  "société  en  commandite  par  actions"/"commanditaire  vennootschap
op  aandelen",  "société  privée  à  responsabilité  limitée"/"besloten  vennootschap  met
beperkte 
responsabilité
limitée"/"coöperatieve  vennootschap  met  beperkte  aansprakelijkheid",  "société
coopérative  à  responsabilité  illimitée"/"coöperatieve  vennootschap  met  onbeperkte
aansprakelijkheid",  and  public  undertakings  which  have  adopted  one  of  the
abovementioned legal forms;

aansprakelijkheid" 

coopérative 

"société 

à 

companies  under  Danish  law  known  as  ”aktieselskab”  and  “anpartsselskab”.  Other
companies  subject  to  tax  under  the  Corporation  Tax  Act,  insofar  as  their  taxable
income  is  calculated  and  taxed  in  accordance  with  the  general  tax  legislation  rules
applicable to “aktieselskaber”;

law 

under 

German 

companies 
"Aktiengesellschaft",
"Kommanditgesellschaft  auf  Aktien",  "Gesellschaft  mit  beschränkter  Haftung",
auf  Gegenseitigkeit",
"bergrechtliche  Gewerkschaft", 
"Erwerbs-  und  Wirtschaftsgenossenschaften",  "Betriebe  gewerblicher  Art  von
juristischen  Personen  des  öffentlichen  Rechts",  insofar  as  these  bodies  may,  under
German Law, assume the functions of parent company or subsidiary;

"Versicherungsvereine 

known 

as 

companies under Greek law known as "αvώvυµη εταιρεία", "εταιρεία περιωρισµέvης
ευθύvης (Ε.Π.Ε.)";

companies  under  Spanish 
law  known  as:  "sociedad  anónima",  "sociedad
comanditaria por acciones", "sociedad de responsabilidad limitada", and those public
law bodies which operate under private law;

companies under French law known as "société anonyme",  "société en commandite
par  actions",  "société  à  responsabilité  limitée",  "sociétés  par  actions  simplifiées",
"sociétés  d'assurances  mutuelles",  "caisses  d'épargne  et  de  prévoyance",  "sociétés
civiles"  which  are  automatically  subject  to  corporation  tax,  "coopératives",  "unions
de  coopératives"  and 
industrial  and  commercial  public  establishments  and
undertakings;

companies  incorporated  or  existing  under  Irish  laws,  bodies  registered  under  the
Industrial  and  Provident  Societies  Act,  building  societies  incorporated  under  the
Building Societies Acts and trustee savings banks within the meaning of the Trustee
Savings Banks Act, 1989;

companies under Italian law known as "società per azioni", "società in accomandita
per  azioni",  "società  a  responsibilità  limitata",  "società  cooperative",  "società  per
mutua  assicurazione",  and  private  and  public  entities  whose  activity  is  wholly  or
principally commercial;

13

i)

j)

k)

l)

m)

n)

o)

z)

companies  under  Luxembourg  law  known  as  "société  anonyme",  "société  en
commandite  par  actions",  "société  à  responsabilité  limitée",  "société  coopérative",
"société  coopérative  organisée  comme  une  société  anonyme",  "association
d'assurances  mutuelles",  "association  d'épargne-pension",  "entreprise  de  nature
commerciale,  industrielle  ou  minière  de  l'Etat,  des  communes,  des  syndicats  de
communes,  des  établissements  publics  et  des  autres  personnes  morales  de  droit
public";

companies  under  Dutch  law  known  as  "naamloze  vennnootschap",  "besloten
vennootschap  met 
commanditaire
vennootschap",  "Coöperatie",  "onderlinge  waarborgmaatschappij",  "Fonds  voor
gemene rekening", "vereniging op coöperatieve grondslag" and "vereniging welke op
onderlinge grondslag als verzekeraar of kredietinstelling optreedt";

aansprakelijkheid", 

beperkte 

"Open 

companies  under  Austrian  law  known  as  "Aktiengesellschaft",  "Gesellschaft  mit
beschränkter  Haftung",  "Versicherungsvereine  auf  Gegenseitigkeit",  "Erwerbs-  und
Wirtschaftsgenossenschaften",  "Betriebe  gewerblicher  Art  von  Körperschaften  des
öffentlichen Rechts", "Sparkassen";

commercial  companies  or  civil  law  companies  having  a  commercial  form  and
cooperatives  and  public  undertakings  incorporated  in  accordance  with  Portuguese
law;

companies  under  Finnish  law  known  as  "osakeyhtiö/aktiebolag",  "osuuskunta
/andelslag","säästöpankki/sparbank"and "vakuutusyhtiö/försäkringsbolag";

companies  under  Swedish  law  known  as  "aktiebolag",  "ekonomiska  föreningar",
"sparbanker", "ömsesidiga försäkringsbolag";

companies incorporated under the law of the United Kingdom;

companies incorporated under Council Regulation (EC) n° 2157/2001 of 8 October
2001  on  the  Statute  for  a  European  company  (SE)  and  the  Council  Directive
2001/86/EC  of  8  October  2001 supplementing the  Statute  for  a  European  company
with regard to the involvement of employees.”

14

FINANCIAL STATEMENT

This  proposal  for  a  Council  Directive  has  no  financial  implications  for  the  Community
budget.

15

IMPACT ASSESSMENT FORM

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 amending Directive 90/435/EEC on the common system of
taxation  applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member
States

DOCUMENT REFERENCE NUMBER

THE PROPOSAL

1.

Taking  account  of  the  principle  of  subsidiarity,  why  is  Community  legislation
necessary in this area and what are its main aims?

Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable
in  the  case  of  parent  companies  and  subsidiaries  of  different  Member  States  (the
Directive)  aims  at  harmonising  tax  rules  governing  the  relations  between  parent
companies  and  subsidiaries  of  different  Member  States.  It  introduces  a  neutral  tax
regime from the point of view of competition, in order to allow enterprises to adapt
to  the  requirements  of  the  common  market,  to  increase  their  productivity  and  to
improve  their  competitive  strength  at  the  international  level.  This  is  achieved  by
eliminating  double  taxation  of  profits  obtained  by  subsidiaries  of  a  Member  State
that  are  distributed  to  their  parent  companies  of  a  different  Member  State.  The
harmful effects of a well-known tax obstacle to the internal market are so reduced.

However,  due  to  the  current  narrow  scope  of  the  Directive,  its  implementation  in
Member States is very different and not all types of entities are covered. Its benefits
as currently provided do not avoid double taxation in all circumstances. These facts
reduce  its  effectiveness  and  result  in  international  double  taxation  of  profits.  This
situation leads to obstacles to cross-border activity, establishment and investment in
the internal market. It adversely affects the competitiveness of European companies.
In economic terms there is a loss of potential EU welfare.

In  addition,  the  Statute  of  the  European  company  (Societas  Europaea  -  SE)  was
adopted in 2001. According to the preamble of its Regulation, the completion of the
internal  market  and  the  improvement  it  brings  about  in  the  economic  and  social
situation  throughout  the  Community  mean  not  only  that  barriers  to  trade  must  be
removed,  but  also  that  the  structures  of  production  must  be  adapted  to  the
Community  dimension.  For  that  purpose  it  is  essential  that  companies  whose
business  is  not  limited  to  satisfying  purely  local  needs  should  be  able  to  plan  and
carry out the reorganisation of their business on a Community scale. The Regulation
on the SE does not include any tax provisions. It is urgent to adopt measures now. It
is essential that the benefits of the Directive are applicable to this new legal type.

16

This proposal for a Directive contains targeted measures towards specific problems.
It does not seek to apply a global solution to all existing cross-border obstacles. It is
designed  to  eliminate  double  taxation  in  a  larger  number  of  cases.  It  aims  at
broadening  the  scope  of  harmonisation  provided  for  in  the  current  text  of  the
Directive and improving the methods to avoid double taxation. All this is achieved in
the proposal through the following measures:

–  The Directive will be applicable to a larger number of legal persons and entities,

including the SE.

–  The  Directive  will  apply  to  profits  distributions  received  through  a  permanent

establishment of the parent company.

–  The shareholding requirements to qualify as a parent company or as a subsidiary

company are reduced.

–  When  the  imputation  method  to  prevent  economic  double  taxation  applies,  the
parent  company  shall  deduct  from  the  tax  on  the  distributed  profits  which  it
receives  from  its  direct  subsidiary  that  fraction  of  the  tax  paid  not  only  by  this
direct  subsidiary  but  also  by  successive  subsidiaries  downstream  of  the  direct
subsidiary.

–  Parent companies will be allowed to prove the actual management costs incurred

relating to the holding which are non-deductible from the tax base.

–  In  addition,  the  transitional  provisions  allowing  withholding  taxes  on  profits
distributed  from  Greece,  Germany  and  Portugal  are  deleted  since  they  are  no
longer effective.

THE IMPACT ON BUSINESS

2.

Who will be affected by the proposal?

–  which sectors of business

–  which  sizes  of  business  (what  is  the  concentration  of  small  and  medium-sized

firms)

–  are there particular geographical areas of the Community where these businesses

are found

The Directive  applies to profits  distributed cross-border  from subsidiary companies
of  a  Member  State  to  parent  companies  of  a  different  Member  State.  Those
companies  must  adopt  one  of  the  legal  forms  mentioned  in  the  list  annexed  to  the
Directive.  The  amending  proposal  will  extend  its  benefits  to  new  legal  types  of
entities, including the SE, co-operatives, mutual companies, certain non-capital based
companies, saving banks, funds and associations with commercial activity. The SE is
a public limited company of an EC dimension. Co-operatives normally have separate
legal personality which cover the needs of their members by concluding agreements
with them. Mutual companies usually bring together persons who pool their common
interests in order to receive services in exchange. Funds are assigned capital to meet
the purposes for which they are set up. Including these legal forms in the coverage of

17

the  Directive  will  extend  its  benefits  to  different  forms  of  organising  economic
activities.

Although  the  inclusion  in  the  scope  of  the  Directive  of  saving  banks  and  mutual
companies should have its effects in the banking and insurance sectors, all sectors of
business and geographical areas of the  Community should benefit equally  from the
proposal.  The  reduction  of  the  shareholding  requirements  to  qualify  as  a  parent
company  or  as  a  subsidiary  company  should  extend  the  benefits  of  this  neutral  tax
regime to a broader scope of relevant holdings.

3.

What will business have to do to comply with the proposal?

No  new  obligations  or  tax  compliance  burdens  are  imposed  on  business.  When
taxpayers  apply  the  new  rules  concerning  non-deductible  management  expenses,
evidence should be obtained and kept.

4.

What economic effects is the proposal likely to have?

–  on employment

–  on investment and the creation of new businesses

–  on the competitiveness of businesses

The  purpose  of  the  proposal  is  to  improve  and  extend  the  tax  regime  aiming  at
avoiding  double  taxation  of  profits.  Such  double  taxation  has  negative  and
discouraging effects on business and investment. It is also unfair. A bigger number of
entities and business groups will benefit from a  reduction of  excessive tax  charges.
The methods designed for this purpose will also be more effective. Ensuring a more
uniform  application  of  EU  tax  law  is  also  an  important  step  to  reduce  compliance
costs and increase the efficiency of company taxation in the EU.

The  benefits  of  the  elimination  of  double  taxation  as  provided  in  the  Directive  are
extended to the SE. These provisions will contribute to the creation and management
of  companies  with  a  European  dimension,  free  from  the  obstacles  arising  from  the
disparity and the limited territorial application of national company law and tax law.

All  this  will  play  a  major  role  in  removing  an  identified  tax  obstacle  for  group  of
companies  within  the  UE.  By  ensuring  a  more  efficient  taxation  of  cross-border
business  profits,  the  Directive  can  contribute  to  balanced  taxation  of  domestic  and
cross-border  activities  and  improved  investment  location  decisions.  International
investor's  decisions  will  no  longer  be  influenced  neither  by  certain  current  tax
obstacles  nor  undermined  by  excessive  taxation.  The  profit  after  tax  of  investment
will tend to increase and will contribute to a capital cost reduction. In  addition, the
reduction of cases where withholding tax is charged will also lower international tax
compliance costs for taxpayers.

Lower tax costs and the expectation of a larger profit after tax would have a positive
effect on investment.

The  competitiveness  of  European  business  will 
the
circumstances under which international double taxation may occur. Also, the waste
of resources linked to economic double taxation will be reduced.

improve  by  reducing 

18

The  improvement  of  the  business  climate  should  have  a  positive  effect  on  job
creation and the fight against unemployment.

5.

Does the proposal contain measures to take account of the specific situation of small
and medium-sized firms (reduced or different requirements etc)?

The  proposal  contains  provisions  extending  the  Directive  to  non-capital  based
entities.  Thus,  a  larger  number  of  small  and  medium  size  enterprises  that  do  not
normally adopt the form of a capital based company will be covered.

CONSULTATION

6.

List the organisations which have been consulted about the proposal and outline their
main views.

The text of this proposal is the result of long consultative processes. On one hand, the
initiatives following the previous amending proposal of the Merger Directive, COM
(93) 293 final, were based on the conclusions of the Ruding Committee1 and on the
Commission  Communication  of  26  June  1992  to  the  Council  and  to  Parliament
subsequent to the conclusions of the Ruding Committee2.

In addition, the more far reaching modifications included in the text hereby proposed
are the result of the debates between international tax experts, technical delegations
from  Member  States  and  the  Commission  services.  The  company  tax  study  is  the
main  source  of  ideas  for  this  legislative  process.  This  study  was  conducted  by  the
Commission  services  based  on  discussions  with  two  panels  of  experts  and
documentation  provided  by  them.  The  panels  of  experts  were  composed  of  highly
qualified  tax  professionals  from  the  academic  world,  including  universities  and
research institutions, and business representatives.

The  final  step  of  this  process  consisted  of  meetings  with  the  Member  States  in  a
Commission chaired working group that examined technical aspects of the elements
taken up in the proposal.

The present proposal is the result of the deliberations of all those experts, the analysis
provided  for  by  the  Commission  services  and  the  evaluation  of  the  reflections  and
concerns of national tax policy makers.

1

2

Report of the Committee of Independent experts on company taxation of March 1992.
SEC(92)1118 final.

19