Proposal for a Council Directive amending Directive 2003/49/EC as regards the possibility for certain Member States to apply transitional periods for the application of a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States
Date: 2004-04-01
Institutions: European Commission
Subjects: group of companies, tax, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 1.4.2004 
COM(2004) 243 final 

2004/0076 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2003/49/EC as regards the possibility for certain Member States to 
apply transitional periods for the application of a common system of taxation applicable 
to interest and royalty payments made between associated companies of different 
Member States 

(presented by the Commission) 

EN 

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EXPLANATORY MEMORANDUM 

INTRODUCTION 

The purpose of this proposal is to amend Directive 2003/49/EC so as to incorporate 
transitional periods, relating to the application of the Directive, following requests by 
the Czech Republic, Latvia, Lithuania, Poland and Slovakia. 

Directive  2003/49/EC1  (hereinafter  “the  Directive”)  was  adopted  at  the  meeting  of 
the “Economic and Financial Affairs” Council on 3 June 2003 as a part of the “Tax 
Package”. 

Subsequently,  on  30  December  2003,  the  Commission  presented  a  proposal  for  a 
Council Directive amending Directive 2003/49/EC2. The intentions of that amending 
proposal were twofold. First, at the Council meeting on 3 June 2003, the Council set 
out in the “Statements for entry in the minutes of the Council” that “the benefit of the 
Interest and Royalty Directive should not accrue to companies that are exempt from 
tax  on  income  covered  by  that  Directive.”  It  therefore  invited  the  Commission  “to 
propose any necessary amendment to this Directive in due time.” Second, given the 
date of adoption and the fact that it is based on a Commission proposal dating from 
19983, the Directive did not make reference to the new legal forms of the European 
Company  (“Societas  Europaea”  –  SE)4  and  of  a  European  Cooperative  Society 
(“Societas  Cooperativa  Europaea”  –  SCE)5  and  did  not  reflect  the  developments  in 
relation  to  the  inclusion  of  other  new  entities  in  the  scope  of  Council  Directive 
2003/123/EC6 and the proposal for amending the Merger Directive7. 

As  the  Directive  was  adopted  on  3  June  2003,  after  the  signing  of  the  Act  of 
Accession on 16 April 20038, the Directive was not included in Chapter 9 of Annexe 
II of the Act of Accession. Thus no adaptation, on the basis of Art. 20 of the Act of 
Accession, was possible.  

Nevertheless,  the  Directive  constitutes  part  of  the  community  acquis  and  therefore 
applies  from  the  date  of  accession  -  1  May  2004.  Since,  in  its  present  version,  the 

Council  Directive  2003/49/EC  on  a  common  system  of  taxation  applicable  to  interest  and  royalty 
payments made between associated companies of different Member States. OJ L 157, 26.6.2003, p. 49. 
Proposal  for  a  Council  Directive  amending  Directive  2003/49/EC  on  a  common  system  of  taxation 
applicable  to  interest  and  royalty  payments  made  between  associated  companies  of  different  Member 
States, COM(2003) 841 final. 
COM(1998) 67 final – 98/0087(CNS), OJ C 123, 22.4.1998, p. 9. 
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, 10.11.2001. 
Council  Regulation  (EC)  n°  1435/2003  of  22  July  2003  on  the  Statute  for  a  European  Cooperative 
Society (SCE) and the Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a 
European Cooperative Society with regard to the involvement of employees, OJ L 207, 18.8.2003, p. 1. 
Council Directive 2003/123/EC of 22 December 2003 amending Directive 90/435/EEC on the common 
system  of  taxation  applicable  in  the  case  of  parent  companies  and  subsidiaries  of  different  Member 
States, OJ L 7, 13.1.2004, p. 41. 
Proposal  for  a  Council  Directive  amending  Directive  90/434/EEC  of  23  July  1990  on  the  common 
system  of  taxation  applicable  to  mergers,  divisions,  transfers  of  assets  and  exchanges  of  shares 
concerning companies of different Member States, COM(2003) 613 final. 
OJ L 236, 23.9.2003, p. 555. 

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Directive includes neither the list of companies referred to in Art. 3(a)(i) (reproduced 
in  the  Annex  to  the  Directive),  nor  the  relevant  taxes  of  the  Acceding  States  that 
should  be  listed  in  Art. 3(a)(iii),  technical  adaptations  are  necessary.  For  such 
adaptations, Art. 57 of the Act of Accession provides for a procedure that is regarded 
as  appropriate  for  the  inclusion  of  the  list  of  relevant  taxes  and  companies  in  the 
Acceding States. 

In  May  and  July  2003,  the  Acceding  States  were  invited  formally  to  submit  their 
requests for transitional periods.  

The  Czech  Republic  and  the  Republics  of  Latvia,  Lithuania  and  Poland  each 
submitted formal requests for transitional periods. Additional information, requested 
by  the  Commission  services,  was  provided  by  mid-December  2003,  except  in  the 
case of Slovakia which made its request on 2 February 2004 and provided additional 
information on 9 February 2004. 

Taking  into  account  their  present  economic  situations,  their  status  as  capital 
importing countries, the ongoing economic transition and their relatively low level of 
budget  revenues,  Acceding  States  might  face  budgetary  difficulties  were  they 
required  to  abolish  withholding  taxes  on  interest  and  royalties  payments.  At  this 
stage, these countries would not be able to balance the loss of tax revenues, arising 
from such abolition, by receipts of additional domestic tax on income from interest 
and  royalty  payments  received  by  associated  companies  from  abroad,  because  they 
are  net  importers  of  capital.  Therefore,  the  Commission  proposes  granting  certain 
transitional arrangements, where these appear to be justified. 

This  is  consistent  with  the  general  position  that  the  European  Union  set  out  during 
negotiations with acceding countries, whereby transitional periods should be granted 
taking account of the interest not only of the Union, but also of Candidate Countries.9 
In an “Information Note” for the European Council, the Commission held that “…in 
considering  whether  transitional  measures  should  be  accepted,  the  Member  States 
should take into account the need to safeguard the functioning of the internal market, 
as well as the political, economic … implications for the Candidate Countries…”10. 

10. 

It  should  be  borne  in  mind  that  some  current  Member  States  were  also  granted 
transitional periods, when the Directive was adopted in June 2003. The Commission 
assessed  the  Acceding  Countries'  requests  against  this  background,  taking  into 
account their specific needs. Under these principles, any transitional periods should 
be of short duration and proportionate to the problem that they seek to address.  

11. 

The Commission's assessment of the derogation requests took account of: 

•  the  current  withholding  taxes  applicable  in  the  requesting  countries  under  their 

domestic income legislation;  

•  the rate of the withholding taxes on interest and royalty payments provided for in 

the Tax Conventions on Income and Capital of the requesting countries, and 

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Enlargement Strategy Paper, Report on progress towards accession by each of the candidate countries, 
2000, p. 26. 
Communication  from  the  Commission  –  Information  note  to  the  European  Council  on  a  mid-term 
review of the implementation of the enlargement strategy, COM(2001) 553 final, p. 3 and 16 f. 

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•  the budgetary effect of abolishing the withholding taxes, and 

•  the transitional periods granted to existing Member States.  

The  Czech  Republic  submitted  its  request  by  letter  of  16  September  2003.  Its 
domestic rate of withholding taxes, on both interest and royalty payments, is 15 %. 
However,  for  interest  payments,  12  out  of  15  Double  Taxation  Conventions  with 
present Member States provide for an elimination of withholding taxes. For royalty 
payments, the Double Taxation Conventions provide, in all cases, for a withholding 
tax of 5 % or 10 %. Thus, the Commission concludes that derogation could only be 
justified for royalty payments. 

The Republic of Latvia submitted its request by letter of 28 May 2003. Its domestic 
rate of withholding tax, for interest payments, is 10 % (with certain exceptions); and 
for royalty payments, 5 % (a withholding tax of 15 % applies for literary or artistic 
work  including  cinematograph  and  video  films  and  records).  All  eight  Double 
Taxation Conventions with present Member States provide for a withholding tax on 
interest  payments  at  a  rate  of  10 %;  and  also  10 %  (and  exceptionally  5 %  under 
certain  Conventions)  for  royalty  payments.  The  Commission  concludes  that 
derogation could be justified for both interest and royalty payments. 

The Republic of Lithuania submitted its request by letter of 5 December 2003. The 
domestic rate of withholding tax on both interest and royalty payments is 10 %. All 
Double Taxation Conventions, with the exception of one, provide for a withholding 
tax of 10 % on both interest and royalty payments. However, in 12 Double Taxation 
Conventions (all of them with present Member States) the rate of withholding tax on 
royalty payments is reduced to 5 % in respect of the use of industrial, commercial or 
scientific  equipment.  The  Commission  concludes  that  derogation  could  be  justified 
for both interest and royalty payments. 

The Republic of Poland submitted its request by letter of 31 July 2003. Its domestic 
rate for withholding taxes, on both interest and royalty payments, is 20 %. However, 
nine out of 15 Double Taxation Conventions with present Member States provide for 
the  elimination  of  withholding  taxes  on  interest  payments.  However,  for  royalty 
payments,  the  Double  Taxation  Conventions  specify  a  rate  of  10 %,  in  most  cases. 
The Commission concludes that derogation could only be justified for royalties. 

The Slovak Republic submitted its request by letter on 2 February 2004. Its domestic 
rate  for  withholding  taxes  is  19%,  following  its  tax  reform  that  took  effect  from 
1 January  2004.  However,  thirteen  out  of  fourteen  Double  Tax  Conventions  with 
present  Member  States  provide  for  the  elimination  of  withholding  taxes  on  interest 
payments. In relation to royalty payments, the Double Taxation Conventions specify 
rates  that  vary  according  to  the  type  of  royalties  and  the  country  concerned. 
Currently  the  rates  are  0%,  1%,  5%  and  10%.  The  Commission  concludes  that 
derogation could only be justified for royalties. 

On this basis, the Commission proposes that, with the exception of Slovakia, which 
only asked for two years, a transitional period of six years should be granted to all 
requesting  states  for  the  application  of  the  Directive  regarding  the  taxation  of 
payments  of  royalties;  and  a  transitional  period  of  six  years  should  be  granted  to 
Latvia  and  Lithuania  regarding  the  taxation  of  payments  of  interest  -  it  being 
considered that six years should be sufficient to allow appropriate adjustments to be 

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made. For a period of four years, the rate of tax applied by Latvia and Lithuania, to 
payments of interest, may not exceed 10% and for the remaining two years, that rate 
may not exceed 5%. 

18. 

Granting  such  transitional  periods  is  regarded  as  going  beyond  mere  technical 
adaptations  under  Art. 57  of  the  Act  of  Accession,  and  therefore,  it  is  proposed  to 
provide  for  the  transitional  periods  by  way  of  a  formal  amending  Directive  of  the 
Council. 

2. 

COMMENTARY ON THE ARTICLES OF THE PROPOSAL FOR A DIRECTIVE 

Article 1 

This  Article  incorporates  the  transitional  periods  for  the  Czech  Republic,  Latvia,  Lithuania, 
Poland and Slovakia into the provision which governs the already existing transitional periods 
for Greece, Spain and Portugal. 

Article 2 

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

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2004/0076 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending Directive 2003/49/EC as regards the possibility for certain Member States to 
apply transitional periods for the application of 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 94 thereof, 

Having regard to the proposal from the Commission11, 

Having regard to the opinion of the European Parliament12, 

Having regard to the opinion of the European Economic and Social Committee13, 

Whereas: 

(1) 

(2) 

(3) 

Council  Directive  2003/49/EC  of  3  June  2003  on  the  common  system  of  taxation 
applicable  to  interest  and  royalty  payments  made  between  associated  companies  of 
different Member States14 provides for the abolition of taxation on those payments in 
the Member State where they arise, but also ensures that these payments are subject to 
tax once in a Member State. 

The  application  of  Directive  2003/49/EC  is  liable  to  cause  budgetary  difficulties  for 
the  Czech  Republic,  Latvia,  Lithuania,  Poland  and  Slovakia  given  the  rates  of 
withholding  tax  applied  under  domestic  law  and  on  the  basis  of  tax  conventions  on 
income and capital and the revenue thus collected.  

Those Acceding States should therefore be permitted, on a temporary basis, until the 
date  of  application  referred  to  in  Article  17(2)  and  (3)  of  Council  Directive 
2003/48/EC  of  3  June  2003  on  taxation  of  savings  income  in  the  form  of  interest 
payments not to apply certain provisions of Directive 2003/49/EC concerning, in the 
case  of  Latvia  and  Lithuania,  interest  and  royalty  payments,  and  in  the  case  of  the 
Czech Republic, Poland and Slovakia, royalty payments only. 

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14 

OJ C …, …, p. … 
OJ C …, …, p. … 
OJ C …, …, p. … 
OJ L 157, 26.6.2003, p. 49. 

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(4) 

(5) 

Since  the  granting  of  a  transitional  period  goes  beyond  mere  adaptation  within  the 
meaning of Article 57 of the 2003 Act of Accession, Directive 2003/49/EC should be 
amended accordingly, 

Since the Member States are required to grant credit for tax deducted from interest and 
royalty  payments,  it  is  necessary  to  ensure  that  this  Directive  is  transposed 
immediately, after the entry into force of the 2003 Act of Accession. 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Article 6 of Directive 2003/49/EC is amended as follows: 

(1) 

The title is replaced by the following: 

“Transitional rules for the Czech Republic, Greece, Spain, Latvia, Lithuania, Poland, 
Portugal and Slovakia” 

(2) 

In paragraph 1, the second and third subparagraphs are replaced by the following: 

“Latvia  and  Lithuania  shall  be  authorised  not  to  apply  the  provisions  of  Article  1 
until the date of application referred to in Article 17(2) and (3) of Council Directive 
2003/48/EC  of  3  June  2003  on  taxation  of  savings  income  in  the  form  of  interest 
payments15. During a transitional period of six years starting on the aforementioned 
date,  the  rate  of  tax  on  payments  of  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 must not exceed 10 %. During the 
first  four  years  of  the  six-year  transitional  period,  the  rate  of  tax  on  payments  of 
interest made to an associated company of another Member State or to a permanent 
establishment  situated  in  another  Member  State  must  not  exceed  10%;  and  for  the 
following  two  years,  the  rate  of  tax  on  such  payments  of  interest  must  not  exceed 
5%. 

Spain, the Czech Republic and Poland shall be authorised, for royalty payments only, 
not  to  apply  the  provisions  of  Article  1  until  the  date  of  application  referred  to  in 
Article  17(2)  and  (3)  of  Directive  2003/48/EC.  During  a  transitional  period  of  six 
years  starting  on  the  aforementioned  date,  the  rate  of  tax  on  payments  of  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  must  not  exceed  10  %.  Slovakia  shall  be  authorised,  for  royalty 
payments only, not to apply the provisions of Article 1 during a transitional period of 
two years starting on 1 May 2004. 

These transitional rules shall, however, remain subject to the continued application of 
any  rate  of  tax  lower  than  those  referred  to  in  the  first,  second  and  third 
subparagraphs  provided  by  bilateral  agreements  concluded  between  the  Czech 
Republic,  Greece,  Spain,  Latvia,  Lithuania,  Poland,  Portugal  or  Slovakia  and  other 
Member  States.  Before  the  end  of  any  of  the  transitional  periods  mentioned  in  this 

15 

OJ L 157, 26.6.2003, p. 38 

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paragraph the Council may decide unanimously, on a proposal from the Commission, 
on a possible extension of the said transitional periods." 

(3) 

Paragraphs 2 and 3 are replaced by the following: 

“2.  Where a company of a Member State, or a permanent establishment situated in 

that Member State of a company of a Member State: 

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– 

– 

receives  interest  or  royalties  from  an  associated  company  of  Greece, 
Latvia, Lithuania or Portugal, 

receives  royalties  from  an  associated  company  of  the  Czech  Republic, 
Spain, Poland or Slovakia, 

receives interest or royalties from a permanent establishment situated in 
Greece,  Latvia,  Lithuania  or  Portugal,  of  an  associated  company  of  a 
Member State, or 

receives royalties from a permanent establishment situated in the Czech 
Republic,  Spain,  Poland  or  Slovakia,  of  an  associated  company  of  a 
Member State,  

the first Member State shall allow an amount equal to the tax paid in the Czech 
Republic,  Greece,  Spain,  Latvia,  Lithuania,  Poland,  Portugal,  or  Slovakia  in 
accordance with paragraph 1 on that income as a deduction from the tax on the 
income  of  the  company  or  permanent  establishment  which  received  that 
income. 

3. 

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

(a) 

(b) 

the tax payable in the Czech Republic, Greece, Spain, Latvia, Lithuania, 
Poland,  Portugal  or  Slovakia,  on  such  income  on  the  basis  of 
paragraph 1, or  

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 2 

1. 

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative 
provisions necessary to comply with this Directive by 2 May 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. 

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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. 

Article 3 

This Directive shall enter into force subject to and as on the date of the entry into force of the 
Treaty  of  Accession  of  the  Czech  Republic,  Estonia,  Cyprus,  Latvia,  Lithuania,  Hungary, 
Malta, Poland, Slovenia and Slovakia. 

Article 4 

This Directive is addressed to the Member States. 

Done at Brussels,  

For the Council 
The President 

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FINANCIAL STATEMENT 

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

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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  2003/49/EC  of  3  June  2003  on  a 
common  system  of  taxation  applicable  to  interest  and  royalty  payments  made  between 
associated companies 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? 

This proposal updates an already existing Council Directive (2003/49/EC of 3 June 
2003  on  a  common  system  of  taxation  applicable  to  interest  and  royalty  payments 
made between associated companies of different Member States). This Directive will 
incorporate  the  request  from  Acceding  States  for  a  transitional  period  for  the 
application of the Directive.  

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. 

This  Directive  will  have  the  effect  that  the  Acceding  countries  requesting  a 
transitional period for the application of Council Directive 2003/49/EC may continue 
to apply their existing tax law on the payments of interest and royalties and that the 
benefits  of  the  Directive  2003/49/EC  only  will  be  available  to  businesses  in  these 
Acceding  Countries  after  termination  of  the  transitional  period.  The  proposal  does 
not  affect  particular  sectors  or  sizes  of  business.  By  the  nature  of  a  transitional 
period, the businesses in the Countries requesting such a transitional period will not 
be able to benefit from the Council Directive 2003/49/EC until the termination of the 
transitional period.  

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3. 

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

No  new  obligations  or  tax  compliance  burdens  are  imposed  on  business.  However, 
until  the  end  of  the  transitional  period  companies  in  the  requesting  Member  States 
with interest or royalty payments to companies of other Member States will have to 
apply the existing rules concerning the taxation of interest and royalty payments and 
thus will not be able to fully benefit from the advantages from the Directive.  

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 
The  positive  effects  on  cross-border 
competitiveness  of  companies  and  employment  from  the  application  of  Council 
Directive  2003/49/EC  will  be  applicable  after  the  transitional  period.  This  not 
immediate  positive  effect  of  the  Directive  is  seen  as  necessary  because  of  the 
economic and budgetary consequences of the implementation and application of the 
Directive in the respective Member States. 

investment  which  will  reinforce 

5. 

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

There are no specific measures for small and medium-sized firms proposed. 

CONSULTATION 

6. 

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

Due  to  the  technical  nature  of  the  proposal  for  an  amendment  of  a  recent  adopted 
Directive  it  was  not  considered  useful  to  consult  again  the  organisations,  which 
commented  on  the  original  Directive.  However,  there  were  discussions  between 
technical representatives of Member States' tax administrations and the Commission 
services.  

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