Report from the Commission to the Council in accordance with Article 8 of 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
Date: 2009-04-17
Institutions: European Commission
Subjects: EU Member State, group of companies, interest, savings, tax, tax on income, tax system, transitional period (EU)

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 17.4.2009 
COM(2009) 179 final 

REPORT FROM THE COMMISSION TO THE COUNCIL  

in accordance with Article 8 of 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 

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REPORT FROM THE COMMISSION TO THE COUNCIL  

in accordance with Article 8 of 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 

1. 

SUMMARY 

Article  8  of  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  (‘the  Interest  and  Royalties  Directive’  or  'the  Directive')1 
requires  the  Commission  to"…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  referred  to in  Article  3  and  the  Annex."  In  response, 
the  Commission  has  looked  at  timeliness  and  completeness  of  implementation,  as 
well  as  at  issues  of  interpretation  and  possible  improvements  to  the  existing  text, 
including broadening the scope of the Directive. The report concludes that while the 
Directive has generally been implemented in a timely and complete manner, there is 
a need for guidance  and coordination in respect of certain key concepts, as well as 
scope for improving the current text.  

2. 

BACKGROUND  

The Directive was adopted on 3 June 2003. The deadline for implementation was 1 
January 2004. It has subsequently been amended by Council Directives 2004/66/EC2 
and 2004/76/EC3. The former extends the application of the Directive to companies 
and taxes of the new Member States (MS), while the latter grants some of the new 
MS  temporary  derogations  from  one  or  more  provisions  of  the  Directive.  Both 
amending directives were to have been implemented by 1 May 2004. 

In  view  of  the  Article  8  report,  the  Commission  asked  the  International  Bureau  of 
Fiscal  Documentation  (IBFD)  to  carry  out  a  survey  of  the  implementation  of  these 
Directives. The information to be provided by the survey was intended to allow the 
Commission to assess the need for:  

• 

action  to  ensure  compliance  with  MS'  obligations  under  the  Directive  and 

under the Treaty; 

•  guidance on the application of the individual provisions of the Directive; 

• 

further legislation within the area covered by the Directive. 

It  was  agreed  that  the  survey  should  cover  only  20  MS,  thus  excluding  five  MS 
(Greece,  Latvia,  Lithuania,  Poland  and  Portugal)  benefiting  from  transitional 
derogations,  since  no  obligations  exist  yet  for  these  MS  to  implement  fully  the 
Directive.  While  the  survey  was  completed  before  the  accession  of  Bulgaria  and 

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3 

OJ L157, 26.6.2003, p. 49. 
OJ L 168, 1.5.2004, p. 35. 
OJ L 157, 30.4.2004, p. 106.  

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Romania to the European Union, it should be noted that those MS also benefit from 
transitional derogations4. 

3. 

THE DIRECTIVE 

3.1. 

Purpose and scheme 

The purpose of the Directive is to put cross-border interest and royalty payments on 
an  equal  footing  with  domestic  payments,  by  eliminating  juridical  double  taxation 
and cash-flow disadvantages.  

It  is  of  equal  concern  that  such  payments  should  not  escape  taxation  altogether. 
According to recital 3, those payments should "…be taxed once in a Member State."  

The  scheme  consists  of  exempting  interest  and  royalty  payments  from  taxation  at 
source, whether by assessment or by withholding tax, while attempting to ensure that 
the beneficial owner of the payments is taxed in its MS of residence or, in the case of 
permanent  establishments  (PEs),  in  the  MS  where  they  are  situated.  The  Directive 
provides  for  a  refund  procedure  for  those  cases  where  tax  has  been  withheld  at 
source. 

By taxing the beneficial owner in the MS of residence – in the case of PEs, in the MS 
where  they  are  located  –  it  is  guaranteed  that  such  income  is  taxed  in  the  same 
jurisdiction  where  the  related  expenditure  is  deductable  (i.e.,  the  cost  of  raising 
capital in the case of interest income, and research and development expenditure in 
the case of royalties). 

3.2. 

Implementation 

Most of the 20 MS covered by the survey appear to have implemented the Directive 
within  the  legal  deadline.  Of  those  MS  which  did  not  do  so,  all  but  one  made  the 
national implementing rules applicable retroactively from 1 January 2004.  

As regards the practical implications of the Directive, the survey notes that ten MS 
do not at present levy withholding tax on outbound interest payments (with a further 
two MS granting broad exemptions), and that six MS do not levy withholding tax on 
royalty payments (an exception, in the case of one MS, for patent royalties).  

It should be noted in this context that the Directive is relevant even for those MS that 
do not levy withholding taxes (or tax by assessment) on interest or royalty payments, 
inasmuch as Articles 4 and 5 limit the discretion of all MS to recharacterise interest 
or royalty payments as profit distributions and levy taxes thereon.  

3.3. 

Specific issues of interpretation and application 

3.3.1.  Articles 1(1), 1(4) and 1(5) – 'Beneficial owner' 

The beneficial ownership condition aims at ensuring that relief under the Directive is 
not wrongfully obtained through the artificial interposition of an intermediary.  

While there are differences of wording between the beneficial ownership criteria for 
companies  and  PEs,  respectively,  the  key  difference  lies  in  the  reference  to 

4 

The  derogations  for  Bulgaria  and  Romania  are  provided  for  in  the  Act  concerning  the  conditions  of 
accession of the Republic of Bulgaria and Romania and the adjustments to the Treaties on which the 
European Union is founded, annexes VI, number 6, and annex VII, number 7, OJ L 157, 21.6.2005, p. 
289 and 329.  

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"…income in respect of which that permanent establishment is subject…to one of the 
taxes…". The Directive here makes explicit that the payments as such must be taxed 
in the hands of the beneficial owner.  

The  MS covered  by the survey have  adopted different approaches in respect of the 
beneficial ownership criteria. With regard to companies, some MS have chosen not 
to  transpose  the  Article  1(4)  definition  at  all,  others  have  relied  on  domestic 
definitions,  and  yet  another  group  of  MS  have  transposed  it  with  deviations.  As 
regards PEs, some MS have chosen either not to transpose Article 1(5) at all, or to 
transpose it with national variations.  

Those differences of approach could lead to relief being denied in one MS, but being 
granted,  in  identical  circumstances,  in  another.  Notwithstanding  comments  from 
some MS to the effect that this issue is essentially one of case-by-case assessment, 
the  fact  remains  that  the  term  as  used  in  the  context  of  the  Directive  is  one  of 
Community law. Its interpretation must be uniform throughout the Community. The 
co-existence  of  27  potentially  different  interpretations  would  undermine  the 
effectiveness of the Directive. 

Possible  solutions  include  developing  guidance  through  discussion  in  a  technical 
working group or amending the definitions with a view to make them more precise.  

3.3.2.  Article 1(3) – PE – 'Tax-deductible expense' 

In  the  case  of  payments  made  by  PEs,  the  obligation  of  the  source  State  to  refrain 
from taxing is made conditional on such payments being a tax-deductible expense for 
the payer.  

It is clear from the context that the purpose of the 'tax-deductibility' requirement is to 
ensure that the benefits of the Directive accrue only in respect of those payments that 
represent  expenses  which  are  attributable  to  the  PE.  However,  on  its  wording  the 
provision would also apply to cases where deduction is denied on other grounds.  

While the IBFD found no cases in the surveyed MS of relief having been denied on 
the  grounds  that  the  payment  was  a  non-deductible  expense,  it  cannot  be  excluded 
that such  cases  may occur  in future, and that  the  host state of  the  PE  might  in that 
situation impose a withholding tax on the payment.  

In order to avoid an unjustifiable difference of treatment as between a subsidiary and 
a  PE,  consideration  might  be  given  to  rewording  Article  1(3)  in  order  to  make  it 
more precise. 

3.3.3.  Article 1(10) – Holding period 

Eleven of the 20 surveyed MS have availed themselves of the option provided for by 
Article  1(10)  to  impose  a  minimum  holding  period  as  a  condition  for  enjoying  the 
benefits  of  the  Directive.  According  to  the  survey,  three  of  these  MS  require  this 
condition to be satisfied at the time of payment, with no possibility for a subsequent 
fulfilment of the condition to be taken into account retroactively.  

The latter requirement appears to be inconsistent with the purpose of the Directive in 
general and of Article 1(10) in particular, and with the relevant ECJ case law. In the 
Denkavit case, concerning the holding period option provided for by Article 3(2) of 
the  Parent-Subsidiary  Directive,  the  Court  found  that  as  a  derogation  from  the 
principle  of  exemption  from  withholding  taxes  laid  down  by  that  Directive,  the 

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holding  period  option  was  to  be  interpreted  strictly.5  It  further  noted  that  the 
provision in issue was “aimed in particular at counteracting abuse whereby holdings 
are taken in the capital of companies for the sole purpose of benefiting from the tax 
advantages available and which are not intended to be lasting”6.  

The above findings have direct relevance for the interpretation of Article 1(10) of the 
Directive. As in the  case of  Article 3(2) of the Parent-Subsidiary  Directive, Article 
1(10)  constitutes  a  derogation  from  the  principle  of  exemption  from  withholding 
taxes,  and  is  therefore  to  be  interpreted  strictly.  It  also  shares  the  same  purpose  as 
Article  3(2),  i.e.  to  counteract  abusive  enjoyment  of  the  benefits  of  the  Directive 
through  temporary,  purely  tax-motivated  holdings.  That  purpose  is  achieved  if  the 
holding  is  maintained  for  the  required  minimum  period,  regardless  of  whether  that 
period has already come to an end at the time of payment or whether it comes to an 
end  only  at  some  later  time,  such  as  the  date  on  which  an  application  for  relief  is 
submitted.  

The ECJ has held that MS are not obliged to grant the exemption from the beginning 
of  the  holding  period  without  being  certain  of  being  able  to  recover  the  tax  if  the 
holding  were  not  maintained  for  the  minimum  period  or  to  grant  the  exemption 
immediately  on  the  basis  of  a  unilateral  undertaking  by  the  parent  company7. 
However,  this  judgment  was  delivered  before  the  Council  amended  Directive 
76/308/EEC  in  order  to  extend  the  scope  of  administrative  cooperation  in  the 
recovery  of  claims  to  taxes  on  income8.  This  new  legal  context  could  modify 
Member  States'  obligations  under  the  Directive  since  they  now  have  new  tools  to 
recover tax debts. 

3.3.4.  Article 2 – 'Interest' and ‘Royalties’  

The  survey  did  not  reveal  any  significant  discrepancies  between  the  Article  2(a) 
definition  of  ‘interest’  and  those  relied  on  in  the  context  of  national  legislation 
transposing the Directive. Nor do there appear to be any obvious differences between 
the Article 2(a) definition and that of Article 11 of the OECD Model Tax Convention 
(MTC) that might be of relevance for the application of the Directive. 

According to the survey, two MS applied a narrower definition of royalties than that 
contained in Article 2(b). Thus, some royalty payments from those MS could at that 
time  have  been  subjected  to  withholding  tax,  depending  on  the  content  of  national 
law and relevant double tax conventions (DTCs). Since the survey was finished, one 
of  the  MS  has  subsequently  amended  its  legislation  in  order  to  align  its  domestic 
definition on that of the Directive. 

The definition contained in Article 2(b) is precise and unambiguous. It follows that 
MS  can  depart  from  that  definition  only  to  the  extent  that  by  so  doing  they  grant 
relief that is identical to, or more generous than, that prescribed by the Directive.  

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8 

Judgment of 17.10.1996 in Joined Cases C-283/94, C-291-94 and C-292/94 Denkavit International BV 
a.o. v Bundesamt für Finanzen, paragraph 27. 
Paragraph 31. 
Denkavit, paragraph 33. 
Council Directive 2001/44/EC of 15 June 2001 amending Directive 76/308/EEC on mutual assistance 
for  the  recovery  of  claims  resulting  from  operations  forming  part  of  the  system  of  financing  the 
European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and 
in respect of value added tax and certain excise duties, OJ L 175, 28.6.2001, p. 17–20. 

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3.3.5.  Article 3(a) – 'Company of a MS' 

3.3.5.1.  The Annex – List of entities 

Several MS have chosen to extend the benefits of the Directive to payments from a 
broader range of entities than those listed in the Annex, while maintaining the Annex 
requirements in respect of the recipients of the payments. 

3.3.5.2.  Transparent entities 

It  is  conceivable  that  one  or  more  of  the  entities  listed  in  the  Annex  could  be 
regarded  as  fiscally  transparent  by  a  MS  other  than  that  in  which  the  entity  is 
registered or incorporated. 

The  Directive  does  not  contain  any  provision  allowing  MS  to  'look  through'  non-
resident  qualifying9  entities.  It  follows  that  a  MS  has  no  legal  basis  for  refusing  to 
apply the Directive to a non-resident entity which meets the requirements of Article 
3.  

However, even if it were permissible to apply a look-through approach, the logic of 
that  approach  would  require  the  MS  in  question  to  extend  the  benefits  of  the 
Directive to the partner/shareholder. That view would be consistent with the position 
taken  in  the  OECD  Partnership  Report  and  the  Commentary  on  Article  1  of  the 
MTC10.  

3.3.5.3.  Place of effective management 

Three of the surveyed MS appear to require, as a condition for granting exemption, 
that the company receiving a payment should be subject to corporation tax in the MS 
in which it has its place of effective management. This could lead to a denial of the 
benefits of the Directive in a situation where, for instance, both the MS in which the 
company is incorporated and that in which it has its place of effective management 
rely, in their domestic legislation, on the place of incorporation as the relevant factor 
for determining tax residence. 

There  is  no  support  in  the  text  of  the  Directive  for  imposing  one  tax  residence 
criterion  in  preference  to  another.  If  the  company  is  resident  in  one  MS  only,  it 
matters  not  whether  the  criterion  applied  by  the  MS  of  residence  is  the  place  of 
incorporation or the place of effective management. If the company is dual resident, 
the tie-breaker rule of the relevant DTC will usually determine residence on basis of 
the  'place  of  effective  management'  criterion.  In  the  latter  situation,  it  may  be 
reasonable  to  expect  that  the  company  should  be  "subject  to  one  of  the  following 
taxes without being exempt" [Article 3(a)(iii)] in the MS in which the company has 
its place of effective management.11 

3.3.5.4.  Subject-to-tax requirements 

While  most  MS  appear  to  apply  a  ‘subjective’  subject-to-tax  requirement  –  i.e.  it 
applies to the company as such, rather than to the specific interest or royalty payment 

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I.e. that meet all of the criteria of Article 3.  
See in particular paragraphs 6.4 and 6.5. 
A  position  that  could  conceivably  be  challenged  on  the  grounds  that  in  a  case  where  a  PE  is  the 
recipient of an interest or royalty payment it should suffice that the company is subject to tax in the MS 
of the PE on profits attributable to the latter.  

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–  some  MS  require  that  the  payment  itself  should  be  subject  to  tax  (an  'objective' 
subject-to-tax requirement). 

According  to  the  survey,  one  MS  requires  that  the  company  should  not  have  an 
option of being exempt.  That MS furthermore requires that the company should be 
subject, in its MS of residence, to a tax that is of the same or similar character as the 
income tax in the first MS.  

There  is  no  support  in  the  Directive  for  either  requirement.  On  the  contrary,  the 
conditions  of  Article  3(a)  are  exhaustive,  thus  leaving  no  scope  to  impose  further 
conditions and restrictions. 

3.3.6.  Article 3(b) – 'Associated company' 

3.3.6.1.  Holding threshold 

According  to  the  survey,  no  MS  had  relaxed  the  25%  direct  minimum  holding 
threshold,  although  one  MS  accepts  indirect  holdings.  However,  several  MS  had 
either moved from a  ‘capital’ criterion to a ‘voting rights’ criterion, or allowed the 
alternative use of either criterion.  

The  survey  found  that  one  MS  requires  that  both  criteria,  ‘capital’  and  ‘voting 
rights’,  be  satisfied  simultaneously.  There  is  no  support  in  the  Directive  for  such  a 
dual requirement. 

3.3.6.2.  Companies 'involved' 

One MS has extended the scope of relief available under the Directive by dispensing 
with  the  requirement  that  the  common  parent  in  the  situation  described  in  Article 
3(b)(iii) should be EU-resident. MS can be more generous than the Directive. 

3.3.7.  Article 3(c) – PE – Definition 

The definition of a PE is clearly modelled on that of Article 5 of the OECD MTC, 
but  without  reproducing  the  list  of  examples  and  exceptions  contained  in  Articles 
5(2) to 5(7).  

The fact that the Directive's definition differs somewhat from that of Article 2(2) of 
the  Parent-Subsidiary  Directive,  and  that  neither  definition  reproduces  exactly 
Article 5 of the OECD MTC, may create a situation of legal uncertainty, in particular 
concerning the situation of dependent agent PEs. 

When  implementing  the  Directive  most  MS  have  chosen  to  rely  on  the  general  PE 
definition contained in their respective domestic tax legislations. However, five MS 
have introduced a specific definition for the purpose of implementing the Directive. 

3.3.8.  Article 4(2) – Exclusion of payments as interest or royalties 

Article 4(2) is a transfer pricing provision. As is clear from the commentary on the 
Article  contained  in  COM  (1998)  67  final,  it  is  also  intended  to  be  a  thin 
capitalisation provision. The commentary also argues that any amount reclassified as 
a  profit  distribution  should  be  granted  the  benefits  of  the  Parent-Subsidiary 
Directive12. 

The  survey  found  that  one  MS  would  deny  the  benefits  of  the  Parent-Subsidiary 
Directive for interest and royalty payments reclassified as hidden profit distributions, 

12 

Cf. the opinion of AG Mischo of 26.9.2002 in Case C-324/00 Lankhorst-Hohorst. 

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on the grounds that under domestic case-law such distributions cannot be regarded as 
dividends. However, that MS finds itself unable to charge withholding tax if there is 
a DTC, since the dividend Article of the DTC would not apply.13  

There is a need for further reflection regarding the tax treatment of excess amounts 
of interest or royalties, whether or not reclassified as profit distributions. Depending 
on  the  circumstances,  there  could  conceivably  also  be  a  question  of  discrimination 
vis-à-vis the treatment of similar domestic payments. 

In  this  context  it  should  be  noted  that  the  Court  has  found  that  the  discriminatory 
application of thin capitalisation provisions involving a fixed debt/equity ratio, with 
no  let-out  clause,  constitutes  a  disproportionate,  and  therefore  unjustifiable, 
restriction of the freedom of establishment.14 

3.3.9.  Article 5 – Fraud and abuse 

Several MS appear to interpret Article 5 as authorising the denial of relief in cases 
where the receiving company is controlled by a third-country resident.  

One  MS  appears  to  deny  the  benefits  of  the  Directive  to  a  receiving  company  of 
another  MS  which  is  owned  or  controlled  by  a  person  ordinarily  resident  or 
domiciled in the first MS. 

Article  3(b)  requires  that  "holdings  must  involve  only  companies  resident  in 
Community  territory".  The  Directive  does  not  however  stipulate  that  a  parent 
company receiving an interest or royalty payment from its part - or wholly- owned 
subsidiary must be controlled by an EU resident (or by a resident of a MS other than 
that of the subsidiary) in order for the payment to qualify for relief.  

Article  5  must  moreover  be  interpreted  in  the  light  of  the  relevant  ECJ  anti-abuse 
case-law, which requires anti-abuse measures to be appropriate and proportionate.15 
Domestic legislation or a DTC provision that denies relief on the sole grounds that 
the parent company is controlled by a third-country resident – or by one of its own 
residents  –  is  unlikely  to  meet  the  proportionality  test,  as  it  does  not  "have  the 
specific purpose of preventing wholly artificial arrangements".16 

It should be recalled that the ‘beneficial owner’ condition of Article 1 is specifically 
designed  to  tackle  artificial  conduit  arrangements.  It  may  therefore  be  doubted 
whether a company that satisfied the ‘beneficial owner’ test, could be considered an 
artificial conduit when applying Article 5.  

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15 

16 

This may not be beyond doubt. In a reservation on Article 10(3) of the OECD MTC, the MS in question 
reserves  "the  right  to  amplify  the  definition  of  dividends  in  paragraph  3  so  as  to  cover  all  income 
subjected to the taxation treatment of distributions". A payment need not therefore necessarily qualify 
as a 'dividend' under the domestic law of that MS in order to be considered a 'dividend' when applying 
Article 10(3). 
Case  C-105/07  Lammers,  paragraph  32.  See  also  Case  C-524/04  Thin  Cap  Group  Litigation,  at 
paragraph 92. 
E.g. 
17.7.1997 
Belastingdienst/Ondernemingen Amsterdam 2, paragraph 44. 
E.g.  judgment  of  13.3.2007  in  Case  C-524/04  Test  Claimants  in  the  Thin  Cap  Group  Litigation  v 
Commissioners of Inland Revenue, paragraph 79. 

in  Case  C-28/95 

Leur-Bloem 

Inspecteur 

judgment 

der 

of 

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3.4. 

Issues not addressed by the survey 

3.4.1. 

Intra-company payments 

The  scope  of  the  Directive  is  currently  limited  to  payments  between  separate  legal 
entities.  Thus,  it  does  not  cover  the  intra-company  situation,  for  instance  actual  or 
notional payments between a head office and a PE, or between two PEs of the same 
company. 

In the context of the OECD work on the attribution of profits to PEs, the question has 
arisen  whether,  under  DTC,  the  source  state  (usually  the  state  of  the  PE)  would  be 
entitled  to  levy  a  withholding  tax,  or  other  form  of  taxation  at  source,  on  notional 
interest or royalty payments to the head office or other PE of the same company.  

The matter is still under debate, but some OECD countries have indicated that they 
would be minded to impose a withholding tax on the above payments. 

Taxation at source on intra-company payments would create disadvantages for cross-
border  investment  similar  or  identical  to  those  that  prompted  the  adoption  of  the 
Directive. It would therefore seem appropriate to consider extending the scope of the 
latter to cover such payments.  

3.4.2.  Holdings 

The threshold: Article 3(b) of the Directive currently stipulates that ‘holdings’ within 
the meaning of that provision should meet or exceed a threshold of 25% of capital or 
voting  rights.  Under  Article  3  of  the  Parent-Subsidiary  Directive,  which  contains  a 
similar provision, the threshold for ‘holdings’ has gradually been reduced from 25% 
to  currently  10%  of  capital  or  voting  rights  as  of  2009  (cf.  also  Article  7(2)  of  the 
Merger Directive).  

Thus,  even  though  all  three  EC  company  tax  directives  share  the  aim  of  creating 
conditions  analogous  to  those  of  an  internal  market,  a  company  group  for  the 
purposes  of the  latter two directives remains something less than a company group 
under  the  Interest  and  Royalties  Directive,  thereby  increasing  the  planning  and 
compliance costs of companies involved in cross-border operations.  

The difference between thresholds may produce incongruous results, for instance in 
the  context  of  a  reclassification  of  an  interest  or  royalty  payment  as  a  profit 
distribution. An interest or royalty payment between companies associated through a 
‘holding’ of at least 10%, but less than 25%, would not qualify for relief under the 
Interest  and  Royalties  Directive,  but  would  qualify  for  relief  under  the  Parent-
Subsidiary Directive if reclassified as a profit distribution.  

Indirect  holdings:  the  scope  of  the  Directive  is  currently  limited  to  direct  holdings, 
while  that  of  the  Parent-Subsidiary  Directive  has  no  such  limitation.  Since  both 
directives  share  the  same  purpose  –  i.e.  to  eliminate  double  taxation  –  there  is  no 
obvious justification for this difference. 

Extension  of  the  scope:  while  the  elimination  of  inconsistencies  in  respect  of 
thresholds and direct/indirect holdings would represent a significant improvement on 
the  existing  situation,  it  can  be  deduced  from  Article  8,  read  in  conjunction  with 
recitals  2,  4  and  9,  that  it  was  the  intention  that  the  Directive  should  eventually 
encompass  unrelated  undertakings,  and  that  the  current  limitation  to  associated 
undertakings should be seen only as an experimental first step. It is self-evident that 
international  double  taxation,  burdensome  administrative  formalities  and  cash-flow 

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problems,  as  cross-border  obstacles  to  transactions  between  related  companies,  are 
also present in the case of payments between unrelated parties. 

As regards royalty payments, an extension of the scope of the Directive to unrelated 
undertakings  would  be  consonant  with 
the  Article  163  EC  objective  of 
“…strengthening  the  scientific and technological bases of Community industry and 
encouraging it to become more competitive at international level…”  

It should also be noted that extending the scope would be consistent with Articles 11 
and 12 of the OECD MTC, which make no distinction between related and unrelated 
undertakings. 

Finally, the budgetary impact of an extension would have to be considered. However, 
it should be noted that it is likely to be limited, since most MS already waive their 
taxing  rights  partly  or  wholly,  either  through  domestic  legislation  or  in  their  DTCs 
with other MS.  

4. 

CONCLUSION  

While  the  survey  indicates that overall  implementation has been satisfactory, it has 
also highlighted  a  number of cases  of questionable transposition  and interpretation, 
e.g. in respect of the minimum holding period, tax residence of the beneficial owner, 
holding  threshold,  reclassification  of  hidden  profits,  the  interrelation  between  the 
Interest and Royalties Directive and the Parent – Subsidiary Directive and the fraud 
and abuse clause.  

It  is  also  clear  that  further  discussion  and  guidance  in  respect  of  key  Directive 
concepts  may  be  necessary  in  order  to  achieve  uniformity  of  interpretation,  and 
reduction in legal uncertainty. There is a need to reflect on the implications of a non-
uniform  implementation  and  interpretation  of  the  'PE'  concept  in  the  context  of  the 
Directive,  and  of  having  a  PE  definition  that  diverges  from  that  of  Article  5  of  the 
MTC, e.g. with regard to the possible exclusion of agency PEs.  

As to amendments that might improve the operation of the Directive, a rewording of 
Article  1(3)  could  remove  what  may  be  seen  as  an  unjustifiable  discrimination 
between subsidiaries and PEs. And in terms of coherence and consistency, aligning 
the holding criteria of the Directive with those of the Parent-Subsidiary and Merger 
Directives should clearly be an urgent priority. Consideration might now be given to 
extending the scope of the Directive to unrelated undertakings, with a view to assess 
its potential to further the Lisbon objectives. 

EN 

10 

   EN