COMMISSION STAFF WORKING PAPER IMPACT ASSESSMENT
Date: 2011-11-11
Institutions: European Commission
Subjects: EU Member State, corporation tax, deduction at source, double taxation, firm governed by commercial law, interest, transnational corporation

EUROPEAN COMMISSION 

Brussels, 11.11.2011 
SEC(2011) 1332 final 

COMMISSION STAFF WORKING PAPER 

IMPACT ASSESSMENT 

Accompanying the document 

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

(Recast version) 

{COM(2011) 714 final} 
{SEC(2011) 1333 final} 

This report commits only the Commission's services involved in its preparation and does not prejudge the final form of 
any decision to be taken by the Commission. 

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TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

2. 

2.1. 

2.2. 

Procedural issues and consultations of interested parties ............................................ 3 

Organisation and timing............................................................................................... 3 

Consultation and expertise ........................................................................................... 4 

Impact Assessment Board ............................................................................................ 5 

Problem definition........................................................................................................ 6 

Identification of the problems that may require action ................................................ 6 

Description, underlying causes and measurement of the problems identified............. 8 

2.2.1.  Dimension of the economic problems caused by withholding taxes ........................... 8 

2.2.2.  Reference to the economic distortions caused by withholding taxes........................... 8 

2.2.3.  Compliance costs linked to withholding taxes........................................................... 11 

2.2.4. 

International Double taxation..................................................................................... 12 

2.2.5.  Specific legal requirements in the case of payments made through permanent 

establishments ............................................................................................................ 15 

2.2.6.  Risk of tax avoidance ................................................................................................. 15 

2.3. 

How would the problem evolve, all things being equal? ........................................... 15 

2.4.  Who is affected?......................................................................................................... 16 

2.5. 

Treaty base and the subsidiarity principle.................................................................. 16 

3. 

Objectives................................................................................................................... 17 

3.1.  What are the general policy objectives?..................................................................... 17 

3.2.  What are the more specific/operational objectives?................................................... 18 

3.3. 

Are these objectives consistent with other EU policies? ........................................... 18 

4. 

Policy options............................................................................................................. 18 

4.1.  What are the options for meeting the objectives and tackling the problems described? 
Description of the different options ........................................................................... 19 

4.2.  Which options have been discarded at an early stage and why?................................ 21 

5. 

5.1. 

5.2. 

6. 

Analysis of impacts .................................................................................................... 22 

Impacts of the different options ................................................................................. 22 

Comparison of options ............................................................................................... 29 

Monitoring and Evaluation ........................................................................................ 33 

6.1.  What are the core indicators of progress towards meeting the objectives? ............... 33 

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6.2.  What is the broad outline for possible monitoring and evaluation arrangements? .... 34 

Annex 1 .................................................................................................................................... 35 

Annex 2 .................................................................................................................................... 39 

Annex 3 .................................................................................................................................... 42 

Annex 4 .................................................................................................................................... 46 

Annex 5 .................................................................................................................................... 50 

Annex 6 .................................................................................................................................... 51 

Annex 7 .................................................................................................................................... 52 

Annex 8 .................................................................................................................................... 54 

Annex 9 .................................................................................................................................... 55 

Annex 10 .................................................................................................................................. 57 

Annex 11 .................................................................................................................................. 59 

Annex 12 .................................................................................................................................. 60 

Annex 13 .................................................................................................................................. 61 

Annex 14 .................................................................................................................................. 62 

Annex 15 .................................................................................................................................. 76 

Annex 16 .................................................................................................................................. 77 

Annex 17 .................................................................................................................................. 78 

Annex 18 .................................................................................................................................. 80 

Annex 19 .................................................................................................................................. 81 

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1. 

PROCEDURAL ISSUES AND CONSULTATIONS OF INTERESTED PARTIES 

1.1. 

Organisation and timing 

On  3rd  June  2003,  the  Council  adopted  the  Directive  2003/49/EC  on  a  common  system  of 
taxation  applicable  to  interest  and  royalty  payments  made  between  associated  companies  of 
different  Member  States1  (hereinafter,  the  Directive  or  the  Interest  and  Royalties  Directive) 
which  was  due  to  be  implemented  by  1  January  2004.  Later,  the  Council  amended  this 
legislation  through  the  Directives  2004/66/EC2  and  2004/76/EC3.  The  former  extended  its 
application to companies and taxes of the new Member States, while the latter granted some 
of  the  new  Member  States  temporary  derogations  from  one  or  more  provisions  of  the 
Directive.  More  recently,  the  Council  Directive  2006/98/EC4  extended  its  application  to 
companies and taxes of Bulgaria and Romania. In addition, the Accession Treaty of Bulgaria 
and Romania included temporary derogations in its annexes VI and VII5.  

The  Commission  adopted  an  amending  proposal  to  the  Directive,  COM  (2003)  841  on  30 
December  2003  aiming  at  its  extension  to  cover  a  larger  range  of  companies  (i.e,  the 
European  Company,  SE  and  the  European  Co-operative  Society,  SCE).  This  proposal  also 
intended  to  exclude  from  its  benefits  companies  already  exempted  from  tax  on  interest  and 
royalties  received  in  order  to  exclude  tax  avoidance  opportunities.  The  discussions  in  the 
working groups of the Council between 2004 and 2006 were unsuccessful and were blocked 
due to this latter issue.  

Article  8  of  the  Directive  states  that:  the  Commission  should  report  to  the  Council  on  its 
operation,  in  particular  with  a  view  to  extending  its  coverage  to  companies  or  undertakings 
other than those under its scope. In order to obtain the required information to draft the report, 
DG TAXUD asked the International Bureau of Fiscal Documentation (IBFD) to carry out a 
survey of the implementation of the Directive (the Directive survey) which was delivered in 
June 2006. The Directive survey indicates that overall implementation has been satisfactory 
and refers to possible amendments in order to extend its coverage. 

The report on the functioning of the Directive was presented on 23 April 2009 (COM (2009) 
179 – the Commission's report of the Directive). Its adoption was delayed in order to facilitate 
discussion in the Council on the 2003 proposal and was only finished when agreement on this 
latter  text  did  not  seem  feasible.  The  main  elements  of  the  report  were  discussed  during  a 
Financial Questions Group called by the Swedish Presidency on 23 November 2009.  

On  December  2009,  Directorate  D  of  TAXUD  launched  a  study  to  prepare  for  an  impact 
assessment  of  the  possible  amendments  to  the  Directive.  This  was  requested  to  provide 
technical  assistance  and  input,  information  and  analyses  in  a  manner  that  would  make  it 
possible for the Commission services to draft such an impact assessment. 

On 22 April 2010, TAXUD called for the creation of a steering group within the Commission 
services to follow the work and feed in views from other services of the Commission in order 

1 
2 
3 
4 
5 

OJ L 157, 26.6.2003, p. 49. 
OJ L 168, 1.5.2004, p. 35. 
OJ L 157, 30.4.2004, p. 106. 
OJ L 363, 20.12.2006, p. 129. 
OJ L 157, 21.6.2005, p. 278 and p. 311. 

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to prepare the impact assessment of the proposal. The SG, SJ, COMP, ECFIN, EMPL, ENTR. 
MARKT, TRADE, INFSO and RTD departments were invited. On May 4, the first meeting 
of  the  steering  group  to  discuss  the  intermediate  report  of  the  impact  assessment  study  was 
held.  A  group  formed  by  officials  from  TAXUD  (D1  and  D4),  LS,  COMP,  TRADE  and 
INFSO  participated  in  the  meeting.  On  7  July,  a  second  meeting  of  the  steering  group  to 
discuss the draft final report of the impact assessment study was held. The group was formed 
by officials from TAXUD (D1 and D4), LS and RTD. A third meeting of the steering group 
was  held  on  12  November  to  agree  on  this  impact  assessment.  The  group  was  formed  by 
officials from TAXUD (D1 and D4), RTD and COMP. 

1.2. 

Consultation and expertise 

International  double  taxation  on  cross-border  interest  and  royalty  payments  is  an  identified 
and  well-known  obstacle  to  the  smooth  functioning  of  the  internal  market.  We  can  refer  to 
abundant academic studies such as, among others, the Report of the Committee of Independent 
Experts  on  Company  Taxation,  the  Ruding  Report,  March  1992;  to  EC  Tax  Law,  by  Paul 
Farmer and Richard Lyal, Clarendon Press, Oxford 1994; to Company Taxes in the European 
Union: Criteria and Options for Reform, by S. Cnossen, ed. Fiscal Studies (1996), vol. 17; to 
European Tax Law, by B. Terra and P. Wattel, 5th edition, Kluwer Law International, 2007; 
and  to  the  comments  by  Bruno  da  Silva  on  the  Report  Functioning  of  the  Interest  and 
Royalties Directive, Highlights Insights on European Taxation, number 6, 2009. 

The Directive IBFD survey released after its implementation has been a source of information 
on its operation and on the issues that could require further policy action to better achieve its 
objective of eliminating this tax obstacle to cross-border activities. 

The study for an impact assessment of the possible amendments to the Directive launched by 
TAXUD  has  been  made  by  Copenhagen  Economics  (the  CE  survey)6.  It  offers  a  broad 
overview of  the withholding taxes effects  on cross-border transactions and measures, where 
possible, its economic impact for business. At the request of TAXUD, it analyses the possible 
consequences of different policy options targeted to the difficulties linked to such tax charges 
and offers some quantitative estimations derived from its implementation. 

The  TAXUD  services  have  also  taken  active  part  in  seminars  and  events  concerning  the 
functioning of the Directive. It is relevant to mention the meeting of the Tax Policy Working 
Group of Business Europe, held on 2 October 2008: there was a debate with experts involved 
in  tax  issues  concerning  multinational  companies  after  a  presentation  by  the  Commission 
services  on  these  topics.  On  4  December  2008,  a  working  session  followed  with  a  steering 
group from Business Europe aiming at a more in depth discussion on future improvements to 
the Directive. A similar event was organized by the Confédération Fiscale Européenne, CFE, 
in Brussels on 16 April 2010, organization that gathers European tax advisors and practitioner 
of companies with interests in cross-border activities. Other informal meetings have also been 
held  with  interested  parties  to  capture  their  views  and  sound  out  any  problems  they  have 
encountered.  There  have  been  also  some  in-house  events  to  discuss  issues  concerning  the 
Directive with tax experts of different areas concerning the Commission tax policy and action. 

6 

Copenhagen Economics: Taxation of interest and royalties – impact assessment of amendments to the 
present Directive, October 2010. 

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A public consultation on proposed amendments to the current legislation, including the areas 
covered  by  the  impact  assessment  run  from  24  August  until  31  October  2010  on  the  "Your 
Voice  in  Europe"  web  portal  and  on  the  DG  TAXUD  website.  71  responses  were  received 
from  various  stakeholders,  including  multinationals  (25  replies),  large  firms  (3  replies), 
business  and  industry  associations  (18  replies),  tax  practitioners  (16  replies),  professional 
associations  (8  replies)  and  one  civil  servant  from  a  Member  State.  The  comments  were 
generally supportive of the objectives of this Commission service's initiative. The responses 
were also used to finalise the policy option parameters on certain specific issues.  

1.3. 

Impact Assessment Board 

The draft impact assessment (IA) was discussed with the Impact Assessment Board (IAB) of 
the Commission on 12 January 2011. This revised IA report takes into account the comments 
of the IAB as follows. 

Concerning the problem definition included in the IA 

a) The IAB required that the IA presents a fuller explanation of the context of this initiative 
and  the  interrelations  of  the  Directive  with  the  Directive  90/435/CEE  on  the  common  tax 
regime applicable in the case of parent companies and subsidiaries of different Member States 
(the Parent-Subsidiary Directive)7. In particular, the report should refer to the reasons why the 
issue  of  extending  the  scope  of  the  Directive  to  intra-company  payments  is  not  subject  to 
analysis, as recommended by the report on the functioning of the Directive.  

For this purpose, section 2.1 of the IA on the identification of the problem has been completed 
with references to the general taxation of the three types of capital flows – dividends, interest 
and royalties – and the context in which the existing Directives were adopted and modified. 
Concerning the issue of the intra-company  payments,  it  has  been  decided  to  modify  section 
4.2 and consider it as a policy option discarded at an earlier stage. 

b)  The  IAB  required  more  clarity  on  the  types  and  scale  of  distortions  being  addressed 
including why they cannot be addressed satisfactorily by Member States to establish a better 
evidence base and rationale for EU action.  

For  this  purposes,  section  2.2  on  the  underlying  causes  of  the  problems  identified  has  been 
reorganized and completed with new text. The economic problems and distortions caused by 
withholding  taxes  have  been  identified  in  three  subsections.  A  new  subsection  has  been 
incorporated including data to illustrate the dimension of the problem. 

Further  explanation  is  given  in  section  2.3  to  illustrate  the  baseline  scenario.  Section  2.5 
gathers new arguments to justify EU action on the basis of the subsidiary principle. 

Concerning the objectives of the recast 

The  IAB  required  further  clarification  on  the  objectives.  It  asked  if  the  alignment  of  the 
Directive  and  the  Parent-Subsidiary  Directive  is  an  objective.  It  also  asked  to  present  the 

7 

OJ  L  225,  20.8.1990,  p.  6,  as  amended  by  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. 

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position  of  Member  States  on  the  options,  and  explain  why  certain  options  have  not  been 
considered for analysis.  

In  this  regard,  sections  3.1  and  3.2  of  the  IA  have  been  redrafted  to  clarify  the  objectives 
pursued.  Also,  section  4.2  refers  now  to  other  policy  options  which  had  been  discarded. 
Section 5.2 on the comparison of options includes a new paragraph referring to the Member 
State known positions on the considered options. 

Concerning the comparison of options 

The IAB required elaborating on the non-quantified benefits of the preferred option, how its 
impacts would be distributed by Member State, and why it has less negative side-effects than 
option 2. The report should assess the importance of the benefits related to the removal of the 
different types of distortions and in what proportion they are likely to be achieved under the 
preferred option. The report should also show how the impacts of the preferred option will be 
distributed  over  Member  States. It  should  better  explain  the  negative  side-effects  associated 
with  the  removal  of  distortions  due  to  different  withholding  tax  rates,  including  why  they 
could  be  used  as  an  argument  against  option  2.  The  report  should  also  specify  more 
systematically the assumptions made for the calculation of the monetised impacts. 

For  this  purpose,  section  5.1  on  the  analyses  of  impacts  and  section  5.2  on  the  preferred 
option include new text in order to explain the effects of the options in the Member States in 
the extent possible. New text has been added to section 5.2 on the comparison of options in 
order to evaluate further on the impact of the preferred option on the distortions detected. 

2. 

PROBLEM DEFINITION 

2.1. 

Identification of the problems that may require action 

The problems addressed by this initiative to recast the Interest and Royalties Directive arise 
from  the  existence  of  particular  corporate  tax  obstacles  to  the  functioning  of  the  internal 
market: cross-border interest and royalty payments are subject to a more burdensome taxation 
as compared to that borne by domestic transactions. In case of purely domestic operations, the 
recipient of the payment is subject to corporate tax as a resident taxpayer in the Member State 
where it is resident for tax purposes (the home State). In case of international payments, they 
may  be  also  subject  to  withholding  taxes  in  the  Member  State  from  which  it  is  made  (the 
source State or the host country) and there is a risk of double taxation. 

It may be that the residence State allows the taxpayer to reduce the corporate tax liability with 
a  tax  credit  related  to  the  withholding  tax  charged  at  source.  Alternatively,  it  may  exempt 
foreign income. The taxpayer must attest the right to this tax relief through the corresponding 
documentation. There is also a period elapsing from the withholding date to that in which the 
taxpayer applies the tax credit to reduce its tax liability. 

The bilateral tax relations between the source State and the residence State are usually ruled 
by  double  tax  conventions  (DTCs).  These  agreements  provide  for  the  reduction  or  the 
exemption of the withholding taxes charged at source. However, the reduction or exemption 
requires attesting the conditions established in the DTC through administrative procedures. If 
those  are  not  attested  when  the  withholding  is  due,  this  is  charged.  The  reimbursement 
required to make effective the tax reduction is only obtained after a claim is submitted and the 

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tax  authorities  verify  the  right  to  the  tax  relief.  So,  there  are  additional  compliance  and 
liquidity costs. 

In recognition of the double taxation burden and the inefficiencies caused by high withholding 
taxes on dividends, interests and royalties, the EU Council of Ministers has adopted two sets 
of legislation. In first instance, in 1990, the Council adopted the Parent-Subsidiary Directive 
which  aims  at  eliminating  withholding  taxes  on  dividend  payments  between  associated 
entities in EU Member States. This Directive was adopted together with the Directive on the 
tax  regime  applicable  to  mergers  and  other  business  reorganizations8.  Both  pieces  of 
legislation  aim  at  easing  the  grouping  together  of  companies  of  different  Member  State  in 
order  to  guarantee  conditions  for  companies  to  adopt  an  European  dimension.  These 
Directives are applicable to companies which are resident for tax purposes in a Member State, 
are subject to corporate tax and have a specific legal form as included in the list annexed to 
them.  The  Parent-Subsidiary  Directive  requires  that  the  parent  company  holds  at  least, 
directly or indirectly, 10% of the capital or voting rights of the subsidiary. 

At  the  same  time,  there  are  other  capital  flows  subject  to  withholding  taxes  according  to 
general international tax practice which limits the smooth functioning of the internal market. 
The Commission had presented proposals to harmonize the tax regime of interest and royalty 
payments. These two items together with dividend payments, already covered by the Parent – 
Subsidiary  Directive,  are  the  main  types  of  capital  flows  arisen  from  business  activities 
subject  to  withholding  taxes  at  source.  Only  recently,  in  2003,  the  Council  adopted  the 
Interests and Royalties Directive. However, its coverage is narrower than that foreseen by the 
Commission initial proposal. Thus, at the time of adoption of the Directive, the Commission 
made  a  protocol  declaration  that  further  measures  for  extending  the  scope  of  the  Directive 
would be pursued and the legal text included Article 8, referred above. 

The  results  of  the  different  legislative  procedures  lead  to  having  two  directives  which  have 
followed  different  policy  initiatives.  In  addition,  the  Parent-Subsidiary  Directive  was 
amended in 2003 and its scope was widened and now is broader than that of the Interest and 
Royalties  Directive:  the  latter  requires  a  minimum  direct  holding  of  25%  to  consider 
companies as associated and the list of legal form to which it applies is narrower. It may be 
noted that in 2003 the Commission adopted an amending proposal to the Interest and Royalty 
Directive (COM (2003) 841) which inter alia provided for an update of the coverage of the 
types of companies. This proposal intended also to require that the recipient of the payment 
would  only  enjoy  the  Directive  benefits  where  it  would  be  subject  to  tax  on  the  payment 
received in its Member State. This element was subject of some controversy since a Member 
State  had  introduced  a  special  regime  to  calculate  the  tax  base  and  there  were  reasonable 
doubts on the fulfilment of such requirement by the eligible companies if introduced. Thus, 
the proposal did never reach an unanimous agreement and was not adopted by the Council. 

Currently,  the  Directive  scope  is  limited  and  does  not  cover  payments  between  companies 
which in turn do enjoy the benefits of the Parent-Subsidiary Directive. If entities seek to enjoy 
the full benefits of tax harmonization they have to meet the conditions of the former Directive 
so that the amendments introduced to the latter in 2003 are ineffective for them.  

8 

Council  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, OJ L 225, 20.8.1990, p.1. 

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This  tax  situation  may  increase  the  costs  of  doing  business  by  raising  the  pre-tax  required 
return on cross-border investments and may limit cross-border activities. These are important 
factors  for  distortions  on  the  allocation  of  resources  between  the  multinational  and  the 
domestic sector. This situation reduces the level of international economic integration and the 
effectiveness of the internal market. 

2.2. 

Description, underlying causes and measurement of the problems identified 

2.2.1.  Dimension of the economic problems caused by withholding taxes 

The withholding tax rate charged  on non-resident corporations is  established  in national tax 
laws.  As  mentioned,  these  charges  are  modified  in  DTCs  prevailing  over  domestic  rules. 
These treaties provide for lower rates between the relevant countries. In the EU context, the 
Directive  already  provides  for  the  exemption  of  withholding  taxes.  Thus,  while  the 
withholding tax on outgoing interest payments fixed in domestic laws ranges from zero (e.g. 
in Austria, Finland, Luxembourg, Malta and the Netherlands) to 30% in Hungary (see annex 
1)  and  the  withholding  tax  on  outgoing  royalty  payments  ranges  from  zero  (e.g.  in 
Luxembourg,  Malta  and  the  Netherlands)  to  33.3%  in  France  (see  annex  2),  the  applicable 
rates provided for in DTCs are lower and range mainly from 0 to 15% (see annex 3 for rates 
on interest payments and annex 4 for rates on royalty payments). 

Concerning  the  companies  and  capital  flows  affected,  we  should  recall  that  those  under  the 
scope of the Directive already enjoy a tax exemption. The requirements for the tax exemption 
are to have a specific legal form and to be associated with the payer of the income. The legal 
forms covered are listed in the annex of the Directive. According to the CE survey, in 82% of 
the cases, both the parent company and the subsidiary have a legal form that falls under the 
scope  of  the  Directive;  nearly  95%  of  the  royalty  payments  and  approximately  90%  of  the 
interest payments are covered by the Directive. In fact, the main part of the economic activity 
(82% of total employment and 85% of total turnover) is concentrated in the subsidiaries that 
already fall under the Directive (see annex 15). As regards the association requirement, in the 
Amadeus  database  used  in  the  CE  study  non-associated  companies  (0  to  25%  holding) 
represent  12%  of  holding  links.  These  companies  represent,  however,  a  large  share  of 
employment and turnover: 32% and 28 % respectively9. It should also be added that most of 
the  interest  payments  between  non-financial  institutions  that  fall  outside  the  scope  of  the 
present  Directive  will  take  place  between  associated  companies  since  direct  loans  between 
non-associated  companies  are  relatively  rare.  The  CE  study  expects  80-90%  of  these 
payments  to  take  place  between  associated  companies.  The  opposite  is  the  case  for  royalty 
payments. OECD10 finds that the proportion of EU companies’ patent portfolio that is being 
licensed to non-associated companies lies in the range 80-100% and are outside the scope of 
the Directive.  

2.2.2.  Reference to the economic distortions caused by withholding taxes 

a. 

Economic distortions due to differences in withholding taxes 

9 

10 

These shares are lower, however, if weighted by intangible assets (28% and 13% respectively) and also 
compared with the share weighted by financial assets (32% and 15% respectively) implying that cross-
border  payments  between  the  companies  mainly  take  the  shape  of  interest  payments.  See  annexes  13 
and 19. 
OECD:  Who  Licenses  Out  Patents  and  Why?  Lessons  from  a  Business  Survey-  STI  Working  Paper 
2009/5- Statistical Analysis of Science, Technology and Industry. 

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In the first place, each DTC signed on a bilateral basis fixes its own withholding tax rate. In 
consequence, each bilateral relation between the Member Stats may be subject to a different 
withholding tax rate, that fixed by each national law or that provided for in each DTC. This 
tax situation may distort patterns of cross-border investment flows in two ways. To the extent 
that investment is attracted to certain locations by the promise of low tax charges rather than 
low production costs, production will be less efficient as a result. Firms may undertake sub-
optimally low levels of real investment in countries with high effective withholding taxes and 
sub-optimally high levels of real investment in countries with low effective withholding taxes. 
The  result  is  a  misallocation  of  real  investment  that  reduces  the  average  productivity  of 
capital.  Although  the  low-tax  country  gains  from  the  increased  investment,  resources  are 
wasted since companies do not operate as efficiently as they could otherwise. Real resources 
employed  with  the  sole  aim  of  reducing  tax  liabilities  generate  a  welfare  loss  equal  to  the 
productivity of these resources in the best alternative use. Second, for a given location of real 
investment  firms  may  incur  in  costs  of  implementing  avoidance  techniques  that  reduces 
effective  taxation  on  cross-border  capital  flows:  instead  of  making  a  direct  payment  to  a 
Member  State  that  is  subject  to  withholding  taxes,  company  groups  may  establish  an 
intermediate  conduit  entity  in  a  different  Member  State  so  that  the  payment  received  by  it 
enjoys  a  tax  exemption  (tax  planning).  On  the  government  side,  opportunities  for  tax 
avoidance result in a loss of tax revenues. On the firm side, tax planning activities result in 
suboptimal choices by EU firms, and the administrative and compliance costs of tax planning 
largely represent unproductive use of scarce resources. 

b. 

Economic distortions deriving from the conditions to enjoy tax relief provided for in 
DTC and in the Directive 

DTCs  and  the  Directive  condition  the  relief  from  withholding  taxes  on  ownership  shares, 
holding periods and organisational form of the entities involved. These provisions introduce 
an incentive for firms to distort holding structures and organisational forms in order to qualify 
for the relief. Requirements related to holding structure impose economic costs on firms in the 
event of restructurings and mergers where flexibility may be severely limited. Requirements 
related to organisational form may induce firms to make use of types of legal entities that are 
suboptimal compared to the first choice of the company. 

In particular, the European Company (SE) and the European Cooperative Society (SCE) are 
legal  forms  which  are  not  in  the  Directive  scope.  These  legal  types  were  created  after  the 
adoption of the Directive by the ECOFIN Council and were not included in its text. The aims 
pursued with these two European legal types - creation and management of companies with a 
European  dimension,  free  from  the  obstacles  arising  from  the  disparity  and  the  limited 
territorial application of national law – will not be fully achieved since they will have to face 
the economic distortions derived from withholding taxes11. 

A  number  of  studies  show  how  the  tax  system  affects  the  organisational  choice  of  firms. 
Some  of  these  papers  focus  on  the  choice  between  corporations  and  non-corporations. 
Effective taxation of capital invested in corporations is determined by the statutory tax at the 
company level and the withholding tax at the investor level, whereas the effective taxation of 
capital  invested  in  non-corporations  is  given  by  the  income  tax.  To  the  extent  that  the 

11 

Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company – see 
paragraph  7  of  the  explanatory  memorandum  and  Council  Regulation  (EC)  No  1435/2003  of  22  July 
2003  on  the  Statute  for  a  European  Cooperative  Society  –  see  paragraph  6  of  the  explanatory 
memorandum. 

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effective taxation differs, there is an incentive to shift income between the two organisational 
forms.  De  Mooij  and  Nicodème12  find  that  an  increase  in  the  corporate  tax  of  1  percentage 
point  reduces  the  corporate  tax  base  by  1%,  reflecting  income  shifting  from  the  corporate 
sector  to  the  non-corporate  sector.  In  sum,  there  is  robust  evidence  that  the  tax  system, 
including  withholding  taxes,  affects  the  organisational  choice  of  firms.  Thus,  payments  not 
covered by the Directive and suffering from withholding taxes will induce business agents to 
opt for organization forms which are eligible for the tax relief. 

Economic distortions caused by different taxation of dividends, interest and royalties; 

c. 
the different scope of the Directive and the Parent-Subsidiary Directive.  

Withholding  taxes  might  also  distort  the  capital  structure  and  allocation  of  intangibles.  The 
applicable  withholding  taxes  rates  and  the  specific  method  to  provide  relief  for  double 
taxation  differ  across  types  of  capital  flows  (dividends,  interest  and  royalties).  In  addition, 
they are often subject to different tax regimes; dividends are not deductible from the corporate 
tax base at the level of the paying entity and are taxable at a low rate or are exempt at the level 
of  the  receiving  entity;  interest  payments  are  deductible  from  the  corporate  tax  base  at  the 
level  of  the  paying  entity  and  fully  taxable  at  the  level  of  the  receiving  entity;  royalty 
payments  are  generally  treated  like  interest  payments  for  tax  purposes  although  some 
jurisdictions apply a favourable tax rate to royalty income. In addition, the Directive and the 
Parent-Subsidiary Directive establish different conditions in order to enjoy the benefits of the 
withholding  tax  exemptions  charged  at  source.  Since  the  three  types  of  capital  are  to  some 
extent  substitutes,  tax  differences  might  cause  distortions  of  capital  structure.  Collins  and 
Shackelford13  find  that  dividend,  royalty,  and  sometimes  interest  cross-border  payments  are 
structured to mitigate net tax transfer costs (i.e., payer deductions and withholding taxes, and 
payee income taxes and credits). Thus, taxes affect the location of the supplier and the terms 
of  the  contracts  for  the  provision  of  equity  and  intangible  capital  within  the  worldwide 
organisation.  

If  the  effective  taxation  of  intra-firm  dividend  payments  is  higher  than  effective  taxation  of 
intra-firm  interest  payments,  firms  may  employ  sub-optimally  high  levels  of  debt.  Desai, 
Foley and Hines14 find that a 10% increase in tax rates is associated with 2.8% higher debt-
asset ratios in their sample of US multinationals. External borrowing is more sensitive (1.9%) 
than  borrowing  from  parent  companies  (0.35%).  Also,  Ramb  and  Weichenreider15  find  that 
the corporate tax rate in the home counties of the parent company has no significant impact on 
the  financial  structure  of  a  German  subsidiary.  However,  if  intra-firm  royalty  payments  are 
taxed more lightly than intra-firm dividend payments, firms may rely too much on intra-firm 
licensing  of  intellectual  property.  The  economic  costs  associated  with  a  distorted  capital 
structure may be considerable. For instance, the role of debt as a corporate governance tool is 
often  emphasised  in  the  corporate  finance  literature,  which  suggests  that  tax  motivated 
departures  from  the  optimal  capital  structure  may  have  adverse  consequences  in  terms  of 

12 

13 

14 

15 

De  Mooij,  R.  A.  and  Nicodème,  G.  (2008),  “Corporate  Tax  Policy  and  Incorporation  in  the  EU”, 
International Tax Public Finance 15, 478-498. 
Collins,  J.  H.,  and  Shackelford,  D.  A.  (1998),  “Global  Organizations  and  Taxes:  An  Analysis  of  the 
Dividend,  Interest,  Royalty  and  Management  Fee  Payments  between  US  Multinationals’  Foreign 
Affiliates”, Journal of Accounting and Economics 24, 151-173. 
Desai, M. A., Foley, C. F. and Hines Jr., J. R. (2004), “A Multinational Perspective on Capital Structure 
Choice and Internal Capital Markets”, The Journal of Finance 6. 
Ramb, F. and Weichenrieder, A. J. (2005), Taxes and the Financial Structure of German Inward FDI, 
Kiel Institute for World Economic. 

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suboptimal  governance16.  Dischinger  and  Riedel17  find  that  an  increase  in  the  average  tax 
differential to other European group affiliates by 10 percentage points reduces a subsidiary’s 
intangible property investment by around 11% on average. 

In addition, the Directive scope is limited and does not cover payments between companies 
which in turn do enjoy the benefits of the Parent-Subsidiary Directive. If entities seek to enjoy 
the full benefits of tax harmonization they have to meet the conditions of the former Directive 
so that the amendments introduced to the latter in 2003 are ineffective for them. The Directive 
functioning,  as  already  evaluated  through  the  Commission's  report,  reveals  the  need  to 
improve its coverage in order to better achieve its objectives. In particular, the limited scope 
of the Interest and Royalties Directive as compared to that of the Parent-Subsidiary Directive 
may  affect  and  distort  business  decisions,  guided  by  the  objective  of  avoiding  withholding 
taxes at source: it may distort the intra-firm capital structure and the allocation of intangibles. 

2.2.3.  Compliance costs linked to withholding taxes 

International  taxation  is  usually  made  effective  through  withholding  taxes  charged  on  the 
crossborder payments according to the tax rate provided for in domestic laws. If the taxpayer 
is eligible for a tax relief provided for in a double tax treaty, the resulting reimbursement has 
to be made effective through a tax claim for refund. In this procedure, the taxpayer rights have 
to be credited through documentation – tax residence certificates – and the payment has to be 
identified. The tax administration has to control the claim and after verifying it, it will order 
the refund. The final tax charged at source may be credited against the corporate tax liability 
due in the Member State where the taxpayer is considered as tax resident. There is a period 
elapsing since the tax is withheld at source and the annual tax return in the State of residence 
is  only  submitted  after  the  closing  of  the  tax  period  concerned.  At  the  same  time,  the  relief 
may require to submit documents crediting the tax paid and the right for the relief. 

Thus,  withholding  taxes  cause  compliance  costs  to  firms,  including  both  administrative 
burdens  and  liquidity  costs.  Administrative  burdens  are  the  part  of  administrative  costs  that 
businesses sustain simply because it is a regulatory requirement. Some of the most important 
administrative  cost  drivers  are  the  requirement  to  use  paper  forms  and  by  the  different 
document  formats,  different  documents  to  be  attached,  different  confirmations,  certificates, 
etc.  Since  the  costs  of  reclaim  do  not  depend  on  the  size  of  the  tax  claim,  SMEs  are 
particularly disadvantaged. 

To quantify the size of the administrative costs the CE survey draws on the findings of DG 
MARKT in the European Commission18, where the amount of occurring costs related to the 
reclaim  procedures  account  on  average  for  2%  of  the  refundable  amount.  This  means  that 
administrative costs of withholding taxes on royalty payments amounts to €26 million (2% of 
€1.3 billion) if full tax relief is provided. Those associated with interest payments amount to 
approximately €16 million (2% of €0.8 billion)19. In total, it is expected that the cost to EU 

16 

17 

18 
19 

Jensen,  M.  (1986),  “Agency  Costs  of  Free  Cash  Flow,  Corporate  Finance  and  Takeovers”,  American 
Economic Review 76, 323–329. 
Dischinger, M. and Riedel, N. (2008), “Corporate Taxes and the Location of Intangible Assets Within 
Multinational Firms”, Munich Discussion Paper 15. 
DG Internal Market and Services: Simplified Withholding Tax Relief Procedures, Brussels 2010. 
Source: Copenhagen Economics: Taxation of interest and royalties – impact assessment of amendments 
to the present Directive, October 2010, on the basis of Eurostat, International Transactions in Royalties 
and  Licence  Fees  and  Eurostat,  International  Transactions  in  Interest  and  Dividend  payments.  For 

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firms  of  reclaiming  withholding  tax  paid  on  interest  and  royalty  payments  is  around  €42 
million.  

Concerning liquidity costs, the issue arises since firms are required to withhold taxes and are 
subsequently  reimbursed  if  the  tax  administration  deems  that  they  qualify  for  the  DTC 
exemption  or  reduction.  Also,  when  withholding  tax  rates  are  matched  by  tax  credits  in  the 
home country, it has to be taken into account that the withholding is levied on the payment 
while its reduction in the residence State is only possible later during the period to submit the 
tax return. It could also be the case that no corporate taxes are due in the home country, for 
instance  because  the  firm  is  running  losses;  the  tax  credit  yields  no  immediate  tax  saving. 
Losses may typically be carried forward for tax purposes, but even if the tax credit is used in 
subsequent tax years, this represents a liquidity cost to the firm. 

Regarding the timing of the tax refund procedure, the CE survey refers to a time lag of at least 
six  months  (see  annex  6)20.  To  estimate  the  opportunity  costs  of  claiming  withholding  tax 
relief  on  dividends,  interest  and  other  securities  income,  the  DG  MARKT  study  applies  the 
interest paid for taking out a loan. In their calculations, an investor who receives the tax relief 
without  delay  could  invest  their  relief  with  at  present  at  least  a  4%  return  per  year. 
Consequently, the €1.3 billion paid in withholding tax on royalty payments carry a cost for the 
investors  due  to  the  delay  of  approximately  €52  million  per  year  (4%  of  €1.3  billion).For 
interest payments, we find that the liquidity cost amounts to €32 million (4% of 0.8 billions). 

2.2.4. 

International Double taxation 

In addition to the withholding tax charged by the source State, the recipient's residence State 
charges corporate tax on the income derived from the cross-border payment. In order to avoid 
such double taxation, the residence State either exempts this international income or allows a 
tax  credit  to  reduce  its  tax  on  the  said  income,  as  provided  for  in  its  national  law  or  in  the 
relevant  DTC.  This  tax  credit  is  normally  limited  to  the  residence  corporate  tax  on  the 
corresponding  profit;  as  well,  it  is  calculated  on  the  basis  of  the  net  profit,  while  the 
withholding  tax  is  charger  on  the  gross  payment.  Thus,  when  withholding  taxes  are  high 
compared to statutory taxes in the residence State or the royalty or interest payments are large 
compared to profits, there is a risk of a higher taxation in the case of an international payment 
than that borne by an equivalent domestic payment (excessive taxation).  

According  to  the  CE  survey,  the  effective  withholding  taxes  on  interest  payments  received 
from other EU countries lie in the range of 4 to 9%; the average withholding tax on interest 
payments  is  6.2%  in  all  EU  countries.  The  withholding  taxes  on  royalty  payments  range 
between 3 and 8%. The average withholding tax on royalty payments in EU countries is 5.5%. 
These numbers tell us that the withholding tax charged on royalty payments is slightly lower 
than  the  withholding  tax  paid  upon  cross-border  interest  payments.  In  order  to  gain  an 
understanding  of  how  important  the  excessive  taxation  problem  is  we  also  need  to  look  at 
statutory  tax  rates  in  EU  Member  States.  We  find  that  the  EU27  corporate  tax  rates  range 
between 35% and 10%. The average (unweighted) corporate tax rate is 23.5%. Also, we see 

20 

further details on the amount of the withholding taxes on interests and royalties, see below section 5.1, 
option 2 of this impact assessment. 
The  European  Commission's  general  Impact  Assessment  study  on  Clearing  and  Settlement  of  2006 
concluded that in the EU, an investor pays on average between twice and six times more for a cross-
border  equity  transaction  compared  to  a  domestic  one.  The  report  can  be  downloaded  from 
http://ec.europa.eu/internal_market/financial-markets/docs/clearing/draft/draft_en.pdf. 

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12 

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that the old EU Member States typically have higher corporate taxes  than the new Member 
States (see annexes 1 to 5). 

The conclusion of the CE survey is that it will rarely be the case that the corporate tax rate is 
lower  than  the  withholding  tax.  Even  for  the  countries  with  the  lowest  corporate  tax  rates 
(Slovakia,  Romania,  Latvia,  Ireland,  Bulgaria  and  Cyprus)  it  is  the  case  that  the  bilaterally 
negotiated withholding taxes on both interests and royalties are much lower than the corporate 
tax rate. Table 1 shows that those Member States in group A have higher corporate tax rates 
and  low  withholding  rates  in  the  DTCs  so  that  the  risk  of  excessive  taxation  is  low.  The 
excessive  taxation  problem  is  most  pronounced  in  the  new  EU  Member  States  in  group  D, 
where  statutory  tax  rates  are  relatively  low  but  where  withholding  taxes  paid  on  royalty 
income from other EU countries are relatively high (the shaded area). 

Table 1. Risk of excessive taxation of royalty payments within the EU 

Low  withholding 
royalty 
source State 

income 

tax  on 
from  DTC 

High  withholding 
royalty 
source State 

income 

tax  on 
from  DTC 

High  statutory  tax  in  residence 
State 

Low  statutory  tax  in  residence 
State 

Group A: 
Austria,  Luxembourg,  Denmark, 
Belgium,  Finland,  Netherlands, 
Sweden, United Kingdom, France 
Germany,  Greece,  Spain  and 
Italy, 

Group B: 
Portugal and Malta 

Group C: 

Bulgaria,  Cyprus, 
Hungary 

Ireland 

and 

Group D: 
Estonia, Romania, Latvia,  
Lithuania,  Poland,  Slovenia,  Czech 
Republic and Slovakia 

Source:  Copenhagen  Economics:  Taxation  of  interest  and  royalties  –  impact  assessment  of 
amendments to the present Directive, October 2010. 

According  to  the  CE  survey,  the  impression  of  relatively  modest  excessive  taxation  of 
royalties is confirmed when we consider the economic variables of country size and flows of 
foreign direct investment (FDI) and royalty payments (see table 2). In fact, group A has the 
lowest potential excessive taxation problem and accounts for 95% of the total intra-EU FDI 
stock, more than 60% of the total EU income on royalties and licences fees, and 97% of the 
total intangible fixed assets recorded in the Amadeus data base. By contrast, the group of new 
Member  States  in  group  D,  where  potential  excessive  taxation  problems  are  the  largest, 
account for just a small fraction of the economic variables that reflect cross-border and intra-
company royalty payments. This finding suggests that companies in the new Member States 
are more prone to excessive taxation whereas their governments earn net revenues from high 
withholding taxes. 

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Table 2. Indications of size of excessive taxation of royalties across groups of countries 

Group A 

Group B 

Group C 

Group D 

Share of EU intra 
FDI stock 

Share 
royalty income 

of  EU 

Share 
patent 
intangible assets 

of  EU 
firm's 

95.1 

61.4 

97.2 

1.0 

0.5 

1.1 

3.1 

34.6 

1.4 

0.8 

3.4 

0.2 

Source: Data on the FDI stock is from Eurostat, European Union Direct Investment; data on 
royalty  income  is  from  Eurostat,  International  Trade  in  Services.  Data  on  intangibles  fixed 
assets is from Amadeus. 

Again,  we  find  that  it  is  mainly  companies  in  the  new  EU  Member  States  that  face  high 
withholding taxes on interest income from other EU countries, cf. Table 3. 

Table 3. Risk of excessive taxation of interest payments within the EU 

Low  withholding 
royalty 
source State 

income 

tax  on 
from  DTC 

High  withholding 
royalty 
source State 

income 

tax  on 
from  DTC 

High  statutory  tax  in  residence 
State 

Group A: 
Sweden,  Spain,  Austria,  Finland, 
United  Kingdom,  Germany, 
Netherlands and France 

Low statutory tax in residence State 

Group C: 

Bulgaria,  Slovakia,  Hungary,  Czech 
Republic and Ireland 

Group B: 
Belgium,  Portugal,  Italy,  Malta, 
Denmark, 
and 
Luxembourg 

Greece 

Group D: 
Romania, Latvia,  
Lithuania,  Estonia,  Poland,  Cyprus 
and Slovenia 

Source:  Copenhagen  Economics:  Taxation  of  interest  and  royalties  –  impact  assessment  of 
amendments to the present Directive, October 2010. 

For interest payments it also seems to be the case that the excessive taxation problem is less 
serious in cases where cross-border payments are expected to be the largest, cf. Table 4. Here, 
we  see  that  the  countries  in  Group  A  account  for  70-80%  of  the  assets  that  generate  cross-
border interest payments. 

Table 4. Indications of size of double taxation of interests across groups of countries 

Group A 

Group B 

Group C 

Group D 

Share  of  EU  intra 
FDI stock 

Share 
interest income 

of 

EU 

Share of EU patent 
financial 
firm's 
revenue 

81.5 

73.2 

82.3 

EN 

14.6 

21.0 

15.3 

14 

3.2 

4.1 

2.0 

0.7 

1.8 

0.4 

   EN 

 
 
 
 
 
Source: Data on the FDI stock is from Eurostat, European Union Direct Investment; data on 
interest income is from Eurostat, International Trade in Services. Data on financial revenue is 
from Amadeus. 

2.2.5. 

Specific  legal  requirements  in  the  case  of  payments  made  through  permanent 
establishments 

The  Directive  covers  the  cases  where  the  companies  make  the  payments  through  their 
permanent establishments. These are cases where the entity does not create a subsidiary to run 
its activities in another country but decides to do it through a fixed place of business without 
own  legal  personality,  i.e.  a  branch.  In  the  case  of  payments  made  through  a  permanent 
establishment,  the  Directive  requires  that  these  have  to  be  a  tax  deductible  expense  for  this 
taxpayer in the Member State where it is situated. The "tax-deductibility" requirement ensures 
that  the  benefits  of  the  Directive  accrue  only  when  the  payments  are  attributable  to  the 
permanent  establishment.  However,  on  its  wording  the  Directive  would  not  apply  to  cases 
where deduction is denied on other grounds, such as the failure to comply with all the formal 
requirements.  This  could  result  in  an  unjustifiable  difference  of  treatment  between 
subsidiaries and permanent establishments. 

2.2.6.  Risk of tax avoidance 

The  Directive  exempts  from  withholding  taxes  in  the  host  country  interest  and  royalty 
payments  but  does  not  guarantee  that  its  recipient  is  actually  subject  to  tax  on  the 
corresponding income in the home country. This taxpayer may be exempted from corporate 
tax  on  these  payments.  There  is  a  risk  of  non-taxation  and  abusive  practices  cannot  be 
excluded.  This  is  a  result  beyond  the  purposes  of  the  Directive,  whose  recitals  mention 
expressly that such payments should be subject to tax at least once in a Member State.  

Thus,  there  could  be  an  important  loophole  in  the  provisions  of  the  Directive  allowing  for 
circumvention of taxation of interest and royalty payments. This could lead to a suboptimal 
allocation of capital and intangibles. We should recall that resources employed with the sole 
aim  of  reducing  tax  liabilities  generate  a  welfare  loss  equal  to  the  productivity  of  these 
resources in the best alternative use. 

2.3. 

How would the problem evolve, all things being equal? 

The  compliance  costs  linked  to  withholding  charges  and  the  risk  of  double  or  excessive 
taxation  result  mainly  in  a  tax  discriminatory  treatment  between  cross-border  activities  and 
purely domestic ones. Their direct effect is the increase of the cross-border investment costs, 
requiring higher yield thresholds in order to decide entering into international activities. 

There  are  important  disparities  among  the  tax  burden  borne  in  the  different  international 
investments and according to the type of capital flows. As well, the lack of tax coordination 
would  ease  tax  evasion  since  firms  would  exploit  tax  differentials  with  the  aim  of  reducing 
their  tax  charges.  Maintaining  the  current  scenario  will  lead  to  continuous  distortions  on 
business behaviour: firms will respond to the risk of excessive taxation by taking advantage 
artificially  of  differences  in  effective  tax  rates  in  EU  Member  States  through  tax  planning; 
they may make suboptimal choices regarding their cross-border investments, concerning the 
intra-firm capital structure or regarding their organizational form. 

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In  conclusion,  maintaining  the  current  costs  associated  with  the  assessment  of  withholding 
taxes  will  have  as  a  consequence  less  cross-border  capital  flows,  reducing  capital  and 
technology  transfers.  The  process  of  cross-border  allocation  of  resources  will  be  altered 
negatively. 

The  CE  survey  concludes  that  the  Directive  adoption  made  a  significant  contribution  to 
eliminating  withholding  taxes  on  interests  and  royalties  payments  between  associated 
companies. This study also mentions that there has been a trend in Member States to reduce 
these levies at source. In fact, between 2003 and 2009 taxation of royalties has been put on a 
more equal footing with interest payments in most EU countries. Also, an increasing number 
of DTCs have been signed and have reduced or eliminated withholding taxes between country 
pairs.  Thus,  there  has  been  a  convergence  of  national  tax  policies  after  the  adoption  and 
implementation of the Directive. This is a positive trend since the costs and distortions linked 
to withholding  taxes have been  reduced. However, there is  no guarantee that  this  trend  will 
continue in the future without further EU action in this tax policy area. Efforts should be made 
to reinforce tax policies that contribute to the smooth functioning of the internal market. 

2.4.  Who is affected? 

The  problems  addressed  by  this  initiative  affect  any  business  entering  into  cross-border 
transactions within the EU and making or receiving interest or royalty payments. 

Interest and royalty payments are neither exclusive to any specific sector nor any geographical 
area.  The  size  of  the  company  is  not  relevant  either.  Concerning  SMEs,  there  no  specific 
elements  in  the  problems  detected  that  could  affect  them  in  a  specific  manner  requiring 
special action. However, it is true that compliance costs typically constitute a larger share of 
their total costs. 

Interest  covers  essentially  payments  from  all  sorts  of  credit,  loans  and  similar  financial 
transactions. The problems here addressed affect mainly the financial sector. Financial groups 
enter  daily  in  internal  lending  and  borrowing.  Any  solution  to  the  problems  identified  will 
benefit more frequently their activities. Still, the capital structure of corporate groups in any 
sector  of  activity  is  generally  made  up  of  equity  and  debt.  This  means  that  all  sectors  of 
activity are affected. 

Concerning royalties, these should cover payments in consideration for the use of intangibles, 
including  industrial  property,  know-how  and  other  information,  processes  and  formulas 
relevant for business activities, as well as the consideration for the use of intellectual rights. 
Thus,  sectors  intensive  in  the  use  of  technology  will  also  benefit  more  often  from  this 
initiative as they are facing the tax burdens more frequently (see annex 7 for further details on 
the  sectors  affected).  The  same  conclusion  can  be  extended  to  sectors  with  intense  use  of 
intellectual property rights. 

Member States are also affected. They receive income from withholding charges. At the same 
time, they assume the cost of the tax credit applied by those companies bearing withholding 
levies at source. 

2.5. 

Treaty base and the subsidiarity principle. 

The Interest and Royalties Directive, adopted by the Council in 2003, was based on Article 94 
of the EU Treaty, currently Article 115 of the TFUE; thus, it refers to cross-border activities 

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of  multinational  groups  hampered  by  tax  obstacles  affecting  the  smooth  functioning  of  the 
internal market. 

EU action must respect the subsidiarity principle. This involves assessing two aspects. Firstly, 
it  is  important  to  be  sure  that  the  objectives  of  the  proposed  action  could  not  be  achieved 
sufficiently  by  Member  States  in  the  framework  of  their  national  constitutional  system 
(necessity  test).  Withholding  rates  are  fixed  by  each  Member  State  in  its  national  law 
according to its corresponding tax policy options. These charges may be reduced or excluded 
according to bilateral DTCs. However, each particular DTC fixes it own rate as a result of the 
trade-off  between  the  two  States  agreeing  it.  The  result  is  that  withholding  taxes  vary 
according  to  each  bilateral  relation  between  the  Member  States.  These  cannot  even  succeed 
on  having  a  unique  tax  rate  for  all  their  bilateral  relations.  Less,  it  does  not  seem  that 
exemption could be achievable so that all the problems described – economic distortions due 
the existing different rates, distortions caused by tax relief requirements, those deriving from 
the different tax regime applicable across the capital flows, compliance costs and the cases of 
double taxation – will be hampering crossborder activities. The result is that there will not be 
a spontaneous coordinated action of the Member States. 

The second aspect to consider is whether and how the objectives could be better achieved by 
action  on  the  part  of  the  EU  (test  of  European  value-added).  The  rationale  for  a  European 
action  stems  from  the  cross-border  nature  of  the  problem  and  the  impossibility  for  each 
individual Member State to establish a unique tax policy for itself and across the EU. Clearly, 
action  at  EU  level  will  guarantee  harmonized  and  coordinated  tax  policies  in  this  particular 
taxation area. Member States would be bound by the exemption of withholding taxes to the 
same extent. This exemption will also diminish tax compliance costs faced by firms. This will 
reduce the costs of doing cross-border business and assimilate taxation of foreign income to 
that  imposed  on  domestic  profits  with  gains  in  productivity  in  EU  Member  States.  It  is 
therefore  in  the  interest  of  all  EU  Member  States  to  remove  these  obstacles  to  the  free 
movement of capital across EU borders. 

Thus, the subsidiarity principle is respected, since the policy objectives cannot be sufficiently 
achieved by actions of the Member States, and can be better achieved at EU level. 

3. 

OBJECTIVES 

3.1.  What are the general policy objectives? 

The  proposal  aims  at  strengthening  the  objectives  pursued  by  the  Interest  and  Royalties 
Directive,  i.e.  the  elimination  of  the  tax  obstacles  to  the  smooth  functioning  of  the  internal 
market concerning cross-border interest and royalty payments, as foreseen in Article 115 of 
the  TFEU.  In  particular,  the  goal  is  that  the  tax  treatment  of  these  payments  between 
companies of different Member States is not less favourable than that applicable to the same 
transactions carried out between companies of the same Member State. These aims should be 
accomplished with the least costs possible in terms of distortions and efficiency in the raising 
of taxes by the Member States. 

In  sum,  the  policy  objectives  are  related  to  the  identified  problems  as  described  above,  but 
weighted according to their importance. For this purpose, we should take into account that the 
reduction of distortions due to differences in withholding rates will not solve those deriving 
from differences in corporate tax rates charged by the State of residence so that this should 

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not be a primary objective. On the other hand, introducing less restrictive requirements for the 
withholding  tax  exemption  and  making  them  similar  to  those  of  the  Parent-Subsidiary 
Directive  would  be  efficient  to  reduce  the  distortions  due  to  the  difference  tax  regime 
applicable on different crossborder payments in each EU bilateral relation. 

This  initiative  aims  also  at  recasting  the  three  existing  Directives  in  this  area  of  tax  law. 
Gathering  existing  legislation  in  one  single  act  will  simplify,  clarify  and  facilitate  the 
application of harmonised law by businesses and professionals dealing with these matters. 

3.2.  What are the more specific/operational objectives? 

The more specific objective of the proposal is the extension of the withholding tax exemption 
provided  for  in  the  Directive  to  a  wider  range  of  cases  in  order  to  reduce  the  economic 
distortions derived from the lack of harmonization, the compliance costs faced by companies 
and the risk of excessive or double taxation.  

In particular, it is important to eliminate or reduce the distortions derived from the different 
taxation of the three types of capital flows, dividends, interests and royalties., which should 
also contribute to reduce the effect of the other distortions: being the tax requirements for the 
Directives  benefits  the  same  will  diminish  their  importance  as  tax  driven  factor;  as  well,  it 
will increase the number of cases enjoying tax exemption so that distortions due to different 
rates  will  also  be  reduced.  These  should  be  achieved  by  aligning  the  scope  of  the  Directive 
with that of the Parent-Subsidiary Directive.  

The Directive should also be amended with a view to close loopholes that may be abused for 
tax  avoidance  purposes.  Some  types  of  companies  may  engage  in  tax  planning  strategies  to 
enjoy  non-taxation  of  cross-border  payments.  The  legislation  should  guarantee  taxation  at 
least once in a Member State.  

3.3. 

Are these objectives consistent with other EU policies? 

The objectives pursued by this proposal will have a positive impact in other policy areas of 
the  EU.  The  Communication  from  the  Commission,  "Europe  2020  -  A  strategy  for  smart, 
sustainable  and  inclusive  growth"  COM  (2010)  2020,  includes  within  its  priorities:  smart 
growth, developing an economy based on knowledge and innovation; sustainable growth and 
promoting a more resource efficient, greener and more competitive economy; concerning the 
financial  system,  this  document  refers  to  the  easy  availability  of  credit.  In  this  context,  this 
document  refers  specifically  to  the  contribution  of  tax  systems  to  achieve  its  priorities.  In 
particular, it refers to the reduction of administrative burdens and removing tax obstacles. 

Thus, eliminating tax obstacles to cross-border interest and royalty payments should improve 
economic performance in the internal market. These actions will address and improve taxation 
associated to financing, technology, industrial and business information as well as intellectual 
rights.  This  should  promote  the  corresponding  activities  and  reinforce  other  EU  specific 
policies in these areas. 

4. 

POLICY OPTIONS 

When  assessing  tax  policy  options,  it  should  be  kept  in  mind  the  aims  of  the  Directive:  the 
abolition of taxation at source on interest and royalty payments as the most appropriate means 
of ensuring the equality of tax treatment between national and cross-border transactions. This 

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review process finds its origin in its Article 8, where it refers to the Commission's report of 
the Directive on its operation with a view to extending its coverage. 

The proposed amendments should be proportionate. On the bases of the problems detected, it 
should  offer  solutions  capable  to  meet  the  objectives  fixed.  The  conclusions  from  previous 
sections of this impact assessment report is that the main cause of compliance costs, economic 
distortions and the risk of excessive or double taxation is the existence of withholding taxes 
charge at source; as well, the disparities on the taxation of the different types of cross-border 
capital  flows  alter  business  behaviour.  Thus,  amendments  to  the  Directive  should  try  to 
achieve  tax  neutrality  in  a  larger  number  of  cases  so  that  economic  operators  allocate 
resources more efficiently. 

Below we will refer to different policy options addressing the problems found in this area of 
taxation.  Options  1,  2  and  3  are  exclusive  alternatives.  Options  4  and  5  can  be  combined 
either with option 2 or with option 3. 

4.1.  What  are  the  options  for  meeting  the  objectives  and  tackling  the  problems 

described? Description of the different options 

Option 1 – No action 

The  first  option  is  to  maintain  the  current  state  of  play  and  disregard  any  possible 
amendments. The legal forms out of the scope of the current Directive and payments between 
non-associated companies as defined in its text will have to face the problems described. 

Option  2  -  Extending  the  scope  of  the  Directive  to  transactions  between  unrelated 
undertakings 

It could be considered extending the benefits of the Directive to interest and royalty payments 
between  unrelated  undertakings,  i.e.  non-associated  companies.  In  fact,  international  double 
or  excessive  taxation,  burdensome  administrative  formalities  and  cash-flow  problems,  as 
cross-border obstacles are also present in the case of payments between unrelated parties. The 
result would be the full elimination of withholding taxes on all interest and royalty payments 
between companies covered by the Directive. 

Option 3 – Aligning the requirements of the Interests and Royalties Directive to those of the 
Parent- Subsidiary Directive 

One of the main problems detected is the distortions in business behaviour deriving from the 
different scope of the two directives ruling the taxation of cross-border capital flows. The tax 
regime  applicable  to  dividends  included  in  the  Parent-Subsidiary  Directive  has  a  broader 
scope than that applicable to interest and royalty payments.  

Firstly, the Directives are only applicable to companies which have a legal type listed in their 
corresponding  annexes.  The  list  of  entities  of  both  Directives  is  made  by  reference  to  the 
national  company  laws.  The  one  annexed  to  the  Parent-Subsidiary  Directive  is  broader  and 
includes  in  its  scope  the  SE  and  the  SCE.  There  is  no  obvious  justification  for  these 
differences. The Parent-Subsidiary Directive applies to profit distributions and shares the aim 
of  the  Interest  and  Royalties  Directive,  the  elimination  of  withholding  taxes  and  the  risk  of 
double taxation in the case of cross-border capital flows. The amendment to the Interest and 
Royalties Directive would consist of the extension of its list with a view to make it identical to 
that of the Parent-Subsidiary Directive. 

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The  second  issue  to  address  concerns  the  requirements  to  consider  that  companies  are 
associated. In the Interests and Royalties Directive association is deemed to exist when one of 
the companies has a direct minimum holding of 25% in the capital of the other company, or a 
third company has a direct minimum holding of 25% in the capital of both the payer and the 
recipient  companies.  However,  the  Parent-Subsidiary  Directive  reduces  the  threshold  for 
‘holdings’ to apply its benefits to 10% of capital or voting rights and indirect participations 
can be computed. Again, there is no obvious justification to maintain these differences. The 
amendment  to  the  Interest  and  Royalties  Directive  would  consist  of  the  reduction  of  the 
minimum shareholding requirements from 25% to 10% and including indirect shareholdings 
to calculate if the minimum participation exists. 

This tax policy option extends the scope of the withholding exemption and is useful to tackle 
the distortions derived from different taxation of cross-border capital flows. The cross-border 
capital flows often affected by these problems take place between associated companies and 
will therefore be closely related to FDI. EU countries’ outward FDI has increased enormously 
during the last few decades, and the stock of total outward FDI by EU companies constitute 
60%  of  GDP  out  of  which  the  stock  of  intra-EU  FDI  is  40%21.  These  figures  show  the 
importance of such type of international activities. Limiting the amendments to transactions 
between associated companies would be proportionate to the goals pursued.  

Option  4  –  Clarifying  the  tax  deductibility  requirement  applicable  to  payments  made  by 
permanent establishments 

The  amendment  would  consist  of  rewording  the  Directive  text  in  order  to  make  it  more 
precise by replacing "tax-deductible expense for the permanent establishment" with "expense 
attributable  to  the  permanent  establishment".  This  modification  is  important  for  the  sake  of 
legal  certainty.  This  text  would  contribute  to  avoid  tax  disputes  over  these  legal  references 
and will achieve better the aim pursued. On the other hand, it will not extend the scope of the 
withholding  tax  exemption.  Both  tax  authorities  and  taxpayers  would  benefit  from  a  more 
clear text and the reduction of juridical disputes. 

Option 5 –Requiring for the exemption of withholding tax that the recipient of the payment 
is subject to tax on the income derived from it 

At the time of the adoption of the Interest and Royalties Directive, the statements for entry in 
the  minutes  of  the  Council  mentioned  that  "the  Council  and  the  Commission  agree  that  the 
benefits of the Interest and Royalty Directive should not accrue to companies that are exempt 
from  tax  on  income  covered  by  this  Directive".  The  Council  invited  the  Commission  to 
propose  any  necessary  amendments.  The  recitals  of  the  Directive  already  provide  that  "it  is 
necessary  to  ensure  that  interest  and  royalty  payments  are  subject  to  tax  once  in  a  Member 
State".  For  that  purpose,  the  Commission  adopted  the  2003  proposal  which  was  close  to  an 
agreement in the ECOFIN Council. 

The Commission withdrew this proposal when adopting its Communication to the European 
Parliament, the Council, the European Economic and Social Committee and the Committee of 
the  Regions,  Commission  Work  Programme  2010  -  Time  to  act,  COM  (2010)  135  final. 
However, this is due to the fact that this new recast of the Directive was foreseen: Annex II of 
this  Communication  includes  a  revision  of  the  Directive  scope  among  the  indicative  list  of 

21 

Source: Eurostat, European Union Direct Investment. 

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possible strategic and priority initiatives under consideration. Thus, the amendments proposed 
in 2003 are still in the Commission's agenda and are considered to be included in this recast. 

This option is the most suitable one to tackle loopholes that could ease tax avoidance, since 
taxation  is  guaranteed:  either  the  exemption  of  withholding  tax  on  the  payment  in  the  host 
country is denied or the beneficiary of the payment is taxed in the residence State. 

4.2.  Which options have been discarded at an early stage and why? 

The option of repealing or reducing the scope of the Directive has never been on the table. It 
took around 5 years of discussions and negotiations to get the measures into place and it has 
been in operation for 6 years. This is the first review and clear benefits are identified from its 
the  overall 
existence.  The  Commission's  report  of 
implementation  has  been  satisfactory.  As  mentioned  before,  the  adoption  of  the  Directive 
produced a tax policy convergence but nothing guarantees that this trend will continue. 

the  Directive  concludes 

that 

It  could  also  be  considered  combining  option  2  with  abolishing  withholding  taxes  on 
dividends  between  unrelated  companies  or  combining  option  2  with  the  extension  of  the 
coverage  of  the  Parent-Subsidiary  Directive  to  below  the  10%  minimum  shareholding 
threshold. However, this initiative responds to the conclusions of the Commission's report on 
the Directive, foreseen only to extend its particular scope, issue that had been carefully dealt 
with. It does not pretend to very ambitious. Concerning the Parent-Subsidiary Directive, it is 
currently  the  object  of  a  different  recast  proposal.  Both  Directives  have  had  their  own 
legislative  process  and  their  own  path  traditionally.  This  recast  does  not  seem  the  suitable 
time to address more ambitious options targeting the scope of the Parent-Subsidiary Directive. 

Another solution could be extending the Directive to other types of companies beyond those 
referred to in the Parent-Subsidiary Directive. However, such a proposal would be contrary to 
one of the main objectives of this recast: making the scope of this Directive similar to that of 
the  Parent-Subsidiary  Directive.  The  public  consultation  launched  in  pararell  with  this 
initiative  shows  more  consensus  on  aligning  both  application  scopes  (89%  of  the  responses 
received) that extending the Directive to a wider number of entities (47%). 

On the other hand, the Directive covers payments between two different companies and does 
not refer to intra-company situations, for instance actual or notional payments between a head 
office and a permanent establishment, or between two permanent establishments of the same 
company. The Commission' report refers to them and to the OECD work on the attribution of 
profits  to  permanent  establishments,  where  the  question  had  arisen.  The  issue  arose  since 
during the debate in the framework of that organization some OECD countries had 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  crossborder  investment 
similar or identical to those that prompted the adoption of the Directive. The report stated that 
if  that  would  be  the  result  of  the  work  undertaken,  it  would  seem  appropriate  to  consider 
extending the scope of the latter to cover such payments. Finally, this initiative does not deal 
with  this  issue  since  the  OECD  did  not  conclude  on  the  possibility  to  charge  withholding 
taxes on notional payments. 

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5. 

ANALYSIS OF IMPACTS 

5.1. 

Impacts of the different options 

This section deals with the impacts of the policy options described. These impacts are largely 
economic  by  nature,  as  we  cannot  expect  that  any  of  the  options  would  have  significant 
environmental  or  social  impacts,  except  a  slight  positive  impact  on  employment  through 
productivity increases. 

The  policy  options  proposing  the  extension  of  the  current  coverage  of  the  Directive  would 
reduce  the  number  of  companies  which  currently  pay  withholding  taxes.  As  described  in 
section 2, withholding taxes entail distortions and costs to the companies. Hence eliminating 
withholding taxes would bring forth economic benefits of the following kind. First, the gap in 
the rates of return between cross-border and domestic investments would be reduced, which 
would encourage cross-border investment and enhance in this way productivity, technological 
transfer  and  economic  growth.  Through  this  channel  also  employment  could  be  enhanced. 
Second, the costs of doing business in the EU would be reduced. Compliance costs related to 
withholding taxes are a particular form of such costs and may be significant to the companies 
subject to withholding taxes. 

These tax policy options would also entail some costs to the Member States, as eliminating 
withholding  taxes  would  reduce  their  tax  revenues.  On  the  other  hand,  these  revenues  costs 
would  be  mitigated  by  the  fact  that  the  countries  receiving  withholding  taxes  would  also 
reduce tax credits provided for in DTCs or in domestic laws. 

The scope of the Directive is limited to EU companies. Thus, the tax policy options described 
above will not have any effect in third countries. Non-EU firms may, however, benefit from 
the proposed amendments to the Directive to the extent that they own EU subsidiaries. But the 
effects on these are computed within the general effects on EU based companies. 

We  will  refer  to  the  impact  of  the  policy  options  on  the  economic  distortions  described,  on 
compliance  costs  for  companies  and  on  the  Member  States'  tax  revenues.  Concerning  their 
measurement, approximate estimates of their magnitude are given, based on the CE study. 

Option 1 – No action 

The  current  tax  regime  applicable  to  cross-border  transactions  of  interests  and  royalties 
creates the problems that have been described in section 2. We should recall that withholding 
taxes  increase  the  cost  of  doing  business,  reduce  cross-border  capital  flows  and,  as  a 
consequence, diminish productivity. Companies facing high effective withholding taxes might 
engage  in  tax  planning  and  restructuring  processes  to  in  order  to  reduce  tax  burdens  and 
compliance costs. On the government side, opportunities for tax avoidance result in a lost of 
tax revenues. Leaving the current Directive unchanged would not solve these problems. 

In  particular,  this  situation  will  limit  the  interest  in  adopting  the  legal  form  of  a  SE  or  of  a 
SCE, legal types which are not currently included in the Directive scope. 

Concerning the legal context of this tax policy area, it will continue to be established in the 
four  Directives  and  the  annexes  of  the  Accession  Treaty  of  Bulgaria  and  Romania  in  the 
absence of a consolidated text. This situation results in legal complexity for those needing to 
consult the legislation in force. 

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Option  2  -  Extending  the  scope  of  the  Directive  to  transactions  between  unrelated 
undertakings 

Economic benefits 

The  exemption  of  withholding  tax  will  eliminate  the  differences  found  in  withholding  rates 
applicable in the different country pairs. These should reduce the distortions in the patterns of 
capital flows. As well, the suppression of some of the tax requirements to enjoy the Directive 
should  contribute  to  reduce  distortions  in  holding  structures  and  organizational  forms 
currently  faced  by  firms.  However,  the  differences  in  taxation  of  dividends,  interests  and 
royalties  will  remain  and  their  distortive  consequences  regarding  the  capital  structure  of 
companies and their allocation of intangibles. 

Social impact 

The reduction of compliance costs, risks of double taxation and lower liquidity costs deriving 
from  this  option  would  reduce  the  costs  of  FDI-related  activities  and  spur  cross-border 
investments. This could have a positive impact on productivity and employment.. The gains 
are larger when the EU firm’s activities give access to new technology and knowledge. Thus, 
outward FDI has a positive impact on employment in EU countries22. However, this impact is 
likely to be small and it has not been possible to quantify it in the impact assessment.  

Impact from the point of view of companies 

This  option  would  eliminate  withholding  taxes  on  all  cross-border  payments  for  the 
companies not currently covered by the Directive, i.e. to those with holding links lying below 
the current 25% ownership interval. As already mentioned, in the Amadeus database used in 
the  CE  study  such  companies  represent  12%  of  holding  links  (the  share  of  holding  links 
within 10-25% ownership interval is 5% and the share of those within 0-10% interval is 7%, 
see  tables  in  annexes  8  and  18).  These  companies  represent,  however,  a  large  share  of 
employment and turnover: 32% (5% + 27%) and 28 % (4% + 24%) respectively23. Hence the 
economic  benefits  that  could  be  obtained  by  removing  withholding  taxes  on  cross-border 
payments for these companies could be significant.  

Moreover,  it  should  be  taken  into  account  that  the  above  presented  shares  do  not  cover 
SMEs24, since these are not included in the Amadeus database consulted. Hence the share of 
companies benefiting form the removal of withholding taxes on cross-border payments could 
actually be larger than indicated by the numbers above, and also the economic benefits. 

22 

23 

24 

Cuyvers, L., Dumont, M., Rayp G. and Stevens, K. (2005), “Home Employment Effects of EU Firms’ 
Activities in Central and Eastern European Countries”, Open Economies Review 16, 153–174; Falk, M. 
and Wolfmayr, Y. (2008), “The Impact of Outward FDI in Central and Eastern Europe on Employment 
in the EU-15 Countries”, FIW Research Report 16; and. Konings, J. (2004), “The Employment Effects 
of Foreign Direct Investment”, EIB Papers 9. 
These shares are lower, however, if weighted by intangible assets (28% and 13% respectively) and also 
compared with the share weighted by financial assets (32% and 15% respectively) implying that cross-
border  payments  between  the  companies  mainly  take  the  shape  of  interest  payments.  See  annexes  13 
and 19. 
For  the  purposes  of  this  impact  assessment  and due  to  the  use  of  the Amadeus  database  as  source of 
information,  SMEs  are:  in  UK,  Germany,  France,  Italy  and  Spain,  those  companies  with  operating 
revenue  below  €1.5  million,  or  total  assets  below  €3  million,  or  less  than  20  employees;  in  all  other 
countries, they are companies with operating revenue below €1 million, or total assets below €2 million, 
or less than 15 employees. 

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As  explained  in  section  2,  paying  withholding  taxes  on  cross-border  payments  and  the 
procedures  needed  to  avoid  double  taxation  could  entail  considerable  compliance  costs  for 
companies. The full elimination of withholding taxes would entail compliance cost savings in 
the amount estimated above: €126 million, which would constitute a direct economic benefit 
for the companies not currently covered by the Directive. 

It  should  be  kept  in  mind,  however,  that  the  above  estimates  are  based  on  a  number  of 
assumptions  and  should  therefore  be  taken  with  caution.  Thus,  the  amount  of  capital  flows 
derives from statistical data; its amount subject to tax has been determined by grouping them 
in  large  economic  categories  regardless  of  the  actual  qualification  for  tax  law  purposes;  as 
well,  the  gross  amount  of  tax  revenues  has  been  calculated  on  the  bases  of  average 
withholding  tax  rates;  concerning  compliance  costs  of  refund  procedures,  it  has  been 
estimated in a forfeit, 2% of the refundable amount. An additional caveat is that they do not 
cover SMEs. Compliance costs could constitute a larger burden on smaller firms compared to 
larger  firms  that  absorb  such  costs  more  easily.  Extending  the  coverage  of  the  Directive  to 
cover  any  cross-border  interest  and  royalty  payment  is  therefore  likely  to  reduce 
administrative burdens laid upon SMEs and at the same time remove the financial burden of 
paying withholding taxes. 

Impact from the point of view of the Member States 

The  extension  of  the  withholding  tax  exemption  may  reduce  the  tax  revenues  of  the  source 
States as host countries; at the same time, as home countries, they will see reduced the amount 
of tax credits applied by their companies to relieve double taxation due to the elimination of 
the withholding taxes charged at source. 

For  interest  payments,  we  find  that  the  tax  revenue  impact  of  extending  the  scope  of  the 
Directive  will  be  limited  in  more  than  half  of  the  EU  Member  States  since  cross-border 
interest  payments  are  generally  exempted  from  withholding  tax  due  to  national  tax  law  or 
DTC.  In  total,  13  countries  will  be  affected  by  the  amendments  with  respect  to  interest 
payment.  By  comparison,  only  5  EU  Member  States  levy  no  withholding  taxes  on  cross-
border royalty payments to other EU Member States (see annex 9). 

As regards withholding taxes on  interest, the CE survey shows that the total EU outflow of 
interests is more than €500 billion out of which it is expected that €334 billion go to other EU 
countries25. According to this study, the tax revenue impacts of eliminating withholding taxes 
on interest payments will be very limited. First, 74% of the interest payments are exempted 
from  withholding  tax  due  to  national  tax  law  in  the  host  countries.  Tax  revenue  in  these 
countries  will  therefore  not  be  affected.  The  remaining  13  EU  countries  that  impose 
withholding  taxes  on  outgoing  interest  payments  –  Belgium,  Bulgaria,  the  Czech  Republic, 
Greece,  Hungary,  Ireland,  Italy,  Latvia,  Poland,  Portugal,  Romania,  Slovenia  and  United 
Kingdom  -  account  for  intra-EU  interest  payments  equal  to  almost  €11.2  billion.  These 
outgoing  interest  payments  constitute  0.22%  of  GDP  in  these  countries  (see  annex  10). 
Second,  only  a  minor  part  of  the  cross-border  interest  payments  are  affected  by  the  present 
Directive  or  even  the  proposed  amendments.  This  is  so  because  the  measure  of  EU  cross-
border interest payments originates from balance sheet information and therefore captures all 

25 

Source:  Eurostat,  International  Transactions  in  Interests  and  Dividend  Payments.  The  expected  EU 
outflow  to  other  EU  countries  is  based  on  the  split  between  intra-EU  and  extra  EU  FDI  stock;  the 
former is 2/3 of the total flows. 

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types of cross-border interest payments, including intra-bank payments, governmental interest 
payments,  payments  between  persons  and  payments  between  (affiliated  and  non-affiliated) 
companies.  However  only  10%  of  the  gross  debt  position  in  EU  countries  is  between 
companies  and  an  even  smaller  share  is  intra-firm  debt26.  Under  the  assumption  that  the 
interest  rate  paid  on  the  different  types  of  debt  is  the  same,  and  applying  the  average 
withholding  rate  in  the  countries  that  impose  withholding  tax  on  cross-border  interest 
payments, 7,1% (annex 11), the CE survey finds that gross income from withholding tax on 
inter-company payments amounts to €0.8 billion. The loss of tax revenues from eliminating 
withholding taxes on outgoing interests would, however, be offset by gains from lower credits 
for  withholding  taxes  paid  in  host  countries.  According  to  the  CE  survey,  it  is  likely  that 
netting for this effect would amount to a loss not exceeding €200 to €300 millions (see annex 
10). 

Concerning  royalty  payments,  the  total  EU  outflow  of  royalties  and  licences  fees  is  €46.5 
billion or 0.4% of GDP27. By assuming that intra-EU payments constitute two thirds of these 
payments  (using  the  same  split  as  between  intra-EU  and  extra-EU  FDI  stock)  the  intra-EU 
royalty payments are estimated to be around €31 billion in 2008. This amount must be further 
reduced by the fact that part of the cross-border payments is exempted from withholding tax 
due  to  national  tax  law  in  certain  countries  (Luxembourg,  Malta,  Netherlands,  Sweden  and 
Slovak Republic). In the remaining 22 EU countries intra-EU royalty payments are estimated 
to be equal to €23,3 billion (see annex 12). By applying the average EU withholding tax rate 
of 5,5% on this amount (annex 13), the gross income from outgoing royalty payments before 
considering the effect of the present Directive is estimated to be around €1.3 billion for EU as 
a whole. It must be further taken into account that losses on revenues on outgoing royalties 
will tend to be offset by gains from lower credits for withholding taxes paid in host countries 
for incoming royalty payments. Some countries will indeed gain on a net basis, namely those 
with a positive balance in royalty payments – Denmark, France and the United Kingdom (see 
annex 12). As well, the present Directive covers a substantial part of the revenues associated 
with  outgoing  royalty.  Hence  it  is  likely  that  netting  for  this  effect  leaves  very  limited  net 
revenue effects: for the seven countries with the largest negative royalty balances as a share of 
GDP – Bulgaria, the Czech Republic, Greece, Poland, Portugal, Romania and Slovakia - , the 
loss should not exceed €100 to €200 million (annex 12). 

Concerning the obligation to transpose the amendments into national legislation, this option 
would go beyond of the current scope of the harmonized corporate tax law. The Directive and 
the  Parent-Subsidiary  Directive  limit  their  coverage  to  associated  companies.  Extending  the 
Directive  benefits  to  unrelated  undertakings  would  be  a  new  feature  affecting  the  EU  tax 
relations of all Member States. It is difficult to foresee how this proposal could affect national 
tax policy and practices and its interrelation with the DTC networks. 

Option 3 – Aligning the requirements of the Interests and Royalties Directive to those of the 
Parent- Subsidiary Directive 

Economic benefits 

26 

27 

Source: The Quarterly External Debt Database (QEDS), jointly developed by the World Bank and the 
IMF. 
Source: Eurostat, International Transactions in Royalties and Licence Fees. 

EN 

25 

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Under  this  option  the  share  of  companies  that  would  not  need  to  pay  withholding  taxes  on 
their cross-border payments would be larger than in the current situation, although not as large 
as under option 2. Hence economic benefits would be of similar nature as under option 2, but 
somewhat smaller in magnitude.  However, the harmonization of the conditions to apply the 
two directives on taxation applicable to the different types of capital flows will contribute to a 
more neutral regime. This option offers better results that option 2 concerning the reduction in 
the  economic  distortions  on  capital  structure  of  companies  and  on  their  allocation  of 
intangibles.  In  the  following  it  is  examined  more  closely  which  share  of  companies  would 
benefit from extending the coverage of the Directive as described in option 3. 

Social impact 

This  option  should  also  have  a  positive  impact  on  employment  for  the  reasons  explained 
under option 2, though smaller than those derived from this latter option. 

Impact from the point of view of companies 

a. 

Extending the list of legal forms benefiting from the Directive 

Option  3  refers  to  the  harmonisation  of  the  list  of  legal  types  covered  by  the  Interest  and 
Royalty Directive with the same list annexed to the Parent-Subsidiary Directive. We find that 
in  11  countries  (Bulgaria,  Cyprus,  Estonia,  Finland,  Latvia,  Lithuania,  Malta,  Poland, 
Portugal,  Romania  and  the  United  Kingdom)  the  list  of  entities  covered  by  the  Interest  and 
Royalty Directive is identical to the list of entities covered by the Parent-Subsidiary Directive 
(see annex 14). For the remaining 16 countries the impact of this option will depend on the 
extent  to  which  the  interest  and  royalty  payments  are  concentrated  in  companies  where  the 
payment is already covered by the Directive.  

As  already  mentioned,  according  to  the  CE  survey,  in  82%  of  the  cases,  both  the  parent 
company  and  the  subsidiary  have  a  legal  form  that  falls  under  the  scope  of  the  Directive; 
nearly  95%  of  the  tax  base  corresponding  to  royalty  payments  is  already  covered; 
approximately 90% of the tax base corresponding to interest payments is also under its current 
coverage; in fact, the main part of the economic activity (82% of total employment and 85% 
of total turnover) is concentrated in the subsidiaries that already fall under the Directive (see 
annex 15). 

We are also interested in assessing to what extent the volume of interest and royalty payments 
are affected by the current Directive. The CE survey assumes that if all of the intangible fixed 
assets are located in the parent companies that do not fall under the Directive (the remaining 
18%) then the Directive will continue to pose a constraint of the flow of payments between 
the  two  entities.  It  therefore  weights  the  employment  and  turnover  data  by  the  amount  of 
assets in the parent company. If the weighted and the unweighted numbers are the same, the 
parent  companies  hold  the  same  amount  of  assets  as  the  parent  companies  that  do  not  fall 
under  the  Directive.  This  survey  finds  that  the  parent  companies  hold  more  assets  than  the 
average  (see  annex  15).  This  evidence  indicates  that  the  current  Directive  does  not  seem  to 
constitute  a  binding  constraint  on  cross-border  interest  and  royalty  payments  between 
companies at the aggregate level. However, for a small number of companies the legal form 
could be a binding constraint and for these companies the amendment could be important. The 
CE  survey  expects  that  this  amendment  would  increase  up  to 84%  of  the  holding  links  that 
will  be  covered  by  the  Directive,  representing  nearly  97%  of  the  tax  base  corresponding  to 

EN 

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royalty payments and approximately 92% of the tax base corresponding to interest payments 
(see annex 16).  

b. 

Extending the Directive to cover indirect holdings 

In the first place, it should be mentioned that there are already two Member States (Belgium 
and Spain, see annex 17) that have implemented the Directive generously and have provided 
the computation of indirect holdings to establish that the companies are associated. 

This amendment could have some impact on tax planning opportunities of companies. In most 
cases,  where  indirect  holdings  are  above  25%  whereas  direct  holdings  fall  short  of  this 
threshold, there are ways in which a tax planning company can alter the finance and holding 
structure  in  order  to  ensure  coverage  by  the  Directive.  However,  it  is  important  to  keep  in 
mind that tax planning may be costly since it requires detailed knowledge of national tax laws 
across EU countries. According to the CE survey such an amendment may produce benefits in 
terms of increased flexibility and lower restructuring costs. 

c. 

Reducing the shareholding requirements from 25 to 10% 

According  to  the  CE  study,  the  holding  share  in  EU  firms  is  concentrated  around  50%  and 
100%. Since the Directive offers more favourable tax treatment for associated entities if the 
direct ownership share is at least 25%, tax planning companies might take advantage of this 
by increasing their ownership share above 25% of their intra-group entities. By lowering the 
threshold  value  for  the  ownership  share  from  25  to  10%,  the  amendments  of  the  Directive 
might  allow  EU  firms  to  move  closer  to  their  preferred  ownership  structure  and  therefore 
reduce or eliminate the distortion caused by the limited coverage of the present Directive. In 
fact, the holding links that lie in this ownership interval, restricting it to companies having a 
legal form under the Directive as amended, accounts for a small number, only 5% of entities, 
i.e.  5%  of  the  holding  links.  The  subsidiaries  that  would  benefit  from  lower  holding 
requirements only account for a small share of employment and turnover, approximately 5% 
(annex 18). Hence, the economic benefits of this extension would be relatively limited. 

Savings in compliance costs 

To  estimate  the  compliance  cost  savings  that  could  be  expected  from  this  option,  the  CE 
survey  differentiate  between  interest  and  royalty  payments.  Thus,  most  of  the  interest 
payments  between  non-financial  institutions  that  fall  outside  the  scope  of  the  present 
Directive  will  take  place  between  associated  companies  since  direct  loans  between  non-
associated  companies  are  relatively  rare.  This  study  expects  80-90%  of  the  compliance  cost 
savings  to  materialise  under  this  option  3:  that  is,  80  to  90%  of  the  48  millions  of  the 
compliance costs accounted for interest payments, €38,4–43,2€. The opposite is the case for 
royalty payments. OECD28 finds that the proportion of EU companies’ patent portfolio that is 
being licensed to non-associated companies lies in the range 80-100%. Thus, out of the €78 
millions of compliance costs associated to royalty payments, the economic gain linked to this 
option would amount €0-€15,6 millions. In total, out of the compliance costs of €126 million, 
this option 3 is estimated to offer a saving of €38,4-€58,8 millions.  

28 

OECD:  Who  Licenses  Out  Patents  and  Why?  Lessons  from  a  Business  Survey-  STI  Working  Paper 
2009/5- Statistical Analysis of Science, Technology and Industry. 

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27 

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Again,  it  should  be  kept  in  mind  that  the  above  estimates  are  based  on  a  number  of 
assumptions and should therefore be taken with caution. 

Impact from the point of view of the Member States 

As  we  can  infer  from  the  analyses  of  option  2,  the  net  revenue  effects  from  removing 
withholding  taxes  on  all  cross-border  payments  would  be  relatively  limited.  In  the  case  of 
option 3 these effects would affect the Member States in similar terms but in a more limited 
way, since the amendments now considered are less ambitious. Concerning the obstacles that 
Member  States  may  find  to  transpose  the  new  harmonized  rules  they  should  be  minor.  We 
should mention that they have already the experience gained with the obligations imposed by 
the Parent-Subsidiary Directive. 

Concerning the tax revenue effects of this option, the CE survey considers that it is possible to 
make calculations on the basis of the weights of the interest and royalty transactions described 
above.  Thus,  if  the  total  reduction  of  tax  revenue  expected  from  the  elimination  of 
withholding  taxes  in  all  transactions  of  interests  amount  €200-€300  millions,  this  particular 
option 3 would account for a reduction of 80 to 90%, that is €160-€270 millions. In the case 
of royalties, the tax revenue redaction estimated was €100-€200 millions. This option would 
affect  to  0-20%  of  this  type  of  transactions,  so  that  the  reduction  of  tax  revenue  could  be 
estimated at a range of €0-€40 millions. In total, the tax revenue reduction could be estimated 
roughly at a range of €160-€310 millions. 

Option  4  –  Clarifying  the  tax  deductibility  requirement  applicable  to  payments  made  by 
permanent establishments 

The amendments that would derive from this tax policy option look for legal certainty and the 
reduction  of  conflicting  cases  in  marginal  circumstances.  This  could  be  concluded  from  the 
IBFD survey, which did not find cases in the surveyed Member States of relief having been 
denied on the grounds that the payment was a non-deductible expense. The economic impact 
of this tax policy option should be negligible. 

As to the transposition of the new legal text, it should not cause major problems. The issue is 
discussed  in  the  Commission's  report  of  the  Directive  where  the  main  elements  of  this 
amendment are considered. Any tax expert can evaluate the problem raised and the solution 
foreseen. The changes in national legislation should be minor and easy to implement.  

Option 5 –Requiring for the exemption of withholding tax that the recipient of the payment 
is subject to tax on the income derived from it 

The  aim  of  this  tax  policy  option  is  to  tackle  tax  avoidance  strategies.  On  the  government 
side, opportunities for tax avoidance result in a loss of tax revenues. Also, tax administrations 
have  to  incur  in  administrative  costs  since  they  have  to  conduct  investigation  procedures 
related  to  tax  avoidance  practices.  On  the  firm  side,  tax  planning  activities  result  in 
suboptimal  choices,  and  the  administrative  and  compliance  costs  of  tax  planning  largely 
represent  unproductive  use  of  scarce  resources.  Hence,  this  option  could  potentially  have  a 
positive  impact  on  the  tax  revenues  in  the  Member  States.  However,  it  is  difficult  to  make 
estimations  and  a  proper  assessment  of  this  revenue  impact  and  of  the  administrative  costs 
associated  with  tax  planning.  We  do  not  have  statistics  offering  relevant  information  to 
conclude  on  the  quantitative  consequences  derived  from  the  abuse  of  the  exemption  of 

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28 

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withholding  taxes  on  interest  and  royalty  payments  combined  with  the  non-taxation  of  the 
corresponding income in the home country.  

Concerning the obstacles that may be found to implement this option, we should mention that 
in the ECOFIN Council invited the Commission to present a proposal to address this issue. In 
addition,  if  Member  States  want  to  check  if  taxpayers  are  subject  to  tax  on  the  payments 
received  in  their  home  country,  they  have  cross-border  administrative  cooperation.  Council 
Directive 77/799/EEC of 19 December 1977 concerning mutual assistance by the competent 
authorities  of  the  Member  States  in  the  field  of  direct  taxation29  establishes  the  rules  for 
administrative cooperation and the exchange of information between Member States with the 
purpose, among other things, to enable Member States to carry out a correct tax assessment in 
the case of cross-border activities. 

Table 5. Table of impacts 

Option 1 

Option 2 

Option 3 

Option 4 

Option 5 

No action 

Extension of 
the exemption 
to unrelated 
undertakings 

Aligning 
with Parent-
Subsidiary 
Directive 

Exemption of 
payments 
connected to 
PE 

Subject to tax 
requirement 
on the 
recipient 
company 

Reduction 
distortions  due 
differences 
withholding rates 

of 
to 
in 

Reduction 
of 
to 
distortions  due 
requirements  for  the 
exemption 

of 
Reduction 
distortions  due 
to 
different  taxation  of 
dividends, 
interests 
and royalties 

Savings  in  compliance 
costs 

-- 

-- 

-- 

++ 

++ 

- 

+ 

+ 

+ 

= 

= 

= 

+ 

= 

= 

None 

€126 mill. 

€38,4-58,8 
mill. 

negligible 

Unknown 

Changes 
revenue 

in 

tax 

None 

 - €300-500 
mill. 

- €160-310 
mill. 

negligible 

Unknown 

Note: Positive: +; Strongly positive: ++; Negative: -; Strongly negative: --; Neutral/marginal: = 

5.2. 

Comparison of options 

The  objective  of  this  initiative  is  the  elimination  of  withholding  taxes  in  a  wider  range  of 
cases  with  the  final  aim  of  reducing  the  economic  distortions,  the  compliance  costs  and  the 
risk  of  excessive  or  double  taxation  linked  to  them.  As  a  more  specific  objective,  it  is 
important  to  highlight  the  need  to  have  a  more  neutral  tax  regime  applicable  to  dividends, 

29 

DO L 336 de 27.12.1977, p. 15. 

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29 

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interest and royalties by aligning the scope of the Directive with that of the Parent-Subsidiary 
Directive.  

In  view  of  the  above  analysis,  option  1,  which  represents  the  business  as  usual  scenario, 
should  be  rejected.  Withholding  tax  rates  continue  to  affect  the  investment  decisions  and 
financing  structures  for  a  number  of  firms  within  the  EU.  It  is  shown  in  this  impact 
assessment that the static budgetary costs of extending the Directive benefits to a wider set of 
firms  tend  to  be  small  while  providing  benefits  in  terms  of  fewer  distortions,  reduced 
compliance  costs  for  EU  firms  and  gains  in  productivity  following  from  increased  cross-
border  investments.  Hence,  other  policy  options  largely  outweigh  the  business  as  usual 
scenario. 

On  the  other  hand,  both  options  2  and  3  give  important  advantages.  They  would  meet  the 
objective  fixed  to  extend  the  Directive  coverage.  At  the  same  time,  they  could  be 
complemented with the policy options 4 and 5, which as such will surely contribute to a better 
functioning of the Directive and should for this reason be included in any future proposal for 
its  amendment.  Thus,  we  will  refer  to  two  alternatives:  the  alternative  I  would  combine 
options 2, 4 and 5 and the alternative II would combine options 3, 4 and 5. 

Concerning the reduction of economic distortions due to the differences in withholding rates, 
while the alternative I would have more positive effects than the alternative II since it covers 
all payments between companies, both solutions pose the question of their efficiency and their 
coherence. Alternative I implies a bigger impact on public finances. The reduction of Member 
State  tax  revenues  is  an  important  element  to  consider  as  stated  in  the  Commission 
Communication on the 2020 strategy, where reference is made to the need for consolidation 
of public finances in the current crisis context. The alternative I would have a bigger impact in 
the  reduction  of  Member  States  tax  revenue  (roughly  estimated  at  a  range  of  €300-€500 
millions) than alternative II (€100-€240 millions), As well, the difficulties for implementation 
will be bigger in the case of alternative I since it would be the first case where the taxation of 
the relations between non-associated parties is harmonized. At the same time, the coherence 
of both options is also limited: since the payments will no longer suffer withholding taxes, the 
relative importance of the corporate tax rate charged by the home country will increase. Thus, 
the major distortions could now be due to the different corporate tax rates in force in the home 
Member  States;  it  is  not  proposed  to  harmonize  this  tax  element  which  is  a  general  feature 
applicable to all the taxpayers' income. Thus, the reduction of the distortions due to different 
withholding tax rates should be weighed against these considerations.  

As  regards  the  distortions  due  to  the  requirements  to  enjoy  the  Directive  benefits,  the 
alternative  I  also  have  slightly  more  positive  effects  than  the  alternative  II  since  it  will 
eliminate the condition that companies are associated. However, this same effect restricts the 
capacity  of  this  alternative  to  reduce  the  distortions  deriving  from  the  different  tax  regime 
applicable to the different types of capital flows (dividends, interest and royalties) as we will 
see below. Thus, such a proposal will not be coherent with other objectives of this initiative. 
Nor is it very efficient due again to its bigger budgetary costs for the Member States and the 
implementation costs. Concerning alternative II, the reduction of the threshold holding to be 
considered as associated companies should allow EU firms to move closer to their preferred 
ownership structure and therefore reduce the distortion caused by the limited coverage of the 
present Directive. As regards the computation of indirect holdings, it may produce benefits in 
terms  of  increased  flexibility  and  lower  restructuring  costs.  If  such  a  proposal  would  be 
adopted, companies will not be forced to maintain holdings over a certain limit to enjoy the 
Directive benefits, reducing part of the financial costs linked to a particular holding structure. 

EN 

30 

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It will neither have such negative consequences as those attributable to alternative I, since the 
tax revenue effort and the implementation costs will be lower. 

On the other hand the alternative II will reduce the economic distortions due to the different 
scope  between  the  Directive  and  the  Parent-Subsidiary  Directive.  The  exemption  of 
withholding  taxes  on  dividends,  interest  and  royalties  will  be  applicable  under  the  same 
circumstances. The firms' legal form, holding structure and their allocation of intangibles will 
not be altered so negatively as up to present due to the different withholding tax regime across 
the different capital flows. The new legal context will offer a more neutral solution and reduce 
the influence of taxation on business decisions. It can be said that it is an effective, since it 
meets this particular achievement; it is efficient since there are no important costs associated 
to  it;  and  coherent  with  the  other  objectives  of  reducing  compliance  costs  and  the  other 
distortions. The alternative I will not have this effect and these distortions will remain since it 
would  maintain  the  different  treatment  of  different  capital  flows:  the  exemption  of 
withholding taxes on dividends would still require a minimum holding between the payer and 
the recipient of 10% while the benefits on interest and royalty payments would not require so. 
Different  types  of  capital  flows  are  to  some  extent  substitutable  and  the  differences  in  tax 
treatment have an impact on the investment decisions of the EU investors. A reduction of the 
tax  costs  associated  with  interest  and  royalties  as  compared  to  dividends  may  lead  to  sub-
optimally high levels of debt and inefficient allocation of intangibles. The financial structure 
of groups and the allocation of intangibles will be decisions where the tax factor will have to 
be weighted. This, this latter alternative is inefficient to achieve this particular goal. 

As  regards  the  reduction  of  compliance  costs,  the  alternative  I  would  have  bigger  effects 
(roughly estimated at €126 millions) than the alternative II (roughly estimated at a range of 
€38,4-€58,8  millions)  since  it  would  affect  a  larger  number  of  transactions.  Again,  these 
results  should  be  measured  considering  the  negative  consequences  on  public  finances  and 
implementation costs, larger in the case of Alternative I. This would reduce the efficiency and 
coherence of this proposal. 

Concerning  the  effects  on  the  elimination  of  excessive  or  double  taxation,  this  impact 
assessment  considered  this  as  minor  problem  since  in  the  current  scenario  it  appears  in  a 
limited  number  of  cases  (see  section  2.2.2).  Thus,  the  achievement  of  this  objective  should 
have  a  minor  weight  at  the  time  to  value  the  different  alternatives.  For  the  reasons  already 
referred  to,  alternative  I  is  more  effective  (wider  exemption)  but  less  efficient  (more  tax 
revenue  and  implementation  costs)  and  less  coherent  (could  increase  distortions  due  to  the 
different tax regime applicable to capital flows). 

SMEs are likely to benefit form both alternatives. In the first place, when the legal types that 
they normally adopt are included in the list annexed to the Directive. It should be mentioned 
that  the  economic  impact  of  alternative  I  assumes  that  the  list  of  entities  covered  by  the 
Directive is extended to make it equal to that included in the Parent-Subsidiary Directive. In 
the second place, we should recall that for these, the weight of  tax burden is proportionally 
higher. 

It is possible to summarize these comparisons in the following table. 

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Table 6. Comparison of alternatives 

Objectives/ 

Options 

Reduction 
of 
distortions  due 
to  differences 
in  withholding 
rates 

Reduction 
of 
distortions  due 
to 
requirements 
for 
exemption 

the 

Reduction 
of 
distortions  due 
different 
to 
of 
taxation 
dividends, 
interests 
royalties 

and 

in 

Savings 
compliance 
costs 

Elimination 
of 
taxation 

double 

Option 1 

Ineffective 

Ineffective 

Ineffective 

Ineffective 

Ineffective 

Alternative I  More  effective, 
lower 
and 

but 
efficiency 
coherence 

More  effective, 
lower 
but 
and 
efficiency 
coherence 

Ineffective 

More  effective, 
lower 
but 
and 
efficiency 
coherence 

Effective, 
but 
lower  efficiency 
and coherence 

Alternative II  Effective, higher 
and 

efficiency 
coherence 

Effective, higher 
and 
efficiency 
coherence 

effective, 
and 

Very 
efficient 
coherent 

Effective, 
higher 
efficiency 
coherence 

Effective, 
higher 
efficiency 
coherence 

and 

and 

The public consultation offered also a view of stakeholders on these tax policy options30. The 
first conclusion from the responses received confirms their interest in the initiatives raised by 
the  Commission  services.  There  is  a  clear  tendency  to  support  the  need  to  take  tax  policy 
action and amend the Directive. Only 7% of the replies do not consider necessary to update 
the  list  of  entities  covered  by  the  Directive  and  4%  do  not  agree  to  the  change  of  the 
shareholding threshold to consider entities as associated. Thus, option 1 receives hardly any 
support. As well, it can be concluded that the majority shows alternative II as preferred option 
(aligning the list of entities to that of the Parent-Subsidiary Directive is supported by 90% of 
the responses; the computation of indirect holdings, 91%; lowering the threshold requirement 
to  10%,  87%  of  replies).  On  the  other  hand,  the  main  option  of  alternative  I,  extending  the 
Directive  to  payments  between  unrelated  undertakings  receives  very  little  support,  28%. 
Finally,  the  public  consultation  did  not  address  questions  on  option  5  since  this  issue  was 
brought up in the ECOFIN Council meeting that adopted the Directive in 2003. There, it was 
agreed to require from the Commission a proposal to deal with the issue. That same year the 
proposal was adopted by the Commission. The ECOFIN Council did not agree on a text due 
to  the  opposition  of  one  Member  State  in  successive  discussions.  Still,  there  is  a  need  to 
maintain  this  amending  proposal  and  included  in  this  new  initiative  for  a  recast.  In  this 
context, it did not make much sense to include the issue in the public consultation since the 
decision to amend the Directive on this particular topic had been taken at that time. 

Member States had also an opportunity to stress their views on these options during a meeting 
to  discuss  the  Commission's  report  on  the  Directive  held  on  23  November  2009.  The 
Commission  services  could  consider  which  the  general  position  on  these  matters  was:  they 
were more included to accept initiatives on the option  3;  some  of  them  rejected  clearly  any 
amendment  on  the  basis  of  option  2.  Concerning  the  technical  modifications  proposed  in 
option 4, a majority of the Member States' delegates understood the problem and agreed the 
need for a solution. Concerning option 5, it has been already mentioned that the subject was 
brought  up  in  the  ECOFIN  Council  agreeing  on  the  Directive  and  there  has  been  a  large 
majority  of  Member  States  supporting  the  Commission  initiatives  in  this  area.  However,  it 

30 

See annex 19 including a briefing of the responses received. 

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32 

   EN 

 
                                                 
should  be  stressed  that  the  said  meeting  had  a  technical  purpose  and  delegations  were  not 
asked  to  take  a  political  position  on  the  initiatives.  In  fact,  a  number  of  delegates  remained 
silent during the debate. 

On the basis of this analysis, we prefer the alternative II, combining options 3, 4 and 5 since it 
offers  a  more  balanced  solution  between  benefits  and  costs.  As  already  mentioned,  this 
solution gathers more support from the public than alternative I. 

As regards the distribution of alternative II impacts between the Member States, it will rely on 
the  importance  of  reduction  of  withholding  tax  revenue  currently  obtained.  Following  the 
tables  1  to  4  of  this  report,  it  can  be  concluded  that  Member  States  with  high  withholding 
taxes  on  interest  and  royalty  payments  will  be  more  affected.  In  order  to  measure  more 
properly this effect, it also should be taken into account the actual capital flows affected by 
the initiative comprised in these options. In the case of royalty payments, the more affected 
Member  States  are  the  Czech  Republic,  Estonia,  Latvia,  Lithuania,  Romania,  Slovakia  and 
Slovenia.  In  the  case  of  interest  payments,  these  are  Cyprus,  Estonia,  Latvia,  Lithuania, 
Poland, Romania and Slovenia. However, it has to be considered the reduced amount of the 
flows affected as shown in tables 2 and 4. 

6. 

MONITORING AND EVALUATION 

6.1.  What are the core indicators of progress towards meeting the objectives? 

The  main  objectives  of  the  Directive  are  the  elimination  of  the  risk  of  excessive  or  double 
taxation, the reduction of compliance costs and less tax distortions in the functioning of the 
internal market. 

The Commission will ensure Member States' compliance with the obligations laid down in the 
amending Directive. Its services will offer assistance for the implementation of the legislative 
changes in the form of transposition workshops with tax authorities and officials from all the 
Member  States  or  in  the  framework  of  its  working  parties  for  direct  tax  matters.  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. 

As entrusted by the TFEU, the Commission will take the necessary and due action if any of 
them fails to respect its duties concerning the implementation and application of Community 
Law. 

Concerning  the  performance  of  the  internal  market,  it  will  be  difficult  to  establish  a  closed 
and direct link between the amendments proposed and the reduction of tax distortions. Still, 
the increase in tax revenues or in tax bases corresponding to income from debt claims or from 
intangibles  in  the  home  countries  could  be  a  good  approximation.  However,  there  are  other 
variables  to  consider  which  may  have  an  influence  on  these  indicators.  In  broad  terms,  the 
total amount of cross-border interest and royalty payments would show the evolution of these 
transactions after the implementation of the amendments. 

Other  indicators  should  be  referred  to  business  behaviour  and  analyse  compliance  costs, 
companies  capital  structure  and  organizational  form,  as  well  as  the  holding  structure  of 
company groups. 

EN 

33 

   EN 

 
6.2.  What 

is 
arrangements? 

the  broad  outline 

for  possible  monitoring  and  evaluation 

The  evaluation  of  the  consequences  of  the  application  of  the  legislative  measure  could  take 
place  three  years  after  the  entry  into  force  of  the  legislative  measures  implementing  the 
Directive. This period should allow the Commission services to gather sufficient and relevant 
data  after  a  minimum  one  year  period  of  the  application  of  the  amendments,  to  analyse  the 
results  and  to  draw  up  some  conclusions.  The  Commission  should  submit  to  the  European 
Parliament and the Council a report on the technical functioning of the Directive as amended.  

The content of such a report will vary according to the scope of the Directive as finally agreed 
in  the  Council.  It  may  be  necessary  to  evaluate  the  need  of  further  developments  to  fully 
achieve the objectives pursued. 

EN 

34 

   EN 

 
Withholding taxes on interests from non-treaty countries in 2003 and 2009 

Country 

Tax rate 2003 

Tax rate 2009 

Notes 

Annex 1 

Austria 

0% (25%) 

0% (25%) 

Belgium 

15% (0%) 

15% (0%) 

25%  tax  applies  to  interest  paid  on  loans  secured  by  mortgage  on  immovable  property.  A 
withholding tax of 25% is levied on bank deposit interest paid to resident individuals and, unless the 
company opts to be paid gross, on such interest paid to resident companies.  

Exemptions include interest on government bonds, registered bonds, mortgage loans on immovable 
property and bond interest paid by non-residents, interest on registered corporate bonds and interest 
on registered bonds issued by resident banks and other financial institutions as well as interest paid 
in relation to loans to non-profit associations and other fixed revenue loans issued by corporations 
and deducted from income. 

Bulgaria 

15% 

10% 

Cyprus 

20% (25%) 

0% (25%) 

25% on the excess amount on annual payments over £40,000. 

Czech Republic 

15% 

15% 

Denmark 

0% 

0% (25%) 

Estonia 

26% 

0% (21%) 

From  1  April,  a  withholding  tax  of  25%  may  apply  in  certain  circumstances  if  interest  paid  to  a 
foreign controlling entity (having 50% of voting power or share capital). However, the withholding 
tax only applies if the foreign resident company is a financial company situated in a tax haven (as 
defined) or (b) a jurisdiction that does not have a double taxation treaty with Denmark. 

There is no withholding tax on interest payments to non-residents on the condition that the interest 
charged does not significantly exceed the arm’s length rate at the time the debt is incurred and the 
interest  payments  are  made.  21%  Estonian  withholding  tax  will  thus  apply  only  to  the  part  of  the 
interest that significantly exceeds the arm’s length amount. 

EN 

35 

EN 

 
  
 
 
Finland 

0% (29%) 

0% (28%) 

Interest on bonds, debentures, deposits on bank accounts, foreign tax credits and other loans that are 
not similar to the borrower's own capital is exempt from tax if paid to a non-resident. 

France 

0% (15%) 

0% (18%) 

In  practice,  loan  interest  is  exempted  from  French  withholding  tax  provided  specific  formal 
conditions are fulfilled (e.g. loans with a contract). 

Germany  

0% (25%) 

0% (25%) 

Interest  paid  to  non-residents  on  instruments  other  than  convertible  or  profit-sharing  bonds  or 
mortgage loans is generally free of withholding tax.  

Greece 

37.5% (15%) 

25% (10%) 

Hungary 

Bilateral 

30% 

Ireland 

20% 

20%  

Interest  earned  on  deposits  with  banks  operating  in  Greece,  as  well  as  on  any  kind  of  bonds  and 
other  interest-bearing  securities  issued  by  private  enterprises,  was  subject  to  a  tax  withheld  at  the 
source of 15% in 2003 and 10% in 2009. 

From  1  January  2010  30%  withholding  tax  will  be  introduced  on  interests,  royalties  and  certain 
service fee payments made to companies, which are resident in countries with which Hungary does 
not have a double tax treaty. 

Italy 

0%, 12.5%, 27% 

0%, 12.5%, 27% 

0% applies on loan agreements and ordinary notes; 12.5% on bonds if the term of the bond issue is 
more than 18 months; 27% if the above mentioned period is shorter. 

Latvia 

10% (5%) 

10% (5%) 

Lithuania 

0% (10%) 

0% (10%) 

Interest  payments  to  related  non-resident  parties  are  generally  subject  to  a  10%  WHT.  If  a  bank 
registered in Latvia pays interest to related companies at the bank’s normal interest rate level, then a 
5% WHT applies. 

Withholding tax is not applied on Government securities issued on international financial markets, 
interest accumulated and paid on deposits, and interest on subordinated loans which meet the criteria 
established by legal acts adopted by the Bank of Lithuania. 

EN 

36 

EN 

 
  
 
 
Luxembourg 

0% 

0% (15%) 

Interest paid to non-residents is generally not subject to withholding tax in Luxembourg. However, 
interest that represents a right to profit participation on a bond may be assimilated as a dividend and 
subject to a withholding tax of 15%. 

Malta 

0% 

0% 

Netherlands 

0% 

0% (15%) 

Interest  and  royalty  income  by  non-residents  is  exempt  from  tax  in  Malta  as  long  as  certain 
conditions are complied with (e.g. they are not effectively connected to a permanent establishment 
of the recipient situated in Malta). 

A  nil  withholding  tax  rate  applies  to  payments  to  a  resident  corporation  when  its  shareholding 
qualifies for the participation exemption and the shares form part of a company whose activities are 
carried out in the Netherlands. However, dividend withholding tax may be levied on certain profit 
participating loans (15%). 

Poland 

Portugal 

Romania 

20% 

20% 

10% 

20% 

20% 

16% (0%) 

Interest  income  obtained  from  Romania  by  EEA  registered  pension  funds  will  be  exempt  from 
withholding taxes. 

Slovak Republic 

25% 

0% (19%) 

Interest  paid  to  related  EU-resident  companies  is  generally  not  subject  to  withholding  tax.  Under 
certain conditions the tax rate is 19%. In 2002 it was 25% 

Slovenia 

25% 

15% 

Spain  

0% (18%) 

0% (18%) 

Spanish internal legislation provides withholding tax exemption on interest obtained by EU lenders 
not established in Spain. Under certain conditions the tax rate is 18%. 

Sweden 

0% 

0% 

United Kingdom 

20% (0%) 

20% (0%) 

Interest paid on debts not capable of exceeding one year (short interest) is not subject to withholding 
tax. 

EN 

37 

EN 

 
  
 
 
 
 
Note:  The withholding taxes listed in the table refer to the rates applicable to non-treaty countries. 

Source: IBFD (2005) and various tax tables provided by PriceWaterhouseCoopers. 

EN 

38 

EN 

 
  
Withholding taxes on royalties 

Annex 2 

Country 

Austria 

Belgium 

Bulgaria 

Cyprus 

Tax rate 2003 

Tax rate 2009 

Notes 

20% 

15% 

15% 

20% 

15% 

10% 

10% (5%*) 

0% (10%**) 

*5% on film and TV royalties. **Where royalties are earned 
on rights used within Cyprus there is a 10 % withholding tax.

Czech Republic 

25% 

15% 

Denmark 

30% (0%) 

25% (0%) 

Estonia 

15% 

10% (5%) 

Exemptions  include  payments  for  copyrights,  e.g.  software, 
manuscripts, music, movies and videos and payments for the 
use of industrial, commercial or scientific equipment. 

The  lower  5%  rate  applies  to  royalties  paid  for  the  use  of 
industrial, commercial or scientific equipment. 

29% 

33.3% 

25% 

20% (10%) 

28% 

33.3% 

15% 

20% 

Finland 

France 

Germany 

Greece 

EN 

Before  1.1.  2003  the  withholding  tax  was  10%  for  film 
rentals of fixed amounts or film rentals based on a percent of 

39 

EN 

 
  
 
 
 
 
 
 
 
Hungary 

Bilateral 

30% 

receipts. 

From  1  January  2010  30%  withholding 
tax  will  be 
introduced  on  interests,  royalties  and  certain  service  fee 
payments made to companies, which are resident in countries 
with which Hungary does not have a double tax treaty. 

Ireland 

Italy 

22.5% (30%) 

22.5% (30%) 

0% (20%) 

0% (20%) 

20% tax applies to patent royalties. 

Latvia 

15% (5%) 

5% 

Lithuania 

Luxembourg 

Malta 

10% 

10% 

0% 

10% 

0% 

0% 

Netherlands 

0% 

0% 

A 30% withholding tax must be applied to 75% of the gross 
income,  making  the  effective  rate  22.5%  (30%  x  75%).  A 
30% withholding tax, levied on the entire amount, applies to 
the  payments  for  the  use,  or  the  right  to  use,  industrial, 
commercial  or  scientific  equipment  if  the  property  is 
physically situated in Italy. 

Rental income from property located in Latvia is subject to a 
5% withholding tax in 2003.  

Interest and royalty income is exempt from tax when certain 
conditions  are  complied  with  (e.g.  they  are  not  effectively 
connected  to  a  permanent  establishment  of  the  recipient 
situated in Malta). 

A nil withholding tax rate applies to payments to a resident 
corporation  when 
the 
participation  exemption  and  the  shares  form  part  of  a 
company whose activities are carried out in the Netherlands. 

its  shareholding  qualifies 

for 

EN 

40 

EN 

 
  
 
 
Poland 

Portugal 

Romania 

20% 

15% 

15% 

Slovak Republic 

25% (1%) 

Slovenia 

Spain 

Sweden 

25% 

25% 

0% (28%) 

0% (28%)  

20% 

15% 

16% 

19% 

15% 

24% 

United Kingdom 

22%  

20% (0%) 

The  lower  rate  applies  to  lease  contracts  under  which  the 
lessee has the right to purchase the leased asset at the end of 
the  lease  period,  provide  that  the  lease  is  of  a  certain 
minimum duration. 

Under domestic law there is no withholding tax on royalties. 
However,  a  non-resident  recipient  of  royalties  is  deemed  to 
have a permanent establishment in Sweden in respect of the 
royalties  received.  Thus,  the  recipient  would  be  taxed  in 
Sweden  on  the  net  royalty  income,  i.e.  gross  royalty  less 
expenses  related  to  the  royalty,  at  the  ordinary  corporate 
income tax rate (28%). 

Under  UK  domestic  law,  withholding  tax  is  deducted  from 
royalties  in  respect  of  UK  registered  patents,  copyright 
royalties (other than film royalties), design royalties, certain 
mineral royalties and royalties which are regarded as annual 
payments. 

Note:  The withholding taxes listed in the table refer to the rates applicable to non-treaty countries. 

Source: IBFD (2005) and various tax tables provided by PriceWaterhouseCoopers. 

EN 

41 

EN 

 
  
 
 
 
 
 
Bilateral double taxation treaties on interest payments between EU Member States (2009) 

Payed from/ 
Recipient 

Austria Belgium  Bulgaria Cyprus

Czech 
Republic Denmark Estonia Finland  France Germany Greece Hungary Ireland Italy 

Annex 3 

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech  

Republic 

Denmark 

x 

15 

0 

0 

0 

0 

0 

X 

10/0 

10 

0 

0 

0 

0/10 

0/10 

0/10 

x 

7 

7 

x 

10/0 

10 

10 

0 

0/10 

0/10 

0 

0 

x 

0 

0 

10 

0 

10 

0 

x 

Estonia 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0 

0 

0/10 

10 

n.a. 

0 

0 

15 

0 

n.a. 

n.a. 

10 

0 

0 

0 

0 

0/10 

0 

x 

0 

0 

0 

0 

0 

0 

0/10 

0/5/10  0/15 

0 

10 

0 

0 

10 

10 

10/0 

10 

0/10 

0 

0 

0 

15 

0/15 

5/0 

0 

0 

0 

0 

10 

0 

0 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

Finland 

France 

Germany 

0 

0 

0 

0 

0/15 

0 

0 

0 

0/10 

0/25 

0/25 

0/10 

Greece 

10/0 

5/10 

Hungary 

Ireland 

0 

0 

10 

10 

15 

0/15 

0/5 

10 

10 

0 

0 

0 

0 

10 

0 

0 

0 

X 

0/18 

0/10 

0/10 

0/25 

0/25 

0 

0 

x 

0 

0 

0 

x 

8 

0 

0 

10 

10 

0/10 

10 

10 

10 

0 

0 

0 

0 

0 

0 

0 

0 

0/10 

x 

0 

0/5 

0 

0 

0 

10 

x 

0 

0 

0 

0 

5 

0 

x 

0 

0/10 

0/25 

10 

0 

10 

EN 

42 

EN 

 
  
Italy 

Latvia 

0/10 

0/15 

0 

0/10 

0 

0/10 

0/10 

0/15 

0/10 

0/10 

0/10 

0 

0/5/10  0/5/10 

0/5 

0/5/10  0/5/10 

0/5/10 

0/5/10  0/5/10  0/5/10 0/5/10 

0/5/10  0/5/10 

Lithuania 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

0/5 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

0¹ 

0¹ 

0 

20 

20 

0¹ 

0¹ 

0 

10 

15 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

5 

10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

0 

0¹ 

0¹ 

0 

0 

0¹ 

0¹ 

0 

5 

15 

12/10  15/10 

0¹ 

0¹ 

0 

10 

15 

0¹ 

0¹ 

0 

10 

10 

Romania 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

Slovakia 

Slovenia 

0 

5 

0 

10 

Spain 

0/5 

0/15 

Sweden 

0 

United Kingdom 0 

0 

15 

0 

5 

0 

0 

0 

0 

10 

n.a. 

0 

10 

0 

5 

0 

0 

0 

0 

5 

0 

10 

0 

5 

0 

5 

0 

5 

0 

10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/8 

0 

0 

0 

10 

0 

0 

0 

0 

0 

0 

0 

0 

0 

5 

0 

0 

0 

0/10 

x 

0/5/10  0/5/10
0/5 

0/5 

0¹ 

0¹ 

0 

10 

15 

0¹ 

0¹ 

0 

10 

15 

0/10 

0/10 

0 

5 

0 

0 

0 

0 

10 

0/12 

0 

10 

EN 

43 

EN 

 
  
Payed from/ 
Recipient 

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech  

Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia Lithuania  Luxembourg Malta  Netherlands Poland  Portugal  Romania Slovakia  Slovenia  Spain  Sweden UK 
0 
0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0 

0/10 

0/10 

0/15 

0/10 

0/10 

0/5 

15 

0/10 

0/10 

0/10 

10 

0/10 

15 

5/0 

10/0 

10 

0 

0 

10/0 

10/0 

15/0 

n.a. 

n.a. 

n.a. 

10 

n.a. 

10 

n.a. 

10 

0/10 

0/10 

0 

0 

0 

0 

0 

0 

0 

0 

0/10 

0/10 

0/7 

0 

n.a. 

0 

10 

10 

0 

0 

5/0 

n.a. 

0/5 

n.a. 

0 

0 

n.a. 

10 

0 

0 

0 

0 

0 

10 

0 

0 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0/21 

0 

0 

0 

0 

0 

0/10 

0/10 

0/10/12 

0/10 

0/10 

0 

0 

0 

0 

0/12 

0/10 

0/25 

0/25 

10 

10 

10 

10 

0/10 

0/10 

0 

8 

0 

0 

0/25 

0 

0/25 

0/25 

0/25 

8 

10 

0 

10/8 

0 

0 

10 

10 

15 

10 

10 

15 

0/10 

0/15 

0/3 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/15 

0/10 

0 

0 

0 

10 

0 

0 

0 

0 

0 

n.a. 

0/10 

0 

0 

0/25 

0/10 

0/25 

10 

5 

0/5 

8 

0 

0 

10 

0 

0 

0 

0 

0 

0 

0 

0 

0/10 

0/12 

0/15 

0/10 

EN 

44 

EN 

 
  
 
Latvia 

Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

x 
0/5 

0 
x 

0/5/10 
0/5 

0/5/10 0/5/10 
0/5 

0/5 

0/5/10 
0/5 

0/5/10 
0/5 

0/5/10 
0/5 

0/5/10 
0/5 

0/5/10 
0/5 

0/5/10 0/5/10 
0/5 

0/5 

0/5/10
0/5 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

10 

10 

x 

0¹ 

0 

10 

15/10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

x 

5 

10 

0¹ 

0¹ 

0 

x 

10 

0¹ 

0¹ 

0 

10 

x 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

10 

10 

0¹ 

0¹ 

0 

0 

0¹ 

0¹ 

0 

0 

0¹ 

0¹ 

0 

5 

15 

10 

10 

0/10 

0/10 

0/10 

0/10 

0/10 

0 

0 

10 

10 

0 

5 

0/10 

0/10 

0/10 

United Kingdom 10 

0 

0 

10 

0 

0 

0 

5 

0 

0 

10 

0 

5 

0/10 

0 

0 

0 

10 

0 

0 

5 

0 

10 

x 

10 

0 

x 

0/15 

0/10 

0/5 

0/5 

0 

10 

0 

10 

0 

0 

0 

5 

0 

5 

x 

0 

12 

0 

0 

0 

5 

0/15 

0/12 

x 

0 

0 

X 

0¹ 

0¹ 

0 

10 

10 

x 

0 

5 

Note: 

Individual notes are prevalent in most bilateral double taxation treaties. 

Source: PriceWaterhouseCoopers (2009). 

EN 

45 

EN 

 
  
 
Bilateral double taxation treaties on royalty payments between EU Member States (2009) 

Annex 4 

Payed 
from/Recipient 

Austria  Belgium  Bulgaria  Cyprus 

Czech 
Republic 

Denmark Estonia  Finland  France  Germany  Greece  Hungary  Ireland 

Italy 

Austria 

Belgium 

Bulgaria 

Cyprus 

x 

10 

0 

0 

0/10 

x 

5 

0 

Czech Republic 

0/5 

0/10 

Denmark 

10/0 

0 

0 

5 

x 

0/10 

10 

0 

0 

0 

10 

x 

0/5 

0 

5 

5/10 

10 

0/5 

x 

0 

0 

0 

0 

0 

0/5 

x 

10/5 

5/10 

5 

5 

n.a. 

0/5 

n.a. 

n.a. 

10 

0/1/5/1
0 

10/5 

0 

0 

0 

5 

0 

0/5 

0 

0 

0 

5 

0 

5 

0 

7 

5 

10 

0 

0/10 

5 

0 

0 

10 

0 

10 

0 

0/10 

0/10 

0 

10 

0 

10 

0 

5 

5 

0 

0/5 

5 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

Estonia 

Finland 

France 

Germany 

5 

0 

0 

Greece 

10/0 

Hungary 

Ireland 

0 

0 

x 

10 

5 

0 

0 

5 

0 

0 

5 

5/0 

5 

10 

10 

0/10 

28 

0 

0/5 

5/0 

0 

0 

10 

0 

x 

0/5/10 

33,33/0 

5/10/0  0 

5 

10 

10 

0/10 

0 

5 

0 

0 

10 

0/5 

5/10 

10 

5/10 

0/10 

5 

0 

0 

x 

0 

5 

0 

0 

5 

0 

x 

0 

0 

0 

10 

5/0 

0 

x 

10 

0/5 

5 

0 

0 

10 

x 

0 

0 

0 

0 

5 

0 

X 

5 

5/0 

0/5 

5 

0 

0 

EN 

46 

EN 

 
  
Italy 

Latvia 

0/10 

5 

5 

0 

0/5 

0/5 

5/10 

0/5 

0/5 

0/5 

0/5 

0 

0 

x 

5/10 

5/10 

0/5 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

Lithuania 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

0 

0 

0 

20 

10/5 

0 

0 

0 

10 

10 

0 

0 

0 

5 

0 

0 

0 

5 

0 

0 

0 

5 

0 

0 

0 

5 

10 

n.a. 

10 

10 

0 

0 

0 

10 

10 

0 

0 

0 

0 

10 

0 

0 

0 

10 

5 

0 

0 

0 

5 

10 

0 

0 

0 

10 

10 

0 

0 

0 

10 

10 

0 

0 

0 

10 

10 

0 

0 

0 

10 

12 

Romania 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

Slovakia 

Slovenia 

Spain 

0 

5 

5 

Sweden 

0/10 

United Kingdom* 0 

0 

5 

5 

0 

0 

0 

5/10 

0 

5 

0 

0 

10 

n.a. 

0 

0 

0 

10 

5 

0/5 

10 

0 

5 

6 

0 

0 

0 

10 

10 

5/10 

10 

0 

5 

5 

0 

0 

0 

5 

5 

0 

0 

0 

5 

5 

0 

0 

0 

10 

6 

0/5 

0 

0 

5 

0 

0 

0 

0 

5 

10 

0/5 

0 

0 

10 

8 

0/5 

8 

EN 

47 

EN 

 
  
Payed from/Recipient 

Latvia  Lithuania Luxembourg Malta  Netherlands Poland  Portugal Romania Slovakia Slovenia  Spain  Sweden  UK 

Austria 

Belgium 

Bulgaria 

Cyprus 

10/5 

10/5 

0/10 

0/10 

0/10 

5/10 

5/10 

7/5 

10 

0 

5 

0/10 

0 

10 

0/5 

n.a. 

n.a. 

n.a. 

0/10 

n.a. 

Czech Republic 

10 

10 

0/10 

5/10 

5/10 

0 

5 

0 

5 

0 

5 

5 

5 

5 

5 

5 

5/10 

10 

10 

n.a. 

10 

n.a. 

3 

5 

15 

0/5 

10 

10 

5 

5 

10 

0/5 

5 

5 

5/10 

5 

5 

0 

n.a. 

n.a. 

0/10 

0/10 

0 

5 

0 

0 

0 

0 

0/10 

10 

0/5 

0/5 

0/10 

5 

n.a. 

6 

0 

0 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

10 

10 

5/10/0  5/10/0 

10 

10 

5 

0 

5 

5/10 

5/10 

5/7 

5/10 

5/10 

0/10 

0/10 

0 

0 

5/10 

5/10 

10 

0 

10/0 

0 

8 

10 

0/5 

0/10 

0 

0 

0 

5/7 

0 

0 

5 

10 

10 

5 

10/0 

5/0 

10/0 

5 

10 

10 

10 

10 

10 

3 

5/7 

10 

10 

5/0 

5 

10 

10 

0/10 

0/10 

0/3 

0/10 

10 

12 

10 

0/5 

5 

5 

n.a. 

5/0 

5 

10 

5 

0/5 

10 

5 

6 

0 

0/10 

4/8 

0 

0 

0 

5 

0 

0 

5 

0 

0 

0 

0 

0 

0 

8 

x 

0 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

5/10 

EN 

48 

EN 

 
  
 
Lithuania 

Luxembourg 

Malta 

Netherlands 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

10/0 

0 

0 

0 

10 

10 

x 

0 

0 

0 

10 

10 

0 

10 

10 

0 

10 

10 

5/10 

5/10 

x 

0 

0 

10 

10 

0 

x 

0 

10 

10 

0 

0 

x 

5 

0 

0 

0 

x 

10 

10 

0 

0 

0 

10 

x 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0/10 

0 

5 

10 

0 

5 

0 

5 

0 

0 

10 

0 

5 

6 

0 

0 

0 

10 

10 

0 

5 

5 

0/5 

0/10 

0/10 

5 

5 

15 

0 

0 

0 

10 

10 

x 

0 

5 

10 

0 

0 

0 

5 

10 

0 

0 

0 

10 

5 

0 

0 

0 

10 

5 

0 

0 

0 

5 

10 

0 

0 

0 

5 

5 

0/10 

0/10 

0/10 

0/10 

0/10 

0 

10 

5 

0/5 

10 

0 

x 

5 

0 

5 

x 

0 

0 

0 

5 

10 

10 

n.a. 

0/10  X 

5 

10 

0 

0 

x 

United Kingdom* 

10 

10 

Note: 

Individual notes are prevalent in most bilateral double taxation treaties. 

Source: PriceWaterhouseCoopers (2009). 

EN 

49 

EN 

 
  
 
Statutory corporate tax rates in EU countries 

Adjusted top statutory tax rate on corporate income in 2009, in percentage
Higher tax countries 

40,0

Lower tax countries 

Annex 5 

35,0

30,0

25,0

20,0

15,0

10,0

5,0

0,0

EN 

50 

EN 

 
  
 
Duration of the tax refund procedure 

Duration of tax relief  

Countries 

Annex 6 

Less than 6 months 

Austria (6 months), Ireland (6 months) and Norway (3-6 months) 

Between 6 and 9 months 

Denmark (6-9 months), Finland (6-9 months), Sweden (6-9 months) and Switzerland (6-8 months) 

Between 9 and 24 months 

Belgium (18 months), France (8-14 months), Portugal (12-24 months) and Spain (12-24 months) 

More than 24 months 

Italy (60-84 months) 

Note:  The numbers show the average run time from point of dispatching to custodian/foreign tax office. The table lists information for 12 EU host 
countries and no data is available for the remaining EU countries. 

Source: Simplified Withholding Tax Relief Procedures, DG Internal Market and Services, European Commission, Brussels 2010. 

EN 

51 

EN 

 
  
Sectors with large intangible fixed assets, 2008 data 

Annex 7 

Mean intangible fixed assets as a share of 
operating revenue 

Share of 
intangible fixed 
assets 

Share of value 
added 

Patent-intensive sectors  

Chemicals and chemical products 

Machinery and equipment n.e.c. 

Electrical and optical equipment 

Manufacture  of  other 
equipment 

transport 

Wholesale trade and retail trade 

Research and development 

Other business activities 

Other royalty-intensive sectors 

Total credit institutions 

Recreational,  cultural  and  sporting 
activities 

Food products and beverages 

6.0 

28.6 

0.1 

0.5 

2.7 

0.1 

8.9 

1.2 

0.4 

1.0 

0.8 

0.6 

56.4 

6.4 

1.5 

2.1 

1.5 

5.9 

0.7 

38.2 

29.1 

4.9 

1.9 

3.5 

41.3 

3.3 

3.6 

2.1 

1.0 

17.5 

n.a 

13.8 

16.7 

n.a. 

n.a. 

3.4 

EN 

52 

EN 

 
  
  
Post and telecommunications 

Computer and related activities 

Rubber and plastic products 

Motor  vehicles,  trailers  and  semi-
trailers 

Other non-metallic mineral 
products 

0.5 

0.2 

0.1 

0.0 

0.0 

13.7 

1.9 

0.6 

1.8 

0.8 

4.3 

3.4 

1.4 

2.7 

1.5 

Note:  We exclude the resource-intensive sectors such as mining and oil extraction since such exploitation rights enter as intangible fixed assets in the 
companies’ balance sheet information but do not all under the Directive. The definition of patent intensive industries follows Norden (2009). 

Source: 

Own calculations based on Amadeus data. 

EN 

53 

EN 

 
  
The impact of lowering the holding requirements from 10% to 0% 

Share of holding links lying in the 0-10% ownership interval 

Annex 8 

Holding links 

Subsidiary employment 

Subsidiary turnover 

Total 

7% 

27% 

24% 

Weighted by intangible fixed assets of parent 

Weighted by financial 
revenue of parent 

. 

12% 

10% 

. 

25% 

12% 

Note:  The calculations are for 2008 and show the proportion of the holding links where the ownership share lies between 0 percent and 10 percent.  

Source: Copenhagen Economics, Taxation of interest and royalties – impact assessment of amendments to the present Directive, October 2010. 

EN 

54 

EN 

 
  
 
Impacts on tax base of reducing withholding taxes on interests and royalties 

Annex 9 

No impact on tax revenues in host country 

Reduced tax revenues in host countries 

Interest 

Austria* 

Cyprus* 

Denmark* 

Estonia* 

Finland 

France* 

Germany* 

Lithuania* 

Luxembourg* 

Malta 

Netherlands* 

Slovak Republic* 

Spain* 

EN 

Royalties 

Luxembourg 

Malta* 

Netherlands* 

Sweden 

Slovak Republic* 

Interest 

Belgium 

Bulgaria 

Czech Republic 

Greece 

Hungary 

Ireland 

Italy 

Latvia 

Poland 

Portugal 

Romania 

Slovenia 

United Kingdom 

55 

Royalties 

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

EN 

 
  
 
 
 
 
 
 
 
 
Sweden 

Italy 

Latvia 

Lithuania 

Poland 

Portugal 

Romania 

Slovenia 

Spain 

United Kingdom 

Note:  *  Indicates  that  there  is  generally  no  withholding  tax  on  cross-border  payments  to  other  EU  Member  States  but  that  there  might  be  few 
exemptions. 

EN 

56 

EN 

 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Indicators of interest payments for different groups of countries 

Annex 10 

Group 1 

Group 2 

Group 3 

Group 4 

Total 

Italy and United Kingdom 

Portugal, 

Romania, 

Belgium 

Poland, Greece, 
Hungary and 

Latvia, 

Ireland 

Slovenia, Bulgaria, 
Czech Rep. 

Outgoing interest payments (billion €) 

Outgoing 
payments (billion €) 

inter-company 

Outgoing 
payments as share of GDP 

inter-company 

interest 

interest 

Loss  of  gross  income  from  withholding 
tax on inter-company payments(billion €)

Net balance (billions €) 

79.4 

7.9 

13.0 

1.3 

3.1 

0.3 

16.0 

111.5 

1.6 

11.2 

0.23% 

0.12% 

0.08% 

0.46% 

0.22% 

0.5 

6.8 

0.1 

0.8 

0.0 

0.1 

0.2 

-0.1 

0.8 

0.8 

Net balance as share of GDP 

0.20% 

0.08% 

0.03% 

-0.02% 

0.01% 

Net revenue effects after netting for: 

Gains from reduced tax credits 

0.5* 

0.05* 

0.0* 

-0.2* 

0.35* 

EN 

57 

EN 

 
  
  
Effectives from existing Directive 

0.3 

0.03 

0.0 

-0.1 

0.23 

Note:  All the data is from 2008 except data from Poland, Greece, Slovenia, Bulgaria with are from 2007 and Romania with are from 2006. Group 1 
includes  countries  with  net  interest  payments  above  €10.000  billion;  Group  2  includes  countries  with  net  interest  payments  between  €1000  and 
€10.000;  Group  3  includes  countries  with  positive  net  interest  payments  below  €1000;  and  group  4  includes  countries  with  negative  net  interest 
payments. The four groups represent 23 percent of the total interest paid. * These numbers should be interpreted with caution since average unweighted 
withholding taxes have been used in the calculations. 

Source: 

Eurostat, International Transactions in Interest and Dividend Payments. 

EN 

58 

EN 

 
  
Average withholding taxes on interest payments to other EU countries 

Annex 11 

Average withholding tax paid on corss-border interest income according to DDTs with 
other EU countries (2009)

Higher tax countries

Lower tax countries

10.0

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Note:  The  withholding  tax  in  the  individual  home  country  is  calculated  as  the  unweighted  average  of  the  withholding  tax  paid  in  other  EU  (host) 
countries.  

Source: 

PriceWaterhouseCoopers. 

EN 

59 

EN 

 
  
 
 
Indicators of royalty payments for different groups of countries 

Annex 12 

Group 1 

Group 2 

Group 3 

Group 4 

Total 

Denmark, France and the 
United Kingdom 

Austria, Belgium, Finland, 
Hungary, Italy and Spain 

Greece, Portugal and 
Romania 

Bulgaria, Czech Rep., Poland 
and Slovenia 

Outgoing royalty payments (billion €) 

11,5 

Outgoing royalty payments as share of GDP 

0.29% 

Loss of gross income from withholding tax 
(billion €) 

Net balance (billions €) 

0.5 

6.6 

8,8 

0.25% 

0.5 

-4.8 

1 

0.18% 

0.1 

-0.9 

2 

0.34% 

0.2 

-1.7 

Net balance as share of GDP 

0.16% 

-0.13% 

-0.17% 

-0.29% 

Net revenue effects after netting from gains 
from reduced tax credits 

Effectives from existing directive 

0.2 

 0.1 

-0.2 

-0.1 

-0.1 

-0.05 

-0.2 

-0.1 

23.3 

0.27% 

1.3 

-0.8 

-
0.01% 

-0.3 

-0.15 

Note:  Cyprus, Estonia, Germany, Latvia, Ireland and Lithuania have been excluded due to lack of data. Group 1 consists of countries with a positive net balance; 
Group 2 consists of countries with a negative net balance of less than 0.25% of GDP and outgoing royalty payments greater than 0.4 billion; Group 3 consists of 
countries with negative net balance less than 0.25% of GDP and outgoing royalty payment less than 0.4 billion; and Group 4 consists of countries with net balance 
negative and greater than 0.25% of GDP. The four groups represent 49% of total EU royalty payments. 

Source: 

Eurostat, International Transactions in Royalties and Licence Fees. 

EN 

60 

EN 

 
  
  
Average withholding taxes on royalty payments to other EU countries 

Annex 13 

Average withholding tax paid on royalty income according to DDTs with other EU 
countries (2009)

Higher tax countries

Lower tax countries

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Note:  The withholding tax in the individual home country is calculated as the (unweighted) average of the withholding tax paid in other EU (host) 
countries.  

Source: 

PriceWaterhouseCoopers. 

EN 

61 

EN 

 
  
 
Legal entities covered by the two directives 

Country 

Legal entities covered by the Interest and 
Royalty Directive as listed  

Annex 14 

Legal entities covered by the 
Parent-Subsidiary Directive 
as listed 

Legal entities covered by 
the Interest and Royalty 
Directive as listed in 
Amadeus 

Legal entities 
covered by 
the Parent-
Subsidiary 
Directive as 
listed in 
Amadeus 

Is the list of entities 
covered by the 
Parent-Subsidiary 
Directive less 
restrictive than the 
Interest and 
Royalty Directive? 

Austria 

Aktiengesellschaft (AG), Gesellschaft mit 
beschränkter Haftung (GmbH) 

AG 

GmbH 

GmbH & Co KG 

Yes 

All 
companies in 
Amadeus 

Aktiengesellschaft (AG), 
Gesellschaft mit beschränkter 
Haftung (GmbH), 
Versicherungsvereine auf 
Gegenseitigkeit, Erwerbs- 
und 
Wirtschaftsgenossenschaften, 
Betriebe gewerblicher Art 
von Körperschaften des 
öffentlichen Rechts, 
Sparkassen and other 
companies constituted under 
Austrian law subject to 
Austrian corporate tax 

EN 

62 

EN 

 
  
 
Belgium 

Société anonyme (SA), Société en 
commandite par actions (SCA), Société 
privée à responsabilité limitée (SPRL) and 
Public law bodies that operate under private 
law 

Private company limited by 
shares 

Yes 

All 
companies in 
Amadeus 

Private company with 
limited liability 

Company limited by shares 

Public company limited by 
shares 

Société anonyme (SA), 
Société en commandite par 
actions (SCA), Société privée 
à responsabilité limitée 
(SPRL), Société coopérative 
à responsabilité limitée 
(SCRL), Société coopérative 
à responsabilité illimitée 
(SCRI), Société en nom 
collectif (SNC), Société en 
commandite simple (SCS). 
public undertakings which 
have adopted one of the 
above mentioned legal forms 
and other companies 
constituted under Belgian law 
subject to Belgian corporate 
tax 

EN 

63 

EN 

 
  
 
Bulgaria 

Акционерно дружество (p.l.c), 
Командитно дружество с акции (ltd.) and 
Дружество с ограничена отговорност 
(ltd.) 

Акционерно дружество 
(p.l.c), Командитно 
дружество с акции (ltd.) and 
Дружество с ограничена 
отговорност (ltd.) 

Czech 
Republic 

Akciová společnost (p.l.c), Společnost s 
ručením omezeným (ltd.), Veřejná obchodní 
společnost (general partnership), 
Komanditní společnost 

Akciová společnost (p.l.c), 
Společnost s ručením 
omezeným (ltd) 

Public limited company 

One-person public limited 
company 

One-person private limited 
company 

Private limited company 

No 

Public 
limited 
company 

One-person 
public 
limited 
company 

One-person 
private 
limited 
company 

Private 
limited 
company 

Joint stock company 

Limited liability company 

Joint stock 
company 

Yes/No 

Družstvo 

Cyprus 

Companies in accordance with the 
Company's Law, Public Corporate Bodies 
as well as any other Body which is 
considered as a company in accordance 
with the Income tax Laws 

εταιρείες” as defined in the 
Income Tax laws 

Limited company 

Public limited company 

Limited 
liability 
company 

Limited 
company 

Public 
limited 
company 

No 

EN 

64 

EN 

 
  
Denmark 

Aktieselskab (ltd.) and Anpartsselskab 
(p.l.c) 

Aktieselskab (ltd.), 
Anpartsselskab (p.l.c) and 
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" 

Limited company 

Company with limited 
liability  

Limited company (Faroe 
Islands) 

Private limited company 

Private limited company 
(Faroe Islands) 

EN 

65 

Limited 
company 

Yes 

Company 
with limited 
liability  

Limited 
company 
(Faroe 
Islands) 

Private 
limited 
company 

Private 
limited 
company 
(Faroe 
Islands) 

Cooperative 
with limited 
liability 

General 
partnership 

Limited 
partnership 
by shares 

Limited 
partnership 

Profit 
foundation 

EN 

 
  
 
Estonia 

Täisühing (general partnership), 
Usaldusühing (limited partnership), 
Osaühing (Ltd.), Aktsiaselts (p.l.c.), 
Tulundusühistu limited liability 
cooperative) 

Täisühing (general 
partnership), Usaldusühing 
(limited partnership), 
Osaühing (Ltd.), Aktsiaselts 
(p.l.c.), Tulundusühistu 
limited liability cooperative) 

Limited liability company 

Share company 

Profit oriented cooperatives 

Finland 

Osakeyhtiö (ltd.), Osuuskunta 
(cooperative), Säästöpankki) and 
Vakuutusyhtiö (försäkringsbolag) 

Osakeyhtiö (ltd.), Osuuskunta 
(cooperative), Säästöpankki) 
and Vakuutusyhtiö 
(försäkringsbolag) 

Private limited company 

Public limited company 

Association/cooperatives 

No 

No 

Limited 
liability 
company 

Share 
company 

Profit 
oriented 
cooperatives 

Private 
limited 
company 

Public 
limited 
company 

EN 

66 

EN 

 
  
 
France 

Société anonyme (SA), Société en 
commandite par actions (SCA), Société à 
responsabilité limitée (SARL) and industrial 
and commercial public establishments and 
undertakings 

Yes 

All 
companies in 
Amadeus 

SA 

SA Directoire 

SARL 

SCA 

Société anonyme (SA), 
Société en commandite par 
actions (SCA), Société à 
responsabilité limitée 
(SARL), Sociétés par actions 
simplifiées (SAS), Sociétés 
d'assurances mutuelles, 
Caisses d'épargne et de 
prévoyance and Sociétés 
civiles which are 
automatically subject to 
corporation tax, Coopératives 
, Unions de coopératives, 
industrial and commercial 
public establishments and 
undertakings, and other 
companies constituted under 
French law subject to French 
corporate tax 

EN 

67 

EN 

 
  
 
 
 
Germany 

Aktiengesellschaft (AG.), 
Kommanditgesellschaft auf Aktien (KGaA), 
Gesellschaft mit beschränkter Haftung 
(GmbH) and bergrechtliche Gewerkschaft 

Greece 

αvώvυµη εταιρ (SA) 

AG 

KG  

GmbH 

GmbH & Co KG 

Aktiengesellschaft (AG), 
Kommanditgesellschaft auf 
Aktien (KGaA), Gesellschaft 
mit beschränkter Haftung 
(GmbH), 
Versicherungsverein auf 
Gegenseitigkeit, Erwerbs- 
und 
Wirtschaftsgenossenschaft, 
Betriebe gewerblicher Art 
von juristischen Personen des 
öffentlichen Rechts, and other 
companies constituted under 
German law subject to 
German corporate tax 

SA 

αvώvυµη εταιρεία (SA), 
εταιρεία περιωρισµέvης 
ευθύvης (ltd.) and other 
companies constituted under 
Greek law subject to Greek 
corporate tax 

Yes 

All 
companies in 
Amadeus 

Yes/No 

All 
companies in 
Amadeus 

EN 

68 

EN 

 
  
 
Hungary 

Közkereseti társaság (community interest 
ltd.), Betéti társaság (partnership), Közös 
vállalat (joint venture), Korlátolt 
felelősségű társaság (ltd.), 
Részvénytársaság (limited company with 
shares), Egyesülés, Közhasznú társaság 
(general partnership) and Szövetkezet  

Közkereseti társaság 
(community interest ltd.), 
Betéti társaság (partnership), 
Közös vállalat (joint venture), 
Korlátolt felelősségű társaság 
(ltd.), Részvénytársaság 
(limited company with 
shares), Egyesülés and 
Szövetkezet 

Company limited by shares 

Cooperative company 

Limited liability company 

Limited partnership 

Yes /No 

Company 
limited by 
shares 

Cooperative 
company 

Limited 
liability 
company 

Limited 
partnership 

Ireland 

Public companies limited by shares or by 
guarantee (Public), private companies 
limited by shares or by guarantee (Private), 
bodies registered under the Industrial and 
Provident Societies Acts or building 
societies registered under the Building 
Societies Acts 

Companies incorporated or 
existing under Irish law, 
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 

Private 

Private 

Yes/No 

Public, A.I.M. 

Public, quoted 

Public, not quoted 

Public, 
A.I.M. 

Public, 
quoted 

Public, not 
quoted 

EN 

69 

EN 

 
  
 
Italy 

Società per azioni (SPA), società in 
accomandita per azioni (SAPA), società a 
responsabilità limitata (SRL) and public and 
private entities carrying on industrial and 
commercial activities 

Società per azioni (SPA), 
Società in accomandita per 
azioni (SAPA), Società a 
responsibilità limitata (SRL), 
Società cooperative, Società 
di mutua assicurazione, and 
private and public entities 
whose activity is wholly or 
principally commercial 

Latvia 

Akciju sabiedrība (AS), Sabiedrība ar 
ierobežotu atbildību (SIA) 

Akciju sabiedrība (AS), 
Sabiedrība ar ierobežotu 
atbildību (SIA) 

Joint stock company - SPA 

Limited liability company - 
SRL 

Yes 

All 
companies in 
Amadeus 

Limited liability consortium 

Limited partnership with 
shares - SAPA 

One-person company with 
limited liability 

One-person joint stock 
company - SPA 

Joint stock company - AS 

Limited liability company - 
SIA 

No  

Joint stock 
company - 
AS 

Limited 
liability 
company - 
SIA 

Lithuania 

Companies incorporated under the law of 
Lithuania 

Companies incorporated 
under the law of Lithuania 

All companies in Amadeus  All 

No 

companies in 
Amadeus 

EN 

70 

EN 

 
  
Luxembourg  Société anonyme (p.l.c), Société en 

commandite par actions (Limited 
partnership with shares) and société à 
responsabilité limitée (Ltd) 

Company limited by shares 

Limited partnership 

Private company with 
limited liability 

Yes 

All 
companies in 
Amadeus 

Société anonyme (p.l.c), 
Société en commandite par 
actions (Limited partnership 
with shares), Société à 
responsabilité limitée (Ltd), 
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, and other 
companies constituted under 
Luxembourg law subject to 
Luxembourg corporate tax 

Malta 

Kumpaniji ta' Responsabilita' Limitata, 
Soċjetajiet in akkomandita li l-kapital 
tagħhom maqsum f'azzjonijiet 

Kumpaniji ta' Responsabilita' 
Limitata, Soċjetajiet en 
commandite li l-kapital 
tagħhom maqsum f'azzjonijiet

International Trading Co. – 
Private non-Exempt 

Limited Liability Co. - 
Public Non-Exempt 

No 

International 
Trading Co. 
– Private 
non-Exempt 

Limited 
Liability Co. 
- Public Non-
Exempt 

EN 

71 

EN 

 
  
Netherlands  Naamloze vennootschap (NV) and Besloten 
vennootschap met beperkte 
aansprakelijkheid (BV) 

Private limited liability 
company (BV) 

Public limited liability 
company (NV) 

Yes 

All 
companies in 
Amadeus 

Naamloze vennnootschap 
(NV), Besloten vennootschap 
met beperkte 
aansprakelijkheid (BV), Open 
commanditaire vennootschap 
(CV), Coöperatie (C)), 
Onderlinge 
waarborgmaatschappij 
(Mutual insurance company), 
Fonds voor gemene rekening, 
Vereniging op coöperatieve 
grondslag, Vereniging welke 
op onderlinge grondslag als 
verzekeraar of 
kredietinstelling optreedt, and 
other companies constituted 
under Dutch law subject to 
Dutch corporate tax 

Poland 

Spółka akcyjna (SA), Spółka z ograniczoną 
odpowiedzialnością (Sp. z.o.o) 

Spółka akcyjna (SA), Spółka 
z ograniczoną 
odpowiedzialnością (Sp. 
z.o.o) 

Joint stock company - SA 

Limited liability company - 
Sp. z.o.o. 

No 

Joint stock 
company - 
SA 

Limited 
liability 
company - 
Sp. z.o.o. 

EN 

72 

EN 

 
  
 
All companies in Amadeus  All 

No 

companies in 
Amadeus 

Portugal 

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

Romania 

Societăţi în nume colectiv (SNC), Societăţi 
în comandită simplă (SCS), Societăţi pe 
acţiuni (SA), Societăţi în comandită pe 
acţiuni (SCA) and Societăţi cu răspundere 
limitată (SRL) 

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

Societăţi în nume colectiv 
(SNC), Societăţi în comandită 
simplă (SCS), Societăţi pe 
acţiuni (SA), Societăţi în 
comandită pe acţiuni (SCA) 
and Societăţi cu răspundere 
limitată (SRL) 

Slovak 
Republic 

Aakciová spoločnos (Limited liability 
company), Spoločnosť s ručením 
obmedzeným (Limited company), 
Komanditná spoločnos (Limited liability 
partnership), Verejná obchodná spoločnos 
(general partnership or unlimited 
partnership), Družstvo (Cooperative) 

Akciová spoločnosť (Limited 
liability company), 
Spoločnosť s ručením 
obmedzeným (Limited 
company), Komanditná 
spoločnosť (Limited liability 
partnership) 

Cooperative 

Joint stock company 

Joint stock 
company 

Yes 

Limited liability company 

Limited 
liability 
company 

EN 

73 

EN 

 
  
 
 
 
Slovenia 

Delniška družba (p.l.c.), Komanditna 
delniška družba, Komanditna družba, 
Družba z omejeno odgovornostjo (Ltd.), 
Družba z neomejeno odgovornostjo 

Delniška družba (p.l.c.), 
Komanditna družba, Družba z 
omejeno odgovornostjo (Ltd.)

Cooperative with limited 
liability 

Joint-stock company 

Limited liability company 

Yes/No 

Cooperative 
with limited 
liability 

Joint-stock 
company 

Limited 
liability 
company 

Spain 

Sociedad anónima (SA), Sociedad 
comanditaria por acciones (SCA), Sociedad 
de responsabilidad limitada (SPRL) and 
those public law bodies which operate 
under private law 

Sweden 

Aktiebolag (Ltd.) and 
Försäkringsaktiebolag 

Sociedad anónima (SA), 
Sociedad comanditaria por 
acciones (SCA), Sociedad de 
responsabilidad limitada 
(SPRL) and public law bodies 
which operate under private 
law. Other entities constituted 
under Spanish law subject to 
Spanish corporate tax 
("Impuesto sobre 
Sociedades") 

Aktiebolag (Ltd.), 
Försäkringsaktiebolag, 
Ekonomiska föreningar 
(economic association), 
Sparbanker and Ömsesidiga 
försäkringsbolag 

Sociedad anonima (SA) 

Sociedad limitada 

Yes 

All 
companies in 
Amadeus 

Private limited company 

Public limited company 

Yes/No 

Private 
limited 
company 

Public 
limited 
company 

EN 

74 

EN 

 
  
 
United 
Kingdom 

Companies incorporated under the law of 
the United Kingdom 

Companies incorporated 
under the law of the United 
Kingdom 

All companies in Amadeus  All 

No 

companies in 
Amadeus 

Note:  Yes/No means that the two lists are different but that we are not able to detect the differences in the legal forms used in Amadeus. 

Source: Council Directive 2003/49/EC and Council Directive 2003/123/EC. 

EN 

75 

EN 

 
  
The coverage of legal forms in the Directive 

Annex 15 

Share of holding links with a legal form is covered by the present Directive 
in 2008 

Total 

Weighted  by  intangible  fixed 
assets of parent 

Weighted  by  financial 
revenue of parent 

Holding links 

82% 

Subsidiary 
employment 

82% 

Subsidiary turnover 

85% 

95% 

95% 

90% 

90% 

Note:  The calculations are for 2008 and include all cases where both the parent and the subsidiary 
entity  have  a  legal  form  that  is  already  covered  by  the  Interest  and  Royalty  Directive.  The  sample 
includes only the entities for which we have information on employment and turnover. 

Source: Copenhagen  Economics  Taxation  of  interest  and  royalties  –  impact  assessment  of 
amendments to the present Directive, October 2010. 

EN 

76 

   EN 

 
 
 
 
The coverage of legal forms in the amended Directive 

Annex 16 

Share of holding links with a legal form is covered by the amended Directive  

(legal form as in the parent-Subsidiary Directive) 

Holding links 

Subsidiary employment 

Subsidiary turnover 

Total 

84% 

83% 

87% 

Weighted by intangible fixed assets of 
parent 

Weighted by financial revenue 
of parent 

. 

97% 

96% 

. 

92% 

91% 

Note:  The  calculations  are  for  2008  and  include  all  cases  where  both  the  parent  and  the 
subsidiary  entity  have  a  legal  form  that  is  already  covered  by  the  Interest  and  Royalty 
Directive.  The  sample  includes  only  the  entities  for  which  we  have  information  on 
employment and turnover. 

Source:  Copenhagen  Economics.  Taxation  of  interest  and  royalties  –  impact  assessment  of 
amendments to the present Directive, October 2010. 

EN 

77 

   EN 

 
 
Annex 17 

Transposition of criteria applicable to “associated companies” 

Country 

Application  to 
more  types  of 
entities 

Association 
threshold 

Indirect 

Notes 

holdings

Austria 

No1 

25% 

No 

1  Austrian  law  limits  the  benefits  of  the 
Directive to entities listed in the Directive with 
respect  to  the  recipients  of  income;  with 
respect  to  the  payer  of  income  the  list  of  the 
types of benefiting entities is broader than that 
in the Annex. 

Belgium 

Yes 

Cyprus 

No 

Czech 
Republic 

Yes2 

Denmark 

No 

Estonia 

Yes 

Finland 

France 

No 

No 

Germany 

No 

Hungary 

- 

Ireland 

Italy 

No 

No 

Luxembourg  - 

Malta 

- 

Netherlands  Yes3 

25% 

25% 

25% 

25% 

25% 

25% 

25% 

25% 

- 

25% 

25% 

- 

- 

- 

Yes 

No 

No 

No 

No 

No 

No 

No 

- 

No 

No 

- 

- 

- 

to 

law 

limits 

the  benefits  of 

the 
2  Czech 
Directive to entities listed in the Directive with 
respect 
income;  no 
the  recipients  of 
limitation  applies  as  to  the  payer  of  income 
resident in the Czech Republic. Czech entities 
subject  to  tax  at  the  level  of  its  members  are 
listed in the Annex to the Directive. 

3  The  Netherlands  limits  the  benefits  of  the 
Directive to entities listed in the Directive with 
respect  to  the  recipients  of  income;  the  payer 
of income resident in the Netherlands may be 
an  NV  (public  limited  liability  company),  a 

EN 

78 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
Slovak 
Republic4 

Yes 

25% 

No 

BV  (private  limited  liability  company),  a 
mutual fund or a cooperative. 

4  The  Slovak  law  requires  the  recipient 
company  to  be  a  legal  entity,  which  is  a 
taxpayer  in  another  EU  Member  State;  no 
limitation  applies  as  to  the  payer  of  income 
resident 
the  Slovak  Republic.  Slovak 
entities  subject  to  tax  at  the  level  of  its 
members  are  listed  in  the  Annex  to  the 
Directive. 

in 

Slovenia 

No 

25% 

No 

Spain 

Yes5 

No/25%6 

Yes/ 
No6 

5  No  restrictions  on  the  type  of  entity  for 
interest  payments;  for  royalties,  only  entities 
listed in the Annex to the Directive. 

6  Exemption  from  tax  on  interest  payments 
applies  to  interest  paid  to  companies  resident 
irrespective  of 
in  EU  Member  States 
affiliation. 

Sweden 

United 
Kingdom 

No 

No 

25% 

25% 

No 

No 

Source: IBFD (2005) and PriceWaterhouseCoopers (2009). 

EN 

79 

   EN 

 
 
 
 
The impact of lowering the holding requirements from 25% to 10% 

Annex 18 

Share of holding links lying in the 10-25% ownership interval 

Holding links 

Subsidiary 
employment 

Total 

5% 

5% 

Subsidiary turnover 

4% 

Weighted  by  intangible  fixed 
assets of parent 

Weighted  by  financial 
revenue of parent 

. 

6% 

3% 

. 

7% 

3% 

Note:  The  calculations  are  for  2008  and  show  the  proportion  of  the  holding  links  where  the 
ownership share lies between 10 percent and 25 percent.  

Source: Copenhagen Economics Taxation of interest and royalties – impact assessment of amendments 
to the present Directive, October 2010. 

EN 

80 

   EN 

 
 
Annex 19 

Briefing on the Public consultation on the taxation of cross-border interest and royalty 
payments between associated companies 

On  August  24,  TAXUD  launched  a  public  consultation  on  the  possible  amendments  to  the 
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 
(hereinafter "the Directive"), which has been closed on 31 October. The questions referred to 
the policy options currently under analyses by TAXUD Directorate D. The main purpose of 
the amendments would be the extension of the Directive coverage, which is currently limited 
to payments between associated companies (25% shareholding); in addition, companies must 
have a legal forma as listed in the Directive annex. The results of the replies received can be 
summarised as follows. 

71 contributors have sent their responses. They can be grouped in the following categories: 

1

8

25

18

3

16

Multinationals
Large companies
Tax advisors/tax practioners
Business associations
Professional associations
Civil servants

EN 

81 

   EN 

 
 
The contributors can be grouped according to their place of establishment: 

16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0

Belgium

Denmark

Germany

Ireland

Greece

Spain

France

Italy

Netherlands

Austria

Portugal

Romania

Sweden UK EU

There are replies from 14 Member States. They correspond to the EU-15 (until 2004) with the 
exception of Finland and Luxembourg, while one response was received from Romania. We 
should bring the attention to the difference level of participation. It could be expected a larger 
share  of  French  and  Italian  stakeholders.  On  the  other  hand,  it  is  important  to  mention  that 
there are 11 replies from organizations with an European dimension (6 business organizations, 
3 professional associations and 2 tax advisors – law firms). 

The  questionnaire  asked  if  there  is  a  need  to  update  the  list  of  companies  covered  by  the 
Directive. A large majority consider that the list should be updated. Only 7% of the answers 
do  not  consider  necessary  to  update  the  scope  of  entities  covered  by  the  Directive.  The 
responses can be seen in the following figure: 

EN 

82 

   EN 

 
 
4%

7%

89%

yes
no
do not know

In  addition,  it  was  required  if  there  is  a  need  to  change  the  minimum  shareholding 
requirements. The results are the same as in the previous question. 

7%

4%

yes
no
do not know

89%

In  the  responses  to  the  other  policy  options  we  can  confirm  that  a  large  majority  of 
contributors are of the opinion that the Directive needs an update. 

The questionnaire asked if the shareholding requirements of the Directive should be reduced 
below  10%.  The  majority  prefer  the  option  of  not  reducing  the  shareholding  requirement 
below 10%. The second preferred alternative is the extension of the Directive scope to non-
associated undertakings, but is limited to 29% of the responses. 

EN 

83 

   EN 

 
 
 
17%

28%

1%

13%

41%

not below 10%
5% shareholding
1% shareholding
non-associated
do not know

The questionnaire asked if the shareholding requirements of the Directive should be reduced 
to 10%. An important majority supported this initiative, 87%. 

6%

7%

yes
no
do not know

87%

The  questionnaire  asked  if  indirect  shareholdings  should  be  taken  into  account  when  the 
minimum  shareholding  is  being  determined.  Almost  all  contributors  (91%)  support  this 
initiative. We can see the results in the following figure: 

EN 

84 

   EN 

 
 
 
6%

3%

91%

yes
no
do not know

The questionnaire asked if the list annexed to the Directive should cover the same legal types 
as  are  included  in  the  list  of  the  Parent-Subsidiary  Directive.  Almost  all  contributors  (89%) 
support this initiative. We can see the results in the following figure: 

6%

4%

90%

yes
no
do not know

The  questionnaire  asked  if  the  list  should  be  extended  so  as  to  include  other  types  of 
companies not referred to in the Parent-Subsidiary Directive. The most common answer was 
affirmative, but it does not reach half of the contributors. On the other hand, only 21,4% of 
the  answers  proposed  the  extension  of  the  Directive  to  all  types  of  entity.  We  can  see  the 
results in the following figure: 

EN 

85 

   EN 

 
 
 
25%

28%

47%

yes
no
do not know

The questionnaire asked if the text of the Directive should be clarified in order to guarantee 
that its benefits apply to interest or royalty payments constituting an expense  attributable to 
permanent  establishments.  Almost  all  contributors  agree  to  this  proposal.  We  can  see  the 
results in the following figure: 

10%

3%

87%

86 

EN 

yes
no
do not know

   EN