CELEX: 51990PC0595
Language: en
Date: 1991-01-24
Title: PROPOSAL FOR A COUNCIL DIRECTIVE CONCERNING ARRANGEMENTS FOR THE TAKING INTO ACCOUNT BY ENTERPRISES OF THE LOSSES OF THEIR PERMANENT ESTABLISHMENTS AND SUBSIDIARIES SITUATED IN OTHER MEMBER STATES

COMMISSION OF THE EUROPEAN COMMUNITIES
                                            C0MC90) 595 final
                                            Brussels, 24 January 1991
                             Proposal for a
                           COUNCIL DIRECTIVE
  concerning arrangements for the taking into account by enterprises
   of the losses of their permanent establishments and subsidiaries
                    situated in other Member States
                     (presented by the Commission)
 ---pagebreak---                                     - 2 -
                           gmAHKIPRy MttrftANTTTM
1.
TnliiTrtunUnn
1. One of the obstacles which might seriouslY haznper the activities of
     enterprises in a oomnon market having the sane characteristics as an
     internal market is their inability to deduct from their profits the
     losses incurred by permanent establishments and subsidiaries situated
     In Member States other than the one in which the enterprise in question
     is resident for tax purposes.
     In its oommunioation to Parliament and the Council of 20 April 1990
     concerning "Guidelines on company taxation" (Deo. SBC(90) 601 final),
     the Commission stressed the need to find a oommon solution enabling
     this obstacle to the single European market to be removed.
2. While the results of establishments situated within the country of the
     head office form an integral part of the enterprise's results, the mere
     fact that there is a frontier between a permanent establishment and its
     head office may result in the losses of the foreign permanent
     establishment not being deductible from the profits of the head office.
     The enterprise therefore pays an excessive amount of tax In relation to
     the total net result of its activity since taxation is based on the
     result achieved solely in the oountry In which the head office Is
     situated.
3. This problem does not arise In Member States which take aooount of the
     results - positive or negative - of a foreign permanent establishment,
     thus avoiding double taxation, where profits are made, by crediting
 ---pagebreak---                                    - 3 -
    foreign tax to the domestic tax payable in respect of the permanent
    establishment (imputation or tax credit method). 1
    In contrast, those other Member States which exempt the profits of a
    foreign permanent establishment (exemption method) do not in principle
    take   into   aooount  the  losses   incurred   by  such  a   permanent
    establishment. However, same of them do allow foreign losses to be
    deducted while also taxing subsequently any profits the permanent
    establishment makes by reincorporating them into the results of the
    head office to the extent of the amounts previously deducted.
4.  It is the latter solution (reincorporation method) which the Commission
    has opted for in its proposal for a Council Regulation on the Statute
    for a European oompany (Article 133). 2
    The Commission considers, however, that tills solution should       be
    available not solely to the European oompany but to all companies
    engaged in transfrontier activities through permanent establishments or
    subsidiaries, whatever their legal form.
    The general application of arrangements for taking losses into aooount
    will also be of benefit to a new legal structure for transfrontier
    oopperation governed directly by Community law, i.e. the European
    economic interest grouping (EEIG).      In practice, an EECG might be
    regarded by the tax authorities as a permanent establishment of its
    members.   In this case, the results of the KKTG will be n^iniiftt^
    separately from the results determined at the level of its members.
1 See Annex.
2 Doc. OOM (89) 268 Pinal - SXN 218 and SYN 279, 25th August,1989
 ---pagebreak---                                    - 4 -
   In view of the auxiliary nature of an EEIG's activity, the risk that
   such determination of results in the country in which the KKEG is
   established will lead to losses is considerably greater than in the
   oase of the other enterprises. The noordeductlbl 11 ty of such losses in
   -Use member's country of residence constitutes an obstacle to making use
   of this new Community instrument for the purposes of transfrontier
   coopération.
5. An enterprise may carry on its activity outside the territory of the
   Member State in which its head office is situated, either through the
   intermediary of a permanent establishment, or through that of a
   subsidiary, the latter having its own legal personality and coming
   under the law of the Member State in which it Is established.
   Economically speaking, these two structures used to carry on an
   activity abroad are equivalent, and the choice between them should not
   necessarily be influenced by tax considerations. However, the choice
   between them would not be neutral if the arrangements for deducting
   losses incurred by foreign subsidiaries were less favourable than those
   applicable to permanent establishments.
   Equality of treatment between permanent establishments and subsidiaries
   Is not, however, a generally accepted idea. Traditionally, oompany
   taxation Is based on the legal concept of the independence of companies
   without considération of the economic ties which may exist between
   them. In some Member States, this approach also determines the tax
   rules applicable to subsidiaries, not only on an international level
   but also domestically.
   Annex 1 contains a summary of the rules applicable in the Member States
   at both these levels.
 ---pagebreak---                                         - 5 -
PnotriKlA onhrMnng IT» t-hft naaft n f A pwrwtrant fttttahU
6. Given that a number of Member States1 already apply the credit method
    to the results of foreign permanent establishments, it seems logical to
    adopt this method as one of the common solutions.
    This method must still allow any negative result which may arise for
    all foreign permanent establishments combined to be deducted from the
    profits of the head offioe. Consequently, provisions Imposing limits In
    this regard, such as those currently applied In Greeoe, oannot be
7. Another solution is to permit enterprises to deduct losses incurred by
    their permanent establishments situated abroad from the results of the
    head office and subsequently to tax the profits of such permanent
    establishments by reincorporating them into the results of the head
    offioe to the extent of amounts previously deducted ("method of
    deducting losses and reincorporating subsequent profits").
    This method may, for example, be chosen by Member States in which the
    law does not provide for the credit method and which consequently
    exempt profits earned outside the country.
8. However, according to the particular characteristics of each of these
     two methods, pertain arrangements must be made in order to safeguard
     the revenue Interests of the country in which the enterprise is
    established and to prevent manipulation.
1 See Annex.
 ---pagebreak---                                    - 6 -
    Thi« is particularly true for the method of deduction and subsequent
    reincorporation since it would give the enterprise an unjustified
    advantage if it were possible to escape recovery of the tax not
    previously due because of reduced taxation. For this reason,
    Member States should, be permitted to reincorporate automatically
    amounts previously deducted if reincorporation has still not ooourred
    after five years or if the permanent establishment oeases to exist In
    that form.
9. At the same time, compulsory reincorporation allows for some
    flexibility In the choice of tax legislation to be applied for
    determining the results of foreign permanent establishments. Since the
    oountry in which the head offioe is situated Is authorized subsequently
    to compensate for the deduction of losses by taxing the profits of the
    permanent establishment, there is no reason why both the losses and
    profits taken into aooount should, not be those determiner! in aooordanoe
    with the rules of the Member State In which the permanent establishment
    is situated.
10. Arrangements for taking into aooount the losses of foreign permanent
    establishments must be oorapulsory only in respect of permanent
    establishments situated within the Conraunity. Of oourse, Member States
    remain free to extend the scope of the method they choose to cover all
    or some of the permanent establishments situated outside the Community,
    and to determine the conditions of such extension. Some of them, In
    particular those which apply the credit method as the basic
    arrangement, have already done so.
11. In the interests of the proper functioning of the reincorporation
    mechanism based on the deduction method it is desirable for there to be
    parallel harmonization of the rules enabling the losses of a permanent
     establishment to be oarried forward to subsequent tax years in the
     oountry In which it is situated. It is thus Important that the
     proposal for a Council Directive on the harmonization of the laws of
     the Member States relating to tax arrangements for the carry-over of
     losses of enterprises,1 presented by the Commission on 11 September
     1984, be adopted alongside this proposal for a Directive.
1 OT No C 253, 20.9.1984, p. 5, and QJ No C 170, 9.7.1985, p. 3.
 ---pagebreak---                                            - 7 -
IWsriKlft orflnMnrre I n 1-hft naflft ctf A «nbErtrHttry
12. The first question to be decided is that of the basic approach: is it
     enough simply to extend beyond national frontiers the arrangements for
     taking into aooount the losses of domestio subsidiaries wherever they
     exist, or should, common arrangements be established ?
     The former approach, i.e. extending the scope of national arrangements
     beyond the country's frontiers, at first sight offers the advantage
     that it affords strictly equal treatment to transfrontier activities
     and those carried on within the oountry. There are, however, two
     drawbacks. On the one hand, it would, offer no solution to the three
     Member States whose domestic legislation makes no provision for taking
     the losses of domestio subsidiaries into aooount. On the other hand,
     given the major disparities which exist between the Member States'
     domestio arrangements, it would create new distortions between their
     enterprises engaged In transborder activities.
     This approach, therefore, does not satisify at all the requirements of
     fiscal neutrality with respect to compétitive conditions on the
     Community level. For this reason, it has been ruled out by the
     The second approach, i.e. the establishment of common arrangements,
     does not have these drawbacks. On the contrary, it responds entirely to
     the necessity of fiscal neutrality.
 13. Before moving on to discuss the choice of methods to be adopted for the
     purposes of the oommon arrangements, it is necessary to establish the
     minimum holding which an enterprise must have in a subsidiary before
     the relationship between the enterprise and the subsidiary oan be
     considered equivalent to that between an enterprise and a permanent
                 it.
 ---pagebreak---                                - 8 -
The holding of a limited number of shares in anotber oompany tends to
oonstitute a form of Investment for a given enterprise.    In order to
Justify the results, and particularly the losses, of that subsidiary
being taken into aooount for tax purposes at the level of the
enterprise heading the group, the latter should have a sufficient
Influence on the management of the subsidiary. This condition can be
considered satisfied if the holding In the subsidiary's capital is
greater than 50%, thereby giving the enterprise beading the group a
majority of voting rights.
If a    closer parallelism  Is to be established     between permanent
establishment and subsidiary as regards their respective degree of
economic integration with the head of the group, a threshold of 100%
might even be envisaged. However, whilst this would offer         dear
advantages in terms of simplicity, it would, considerably limit the
scope of the arrangements because the holding of the entire capital of
a subsidiary is only possible in practice where new companies are
formed.
In this respect, it must be stressed that even those Member States
which apply a system of consolidation at national level do not, with
the exception of Denmark, require a 100% holding.
On the other hand, in order to avoid, inverse distortions that work to
the detriment of resident groups of undertakings, the conditions of
common arrangements for taking foreign losses into aooount should not
be too different from those applied at national level. In this regard,
 it is noteworthy that those Member States with a system of loss
 offsetting at the national level for subsidiaries require a holding of
75% or more by the parent in its subsidiary.
A holding of 75% would therefore appear to be appropriate for a common
 transborder system. It would ensure equal treatment among permanent
establishments and subsidiaries and at the same time permit significant
use of the common system.
 ---pagebreak---                                     - 9-
14. As for the methods to be employed, the losses of a foreign subsidiary
    can, in principle, be taken into aooount in a similar manner to that
    described above for permanent establishments, the imputation method
    being similar to that of profit consolidation.
    Nevertheless,  the  Commissi on  considers  that, in  view  of  current
    national tax laws Involving differences in both the tax base and tax
    rates, the application of this method would encounter considerable
    practical difficulties, and that it would be extremely difficult for
    the enterprise concerned to assess the usefulness of such a method. Tne
    fact that the French system of consolidation is seldom used is evidence
    of the latter difficulty.
    As the Internal market becomes more integrated, however, the Commission
    does not rule out future use of a common system of consolidation. It is
    with this prospect in mind, that the Commission will ask the Committee
    of experts responsible for studying the problems of business taxation
    to examine the broad range of questions related to the establishment of
    a common system of consolidation.
15. Consequently, the Commission proposes only the second method, which
    involves allowing the enterprise heading the group to deduct the losses
    incurred in a given tax period by its subsidiaries situated in other
    Member States from its taxable profits for the same tax period, with
    any subsequent profits by these subsidiaries being reincorporated into
    the enterprise's taxable results to the extent of the loss previously
    deducted.
    In order to safeguard the tax revenue interests of the Member State in
    which the enterprise is situated and to prevent manipulation, provision
    should be made, as In the case of permanent establishments, to allow
    Member States to reincorporate deducted losses automatically into the
    enterprise's taxable results if such reincorporation has not been
    carried out after five years.
 ---pagebreak---                                    - 10 -
16. The Commission has not deemed it appropriate to Include at the
    Community level, another method of taking aooount of the losses
    incurred by subsidiaries, I.e. that of writing down the book value of
    the enterprise's holding. Making this method generally available oomes
    up against -Use problem that taxable profits are not determined in all
    Member States in accordance with commercial accounting rules. For this
    reason, it would be virtually impossible to apply in Member States
    whose tax legislation lays down that profits for tax purposes are to be
    determined independently of commercial profits.
    But even in those oountries which do determine their enterprises'
    taxable profits in accordance with commercial accounting rules, the
    effect of the write-down method is limited to the present value of the
    holding. In cases in which the amount of the subsidiary's losses is
    greater than the present value of the holding in the enterprise's
    balance sheet, that portion of losses in excess of the present value
    may not be taken into account.
    Moreover, reincorporation into the enterprise's profits of amounts
    previously deducted under the write-down method gives rise to a number
    of problems. This is because the subjective scope of the Directive
    takes in all enterprises which, under the tax laws of a Member State,
    are considered to be resident In that State for tax purposes, whereas
    the Fourth Council Directive of 25 July 1978 on annual accounts,1
    Article 35(l)(c)(dd) of which requires the lower value to be Increased
    if the reasons for which the value adjustments were made have ceased to
    apply, applies only to limited companies. There would not be any
     requirement on the other forms of enterprise falling within the scope
     of this Directive to revalue the holding in their balance sheet. Even
     in the case of limited companies, the occurrence of subsequent profits
     in a subsidiary does not as such give rise to revaluation unless it
     reflects a continuous Improvement in the subsidiary's productivity. In
     other words, the fact that a subsidiary makes a profit In a subsequent
     tax period does not necessarily result in an adjustment of the value of
     the holding in the parent enterprise's balance sheet.
1 OT No L 222, 14.8.1978, p. 11.
 ---pagebreak---                                   - 11 -
17. Each enterprise will be free either to make use of the common method of
    taking into aooount the losses incurred by subsidiaries or to have the
    ordinary arrangements, i.e. separate taxation of subsidiaries, applied
    to it.
    Moreover, there is nothing to prevent a Member State from maintaining
    or introducing another method of loss offsetting, such as the
    consolidation method, alongside either of the methods laid down by the
    Directive, provided it is understood that an enterprise may not combine
    the former with the oommon system.
TT ffrmrnlary rai ir^-tH^n*1 «rtioies
                                 Artlole 1
18. Member States will have to make it possible under their laws for their
    enterprises to take into account the losses they incur through ventures
    situated in other Member States, be they permanent establishments or
    subsidiaries.
    It is not only limited companies which carry on transfrontier
    activities through permanent establishments or subsidiaries In other
    Member States, but also other forms of enterprise, Including
    partnerships and one-man businesses. One of the main alms of -Oils
    Directive is to establish the principle of equal treatment for all
    legal forms of enterprise.
                                 Article a
19. The purpose of this Article Is to define three basic notions, i.e.
     "enterprise of a Member State", "permanent establishment" and
     "subsidiary".
 ---pagebreak---                                    - 12 -
    An enterprise is deemed to be situated in a Member State if it is
    resident there for tax purposes according to the law of the
    l^nv^r state in question, account being taken of the provisions of
    bilateral agreements.
    The definition of "permanent establishment" is modelled on that of
    Article 5 of the GBCD Model Convention.
    The notion of subsidiary is defined with reference to two criteria: a
    majority of voting rights to be held by an enterprise of a
    Member State, and its holding in the subsidiary's capital to stand at a
    minimum level. The combination of these two criteria Is necessary
    because of the existence in several Member States of multiple voting
    shares i"*i non-voting shares.
    Although a Member State is free to fix a lower minimum holding, it must
    always respect the majority voting rights criterion.
                                  ArtiûlôJi
20. ^ « Article lists the taxes to which the enterprise, permanent
    establishment or subsidiary must be liable in order to qualify for
    application of the Directive. These are either personal income tax or
    corporation tax, depending on the enterprise's legal form.
                                  Article 1
21. It is left to the discretion of each Member State whether to widen the
    geographioal scope of the arrangements laid down by the Directive to
    permanent establishments or subsidiaries situated outside the
    Community. Whereas all permanent establishments or subsidiaries
    situated in the Community must be oovered, it is up to the Member
     States to determine the extent to which the arrangements should apply
     on a world scale.
 ---pagebreak---                                    - 13 -
    However, the provisions applicable to permanent establishments or
    subsidiaries situated outside the Community may not be more favourable
    than those applied within the Community.
    The results of all permanent establishments are already taxed In the
    hands of the head office in those Member States which apply credit or
    worldwide profit arrangements.
                                  Article 8
22. i^iff Article lays down that Member States are required to apply to the
    losses of their enterprises' permanent establishments one of the two
    methods described in Articles 6 and 7, which are of equal status.
                                  Article 6
23. Article 6 defines the credit method. It is important to note that this
    method Involves taking into account, at the level of the enterprise's
    head offioe, both the positive and the negative results of its
    permanent establishments.
                                  Articled
24. Since the method of deducting losses and reincorporating subsequent
    profits gives the enterprise which applies it only a temporary cash
     advantage, it would seem justified to stipulate that the Member State
     in which the enterprise in question Is resident for tax purposes must
    allow the losses of permanent establishments situated in other Member
     States to be deducted as they are shown on the permanent
     establishments' tax accounts, and should not recalculate them aooording
     to its own tax rules.
     Should the Member State extend the scope of this method's application
     to permanent establishments situated outside the Community, it is free
 ---pagebreak---                                    - 14 -
    to lay down more striot rules stipulating, for example, that foreign
    results must be recalculated according to the domestic rules.
                                 Article 8
25. T*^« Article offers Member States the possibility of prescribing
    compulsory relnoorporation of amounts previously deducted if the
    enterprise's foreign activity does not yield a profit within five
    years. This five-year time limit applies separately to each tax period
    at the end of which losses have been deducted.
26. Another situation which may give rise to automatic reincorporation Is
    where a permanent establishment is sold, wound up or transformed into a
    subsidiary; this Is because such an operation takes the permanent
    establishment outside the scope of the method.
                                 Article 9
27. The method laid down for taking a subsidiary's losses into account Is
    Identical to that used for permanent establishments as described in
    Article 7, except that the losses allowed as a deduction are determined
    separately for each subsidiary, without any aggregation.
                                 Article 1Q
28. As in the oase of the method of deducting the losses of permanent
    establishments, the Directive authorizes Member States to provide in
    their laws for the automatio reincorporation of amounts previously
    deducted if reincorporation has not oocurred by the end of the fifth
    year following deduction of the loss. The same rule applies where the
    subsidiary is sold, wound up or transformed Into a permanent
                it.
 ---pagebreak---                                    - 15 -
    Provision must also be made to cover one further situation. Since the
    Directive is applicable only if the enterprise's holding in the
    subsidiary reaches a minimum threshold, it is logical that amounts
    previously deducted should automatically be reincorporated if its
    holding falls below that threshold.
                                 Article 15
29. Notwithstanding the fact that the present directive does not provide
    the method of writing down the book value of the holding as a Community
    solution, Member States are free to Include this method as an
    additional one into their Internal legislation. In such a oase, it
    shall however be avoided that an enterprise applies at the same time
    both the method provided by this directive and the method of writing
    down the book value, because otherwise the same loss would be taken
    into aooount twice.
 ---pagebreak---                                    - 16 -
                               Proposal for a
                             COUNCIL rJŒKBCTIVB
    nr«m«rrriT^ arrangements for the taking Into aooount by enterprises
     of the loflFww of their permanent establishments and subsidiaries
                      situated In other Member States
THE COUNCIL OP THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Eoonomio Community,
and in particular Article 100 thereof,
Having regard to the opinion of the European Parliament,
Having regard to the opinion of the Economic and Social Committee,
Whereas in a common market having the characteristics of an internal
market, the activities of enterprises across Community borders should not
be treated less favourably than activities limited to a single Member
State, a requirement that is not currently met, since existing legislation
often does not permit enterprises to take into aooount the losses Incurred
by their permanent establishments and subsidiaries situated in other Member
States; whereas it Is consequently necessary to introduce oommon rules
covering all enterprises, whatever their legal form;
Whereas, in the case of permanent establishments, Member States should
ensure that the enterprises of which they form an Integral part are able to
take aooount of their losses, either by allowing the results of such
permanent establishments to be Included in those of the enterprises and, at
the same time, authorizing the latter to deduct "tiae tax pa-iri by the said
establishments in the other Member States from any tax due in respect of
 ---pagebreak---                                   - 17 -
their profits, or by authorizing the enterprise to deduct the losses of its
permanent establishments from its own profits and taxing subsequent profits
of the latter to the extent of the losses deducted; whereas the results of
permanent establishments should be determined Member State by Member State;
Whereas in the case of subsidiaries, the latter method appears under the
present  circumstances  to be   the most   appropriate means   of   allowing
enterprises to offset the losses Incurred with respect to activities across
Community borders; whereas it is appropriate for the aooount taken by the
parent enterprise of its subsidiaries' losses and profits to be determined
separately for each subsidiary in proportion to the parent's holding
therein; whereas, since a subsidiary is a legally independent entity, the
enterprise which controls it should be free to decide whether or not to
take into account its losses; whereas provision should be made to prevent
the same losses from being taken into aooount twice by excluding the use of
the method specified in this Directive in conjunction with an adjustment to
the value of the holding;
Whereas, where the enterprise applies the method of deducting losses with
reintegration of subsequent profits, the results of permanent establish-
ments and subsidiaries may without any difficulty be determined according
to the law of the Member State in which they are situated;
Whereas, In order to preclude unjustified advantages for enterprises and to
safeguard the Member States' tax revenues, Member States must be allowed,
in pertain circumstances, to reincorporate automatically losses previously
deducted; whereas, in addition, Member States should be free to apply
provisions designed to prevent tax evasion and abuse;
Whereas it is appropriate to allow Member States the option of TnAjirha-iTvtT^»
or introducing other means of taking into aooount subsidiaries' losses
alongside the common method defined in this Directive;
 ---pagebreak---                                    - 18 -
Whereas, with a view to Improving the worldwide competitiveness of
Community enterprises, it appears appropriate to extend the arrangements
i«jH down by this Directive to permanent establishments and subsidiaries
situated in non-member countries; whereas Member States should be free to
determine the conditions and scope of any such extension,
HAS ADOPTED TEES DIRECTIVE :
                                  Article 1
Member States shall adopt, in accordance with the provisions of this
Directive, arrangements enabling their enterprises to take aooount of the
losses incurred by permanent establishments or subsidiaries situated in
other Member States.
                                   TITLE I
                             General provisions
                                  Article 2
For the purposes of this Directive:
     "enterprise of a Member State" means any enterprise which, under the
    tax legislation of a Member State, is considered to be resident for tax
    purposes in that State;
     "permanent establishment" means any fixed place of business through
    which an enterprise of a Member State carries on all or part of its
    activities;
     "subsidiary" means any company in the capital of which an enterprise of
    a Member State has a minimum holding of 75%, giving it a majority of
    voting rights. Member States may, however, stipulate a lower minimum
    holding.
 ---pagebreak---                                     - 19 -
                                  Article 3
In order to fall within the provisions of this Directive, the enterprises,
permanent establishments, and subsidiaries referred to in Article 2 must be
subject to, without being exempt from, one of the following taxes:
(a) in Belgium:
    impôt des personnes physlques/personenbelasting,
    impôt des soolétés/veDnootschapsbftl asting,
- impôt des non-rési dents/bel asting der niet-verblijfnouders;
(b) in Denmark:
    selskabsskat,
- indkomstskat til staten;
Ce) in Germany:
    Kbrperschaftsteuer;
(d) In Greece:
 -   ipôpoç eiooônpaTOÇ tpuoiKÛv npooùnuv,
     «pôpoç EjooônpaTOÇ VOJJIKÛV npooûnuv,
(e) in Spain:
    Impuesto sobre la renta de las personas fisicas,
    impuesto sobre sociedades;
(f) in France:
    impôt sur le revenu,
    impôt sur les sociétés;
(g) in Ireland:
    income tax,
    corporation tax;
 ---pagebreak---                                    - 20 -
(h) in Italy:
    Imposta sul reddito délie persone fislche,
- imposta sul reddito delle persone glurldiohe;
(1) in Luxembourg:
    impôt sur le revenu des personnes,
    impôt sur le revenu des collectivités;
Cj) in the Netherlands:
    Inkomstenbel asting,
(k) in Portugal:
    inrposto sobre o rendimento das pessoas slngulares,
    imposto sobre o rendimento das pessoas oolectivas;
Cl) in the United Kingdom:
    income tax,
    oorporatlon tax,
or any other tax which may be considered a subsltute for one of these
taxes.
                                  Article 4
Member States may extend the application of this Directive, under
conditions which they shall lay down, to all or some of their enterprises'
permanent establishments and subsidiaries situated outside the Community.
However, these conditions may not be more favourable than those applicable
to permanent establishments and subsidiaries situated in the other
Member States.
 ---pagebreak---                                    - 21 -
                                  TITLE II
               Provisions relating to permanent
                                  Article 5
Member States shall make provision for their enterprises to take aooount of
the losses Incurred by permanent establishments situated in another
Member States either by means of the credit method defined in Article 6, or
by means of the method of deducting losses and reincorporating subsequent
profits, as defined in Article 7.
Application of the credit method shall be obligatory for enterprises in
Member States that have chosen it; application of the method of deducting
losses and reincorporating subsequent profits is a matter for each
enterprise to decide.
                                  Article 6
The credit method shall consist of Including in the enterprise's results
for a given tax period the positive or negative results of all the
enterprise's permanent establishments situated in another Member State,
and where appropriate, crediting the tax paid by the latter against any tax
which may be payable by the enterprise on the profits of such
            its.
 ---pagebreak---                                    - 22 -
                                 Article 7
1. The method of deducting losses and reincorporating subsequent profits
shall Involve:
(a) the deduction from the enterprise's taxable profits for a given tax
    period of the loss incurred in the same tax period by the enterprise's
    permanent establishments situated in other Member States;
Cb) the Incorporation of subsequent profits of such permanent
    establishments into the enterprise's taxable income to the extent of
    the loss deducted pursuant to subparagraph (a).
2. The income of permanent establishments shall be determined Member State
by Member State in accordance with the rules of the law of the
Member State in which the permanent establishment is situated.
                                 Article 8
Member States may make provision for losses which are deductible pursuant
to Article 7 to be automatically reincorporated into the enterprise's
taxable results in one of the following circumstances:
Ca) where reincorporation has not ooourred by the end of the fifth year
    following that during which the loss became deductible;
Cb) where the permanent establishment has been sold, wound up or
    transformed into a subsidiary.
 ---pagebreak---                                    - 23 -
                                 TITLB III
                    Provisions relating to subsidiaries
                                 Article 9
1. Member States shall make provision for their enterprises to take
aooount of the losses Incurred by subsidiaries situated in another
Member State by means of the method of deducting losses and reincorporating
subsequent profits.
This method shall involve:
(a) the deduction from the enterprise's taxable profits for a given tax
    period of the loss Incurred in the same tax period by the enterprise's
    subsidiaries situated in other Member States;
Cb) the incorporation of subsequent profits of such subsidiaries into the
    enterprise's taxable income to the extent of the loss deducted pursuant
    to subparagraph (a).
2. The Income of each subsidiary shall be determined in accordance with
the rules of the law of the Member State in which it is situated, in
proportion to the holding which the enterprise has In its capital. The
level of holding to be applied in this respect shall be the lowest
obtaining during the tax period in question.
                                 Article 10
Member States may make provision for losses which are deductible pursuant
to Article 9 to be automatically reincorporated into the enterprise's
taxable income in one of the following circumstances:
(a) where reincorporation has not occurred by the end of the fifth year
    following that in which the loss became deductible;
 ---pagebreak---                                    - 24 -
Cb) where the subsidiary is sold, wound up or transformed Into a permanent
Co) where the enterprise's holding in the oapital of the subsidiary has
    fallen below the minimum level laid down by the Member State in which
    the enterprise is situated.
                                 Article 11
Application of the method defined in Article 9 shall be Incompatible with
any correction of the value of the holding of that enterprise in a
subsidiary.
                                 Article 12
The provisions of this Directive shall not prevent Member States from
maintaining or introducing other methods of taking into aooount the losses
of subsidiaries of its enterprises looated in other Member States,
Including the consolidated profit method.
                                  TITLE IV
                              Final provisions
                                 Article 13
This Directive shall not preclude the application of provisions laid down
by national law or under agreements to prevent tax evasion or abuse.
 ---pagebreak---                                    - 25 -
                                Article 14
1.    Member States shall bring into force the laws, regulations and
administrative provisions necessary to comply with this Directive before 1
January 1998. They shall immediately Inform the Commission thereof.
    When Member States adopt these measures, these shall contain a
reference to this Directive or shall be accompanied by such reference at
the time of their official publication. The prooedure for such reference
shall be adopted by Member States.
2. Member States shall ensure that the texts of the main provisions of
national law which they adopt in the field oovered by this Directive are
oommunioated to the Commission, and, should the oooasion arise, the texts
of measures taken to extend the provisions of this Directive to permanent
establishments and subsidiaries of their enterprises located outside the
Community.
                                Article 18
This Directive is addressed to the Member States.
Done at Brussels,
                                           For the Council
                                           The President
 ---pagebreak---                        TAX A R R A N G E M E N T S A P P L I C A B L E TO LOSSES OF S U B S I D I A R I E S A N D F O R E I G N P E R M A N E N T     ESTABLISHMENTS
 Member    State    Resident           subsidiary               Foreign Permanent                 Establishment                                   Foreign        subsidiary
 Be I g ium                                                     -No tax treaty : d e d u c t i o n w i t h r e i n t e g r a t i o n
                                                                following a c e r t a i n o r d e r ( a r t . 66 and f o l l o w i n g
                                                                  AR - C I R )
                                                                - tax treaties                   exemption method
                                                                - deduction w i t h r e i n t e g r a t i o n w h e r e a t r e a t y
                                                                p r o v i d e s for e x e m p t i o n
Denmark           ConsoIi dat i on                              -No     tax t r e a t y : t a x a t i o n of w o r l d w i d e        income    Consolidation (consolidated
                  c o n s o I i d a t e d prof i t              with      tax credit                                                            profit 1 0 0 % s u b s i d i a r y ) .
                  100% subsidiary)                              -tax      t r e a t i e s : t a x a t i o n of w o r l d w i d e      income    D o u b l e t a x a t i o n is In p r a c t i c e
                                                                with      either tax credit or e x e m p t i o n                                a v o i d e d in the s a m e w a y a s for
                                                                with      p r o g r e s s i o n , or e x e m p t i o n                           foreign permanent e s t a b l i s h m e n t s
Germany          C o n s o l i d a t i o n when the                 No      tax treaty              t a x a t i o n of w o r l d w i d e
                 O R G A N S C H A F T system is                    income with tax credit
                  applied ( s u b s i d i a r y under               tax t r e a t i e s : e x e m p t i o n m e t h o d
                  financial ( 5 1 % of v o t e s )                  deduction of losses w i t h r e i n t e g r a t i o n
                  structural and e c o n o m i c                    where a treaty p r o v i d e s for e x e m p t i o n
                 c o n t r o l ) at the o p t i o n of
                  the parent company
Greece                                                         - No tax treaty :in p r i n c i p l e tax c r e d i t
                                                                   method except if the g l o b a l r e s u l t of all
                                                                   permanent e s t a b l i s h m e n t s is n e g a t i v e (no
                                                                   deduction of losses in s u c h c a s e s )
                                                               - tax treaties                    tax c r e d i t m e t h o d
Spa in           ConsoIi dat ion                               - No tax treaty : t a x a t i o n of w o r l d w i d e                    income
                 (consolidated profit)                             wi th tax credit
                 90% subsidiary minimum                        - tax t r e a t i e s : tax c r e d i t m e t h o d
France           ConsoI IdatIon if:                                Tax t r e a t i e s : e x e m p t i o n m e t h o d                          C o n s o I IdatI on if:
                 1) c o n s o l i d a t e d profit                 taxation of w o r l d w i d e i n c o m e In t h e f r a m e w o r k         1) R e g i m e of " b é n é f i c e c o n s o l i d é
                 ( b e n e f i c e c o n s o l i d é ) upon        of the " b é n é f i c e m o n d i a l " s y s t e m u p o n a u t h o r i - on a u t h o r i s a t i o n ( 1 )
                 a u t h o r i s a t i o n by the tax              sation by the tax a u t h o r i t i e s ( 1 ) a n d                          2 ) d e d u c t i o n of lossss of the
                 a u t h o r i t i e s . (1)                       i r r e s p e c t i v e of w h e t h e r a t r e a t y a p p l i e s or      first five y e a r s to the Invested
                 2. S y s t e m of fiscal                          not.                                                                         amount for investment In the E E C
                 integration (régime                                                                                                            with a u t o m a t i c r e i n c o r p o r a t i o n
                 d'intégration fiscale)                                                                                                         once p r o f i t s ore carried and at
                 95% subsidiary minimum.                                                                                                        the latest after 10 years
                                                                 (1) In p r a c t i c e very              limited      application              ( a r t . 3 9 - 8 0 CGI)
 ---pagebreak---                     TAX ARRANGEMENTS APPLICABLE TO LOSSES OF SUBSIDIARIES AND FOREIGN PERMANENT ESTABLISHMENTS
 Membe r State           Resident           subsidiary             Foreign         Permanent         Establishment                 Foreign        subsidiary
 I re 1 a n d          L o s s o f f s e t t i n g if              - no t a x t r e a t y : t a x a t i o n of w o r l d
                       1) a m i n i m u m p a r t i c i p a -         wide income w i t h tax credit                                                     -
                       t i o n of 7 5 % i n a                      - tax t r e a t i e s : tax c r e d i t m e t h o d .
                       s u b s i d i a r y or                      - if t h e f o r e i g n t a x r a t e e x c e e d s
                       2 ) c o n s o r t i urn                       the I r i s h r a t e , a p a r t i a l         deduction
                                                                     is g r a n t e d for t h e e x c e s s a m o u n t .
 taly                                                             - no t a x t r e a t y : t a x a t i o n of w o r l d                                  -
                                             -                        wide income w i t h tax credit
                                                                  - tax t r e a t i e s : tax c r e d i t m e t h o d
 L u x e m b o u rg    Tax c o n s o l i d a t i o n when         - no t a x t r e a t y             t a x a t i o n of w o r l d
                       the O R G A N S C H A F T s y s t e m          wide income w i t h tax credit                                                     -
                       is a p p l i e d ( s u b s i d i a r y at - t a x t r e a t i e s           exemption method
                       9 9 % ) at t h e o p t i o n of                w i t h o u t d e d u c t i o n of l o s s e s
                       the parent e n t e r p r i s e *
                      a n d u p o n a u t h o r i s a t i o n by
                       the M i n i s t e r of F i n a n c e
Nether 1ands          Tax c o n s o l i d a t i o n when
                      a p p I 1 c a t ion of f I s e a 1
                                                                  - no t a x t r e a t y : t a x a t i o n of w o r l d
                                                                      wide income with tax credit
                                                                                                                                  Under certain conditions,
                                                                                                                                   w h i c h a r i s e In t h e c a s e o f
                                                                                                                                                                             losses
                                                                                                                                                                                    !3
                      e n t i t y ( f i s c a l e e e n h e i d ) - tax t r e a t i e s            exemption method                w i n d i n g up a s u b s i d i a r y c a n be
                      99 % s u b s i d I ary                      - d e d u c t i o n w i t h r e i n t e g r a t i o n in         taken Into account
                      Under certain conditions                        c a s e of l o s s e s w h e n a t r e a t y
                       l o s s e s wh i ch a r i s e in               p r o v i d e s for t h e e x e m p t i o n m e t h o d
                      the c a s e of w i n d i n g up a
                      s u b s i d i a r y that is part
                      of a f i s c a l e n t i t y c a n be
                      t a k e n Into a c c o u n t .
Por tuga 1            C o n s o 1 i d a t I on                      - no t a x t r e a t y            taxation        of world
                      ( 9 0 % s u b s i d i a r y at t h e              i ncome
                        o p t i o n of t h e p a r e n t          - t a x t r e a t i e s : t a x â t i o n of        worldwide                          -
                        enterprlse)                                   income with tax credit
United                Tax a r r a n g e m e n t s   for           - no tax t r e a t y              t a x a t i o n of w o r l d
K I ngdom             1 osses I f                                    w i d e i n c o m e w i t h tax c r e d i t                                         -
                      1) 7 5 % s u b s i d i a r y    minimum - tax t r e a t i e s : tax c r e d i t m e t h o d
                                          or
                      2 ) c o n s o r t i urn
 ---pagebreak---                                  - 28
The Impact of the proposal on business with special reference to small and
medium sized enterprises (SMEs)
Title of the proposal:   Proposal     for     a    Council     Directive       concerning
                         arrangements       for    the   talcing     Into    account    by
                         undertakings      of   the    losses    of    their    permanent
                         establishments and subsidiaries situated                in other
                         Member States.
The proposal :      1.   One of the aims of the internal market is to enable
                         undertakings     to operate      throughout      the   Community
                         without falling foul of frontiers or obstacles. One
                         of   the obstacles       is due   to the absence         in many
                         cases     of     national      provisions        allowing      an
                         undertaking to set against           Its profits the       losses
                          Incurred    by     its    permanent      establishments       or
                         subsidiaries        abroad.    The      proposal       therefore
                         provides    to   Introduce    common     rules   to   take   Into
                         account such losses.
The impact on business
                         All sectors and sizes of business will benefit from
                         this directive which applies to              incorporated     and
                         unincorporated       undertakings,        Including     European
                         Economic Interest Groupings.
                         All undertakings falling within the scope of the
                         Directive      will      benefit      from     It.   No     other
                         compliance conditions are provided.
                         The   proposal      will    have   a    positive     effect    on
                         transborder      investment      and     thus     improve     the
                         competitive position of Community undertakings.
 ---pagebreak---                       - 29 -
             5. The  proposal  does  not  provide  any  reduced  or
                different requirements for small and medium sized
                firms.
Consultation
             6. The attached list describes the main views of the
                consulted organisations which are in general all in
                favour of the proposal.
 ---pagebreak---                                          - 30 -
                Systems proposed by the professional associations
                              m
   — ^ —    — • — • ' « — — ^   ^ t   " ' ~—^—** * • • — ^ — i •— — — —              m «.
                                    Foreign permanent          Foreign subsidiary
                                      establishment
CFE -                               choice between credit      only reintegration system
                                    and reintegration
                                    system
Fed. banc. CE                       choice between credit      reintegration system or
                                    and reintegration          provision for déprécia-
                                    system                     tion
FEE (Federation of Euro-            credit or réintégra-       only reintegration system
pean Chartered Accountants          tion
UNlCE                               choice between credit      reintegration system or
                                    and reintegration          provision for depreela-
                                    system                     tion
CEEP                                proportional fiscal        proportional fiscal
                                    consolidation              consolidation
 ---pagebreak---                                                   - 31 -
                                                                                ISSN 0254-1475
                                                                 COM(90) 5964iRal
                                                         DOCUMENTS
EN                                                                                          08
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