Taxes

The Directive introduces essential changes in the Community system of dividend taxation, whereas taking account of the various proposals of the Commission since 1993.

Firstly, the Directive significantly extends the exhaustive list of the entities covered by the EC dividend taxation rules. What appears essential, the EC dividend taxation rules would be extended to cover also the European Company and the European Cooperative Society.

When a Member State chooses to determine the share of the parent company in the profits of its subsidiary, it should either refrain from taxing these profits or allow the parent company to deduct from its tax liability that fraction of the corporate income tax which is related to that share in the profits and has been paid by the subsidiary, up to the amount of the tax due from the parent subsidiary. What is essential, the relief for the corporate tax would now include also the tax paid by any of the lower-tier subsidiaries. That benefit would be available under the condition that the subsidiaries fulfil the criteria provided for in the Directive 90/435.

Another important development is the extension of the EC dividend taxation system to permanent establishments of companies. As the amended Directive 90/435 provides, it applies also when permanent establishments, situated in the Member States, of companies from other Member States receive distributed profits from subsidiaries from Member States other than those in which the permanent establishments are situated. The amended Directive 90/435 would apply likewise to profits distributed or received by a permanent establishment of a parent company with a subsidiary in the same Member State, if the permanent establishment is situated in other Member State.

The Directive features also a gradual decrease of the shareholding level required for the EC dividend taxation rules to apply. The current minimum level of 25% is now reduced to 20%, down to 15% (by 1 January 2007) to reach 10% by 1 January 2009. For the purpose of the shareholding threshold calculation, the shareholding of a parent company in a subsidiary from the same Member State would be accumulated provided that shareholding is held through a permanent establishment located in another Member State.

Please also note that the amended Directive 90/435 would enable a parent company or its permanent establishment to enjoy a tax credit not only for the tax on the dividends distributed withheld from the direct subsidiary but also from lower-tier subsidiaries.

Therefore, the Directive is a remarkable development of the EC dividend taxation regime, removing its present shortcomings and extending the resulting benefits to a greater scope of commercial operators in the Single Market. Inclusion of the European Company, in particular, may encourage corporate restructuring which would otherwise be hampered for fiscal reasons. New provisions concerning permanent establishments may also be expected to enhance flexibility of investment policies across the enlarged EU.

The Directive is to be implemented by the 25 Member States by 1 January 2005.