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Taxation of cross-border interest and royalty payments in the European Union

On 3 June 2003 the Council adopted Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (the "I+R" Directive) based on a proposal from the Commission (COM(1998) 67pdf(1.14 Mb) Choose translations of the previous link  final of 04/03/1998). See press release IP/03/787 Choose translations of the previous link  .

The I+R Directive is designed to eliminate withholding tax obstacles in the area of cross-border interest and royalty payments within a group of companies by abolishing:

  • withholding taxes on royalty payments arising in a Member State, and
  • withholding taxes on interest payments arising in a Member State.

These interest and royalty payments shall be exempt from any taxes in that State provided that the beneficial owner of the payment is a company or permanent establishment in another Member State.

The European Commission in June 2006 published a survey on the implementation of the Directive. The survey carried out by the International Bureau of Fiscal Documentation (IBFD) aims to provide a comprehensive overview of the implementation of the Interest and Royalty Directive and application of Article 15(2) of the Agreement between the EU and the Swiss Confederation in the Member States covered.

Following this survey, on November 11, 2011, the Commission has adopted a new proposal to recast the Directive with a view to expand its scope.

Companies that are covered by the Interest and Royalties Directive

As under the Merger and the Parent-Subsidiary Directives, the benefits of the I+R Directive are only granted to companies which are

  • subject to corporate tax in the EU,
  • tax resident in an EU Member State and
  • of a type listed in the annex to the Directive.

As the annex to the Directive only includes the types of companies existing in the 15 Member States that were already members of the EU before 1 May 2004, the types of companies in the new Member States have now been added by Council Directive 2004/66/EC of 26 April 2004 (Official Journal L 168, p.35, 67). In addition, the Council, on 29 April, adopted Directive 2004/76/EC (Official Journal L 157, p. 106) on the basis of the Commission's proposal of 1 April 2004 (see COM(2004) 243 final), granting some of the new Member States transitional periods resulting in their not applying the provisions of the Directive immediately from the date of their accession.

The new amending proposal adopted by the Commission recasts all these Directives (COM(2011) 714 final - see also press release at IP/11/1337 Choose translations of the previous link  ) to provide for an update of the list of companies in the annex to the Directive.

The proposed new list would also include:

Transitional periods for some Member States

Article 6 of the Directive provides for transitional regimes applicable in Greece, Spain and Portugal according to which, these Member States can charge withholding taxes during a certain period (see following table).

Council Directive 2004/76/EC of 29 April 2004 also allows certain Member States the possibility of transitional periods as regards the application of the provisions of the I+R Directive. The Directive is based on the proposal of the Commission of 1 April 2004 (COM(2004) 243 final).

The Protocol concerning the conditions and arrangements for admission of the Republic of Bulgaria and Romania to the European Union, Annexes VI and VII, introduced transitional arrangements concerning these two Member States (Official Journal of 21 June 2005, L 157, p.116 and 156).

Member State
Interest Payments
Royalty payments
Bulgaria
31 December 2014
31 December 2014
Czech Republic
--
1 July 2011
Greece
1 July 2013
1 July 2013
Spain
--
1 July 2011
Latvia
1 July 2013
1 July 2013
Lithuania
1 July 2011
1 July 2011
Poland
1 July 2013
1 July 2013
Portugal
1 July 2013
1 July 2013
Romania
31 December 2010
31 December 2010

Proposed amendment to the Interest and Royalty Directive

The above-mentioned proposal of 11 November 2011 is adopted by the Commission with a view to:

- Change the scope of the Directive  by extending the list of companies to which it applies;

- Reduce the shareholding requirements to establish that companies are associated, from a 25% direct holding to a 10% direct or indirect holding;

- Make it clear that Member States have to grant the benefits of the Directive to relevant companies of a Member State only when the interest or royalty payment concerned is not exempt from corporate taxation. In particular this addresses the situation of a company which, while subjected to corporate tax, also benefits from a special national tax scheme exempting foreign interest or royalty payments received. The source State would not be obliged to exempt from withholding tax under the Directive in such cases.

The transitional periods remain unchanged.

The adoption of the proposal follows the withdrawal of the previous amending initiative dated from 30 December 2003. The issues raised in the now withdrawn initiative have been covered in this new 11 November 2011 initiative.

Report on the operation of the Interest and Royalty Directive

The Commission adopted a report COM (2009) 179pdf(54 kB) Choose translations of the previous link  on 23 April 2009 on the functioning of the I+R Directive, as foreseen in its Article 8. This report was originally scheduled for submission to Council by 31 December 2006 but due to ingoing discussions in Council on the above-mentioned proposal to amend the Directive it was decided to postpone the date of adoption.

The report covers a wide range of issues concerning the transposition and implementation of the Directive. While the overall implementation has been considered satisfactory, the report highlights a number of cases of transposition and interpretation, which invite for improvement or clarification like the tax residence of the beneficiary of the payment, holding thresholds and the period to qualify as an associated company, the interrelation between the Interest and Royalties Directive and the Parent - Subsidiary Directive and the application of the anti-fraud and anti-abuse clause.