Interest and royalty payments made between associated companies

Directive 2003/49/EC — common system of taxation on interest and royalty payments made between associated companies of different EU countries aims at ensuring fair taxation of payments made between associated companies* in different EU countries, while avoiding double-taxation between EU countries. It applies to interest payments and royalty payments.

KEY POINTS

The purpose of the directive is to abolish taxes levied at the EU country of source, while the EU country of receipt taxes the same payment.

Therefore, the main aim is to ensure that the payments are not taxed in more than one country (double taxation).

Interest and royalty payments arising in an EU country are exempt from any taxes imposed on those payments in that country provided that the beneficial owner* of the interest or royalties is a company of another EU country or a permanent establishment situated in another EU country.

The annex to the directive includes a list of the types of companies to which the directive applies. The directive has been amended to take into account the types of companies in the countries that joined the EU in 2004, 2007 and 2013.

Where an associated company or permanent establishment pays excess tax on interest or royalties in an EU country that is not its own, it must apply for a refund. The country must repay the excess tax withheld within 1 year following receipt of an application and any supporting information that it may reasonably ask for from the company or permanent establishment. If the tax withheld has not been refunded within that period, the company or permanent establishment is entitled (on expiry of the year in question) to interest on the tax which is refunded. This interest is calculated at a rate corresponding to the national interest rate to be applied in comparable cases under the domestic law of the country in question.

This directive will not rule out the application of domestic or agreement-based rules required for the prevention of fraud or abuse. EU countries may withdraw the benefits of this directive or refuse to apply it in the case of transactions for which the principal motive or one of the principal motives is tax evasion, tax avoidance or abuse.

Certain countries benefited for a period from transitional rules whereby the application of the directive was delayed.

The International Bureau of Fiscal Documentation conducted a survey on the directive’s implementation for the European Commission in 2006 and the Commission published its own report on its operation in 2009. In 2011, the Commission adopted a proposal to recast the directive with a view to expanding its scope and to avoid situations where tax relief is granted but the corresponding income is not effectively subject to tax (double non-taxation).

The directive has applied since 26 June 2003 and had to become law in the EU countries by 1 January 2004.

KEY TERMS

Interest payment: income from debt-claims of every kind, whether or not they are secured by mortgage and whether or not carrying a right to participate in the debtor’s profits. Examples include income from bonds or debentures (long-term bonds which yield a fixed rate of interest, issued by a company and secured against assets), and premiums and prizes relating to those bonds or debentures. Penalty charges for late payment are not regarded as interest.

Royalty payment: payments of any kind received for the use of or the right to use any copyright of literary, artistic or scientific work, including:
cinematograph films and software,
any patent,
trade mark,
design or model,
plan,
secret formula or process or for information concerning industrial, commercial or scientific experience.
Payments for the use of, or the right to use, industrial, commercial or scientific equipment are regarded as royalties.

Associated companies: 2 companies are regarded as associated companies:
when one has a direct minimum holding of 25% in the capital of the other, or
when a third company has a direct minimum holding of 25% in the capital of both companies.
Beneficial owner: the company that receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person.
In case of a permanent establishment, when the payment is effectively connected with that permanent establishment.

Company of another EU country: this company must meet the 3 following criteria:
it was formed in accordance with the law of an EU country (i.e. it has its registered office, central administration or principal place of business within the EU and its activities present an effective and continuous link with the economy of that country);
it is resident in that EU country;
it is subject to corporation tax.

Permanent establishment: a fixed place of business situated in a Member State through which the business of a company of another Member State is wholly or partly carried on.

DOCUMENTS

Council 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 (OJ L 157, 26.6.2003, pp. 49-54)

Successive amendments and changes to Directive 2003/49/EC have been incorporated in the original text. This consolidated version is of documentary value only.

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 (COM(2011) 714 final, 11.11.2011)

Common system of taxation Reorganisations

It applies to  mergers, divisions, transfers of assets, exchanges of shares and transfer of the registered office of an SE or SCE. Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States.

SUMMARY

This Directive applies to:

mergers, divisions, transfers of assets and exchanges of shares in which companies from two or more EU countries are involved;
the transfer of the registered office between EU countries of a Societas Europaea (European Company) (SE) or aEuropean Cooperative Society (SCE).
Rules applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares

A merger, division or partial division does not give rise to any taxation of capital gains – calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes – at the time of the operation in question but only when such gains are actually realized.

EU countries are required to take the necessary measures to ensure that provisions or reserves partly or wholly exempt from tax may be carried over by the permanent establishments of the receiving company which are situated in the Member State of the transferring company.

The allotment of securities representing the capital of the receiving or acquiring company to a shareholder of the transferring or acquired company must not give rise to any taxation of the income, profits or capital gains of that shareholder.

Rules applicable to the transfer of the registered office of an SE or SCE

Where an SE or an SCE transfers its registered office from one EU country to another or becomes resident in another EU country, that transfer shall not give rise to any taxation of the income, profits or capital gains of the shareholders. However, EU countries may tax the gain arising out of the subsequent transfer of the securities representing the capital of the SE or of the SCE that transfers its registered office.

In the same case, EU countries shall take the necessary measures to ensure that, where provisions or reserves properly constituted by the SE or the SCE before the transfer of the registered office are partly or wholly exempt from tax and are not derived from permanent establishments abroad, such provisions or reserves may be carried over, with the same tax exemption, by a permanent establishment of the SE or the SCE which is situated within the territory of the EU country from which the registered office was transferred.

This Directive repeals Directive 90/434/EC.

REFERENCES

Directive 2009/133/EC

Directive 2013/13/EU