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Taxation and Customs Union

Parent companies and their subsidiaries in the European Union


On 22 December 2003, the Council adopted Directive 2003/123/EC to broaden the scope and improve the operation of the Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.

The 1990 Directive was designed to eliminate tax obstacles in the area of profit distributions between groups of companies in the EU by:

  • abolishing withholding taxes on payments of dividends between associated companies of different Member States and
  • preventing double taxation of parent companies on the profits of their subsidiaries.

The amending Directive, based on a Commission proposal of 8th September 2003 (see press release IP/03/1214 ), contained three main elements:

  • updating the list of companies that the Directive covers;
  • relaxing the conditions for exempting dividends from withholding tax (reduction of the participation threshold); and
  • eliminating double taxation for subsidiaries of subsidiary companies.

An updated list of companies that are covered by the parent subsidiary Directive

The new Directive updated the list of companies covered by the parent-subsidiary Directive to include:

  • certain co-operatives,
  • mutual companies,
  • certain non-capital based companies,
  • savings banks,
  • funds, and
  • associations with commercial activity.

The new list also includes:

This means that companies and co-operatives operating in more than one Member State have the option of establishing themselves as single entities under Community law.

Relaxing the conditions for exempting dividends from withholding tax

Currently, certain dividends paid by a subsidiary company to its parent company are exempted from withholding tax. This is also the case where the two companies are located in different Member States. The amending Directive relaxed the conditions of this exemption.

Before 2005, the parent company had to hold at least 25% of the shares in the subsidiary company for the exemption to apply. The minimum shareholding will be reduced gradually to 10%.

The minimum shareholding was/will be:

  • 20% from 1 January 2005 to 31 December 2006 ;
  • 15% from 1 January 2007 to 31 December 2008 ; and
  • 10% from 1 January 2009.

Eliminating double taxation for subsidiaries of subsidiary companies

The amending Directive rendered more complete the mechanism for the elimination of double taxation of dividends received by a parent company located in one Member State from its subsidiary located in another.

Before 2005, since a subsidiary company is taxed on the profits out of which it pays dividends, the Member State of the parent company had either:

  • exempt profits distributed by the subsidiary from any taxation or
  • impute the tax already paid in the Member State of the subsidiary against its own tax.

The amending Directive deals with imputing tax paid by subsidiaries of these direct subsidiary companies. Member States must impute against the tax payable by the parent company any tax on profits paid by successive subsidiaries downstream of the direct subsidiary. This ensures that the objective of eliminating double taxation is better achieved.

Implementation Deadline

Member States had to ensure that the necessary national implementing legislation was in force by 31 December 2004 at the latest.

Council Directive 90/435/EEC also applies to the Member States having joined the European Union from 1 May 2004 and from 1 January 2007 respectively. As transition provisions were not provided as part of accession negotiations, Directive 2003/123/EC applies to the accession countries with effect from 1 January 2005 (for Bulgaria and Romania from 1 January 2007).

The list of companies and taxes in the countries that became part of the EU on 1 May 2004 and that are to be included within the scope of the Directive are contained in the Act of Accession and became part of the Directive on 1 May 2004. For Bulgaria and Romania the respective provisions are contained in the Council Directive 2006/98/EC of 22 November 2006. Further information including an analysis of recent withholding tax developments together with a list of withholding tax rates may also be found in a working paper of the European Parliament: "Taxation in Europe: Recent Developments".

Finally, Council Directive 90/435/EEC and, more general, cross border dividend distributions have already been the subject of interpretation by the European Court of Justice in the following case law:

  • Commission v France - avoir fiscal (Case 270/83)
  • Denkavit International BV , VITIC Amsterdam BV and Voormeer BV v Bundesamt für Finanzen. (Joined cases C-283/94, C-291/94 and C-292/94)
  • Leur-Bloem v Inspecteur der Belastingdienst/Ondernemingen Amsterdam 2 (Case C-28/95)
  • Futura Participations SA and Singer v Administration des contributions (Case C-250/95)
  • Imperial Chemical Industries plc (ICI) v Colmer (Case C-264/96)
  • Epson Europe BV (Case C-375/98)
  • Metallgesellschaft Ltd, Hoechst v Commissioners of Inland Revenue (Joined cases C-397/98 and C-410/98)
  • Athinaïki Zythopoiïa (Case C-294/99)
  • Lankhorst-Hohorst GmbH v Finanzamt Steinfurt (Case C-324/00)
  • Bosal Holding (Case C-168/01)
  • Océ van der Grinten (Case C-58/01)
  • ACT Group Litigation (Case-374/04 )
  • Franked Investment Income (FII) Group Litigation (Case C-446/04)
  • Kerckhaert-Morres (Case C-513/04)
  • Denkavit International BV und Sarl Denkavit France (Case C-170/05).