European Commission proposed to amend the Parent-Subsidiary Directive

European Commission proposed to amend the Parent-Subsidiary Directive

On 25 November 2013 the European Commission proposed amendments to key EU corporate tax legislation, in particular, the Parent-Subsidiary Directive, in order to significantly reduce tax avoidance in Europe.

The Parent-Subsidiary Directive was originally conceived to prevent same-group companies, based in different Member States, from being taxed twice on the same income (double taxation). This proposal will close the loopholes in the Parent-Subsidiary Directive, which some companies have been using to escape taxation.

First, it updates the anti-abuse provision in the Parent Subsidiary Directive i.e. the safeguard against abusive tax practices. The proposal obliges Member States to adopt a common anti-abuse rule. This will allow them to ignore artificial arrangements used for tax avoidance purposes and ensure taxation takes place on the basis of real economic substance.

Second, it will ensure that the Directive is tightened up so that specific tax planning arrangements (hybrid loan arrangements) cannot benefit from tax exemptions. Currently, the Parent Subsidiary Directive obliges Member States to give parent companies a tax exemption for the dividends they receive from subsidiaries in other Member States. However, in some cases, the Member States where the subsidiaries are based classify these payments as tax deductible "debt" repayments. The result is that the payments from the subsidiary to the parent company is not taxed anywhere.

Under the proposal, if a hybrid loan payment is tax deductible in the subsidiary's Member State, then it must be taxed by the Member State where the parent company is established. This will stop cross-border companies from planning their intra-group payments to enjoy double non-taxation.

Member States are expected to implement the amended Directive by 31 December 2014.

We will continue monitoring this issue and keep you updated on further developments in this area.

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