- Professional News
- 16 July 2014
Amendments to the EU Parent-Subsidiary Directive
The European Union adopted a number of amendments to the Parent-Subsidiary Directive to avoid double non-taxation via the use of hybrid financing arrangements.
On 8 July 2014, the European Union adopted amendments to the Parent-Subsidiary Directive to avoid double non-taxation via the use of hybrid financing arrangements.
Consequences of the amendments
The adopted text provides for a mandatory limitation of the exemption of payments received through hybrid financing arrangements.
According to the Directive, a Member State of a parent company must refrain from taxing profits distributed by qualifying subsidiaries of another Member State only to the extent that the distributions are not tax deductible in the Member State of the subsidiary.
If the profit distributions are tax deductible in the Member State of the subsidiary, the distributions must be taxed by the Member State of the parent company.
The Member States must apply the Directive only in cases, where the distributed profits have not been deducted by the subsidiary in the assessment of its taxable income. The purpose of this amendment is to deny tax exemption in instances where hybrid financing arrangements are used to achieve a deduction in the country of source, while no taxation is levied on the recipient.
The Member States may refuse exemption from tax according to the Directive, if the arrangement is artificial and not based on an economic activity.
For the time being, the companies are advised to await the national implementation of the Directive. Subsequently, a review of the companies’ financial structure should be considered.
The final Directive
The initial proposal of the amendments to the Directive did not contain an explicit obligation for Member States to tax profit distributions deductible in the Member State of the subsidiary. However, such obligation has been adopted in the final text of the amendment.
The general anti-abuse rule that was part of the initial proposal has not been adopted. The Directive does not, however, prevent the Member States from using their own domestic anti-abuse rules to prevent tax evasion.
The amendments to the Parent-Subsidiary Directive must be seen in light of the current international efforts to close loopholes in the international tax system that enable base erosion and profit shifting. OECD released an action plan in July 2013 against base erosion and profit shifting, which is expected to lead to a series of proposals in 2014 and 2015.
The amendments to the Parent-Subsidiary Directive will be relevant when Danish subsidiaries distribute profit to their parent companies domiciled in Europe/the EEA.
Member States are required to implement the amended Directive into their domestic law before 1 January 2016.
For more information view the amendment here.