Proposed Amendments to the Interests and Royalties Directive 2003/49/EC : Toward an harmonization with the Parent / Subsidiary Directive

Transcription

1 Proposed Amendments to the Interests and Royalties Directive 2003/49/EC : Toward an harmonization with the Parent / Subsidiary Directive Vincent Agulhon April 13,

2 I - Directive 2003/49/EC : The Interests and Royalties Directive Purposes To avoid that cross-border interest and royalty payments be subject to a more burdensome taxation than domestic payments To avoid the economic distortions caused by different withholding taxes applied by each EU country and the double taxation potentially arising therefrom To ensure that interest and royalty payments between associated companies of different Member States are subject to tax at least once in a Member State To harmonize the tax treatment of EU cross-border Interest and Royalty payments with the tax treatment of dividends under the Parent - Subsidiary Directive 2

3 I - Directive 2003/49/EC : The Interests and Royalties Directive Directive s current scope Definitions Interest means notably income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor s profits* Royalty means notably payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including software, patent, trade mark, design or model. Payments for the use of, or the right to use, industrial, commercial or scientific equipment are also covered. The term company of a Member State covers any company that meets the following three criteria the company is taking one of the listed legal forms and was incorporated in a Member State the company is tax resident in a Member State the company is subject to corporation tax Two companies are regarded as associated companies when one has a direct minimum holding of 25 % (capital or voting rights) in the capital of the other, or when a third company (itself in the EU) has a direct minimum holding of 25% (capital or voting rights) in the capital of both companies Permanent establishments are within scope of the Interests and Royalties Directive Interest and royalties paid by a p.e. are covered if tax deductible at p.e. level * Penalty charges for late payment are not regarded as interest 3

4 II -The initiative to amend the Interests and Royalties Directive The initiative s background According to article 8 of the Directive, the Commission should report to the Council on the operation of this Directive notably with a view to extending its coverage to companies or undertakings other than those under its scope 2009 report by the IBFD, endorsed by the Commission : Main issues spotted / raised by the IBFD / Commission lack of harmonization re. definition of «beneficiary» need to better define link of interest / royalty expense with paying permanent establishment need to clarify use of «2-year holding period» condition by Member States dual resident companies excessive interest / royalties payments anti-abuse clause : what is and what isn t abusive. payments between p.e. and headoffice Reasons for action, as pointed out by the Commission Need to align the Interest / Royalties and Parent / Subsidiary Directives Eliminate reasons for artificial structuring to ensure exemption of intra-group flows Reduce administrative burden linked to use of bilateral tax treaties and residual double taxation Eliminate condition of tax deductibility at p.e. level Ensure taxation at recipient level 4

5 II -The initiative to amend the Interests and Royalties directive Descriptions of the different options Option 1 : No action Option 2 : Extending the benefits of the Directive to interest and royalty payments between unrelated parties Option 3 : Aligning the requirements of the Interests and Royalties Directive to those of the Parent-Subsidiary Directive, which means : The list of entities of both Directives need to be identical (i.e Parent - Subsidiary Directive includes in its scope the SE and the SCE) Requirements to consider the scope of related companies (he Parent - Subsidiary Directive s threshold is lower than the Interests and Royalties Directive 10% VS 25%) To include indirect shareholdings to calculate if the minimum participation s requirement is fulfilled Option 4 : Clarified tax deductibility requirement applicable to payments made by permanent establishments Rewording the Directive text by replacing «tax-deductible expense for the permanent establishment» with «expense attributable to the permanent establishment» Option 5 : Amend Interests and royalties Directive to ensure that interest and royalty payments are subject to tax at least once in a Member State 5

6 II - The initiative to amend the Interests and Royalties directive 4) Impacts of the different options Option 1 : Does not solve issues Option 2 : The exemption of withholding tax will eliminate the differences in withholding rates applicable in the different countries The reduction of risks of double taxation and liquidity costs (i.e saved compliance cost around 126 M) The extension of the withholding tax exemption may reduce the tax revenues of Member States, in contrast the amount of tax credits used by companies will reduce (impact on Member States finance will be limited)(total estimated loss of tax revenue 300 to 500 M). Option 3 : Extending the Directive to cover indirect holdings could have some impact on tax planning of companies and in terms of increased flexibility and lower restructuring costs For EU Member States, the financial impact could be estimated at a range of M Option 4 : The impact on Member States will be negligible Option 5 : This option may have significant impact on the tax revenues of Member States Cross-border administrative problem can arise to determine if Member States want to check if taxpayers are subject to tax in their home country 6

7 III - Proposal of a new Interests and Royalties Directives The requirements of the new Interests and Royalties Directive will align to those of the Parent-Subsidiary Directive In consequence : The lists of entities in the scope of both Directives will be aligned (The new Directive will include SE and SCE) Two companies will be deemed as related parties when an EU company detains directly or indirectly at least 10 % of the capital or voting rights of another EU company. The third option has been chosen predominantly by EU Member States (90%) According to the report the loss of tax revenue for the Member States could globally be estimated in a range between M M 300 for interests and M 100 M 200 for royalties The impact analysis assessed that the gain for EU companies could be estimated at a range of M 38.4 M 58.8 (compliance costs savings) 7