Parent Subsidiary Directive
|The majority of countries impose a form of taxation on dividends, which can become a substantial barrier to multi-national companies. This withholding tax is generally applied to the gross amount of the dividend, as opposed to the net, and usually follows the domestic rate of tax in the absence of an applicable tax treaty, or where a tax treaty provides for specific rate of tax.
The withholding tax issue is made even more difficult by the need to understand what items are deemed to be taxable dividends under local and foreign tax legislation. The tax regulations in each country can vary significantly and what is treated as dividend in one jurisdiction, may be considered as interest in another, and therefore taxed and treated differently.
These types of discrepancies and ambiguities in the tax regulations between different jurisdictions creates opportunities for tax planning, however at the same time can also create difficulties for those in the international arena. Certain treaties can be depended upon in order to provide certain beneficial tax treatment on dividend payments, however they can also have a detrimental effect by complicating international movement of funds between, for example, group companies. It is therefore important to have solid expert advice.
Tax Harmonization in the EU
As mentioned above, the taxation of dividends between EU member states may also be affected by the application of EU Directives, specifically the Parent-Subsidiary Directive.
As from 1 July 2005, Switzerland, which is not a member of the EU, gained access to benefits similar to those under the Parent-Subsidiary Directive via an agreement with the EU. Under the EU-Switzerland agreement, dividends can be paid without incurring withholding tax provided that certain conditions for exemption which are similar (but not equal) to those under the Parent-Subsidiary Directive are satisfied, and subject to any applicable transition rules.
Parent-Subsidiary Directive Overview
The Parent-Subsidiary Directive, whose purpose is to eliminate double taxation on profits distributed by a company resident in one EU member state to a parent company resident in another member state, changes the way in which withholding tax on dividends at domestic or tax treaty rates is calculated.
Under the Parent-Subsidiary Directive:
The Parent-Subsidiary Directive applies only to parent companies and subsidiaries that qualify as “companies of a Member State” within the meaning of the directive. Therefore to qualify for the exemption under the Parent-Subsidiary Directive, both companies must satisfy the following cumulative conditions:
Under the EU-Switzerland agreement, the following cumulative conditions must be satisfied for dividends to be paid free of withholding tax between companies resident for tax purposes in Switzerland and companies resident in the EU:
As you can see, the similarities between the requirements for EU member states and Switzerland are similar, but not identical.
Please note that Estonia may continue under the Parent-Subsidiary Directive and the EU Swiss agreement to levy dividend withholding tax as long as it still charges income tax on distributed profits, but without taxing undistributed profits.
It should be noted that the EU member states are required to implement the Parent-Subsidiary Directive and the agreement with Switzerland as minimum standards, but they are free to apply more favorable rules.