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 member state in which a qualifying subsidiary is resident may not impose withholding tax on distributions made to its EU parent company (subject to certain specific exceptions); and
  • The member state where the parent company is resident must give credit for the underlying corporate tax that relates to the distribution, or it must exempt the dividends from tax.

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:

  • The company must be in one of the legal forms listed within the Annex to the Parent-Subsidiary Directive;
  • The company must be deemed to be a resident of an EU member state under its domestic law and be subject to corporate income tax without any possibility of being exempt;
  • The parent company must hold at least 10% of the capital (or voting rights) of the subsidiary;
  • The minimum holding period requirement, if any, must be met (the Parent-Subsidiary Directive gives member states the option to require that a parent company hold the shares in its subsidiary for an uninterrupted period of at least two years to qualify for benefits under the Parent-Subsidiary Directive). According to the European Court of Justice, where a holding period is required, but the requisite holding is met only after the dividend distribution takes place, the relevant member state must refund any dividend withholding tax that was levied.

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:

  • The parent company has held directly at least 25% of the capital of the subsidiary for at least two years; and
  • Under any tax agreements with third countries, neither company is resident for tax purposes in that third country; and
  • The Swiss company qualifies as a public limited company, private limited company or limited partnership with share capital.

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.

Minimum Required Holding Periods for the Application of Parent-Subsidiary Directive


Minimum Required Holding Period


Continuous period of at least one year


Continuous period of at least one year


None (dividends are exempt as from 1 January 2009)


Cyprus does not impose withholding tax on dividends

Czech Republic

Continuous period of at least 12 months


Continuous period of one year






Continuous period of at least two years


Continuous period of at least 12 months




Hungary does not impose withholding tax on dividends




Continuous period of at least one year




Continuous period of at least 12 months


Continuous period of at least 12 months, or where the parent company agrees to hold the shares for 12 months


Malta does not impose withholding tax on dividends


None, except where dividends are paid to Switzerland, where a two-year holding period applies


Continuous period of at least two years


Continuous period of one year


Continuous period of two years




Continuous period of two years


Continuous period of one year




Continuous period of two years

United Kingdom