The EU Parent-Subsidiary Directive

The Council Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, known as the Parent/Subsidiary Directive, was designed to eliminate tax obstacles in the area of profit distributions between group companies established within the EU, by abolishing withholding taxes on payments of dividends between associated companies of different Member States and preventing double taxation of parent companies on the profits of their subsidiaries.

More specifically the Member State of the subsidiary is required to abolish any withholding tax, while the Member State of the parent company is required either to exempt the dividends or to impute the tax already paid in the Member State of the subsidiary against its own tax.

A company qualifies as a parent company if it holds at least 15% of the shares in the subsidiary company. The minimum shareholding as from 1st January 2009 shall be 10%. Council Directive 2003/123/EC has broadened the scope of the 1990 Directive by updating the list of companies covered, by relaxing the conditions for exempting dividends from withholding tax and by eliminating double taxation for subsidiaries of subsidiary companies. As a corollary the mechanism of the Directive is now more complete and its operation is improved.

The importance of the Parent/Subsidiary Directive lies in that it is a step to remove all forms of double taxation as well as other tax obstacles encountered by companies exercising their freedom to operate across borders within the Internal Market. The Directive is one of the tax policy measures aiming to make the EU the most competitive economy by 2010. Cyprus has implemented the Parent/Subsidiary Directive with the Income Tax Law 118(I)/2002, which covered also the amendments of the 2003 Directive.

Stella Strati
Democritos Aristidou & Co. Law Firm@2008