EU Parent Subsidiary Directive

The European Union issued the “Directive on the Common System of Taxation Applicable in the Case of Parent Companies and Subsidiaries of Different Member States” or the “EU Parent-Subsidiary Directive”. It has subsequently amended several times in future years.

The EU Parent-Subsidiary Directive, in general, has the sole aim of achieving a standard system of taxation within the European Union. Furthermore, this will apply to parent companies and subsidiary companies based in different EU member states. It has the aim to eliminate double taxation on profit distributions between associated companies in the various EU Member States.

How does the EU Parent-Subsidiary Directive do this?

The EU Parent-Subsidiary Directive achieves this by:

  • Removing withholding taxes on any payments of dividends or profit distributions between associated companies within different member states
  • Prevents the double taxation of parent companies on the profits derived from their subsidiaries

Who has adopted the EU Parent-Subsidiary Directive?

All EU Member States has adopted the EU Parent-Subsidiary Directive. Switzerland also has in the main provided for it within its bilateral agreement with the European Union with some subtle changes related to the qualifying holding.

What qualifies as a Parent company?

The EU Parent Directive states that a company gains the status of a parent providing it has at least a 10% holding in the capital of a company in another member state. Member states may require that a parent company holds the 10% capital for a minimum period of 2 years.

A company is defined in the EU parent directive for each member state, and it must be considered tax resident in one EU Member state according to the tax laws of that Member state.

How does an EU Member State give relief?

When a parent company receives distributed profits, the Member State of the parent company shall, except when the subsidiary is liquidated, either:

  • Refrain from taxing such profits and thus give an exemption
  • Tax such profits while authorising the parent company to deduct the amount of tax due that fraction of the corporation tax related to those profits and paid by the subsidiary

The Malta Tax System has transposed the EU Parent-Subsidiary Directive within its local tax legislation and applies it through the Malta Participation Exemption regime.

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The Malta Tax System allows for many tax planning opportunities and is an excellent jurisdiction to consider the option of Malta company formation. If you want to speak with our tax advisory team directly, contact us today using the form below to arrange a consultation.

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