EU Parent Subsidiary Directive | Papilio Services Limited

EU Parent Subsidiary Directive

EU Parent Subsidiary Directive – What is it?

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” as it is more commonly known on the 23rd July 1990. It has subsequently amended a number of times in future years.

The EU Parent Subsidiary Directive, in general has the sole aim of achieving a common system of taxation within the European Union for parent companies and subsidiary companies that are situated in different member states. It has the aim to eliminate double taxation on profit distributions between associated companies in different 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?

The EU Parent Subsidiary Directive has been adopted by all EU Member States. Switzerland has also 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.

The Malta Tax System allows for a number of planning opportunities and is an excellent jurisdiction to consider the option of Malta company formation.

Malta has transposed the EU Parent Subsidiary Directive into its tax legislation and for more information on the Malta Tax System and Malta Participation Exemption, please contact us at