The conditions for implementation of the parent-subsidiary Directive of July 23, 1990 by the Member States of the European Union have recently been clarified by the European Court of Justice, in a decision dated October 17, 1996.
Since the entry into force of the parent-subsidiary Directive (January 1, 1992), an EU parent company holding 25% in the share capital of an EU subsidiary benefits from an exemption of withholding tax on the dividends distributed by the subsidiary.
However, the Member States have the possibility of not applying the Directive, where the shares in the EU subsidiary are not held at a level of 25% of the share capital during an uninterrupted period of at least two years.
Most EU Member States do not apply the exemption of withholding tax where the shares in the EU subsidiary have not been held during the minimal holding period, even if the parent company has pledged to respect such minimal period. This minimal period varies in the different EU Member States: France applies the withholding exemption after an uninterrupted holding period of two years while Germany, followed by many other Member States, only requires a holding period of one year.
Three Dutch parent companies intended to benefit from the withholding tax exemption provided by the Directive on dividends distributed by German subsidiaries. The German tax authorities refused to grant such exemption, as the condition related to the minimum period of shareholding was not realized. The Financial Court of K”ln (Germany), to which the parent companies referred the matter, raised this issue to the European Court of Justice.
In its decision, the European Court of Justice ruled that the Directive does not allow a Member State to refuse the withholding exemption to an EU parent, if that has not, at the time the dividend distribution takes place, directly held at least 25% of the share capital of the subsidiary during the minimal holding period. Hence, the withholding exemption is available since the time of the dividend distribution as soon as the minimal holding period is realized.
According to the Court, the Member States are not obliged, however, to grant immediately the withholding tax exemption if the parent company commits to respect the minimal period of holding of the shares.
Consequently, a Member State respects the Directive when levying a withholding tax on dividend distributions taking place during the minimal holding period. However, in this case, the Member State will have to refund the withholding tax paid by the parent company as soon as the minimal holding period has been realized.
The content of this article is intended to provide a French guide to the subject matter. Specialist advice should be sought for your specific circumstances.
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