EU member states have until the end of 2015 to adopt the latest revision of the Parent-Subsidiary Directive rules - dealing with taxing dividends - to their local law. Our Head of Accounting for Malta walks us through the latest amendments.

The EU's Parent–Subsidiary Directive was designed to eliminate tax obstacles for profit distributions between parent companies and subsidiaries based in different member states, thereby giving a tax exemption for dividends and other profit distributions paid by subsidiary companies to their parent companies. This eliminates the risk of double taxation - that is, the same income being taxed in the member state of the subsidiary and member state of the parent company.

The directive has gone through various changes, most recently on 20 June 2014. The EU's 28 finance ministers agreed to amend the directive by addressing the effects of tax arbitrage resulting from EU member states' varying tax treatments of hybrid loans and double non-taxation. 

Hybrid loan arrangements are financial instruments that have characteristics of both debt and equity. Due to this, member states may give different tax qualifications to hybrid loans: one member state treats them as simple loan, while other member state treats them as equity. As a result, cross-border hybrid loans may be treated as a tax deductible expense (interest) in the member state of the payer (subsidiary) and as a tax exempt dividend in the other member state (that of the parent). This results in a deduction in one member state, followed by exemption in the other member state.

The directive also aims to remove double non-taxation which occurs when income is not taxed in the source state and is also exempt in the state of residence; this results in double deduction when the same loss is deducted in both states.

Under the amended directive article 4.1 (a), the member state of the parent company (or its permanent establishment) receiving the distribution (e.g. dividends) will be required to refrain from taxing profits from the subsidiary only to the extent that such profits are not tax deductible for the subsidiary.

These changes were on the agenda of recent G20 and G8 meetings, where OECD work on base erosion and profit sharing (BEPS) was endorsed as the way forward. The BEPS project is supported by the EU, and both the commission and member states are actively involved in this development and delivery.

Member states will have until 31 December, 2015 to adopt this revised rule to their local law.

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