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Taxation of Cross-border Interest and Royalty Payments in the European Union

Taxation of Cross-border Interest and Royalty Payments in the European Union
10 Jun 2011

The European Commission launched a consultation on the 'Taxation of Cross-border Interest and Royalty Payments in the European Union' on a recast and amended version of the Council Directive on a common system of taxation applicable to interest and royalty payments between associated companies of different Member States.

The Directive on a common system of taxation applicable to interest and royalty payments between associated companies of different Member States aims at solving double taxation problems linked to cross-border payments. In these cases, the State from which a payment is made (source State) charges a tax on its recipient company. Additionally, the recipient company is subject to tax on the income derived from this same payment in the Member State of its tax residence. The Directive provides for tax exemption in the source State. The exemption also applies when the payment is made from a permanent establishment (ie a branch) of the company place in a third Member State or received by such business centre.

The objective of this initiative was to clarify existing legislation while extending its benefits to a wider range of companies by: including other legal forms of companies enjoying the Directive; reducing the threshold to be considered associated company; taking account of indirect shareholdings to compute the total holding; alternatively, extending the exemption to payments between unrelated parties. 

Your Taxand contact for further queries is:

Álvaro de la Cueva
T. +34 91 514 52 00 
E. alvaro.de.la.cueva@garrigues.com

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