Common EU Tax System for Associated Companies’ Interest & Royalties

Posted on Sep 27, 2025 in Law

EU Directive 2003/49/EC: Cross-Border Interest & Royalty Tax

This document outlines the key provisions of Council Directive 2003/49/EC of 3 June 2003, which establishes a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.

1. Directive Structure and Key Elements

The basic elements involved in this directive are:

  • State of Origin: This is the state of the payer, which can be a company or a permanent establishment (all within the EU).
  • State of the Beneficial Owner: This is the state of the receiver, which can be a company or a permanent establishment.
  • Existence of a Partnership: This implies an equity relationship between two companies.

The conditions that a company must meet to fall under this directive are:

  1. It must be a capital company (e.g., SA or SRL).
  2. It must have its tax residence in a Member State of the European Union.
  3. It must be subject to corporate income tax (IS).

For the purpose of this directive, interest is defined as income from debt claims, including income from bonds and obligations.

2. Defining Payers and Beneficial Owners

Payers

A payer can be either a company of a Member State or a permanent establishment of a company located in another Member State. The “Home State” refers to the state where the payer (company or permanent establishment) is located.

A permanent establishment is considered a payer if the interest payment is a deductible expense for that permanent establishment in the state where it is located and files its taxes. If a permanent establishment is deemed the payer, then no other part of the company will be considered the paying entity.

Beneficial Owners

The Directive identifies two types of beneficial owners:

  1. A company of another Member State.
  2. A permanent establishment in another Member State belonging to a company of a Member State.

The company must be entitled to receive the interest for its own benefit, not merely as an intermediary. The conditions for a receiving permanent establishment are:

  1. The establishment receives the interest.
  2. The interest is subject to income tax in the state where the establishment files its taxes.
  3. The credit from which the interest arises has an effective relationship with the activity of the permanent establishment.

3. Partnership Relationships

The Directive outlines three scenarios for a partnership relationship:

  1. A company holds a 25% stake in another company.
  2. A company is 25% owned by another company.
  3. A third company holds a direct 25% stake in both companies.

4. Exemption in the State of Origin

To prevent double taxation, the Directive’s solution is to implement a source-state exemption from withholding tax on interest payments between two associated companies. This exemption applies even when a payer permanent establishment or a beneficiary permanent establishment is involved.

However, if the conditions for the exemption are not met or demonstrated, the practice of withholding tax will apply (as per Article 1.11 of the Directive).

5. Exemption Procedure

The source state may grant an exemption decision upon submission of a certificate proving that the concurrent conditions are met. This certificate must contain:

  • The home state of the receiver.
  • The beneficiary status of the receiver.
  • The applicable tax burden on the receiver.
  • The participation in the capital and its duration.

A separate certificate is issued for each contract payment. Each certificate is valid for a minimum of 1 year and a maximum of 3 years. The exemption decision itself is valid for at least 1 year after its issuance.

The deadline for the procedure is 3 months. The Directive does not specify the consequences of failing to meet this deadline.

6. Tax Refund Process

If a payer has withheld and paid tax on an interest payment that was subject to exemption, the amount will be refunded with interest. Interest begins to accrue after one year.

The applicable interest rate will be the percentage rate for comparable cases as stipulated by national law. The application deadline for such a refund must be less than two years.