European Union:

Under the EC Interest and Royalties Directive 2003/49/EC of June 3, 2003 (as amended), the Council of the European Union enacted a common system to relieve source taxation on inter-company interest and royalty payments between qualifying associated companies within the Community.

The Directive eliminates withholding tax on cross-border interest and royalty payments to companies resident in an EU Member State and to their permanent establishments provided they are subject to EU corporate tax and are of a type listed in the Annex to the Directive. This subsection summarizes some of the key provisions under the Directive.

Article 1 – Scope and Procedure:


i. Interest and royalty payments arising in a Member State are exempt from any taxes, by deduction or assessment, if the beneficial owner is a company of a Member State or its PE in another Member State. A company must receive the payments for its own benefit and not as an intermediary (e.g., an agent, trustee or authorized signatory).

ii. The payment made by a company of a Member State or by its PE in another Member State is deemed to arise in that Member State. In case of a PE, the payments must be tax-deductible in the Member State where it is situated.

iii. A Member State may require that the conditions under Article 3(b) be maintained or committed to be maintained for at least two years.

iv. The Article does not apply where payments are made by or to a PE situated in a third state of a company of a Member State if its business is carried wholly or partly through that permanent establishment (Article 1(8)).


v. Under a proposed amendment of December 30, 2003, the source State is not obliged to grant withholding tax exemption under the Directive if the interest or royalty payment is not subject to tax in the other Member State.

Article 2 – Definition of Interest and Royalties:

This Article defines interest and royalties. The definitions follow the OECD MC Articles 11(3) and Article 12(2) with one exception. In case of royalties, they also include payments for the use of, or the right to use, industrial, commercial or scientific equipment.

Article 3 – Definitions of Company, Associated Company and Permanent Establishment:


For the purposes of the Directive:

(a) A “company of a Member State” must have

(i) The form listed in the Annex,

(ii) Be resident under the tax laws of a Member State and not be considered resident in a third state outside the Community under a tax treaty; and


(iii) Be subject to a tax either listed in the Article or a substantially similar tax, without being exempt.

(b) A company is an “associated company” if

(i) The first company has a direct equity holding of at least 25% in the second company, or

(ii) The second company has a direct equity holding of at least 25% in the first company, or


(iii) A third company has a direct equity of at least 25% in both the first and second companies. A Member State can substitute voting rights for equity holding. Holdings must involve only companies resident in the Community territory.

(c) A permanent establishment is defined as a fixed place of business in a Member State through which the business of a company of another Member State is wholly or partly carried on.

Article 4 – Exclusion of Payments as Interest and Royalties:

The source State may exclude payments treated as profit distributions or capital repayments, and profit-sharing, convertible loans or long-term loans with repayment over 50 years. Moreover, the Directive does not apply to amounts in excess of arm’s-length payments under a special relationship (similar to OECD MC 11(6) and 12(4)).


Article 5 – Fraud and Abuse:

The Directive permits Member States to apply domestic or agreement-based provisions for prevention of fraud or abuse, e.g. if the main motive or one of the main motives is tax evasion, tax avoidance or tax abuse.

Article 6 – Transitional Rules:

The Directive provides transitional rules for its application in the Czech Republic, Greece, Spain, Latvia, Lithuania, Poland, Portugal and Slovakia.