The European Commission has adopted a proposal to amend the Interest and Royalties Directive which aims to reduce the instances of one Member State levying a withholding tax on a payment, while another Member State taxes the same payment.

The proposed recast tries to solve some of the problems resulting from the limited scope of the Directive as follows:

• It proposes to extend the list of companies to which the Directive applies and to reduce the shareholding requirements to be met for companies to qualify as associated.
• It adds a new requirement for the tax exemption: the recipient has to be subject to corporate tax in the Member State of its establishment on the income derived from the interest or royalty payment. This condition seeks to ensure that the tax relief is not granted when the corresponding income is not subject to tax and thereby close a loophole.
• A technical amendment is proposed to avoid situations where payments made by a permanent establishment and deriving from its activities are denied the exemption on the grounds that they do not constitute a tax-deductible expense.

The Commission will submit the Interest and Royalty Directive proposal to Council and the European Parliament.

The recast Interest and Royalty Directive is the most tangible element of a range of announcements and proposed measures concerning Double Taxation issues from the Commission in recent weeks. Other items include:

• A promise of specific solutions to double taxation problems include cross-border inheritance tax and dividends paid to portfolio investors.
• A possible new EU Forum to develop a code of conduct on double taxation and a binding dispute resolution procedure for unresolved double taxation cases.
• A consultation to gauge the full scale of double non-taxation in the EU. “Double non-taxation” would appear to be Commission speak for tax planning which relies on cross-border arbitrage. There is an emerging trend within the Commission to treat tax avoidance and tax evasion as one and the same thing, and this consultation may be further evidence of the trend.