Double tax threat prompts renewed action

Date: 20/02/1997

By Chris Johnstone

THE Dutch presidency is looking for a breakthrough on long-stalled plans to allow more companies to escape from double taxation.

It hopes a meeting of national experts tomorrow (21 February) will push a 1993 proposal on the taxation of parent companies and their subsidiaries towards an overdue agreement.

The latest suggestion aims to widen the number of firms which can benefit from a 1990 measure designed to prevent fresh taxation, such as the imposition of withholding tax, when a subsidiary in one country transfers its profits or dividend payments cross-border to the main company.

The European Commission has proposed expanding the existing list of company types which qualify for such treatment, to cover all firms that pay corporation tax.

“The original list covered most companies in some countries, but there were large gaps in others,” said an official.

Two of the biggest beneficiaries of the change would be cooperative banks and savings banks which are not limited liability companies. Both were excluded from the 1990 text in spite of being relatively important in a handful of states such as Germany, Belgium, Luxembourg and the Netherlands.

The new measure would also close a possible loophole in the existing rules by abolishing all risk of double taxation within a chain of companies which is transferring cash from one firm to another.

The modest 1993 proposal has made slow progress. It waited until 1994 for an opinion from the European Parliament and was then sidelined by a succession of EU presidencies.

But the Italian presidency dusted down the dossier and attempted to start it moving last year, and the Irish and Dutch have continued the push to break the deadlock. It is the only taxation issue on the Dutch list of priorities.

However, the proposal is now becoming bogged down in arguments between member states over the exact definition of companies which could benefit from the change.

Germany has a long-standing objection that French company law would allow partnerships in France to benefit from the measure while equivalent German companies could not qualify.

Bonn's solution is simple - partnerships in any form should be excluded from the scope of the proposal.

The UK also has some reservations that equivalent companies in different countries are not to be offered equal treatment under the Commission proposal.

“A large part of the problem is dealing with widely different corporate structures and businesses. A société in France does not necessarily mean the same as a sociedad in Spain. Some countries have clear distinctions between companies and partnerships and others do not,” said an expert.

Some member states expect the Dutch to promise a considerable rewriting of the Commission text in order to push the dossier forward. However, an official in The Hague said the presidency was largely following the Commission text and would leave partnerships within the scope of the proposed directive as long as they pay corporation tax.

The so-called parents and subsidiaries proposal is a key issue for European employers' lobby UNICE. “It is one of our top priorities for this year. We have submitted a report to the Financial Services Commissioner Mario Monti telling him of the costs related to non-harmonisation. It is very important we have some action soon,” said a UNICE official.