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Common taxation of parent companies and their subsidiaries

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Common taxation of parent companies and their subsidiaries

The EU is establishing competition-neutral tax rules for groups of companies from different Member States. It is eliminating double taxation of profits distributed in the form of dividends by a subsidiary in one Member State to a parent company in another


Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States [See amending acts].


This Directive, as amended by Directive 2003/123/EC, is applicable by each Member State:

  • to distributions of profits received by permanent establishments situated in that State of companies of other Member States which come from their subsidiaries of a Member State other than that where the permanent establishment is situated,
  • to distributions of profits by companies of that State to permanent establishments situated in another Member State of companies of the same Member State of which they are subsidiaries.

It does not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.

For the purposes of the Directive, the term 'company of a Member State' means any company which:

  • takes one of the forms in the updated list in the Annex to Directive 2003/123/EC to which new legal entities have been added, e.g. certain cooperatives, mutual societies, non-capital based companies, savings banks, provident funds and associations with commercial activity;
  • according to the tax laws of a Member State, is considered to be resident in that State for tax purposes and, under the terms of a double taxation agreement concluded with a third State, is not considered to be resident for tax purposes outside the Community;
  • moreover, is subject to corporate tax, without the possibility of an option or of being exempt.

The term 'permanent establishment' means a 'fixed place of business' situated in a Member State in which:

  • the business of a company of another Member State is wholly or partly carried on,
  • the profits are subject to tax in the Member State in which it is situated by virtue of a bilateral tax treaty or, in the absence of such a treaty, by virtue of national law.

The status of 'parent company' is attributed at least to any 'company of a Member State' that has a minimum holding of 20% in the capital of a company of another Member State fulfilling the same conditions.

Such status is also attributed, under the same conditions, to a 'company of a Member State' which has a minimum holding of 20% in the capital of a company of the same Member State, held in whole or in part by a 'permanent establishment' of the former company situated in another Member State.

From 1 January 2007 the minimum holding percentage will be 15%.

From 1 January 2009 the minimum holding percentage will be 10%.

'Subsidiary' means a company whose capital includes a minimum holding of 20%.

Member States may:

  • replace the criterion of a holding in the capital by that of a holding of voting rights;
  • not apply the Directive to those of their companies which do not maintain holdings qualifying them as parent companies or to those of their companies in which a company of another Member State does not maintain such a holding.

Until the date of effective entry into force of a common system of company taxation, Member States must apply the following rules.

Where a parent company or its permanent establishment, by virtue of the association of the parent company with its subsidiary, receives distributed profits, the State of the parent company and the State of its permanent establishment must, except when the subsidiary is liquidated, either:

  • refrain from taxing such profits, or
  • tax such profits while authorising the parent company and the permanent establishment to deduct from the amount of tax due that fraction of the corporation tax related to those profits and paid by the subsidiary and any lower-tier subsidiary (subject to the above conditions relating to the definition and minimum percentage holding).

The Directive also provides for the tax to be offset by the parent company to be determined in such a way (including the taxes paid by lower-tier subsidiaries) as to totally eliminate double taxation. In this way, even without a common system for double taxation, the Directive includes in the tax to be deducted from the parent company's profits all the taxes paid by the subsidiaries in the different Member States.

Member States retain the option of providing that any charges relating to the holding and any losses resulting from the distribution of the profits of the subsidiary may not be deducted from the taxable profits of the parent company.

Profits distributed by a subsidiary company to its parent company are exempt from withholding tax.

The Member State of a parent company may not charge withholding tax on the profits that such a company receives from a subsidiary.



Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 90/435/EEC



OJ L 225 of 20.8.1990

Amending act(s)

Entry into force

Deadline for transposition in the Member States

Official Journal

Directive 2003/123/EC



OJ L 7 of 13.1.2004

Directive 2006/98/EC



OJ L 363 of 20.12.2006


Communication of 23 May 2001 from the Commission to the Council, the European Parliament and the European Economic and Social Committee "Tax Policy in the European Union" [COM (2001) 260 - Official Journal C 284 of 10 October 2001].

Last updated: 03.04.2007