91998E3645

WRITTEN QUESTION E-3645/98

by Amedeo Amadeo (NI) to the Commission

(3 December 1998)

Subject: Common system of taxation applicable to interest and royalty payments

In connection with the "Proposal for a Council Directive on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States" (COM(98) 67 final - 98/0087 CNS)(1), the Commission indicates that it may submit a proposal, at a later date, in the framework of the completion of the single market, to extend the measure provided for by the directive to taxes levied on interest and royalty payments made between companies which are not associated.

This gradual approach is motivated by a desire to alleviate the budgetary impact of the proposal in Member States that are net importers of capital and technology, while, moreover, a five-year transitional period is being requested for the Member States in question (Greece and Portugal) during which the taxation rate will be gradually reduced: the governing principle will be that interest and royalty payments that can be exempted from taxation at source are to be arm's length payments made between independent companies. When such payments are made between associated companies, the application of this principle involves treating the excess part of these payments as distributed income which falls within the scope of Directive 90/435/EEC(2). What is the logic behind these arrangements?

Answer given by Mr Monti on behalf of the Commission

(8 February 1999)

The purpose of the proposal for a directive is to eliminate one of the tax obstacles to cross-border cooperation between companies in different Member States. The measure is necessary for the completion of the single market.

However, in order to reduce the financial impact for Member States that are net importers of capital and technology, the proposal provides for gradual elimination of taxation at source. Initially, only payments between associated companies would be concerned. The proposal also provides for a five-year derogation period for Greece and Portugal. Since most interest and royalty payments are between associated companies, the derogation seems to be justified.

It is true that interest and royalties should in principle be fixed as if there were no relationship between the payer and the beneficial owner. That rule, which is completely separate from the transitional measures for Greece and Portugal, is intended to exclude from the scope of the proposal payments which constitute a distribution of profits. The amount of interest or royalty payments not exceeding the amount which would have been agreed in the absence of a special relationship continues to be treated as interest or royalty, even in the case of payments between associated companies, and should thus be caught by the directive. The surplus amount which would be re-characterised as a distribution of profits would benefit from Directive 90/435/EEC, provided that it satisfied the conditions laid down in that directive.

(1) OJ C 123, 22.4.1998, p. 9.

(2) OJ L 225, 20.8.1990, p. 6.