2.4.3.2 Parent Subsidiary Directive

The PSD1 applies to cross-border distributions from subsidiaries to parent companies. As set out in its preamble, the PSD is important for removing obstacles to the regrouping of companies from different Member States, in order to ensure the proper functioning of the internal market.2 The PSD prevents double taxation when corporate groups are organized in chains.3 This concerns both the avoidance of economic and juridical double taxation, through an exemption from withholding tax and an exemption or tax credit on the receipt of a distribution. The PSD does not, in principle, cover parent-subsidiary relationships within one Member State, nor does it cover European Economic Area (EEA) or third country parent-subsidiary situations.4

To be eligible for the benefits of the PSD, a taxpayer must be a company of a Member State and must qualify as a parent company or subsidiary.5 A company of a Member State is deemed to exist if three conditions are met. First, the company must take one of the forms listed in the Annex to the Directive. The legal forms referred to are the common types of companies,6 and also the less common types of companies.7 Moreover, several countries choose to include in the scope of application ‘other companies’ formed under the laws of the relevant country and subject to the corporate tax applicable there.8 Hybrid entities may also be included in the list annexed to the Directive.

The second condition for a company to be considered a company of a Member State is that the company must be considered to be resident for tax purposes in that State under the tax laws of the state and the company must not be resident for tax purposes outside the EU under a tax treaty with a third state.

Finally, the company must be subject to one of the taxes listed in the annex to the PSD without an option or exemption. In short, there must be a company with legal personality, resident for tax purposes in a Member State which is subject to tax.

Additionally, since the 2003 update the PSD applies to permanent establishments of qualifying companies. The PSD treats the payment of profit distributions to, as well as their receipt by, a permanent establishment of a parent company in the same way as payments between a subsidiary and its parent company.9 This equal treatment requirement includes the situation where a parent company and its subsidiary are established in the same Member State, while the permanent establishment is located in another Member State.10

For the purposes of the PSD, the company should be considered either a parent company or a subsidiary company. The parent company must hold at least 10% of the capital of the subsidiary.11 Whether or not the shares have been paid up is irrelevant in this context. A subsidiary is defined as the company in which the parent company holds the holding referred to above. The first version of the Directive was based on a 25% holding requirement. This holding requirement has been gradually reduced to 10% since 1 January 2009.12 This has been done to bring more parent-subsidiary relationships within the scope of the Directive.13 Member States are free to further lower the holding requirement.14 Alternatively, the PSD provides for the possibility to impose a 10% holding of voting rights as a condition for the minimum capital participation.

Under the PSD, Member States are free not to apply the Directive to companies that do not meet the requirements – of being a parent company or a subsidiary – laid down in the Directive for a period of at least two years.15 This provision prevents a parent company that does not qualify under the PSD from temporarily transferring its holding to a qualifying company in order to benefit from the application of the Directive. The wording of the provision seems to lead to the conclusion that the Directive does not preclude a Member State from applying a shorter holding period. After all, the introduction of a two-year holding period is not a requirement and the introduction of a shorter holding period goes beyond what the PSD obliges Member States to do.

After the publication of the PSD, it was not clear whether the provision regarding the minimum holding period allowed Member States to refuse the application of the Directive if the two-year period had not yet been met at the time of the dividend distribution, but was only met after that. Case law shows that Member States are indeed not – simply – free to refuse to apply the Directive if, at the time of the dividend distribution, the minimum holding period has not yet been met.16 Member States may, however, set their own rules to ensure that the minimum holding period is complied with.17 It would seem that the ‘flexible’ explanation by the CJEU of the interpretation of the minimum holding period is in line with the objective pursued by the Directive. After all, the European Commission (EC) is trying to remove obstacles to the regrouping of companies from different Member States in order to ensure the proper functioning of the internal market. It is in line with this aim to allow a favourable interpretation of the minimum holding period for taxpayers.

The PSD requires a relatively low minimum holding requirement to qualify as a parent company or as a subsidiary company. This is logical from the PSD's objective of avoiding double taxation when corporate groups are organized in chains and the profits are being distributed to the parent company.18 The Directive does not include a pure group criterion. If it can be said that all parent companies and subsidiaries together form a group within the meaning of the Directive, this would be a very broad scope of the group concept. Yet a broad scope seems appropriate given the objectives of the PSD.

The question may arise whether, in addition to holding any shareholding, additional requirements should be imposed at all for the PSD to apply. After all, even a 1% shareholding, for instance, is subject to double taxation in the event of a dividend distribution. The fact that double taxation is not eliminated in such situations seems to be prompted by the difference in investing compared to participating where, by assuming a minimum share percentage, there is a practically workable definition. In the case of smaller shareholdings, it will more often concern a passive interest in which investments have been made. In such situations, the shareholders’ interest is to obtain the expected return rather than to be involved in the management of the entity. Larger shareholdings will involve a bigger degree of risk and are more likely to be participations. If there is a participation, the shareholders’ interest is the joint economic activity of both entities. From the perspective of the parent company, the subsidiary contributes to the overall business result. Hence, in such relationships there is group formation. That is not the case in investment structures. It therefore seems logical to keep investment structures outside the scope of the PSD. For the purposes of the PSD, there is no actual test of whether there is a participation or an investment. It would seem that this is logical considering the enforceability of the scheme.