On 3 June 2003 the Council adopted Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (the "I+R" Directive) based on a proposal from the Commission (COM(1998) 67 (pdf 2.0 MB)(2.0 MB) final of 04/03/1998). See press release IP/03/787.

The I+R Directive is designed to eliminate withholding tax obstacles in the area of cross-border interest and royalty payments within a group of companies by abolishing:

• withholding taxes on royalty payments arising in a Member State, and
• withholding taxes on interest payments arising in a Member State.

These interest and royalty payments shall be exempt from any taxes in that State provided that the beneficial owner of the payment is a company or permanent establishment in another Member State.

The European Commission in June 2006 published a survey on the implementation of the Directive. The survey carried out by the International Bureau of Fiscal Documentation (IBFD) aims to provide a comprehensive overview of the implementation of the Interest and Royalty Directive and application of Article 15(2) of the Agreement between the EU and the Swiss Confederation in the Member States covered.

Companies that are covered by the Interest and Royalties Directive

As under the Merger and the Parent-Subsidiary Directives, the benefits of the I+R Directive are only granted to companies which are

• subject to corporate tax in the EU,
• tax resident in an EU Member State and
• of a type listed in the annex to the Directive.

As the annex to the Directive only includes the types of companies existing in the 15 Member States that were already members of the EU before 1 May 2004, the types of companies in the new Member States have now been added by Council Directive 2004/66/EC of 26 April 2004 (Official Journal L 168, p.35, 67). In addition, the Council, on 29 April, adopted Directive 2004/76/EC (Official Journal L 157, p. 106) on the basis of the Commission's proposal of 1 April 2004 (see COM(2004) 243 final), granting some of the new Member States transitional periods resulting in their not applying the provisions of the Directive immediately from the date of their accession.

Furthermore, the Commission proposed an amendment to Directive 2003/49/EC on 30 December 2003 (COM(2003) 841 final - see also press release at IP/04/105 ) to provide for an update of the list of companies in the annex to the Directive.

The proposed new list would also include:

• the European Company (Council Regulation (EC) 2157/2000 and Council Directive 2001/86/EC) which may be created from 2004 (see press release IP/01/1376), and
• the European Co-operative Society (Council Regulation (EC) 1435/2003 and Council Directive 2003/72/EC) which may be created from 2006 (see press release IP/03/1071)

Transitional periods for new Member States

Article 6 of the Directive provides for transitional regimes applicable in Greece, Spain and Portugal according to which, these Member States can charge withholding taxes during a certain period (see following table).

Council Directive 2004/76/EC of 29 April 2004 also allows certain new Member States the possibility of transitional periods as regards the application of the provisions of the I+R Directive. The Directive is based on the proposal of the Commission of 1 April 2004 (COM(2004) 243 final).

The Protocol concerning the conditions and arrangements for admission of the Republic of Bulgaria and Romania to the European Union, Annexes VI and VII, introduced transitional arrangements concerning these two new Member States (Official Journal of 21 June 2005, L 157, p.116 and 156).

Member State	Interest Payments	Royalty payments
Bulgaria	31 December 2014	31 December 2014
Czech Republic	--	1 July 2011
Greece	1 July 2013	1 July 2013
Spain	--	1 July 2011
Latvia	1 July 2013	1 July 2013
Lithuania	1 July 2011	1 July 2011
Poland	1 July 2013	1 July 2013
Portugal	1 July 2013	1 July 2013
Romania	31 December 2010	31 December 2010

Proposed amendment to the Interest and Royalty Directive

In the above-mentioned Commission proposal of 30 December 2003 a change to the scope of the Directive has been envisaged. This change will make it clear that Member States have to grant the benefits of the Directive to relevant companies of a Member State only when the interest or royalty payment concerned is not exempt from corporate taxation. In particular this addresses the situation of a company which, while subjected to corporate tax, also benefits from a special national tax scheme exempting foreign interest or royalty payments received. The source State would not be obliged to exempt from withholding tax under the Directive in such cases.

Report on the operation of the Interest and Royalty Directive

The Commission adopted a report COM (2009) 179 (pdf 52.0 KB)(52.0 KB) on 23 April 2009 on the functioning of the I+R Directive, as foreseen in its Article 8. This report was originally scheduled for submission to Council by 31 December 2006 but due to ingoing discussions in Council on the above-mentioned proposal to amend the Directive it was decided to postpone the date of adoption.

The report covers a wide range of issues concerning the transposition and implementation of the Directive. While the overall implementation has been considered satisfactory, the report highlights a number of cases of transposition and interpretation, which invite for improvement or clarification like the tax residence of the beneficiary of the payment, holding thresholds and the period to qualify as an associated company, the interrelation between the Interest and Royalties Directive and the Parent - Subsidiary Directive and the application of the anti-fraud and anti-abuse clause.

The report has been sent to the Council for discussion on the issues described. It is expected that an ECOFIN Council adopts conclusions on further developments.

Taxation of restructuring operations in the European Union

A common system of taxation applicable to cross-border reorganisations of companies in the EU was put in place in 1992 and improved in 2006. It aims at removing fiscal obstacles to those operations. A survey on the implementation of the system was published in 2009.

The main objectives of the Merger Directive

On 23 July 1990 the Council adopted Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Merger Directive). The objective of the Merger Directive is to remove fiscal obstacles to cross-border reorganisations involving companies situated in two or more Member States. The Merger Directive includes a list of the legal forms to which it applies. The companies must be subject to corporate tax, without being exempted, and resident for tax purposes in a Member State.

In the case of mergers and divisions, the transferring company transfers assets and liabilities to one or more receiving companies. The Merger Directive provides for deferral of the taxes that could be charged on the difference between the real value of such assets and liabilities and their value for tax purposes. The deferral is granted provided that the receiving company continues with their tax values and effectively connects them to its own permanent establishment in the Member State of the transferring company. These rules apply to transfer of assets where the assets transferred form a branch of activity. The Merger Directive covers also triangular cases where the transaction includes a permanent establishment of the transferring company situated in a different Member State.

The exchange of shares is a transaction where a company acquires a holding majority in the capital of the acquired company. It transfers in exchange its own shares to the shareholders of the latter company.

In all these transactions, the Merger Directive provides for tax deferral of the taxes that could be charged on the income or capital gains derived by the shareholders of the transferring or the acquired company from the exchange of such shares for shares in the receiving or the acquiring company.

Directive 2005/19/EC amending the Merger Directive

On 17 October 2003 the Commission adopted a proposal (COM(2003) 613) amending Council Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares concerning companies of different Member States (see press release IP/03/1418), which was subsequently adopted after negotiations by Council on 17 February 2005 , as Directive 2005/19/EC (see press release IP/05/193 and Official Journal L 58, p. 19 of 4 March 2005 ). See also the press release issued at the time of political agreement on the modified version (IP/04/1446).

The main amendments introduced by Directive 2005/19/EC are the following:

• Directive 2005/19/EC adds new legal entities to this list annexed to the initial Directive and to which it applies. The benefits of the Merger Directive are thus extended to a greater number of legal entities, including the European Company (SE) (Council Regulation (EC) 2157/2001 and Council Directive 2001/86/EC) which may be created as of October 2004 (see press release IP/01/1376) and the European Co-operative Society (SCE) (Council Regulation (EC) 1435/2003 and Council Directive 2003/72/EC) which may be created from 2006 (see press release IP/03/1071).
• The current list of companies covered by the Merger Directive contains entities that are subject to corporate tax in their Member States of residence. However, in the case of some of the new entities that have been added to the list other Member States simultaneously tax their resident taxpayers which have an interest in those entities, so-called 'transparent entities'. The same tax situation can also apply to the shareholders of companies entering into the transactions covered by the Directive. Directive 2005/19/EC introduces specific provisions (new Articles 4(2) and 8(3)) to ensure that the benefits of the Merger Directive are available even in these cases, subject to certain exceptions which are set out in the new Article 10a.
• The coverage of a new type of transactions: a special division known as a "split off ", named in the Directive as partial division (new Article 2(b)(a)). The splitting company is not dissolved and continues to exist. It transfers part of its assets and liabilities, constituting one or more branches of activity, to another company. In exchange, the receiving company issues securities representing its capital. These securities are transferred to the shareholders of the transferring company.
• The directive provides for capital gains exemption when the receiving company holds shares in the transferring company. The holding threshold required to enjoy this exemption has been modified by the Directive 2005/19 to align it with that of the Parent-Subsidiary Directive. This threshold will be lowered in stages from 25% to 10% (Article 7(2)), in line with the amendments to the Parent-Subsidiary Directive introduced by Council Directive 2003/123/EC.
• Directive 2005/19/EC introduces specific provisions providing relief on the conversion of branches into subsidiaries (Article 10).
• The Directive introduces rules governing the transfer of the registered office of the European Company (SE). The title of the Merger Directive is modified to include a reference to this operation (Article 1) and the latter is defined in the text of the Directive (Article 2(j)).
  The applicable tax regime is found under a new Title IVb, Articles 10b to 10d: the SE transferring its registered office will enjoy tax deferral on capital gains where its assets remain connected with a permanent establishment situated in the Member State from which it is moving. The shareholders of the SE should not be liable to tax on this occasion.